Painting economicsNov 30th, 2010 | By Ian Poulton | Category: Ireland
Imagine you were the person who paid £68 million for a Picasso painting and then someone, unknown to art collectors, revealed that they had 271 works by the artist ; it would not only depress you that your purchase was not as exclusive as you had believed, it would also depress the value of your investment. The laws of economics taught at secondary school are simple – a glut in supply without a corresponding increase in demand will cause a fall in prices. Surely even the Irish Government would have grasped concepts comprehensible to 5th formers? There was an aptness in 271 Picassos appearing on the day when the Government was forced to confront its wilful denial of the laws of supply and demand.
Even when the Credit Crunch was biting at the end of 2007, there was still insistence that Ireland would have a ‘soft landing’, that house sales would hold up, that there would continue to be growth in prices. The voices of George Lee and David McWilliams dissented, but they were shouted down by a chorus of voices who insisted that these party-poopers were wrong and that the ‘fundamentals’ justified massive inflation in the housing market. Every morning RTE would give airtime to voices who seemed genuinely to believe in constantly rising markets.
A friend in Co Laois, observed the first signs of the end of the housing boom in October 2005; that was the month when the interest payable on a buy to let house mortgage in his town first exceeded the potential rental yield from such houses. This led to a decline in demand and the beginning of a fall in prices; as prices started to fall in similar towns, where buy to let sales had fuelled the boom, the decline would begin to ripple inwards. The property bubble was already beginning to deflate before the ‘Credit Crunch’ of 2007. Websites like Irish Property Watch and The Property Pin were tracking the end of the boom years on a daily basis while the siren voices denied such things were happening.
You cannot buck the market, the laws of supply and demand will always rule. Even in Communist states, the market, often the black one, was still dominant. Police forces know that the street value of drugs will rise and fall according to the supply available and the demand on the street. Yet through the boom years our politicians continued to act as though the market implications of their policies could be avoided, continued to behave as though demand would grow indefinitely as the housing estates sprouted across the country; the most simple, the most basic laws of economics were disregarded.
To fail to understand that over supply will depress prices is bad enough; the way forward proposed by the Government is to take money from working people. Even a fifth form economics student could explain to the Department of Finance that the people with the highest propensity to spend, those most likely to put money directly back into the economy, rather than to put it into savings or spend it overseas, are working people. Having created a glut in supply, the Government now proposes to depress demand and cause a further deflationary spiral in our economy. Somewhere in that collection of 271 Picasso works there must be something that captures a mood of overwhelming gloom.