dimecres, 24 de setembre del 2008

WEALTH INDICATORS








WEALTH INDICATORS

In a previous papers I analized the crude oil price evolution, the cost of housing and the inflation rate in Spain for the last 32 years. Prices with corrected inflation were plotted versus time showing a big increase from 2000 but reaching lower values than during the Iran Revolution.

I critizized the very concept of inflation. It is very difficult to calculate because the proportion of the different products depend on every individual and on salaries. The basket of product consumption of a wealthy family has nothing to do with that of the poorer ones.¡¡

Inflation serves only to 2 main purposes : to fix salary increases in Governments negotiation with social agents, Sindicates and the Business Community and to dictate official interest rates from Central Banks Authorities.

But what about the adquisition power ?. Lets assume that on a certain year, salaries, crude oil (which is a common element in all product and service ) and housing (everybody needs a place to live) have a level 100 (base).

If salaries increase 10 % the next year and crude oil 5%, we would have a 110 index for salaries and 105 for crude oil prices compared to last year.

The ratio 110/105 = 104,9% woul tell us that we are a 4,9% more capable of buying crude oil (or indirectly its derivatives) than last year.

If we do the same thing with houses we would have another index that I call wealth investment indicator.

What do we get if we plot the three indexes ?

copyright JORDI Delcor http://www.jordi-delcor.com/


Sources : BP, MINISTERIO DE FOMENTO, INSTITUTO NACIONAL DE ESTADÍSTICA.

A) Salaries have increased 10 times from 1976 to 2007.
B) House cost has increased 20 times.
C) Crude oil 30 times.

A gloomy picture indeed¡¡

If we correct he inflation rate (2ond figure)

It looks bad.¡¡¡.

If we calculate the ratios acumulated house cost/acumulated salary increase and acum crude oil cost/acum salary increase we get (3erd figure):

Apparently we were more capable of buying a house in 1987 , we were capable of buying more crude oil in 1998 and since then we started a relentless decline. Now, in 2008 we can scarcely buy 40% of what we could buy in 1976....

How can this be if apparenlty we have many more things now than then. Two main factors will give a clearer idea :

a) Technology has allowed us to live a more confortable life.
b) “Cheap” credit (cheap when we had to pay 2% interest rate for our mortgages) but lifelong chains (30-50 year mortgages instead of 15-20 years).
c) We have sold our freedom to the finantial institutions.


By the way, why has this happened? Is anybody reacher in this process? If you suspect that finantial institutions are.. you are partly right .. There are other winners....

In the next chapter we will look al the profit of the finantial institutions in Spain . Source : Asociación Española de Banca.



Jordi Delcor PhD.