Economists Predict an Upcoming Financial Crisis

The U.S. economy often seems unpredictable. However, according to economists Steve Hank and Amar Manzoor, it has followed a set cycle for nearly 200 years and if trends continue, 2016 will see the beginning of another financial crisis. Economists have begun to sound the alarm on what may be an unprecedented recession marked by sudden and crippling home and land prices.

The real estate market will play a key role in the impending crisis. According to Fred Harrison, UK-based economist and director of the Land Research Trust, the value of land rises and falls on an 18-year cycle. Once land prices pass their peak, economic mayhem ensues.

Abandoned construction site
Maybe I Feel Like I’ve Been Gathering Dust via photopin (license)

It may seem surprising that the rise and fall of land values could uphend the entire U.S. economy. However, nearly one-fifth of the GDP is based on residential investment and housing services, and when one portion of the economy falters, a ripple effect occurs. According to Steve Hanke of the Cato Institute, rising and falling land values have “a domino effect on the construction cycle, the business cycle, and then the overall economy.”

Averting disaster is possible, but it won’t be easy. 19th-century political economist Henry George was the first to present a solution. He noted that government tax incentives to purchase land are directly responsible for the land-value cycle. As the value of land increases, due to consumer demand and tax incentives, fewer people have the capital to buy into the real estate market. This slows growth and inevitably causes the value of land to rapidly decline, thereby causing a recession. Henry George recommended that governments shift tax burdens from income and profits to land value in order to minimize fluctuation in land prices and increase access to the real estate market.

Abandoned unfinished building
c i r c u m s t a n c e s via photopin (license)

According to Fred Harrison, Henry George’s strategy has helped stabilize land values in some countries, such as Taiwan and Denmark. Unfortunately, the largest economies in the world remain tied to this cycle. In the 1960s, the communist party of China seized all land and kept it under the control of local bureaucrats–a grave mistake that may help trigger another, much larger, financial crisis. China’s housing market is on the verge of collapse, and as the second largest economy in the world, this collapse will shake global markets. Economists predict that commodity and bond markets will be particularly hard hit. Although another recession is definitely coming at some point, it probably won’t occur this year. However dire the consequences, we ought to be proactive and implement policies, like the land value tax, which keep land prices from spiraling out of control.



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