Fred Harrison released his forecast during a Press conference at the Foreign Press Association, London. His estimate is based on conservative assumptions, it therefore under-estimates the true scale of the losses that are destroying banks and peoples savings around the globe.

The Wealth Wipe-out of 2010

Asset    Amount: US$ trillion

Capital (stocks & shares)    $15

Residential Property     $20

Commercial Property    $10

All assets    $45 trillions (£23 trillion)

Harrison describes the contagion spreading around the world in a new Renegade Economist film that may be viewed today on our YouTube channel.

“By using the methodology that enabled me to forecast the current crisis back in 1997 – a full 10 years before the credit crunch crushed the banks – I am left in no doubt that the assets of home-owners and investors will be savaged,” Harrison claims.

The “wealth effect” – in which people tailor their spending according to the value of their assets – will crush consumption worldwide. This contraction in the demand for consumer goods and services makes a depression unavoidable, unless governments adopt the correct remedies.

Futile Regulation and Arrested Growth

At present, governments are banking on a regulatory approach to the credit crisis. This will not cure the systemic flaw in the market economy, warns Harrison, which is why politicians are leading their countries into what he calls a decade of “arrested growth”.

To avoid being sensationalist Harrison cautiously assumes a 20% drop in values. In the UK, residential property was valued at £4 trillion in 2006, according to Halifax, the nation’s largest mortgage bank. If house prices drop by 20%, a loss of £800bn would be incurred. Fred actually expects them to drop by 30% on average.

In the US, the value of wealth tied up in residential property alone declined by $3.4 trillion in the two years following the peak in prices in July 2006. The total wealth in the homes of American families exceeded $30 trillion. Assuming prices drop by no more than 20%, the wealth wipe-out in the US residential sector alone is more than $6 trillion. Fred expects US house prices to drop by at least 40%.

In Australia, residential property was worth about AU$3 trillion in 2006. A 20% drop would incur a loss of AU$600bn. Worldwide, residential property will lose about $20 trillion in value.

Unless the Federal government adopts the tax-led incentives – spelt out in Fred’s forthcoming book – there will be no consumption-led recovery in America after 2010.

In addition to the real estate estimates Fred estimates a $15 trillion wipe-out of capital invested in the business sector. The major losses will be concentrated in Europe and North America.

Buying Time

Worldwide, central bankers have committed about $2 trillion in taxpayer-backed bail-outs to banks. This is buying time, but the reform plans being discussed are useless. Politicians think that a new tier of regulations – trimming bankers’ bonuses, checking the short sellers, enforced “transparency”, improved risk assessment – will prevent further episodes of reckless property speculation. But these are symptoms, not the cause, of property bubbles.

Sub-prime lending in the USA and UK has featured in every boom/bust over the last two centuries, and it will resurface in the next cycle in new forms to evade the controls of regulators.