Comments on: Why Now?

By: Chewman

Chewman — Mon, 14 Apr 2008 23:27:01 +0000

Hello Steve

This is my first two-bobs worth to you and your great forum. My apologies if I’m only repeating what may have already been covered here, but I haven’t had the liberty of reading all of the issues.

Having an economics background, I’ve been greatly concerned for the last decade that we’ve managed to make investment in productive assets much less attractive than speculating in non-productive “assets”.

We have negative gearing that encourages money to be pumped into housing, but we continuously dream up more & more ways to stifle productive investment. Red tape and regulation (eg. BAS, OH&S) strangle investment in production and then we tax the crap out of any profit that has been made.

My view for a long time has been that negative gearing and depreciation benefits should be scrapped for housing unless it is for new building. If you are not the first owner of a house, you don’t get the incentives. Extending these incentives to owner-occupiers as well investors for new dwellings would then encourage investment in expanding the stock of housing if need be, rather than inflating the prices of existing stock.

Is this too simplistic as a start?

Cheers

By: Steve Keen

Steve Keen — Wed, 02 Apr 2008 12:23:59 +0000

Hi Foundation,
I took it off under threatened legal action from the promoter, but the threatened legal challenge never arrived, so I’ll pop the analysis back on my Debtwatch reports page.

By: foundation

foundation — Thu, 27 Mar 2008 06:00:37 +0000

Hi Steve. Sorry for posting off-topic, but there is an increasing amount of chatter around lately concerning the EFM product you were so critical of when it was announced a year ago. I’ve looked around your site here (and my hard-drive) but can’t find your original analysis of the product with the charts and so-on. I was hoping perhaps you could put a copy up on this site somewhere if it isn’t here already? Thanks, F.

By: Miner

Miner — Tue, 25 Mar 2008 03:10:38 +0000

Hyperproductive,

the reason I suspect we continue to make mal-investments is that normal rules of supply and demand (and resulting price) wrt loans and interest rates do not exist while the central banks fiddle with short term interest rates.

If a normal market was to apply to funds people wanted to borrow, then if demand for loans exceeded supply, you would pay a higher interest rate, and subsequently would ask questions of the investment requiring the borrowing (do I really want this, does it make a good enough return to fund the loan etc.)

As it currently stands, more demand for loans has very little impact on the price of those loans.

I believe that this disconnect between the demand and price of loans is a major reason for malinvestment.

One consequence of allowing floating interest rates would be that the link between cost of loans and demand would be re-established. Could be very torrid though to get there.

By: Ken

Ken — Tue, 25 Mar 2008 00:01:02 +0000

There is another way off looking at it. Increased debt caused increased demand and so increased employment, eventually getting to the point where there is so much demand that we need to import people. Unfortunately much of this employment seems to involve shuffling money around, not doing anything useful, but there is a lot of money to be made.

This is all an example of the positive feedback. A causes B, B causes A and quickly we have an out of control and very confusing economy. Note as well as A and B, there will be C,D, etc and it will be very confusing.

By: Zoo

Zoo — Mon, 24 Mar 2008 22:47:10 +0000

AC, I would argue that women HAD to enter the workforce as a consequence of rising (ponzi/bubble) prices. When two incomes were not enough to sustain families, they began borrowing to supplement incomes…and the bubble got bigger.

By: AC

AC — Mon, 24 Mar 2008 22:23:05 +0000

Being both backward and backward looking, rather than asking why now? Im still trying to work out why in the first place? Seems to me the trigger for the sudden rise in house prices coincided with the sudden rise in women in the workforce. With this increase in the number of double incomes, there was a rise in disposable incomes leading to a coincident rise in house prices to mop up all that extra cash. If you can afford to pay more - then the market will make you. Rather like when the government increases first home buyers scheme by X grand and the house prices immediately go up by X grand. Because of this rise in the number of double incomes pushing up housing prices - it is now necessary to have a double income to buy a house. I cant see how you reverse that. Just thought Id write this to see what folks think.

By: Contrarian Investors' Journal

Contrarian Investors' Journal — Mon, 24 Mar 2008 11:16:27 +0000

Hi Zoo!

When I said about China facing a major correction, I meant a correction in the real economy.

In China, given that their financial system is not as advanced as in the Western nations, what happens in their stock market can be rather independent from their real economy. For example, in the years leading to around, say, 2002, the Chinese stock market was in a bear market (I think). But their real economy is still chugging along fine. Now that the Chinese stock market is facing a major correction, it does not necessary reflect the state of their real economy.

Also, given that the global financial system is inter-connected with each other, the Chinese stock market decline may have more to do with global financial market then with their real economy.

Nevertheless, if China’s real economy faces a major correction in the coming years (I believe it’s a matter of time), it may well coincide with the global stock market (including the Chinese stock market) decline.

The next question we should ask ourselves is this: Can China de-couple from the coming major US recession? We have a theory about that: Can China really ‘de-couple’ from a US recession?. Note: That’s just my theory- it’s not a prediction.

By: Zoo

Zoo — Sun, 23 Mar 2008 11:53:11 +0000

Contrarian Investor, you said:

I believe China is due for a major correction down the track due to mal-investments. When that happen, I fear Australia will be in for a rude shock.

I think you and everyone else here is spot-on. According to the Financial Times on Thursday, the Chinese government is having to stop collecting taxes from Chinese mutual finds to help out their ailing stock market:

http://www.ft.com/cms/s/0/86901c12-f61d-11dc-8d3d-000077b07658.html

Just how ailing?
http://finance.yahoo.com/q/bc?s=000001.SS&t=6m

By: Ken

Ken — Sun, 23 Mar 2008 11:29:51 +0000

Battellino’s speech http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html also demonstrates one of the problems that the economists are having with reality. His conclusion is that debt will eventually stabilise, but that isn’t going to happen in a dynamic system, it will overshoot unless the system is massively damped. One with positive feedback, not a hope.

NZ should be worse than here. They have been running an even higher current account, so now have a foreign debt greater than 100% GDP.

For some more humour (from UK early 90’s) http://www.youtube.com/watch?v=2t8YTvdYXws