Yes, the state of knowledge of dynamic systems in economics is truly appalling.

The CAD is certainly part of the story behind the growth in NoDoc/subprimes, though not the whole story. In a nutshell, I argue that all monetary systems have an endogenous capacity to expand indefinitely, but if that is allowed to happen, one impact will be a debt-driven capacity (for a while) to purchase imports.

So rather than seeing the CAD as a reflection of the gap between Exports and Imports–the conventional economic interpretation–I see the CAD as fuelling our excess of Imports over Exports.

At some point, as you intimate, the debt servicing burden that generates will become overwhelming–or the currency will collapse, or some combination of the two.

And yes, to get back to balance again, we need to produce: though “XM for some substantial time to reduce it. We may get some salve out of our resources on that front, but with the move to treating the country as primarily a quarry, we’re always going to be paying to import other people’s technology.

What I am most concerned about is the Current Account which has been which has been in deficit continuously since July 1973. Is this not the most significant source of internal credit? As I understand it, this is covered by asset sales and borrowings (by the banks), and that this debt is passed on to consumers who have bid up the price of everything, is this correct?

What happens when we run out of people capable of paying the interest on this “private” debt as it undergoes “growth”?

Has this debt resulted in both the no doc/sub prime problem and the current oil price rise?

Australia is now so technologically dumbed down that is will take a generation to be able to actually balance the Current Account.

Well that’s not going to be very good.

We are essentially saying house prices reflect the relative purchase power of a wage earner in nominal dollars in that wage earners country.

1. If you agree that the Case Shiller will regress to it’s 100 year mean of 100 over the next 5 years (that also seems to be what the FED, IMF & market think)

2. The AUD/USD exchange rate is roughly 1:1 i.e. parity and stays around that level

3. The Stapleton index must ultimately fall 50% and it will likely begin its fall very soon.

Peter

I think those metrics do make sense. Ultimately you’re looking for imbalances, and they are certainly there. What’s more likely as a correction though is that our house prices will start to fall–though not as rapidly as the USA’s–so that Stapledon’s index will drop too. That will counteract where the Aus/USA dollar relation might go, and gives some idea too of how long the imbalances are likely to persist.

Regarding my previous post.

When I look at the data, in 1970 the Case Shiller Index and the Nigel Stapleton Index were both roughly 100 and the AUD/USD Fx rate was roughly $1.50. The divergence is almost exactly the decline in the AUD/USD at purchase power parity. If the Case Shiller ‘mean reverts’ to 100 and the Stapleton Index is still 300 it would seem to imply the AUD/USD purchase power parity exchange rate should be roughly $0.50. The alternatives would be some combination of changes in both the Australian house price and the AUD/USD ppp Fx rate.

Presently the median Australian wage is $58K and with an AUD/USD market Fx rate near on parity (1:1) the US median wage is $43K. We are being priced out of our own jobs to pay for our houses vs the USA as we speak.

Does this make economic sence (I’m not an economist)

Peter

In Australia it doesn’t seem to have been an insolvency issue anyway, more a case that if the Reserve Bank didn’t do something about the liquidity our banking systems would be a lot more constrained. If banks refuse to lend each other money against the securities then each bank would need to more closely balance it’s own liquidity. This would cause a certain amount of rigidity to the financial system and constrain debt leading to a crash. Steve, is that a reasonable interpretation ?

On the Reserve Banks problems, it is almost a corollary of Minsky’s law that deregulation will be very popular on the up side and will be unpopular on the downside. Most likely outcome is increasing micromanagement of the financial system as the government attempts to make itself more popular by fixing “defects”.

I’d be very interested in your comments regarding ANZ’s economists, who say Australian housing is in a super-cycle and that supply and demand issues mean prices simply cannot fall:-

http://fnarena.com/fnarena.com/index2.cfm?type=dsp_newsitem&n=3680A01D-1871-E587-E1E2426238AEA28A

I’ll start with Greg’s criticism for my article in the Daily Telegraph.

Firstly Greg, I will defend writing in the Daily Tele–and almost any medium short of a Klu Klux rag. For the last 30 years, the perspective that I have on economics couldn’t get a run anywhere outside a limited range of non-orthodox academic journals. Now, because policies inspired by the dominant school of economics have contributed to an economic catastrophe, I can get an audience virtually anywhere.

I am seizing that opportunity while it exists, because a major factor in causing a re-orientation of economic thought is getting widespread support for that new orientation, from far more than just professional economists. As I wrote in Debunking Economics, economics is too important to just leave it to the economists.

A major reason why Keynes had the success he did–though in the long run his ideas were killed, to coin a phrase–was because he had established a public presence via his pamphlets (in particular “The economic consequences of the Peace”) and public commentary.

That process began for Keynes in 1919, almost two decades before he published The General Theory, and he could pick and choose where his ideas were published. I don’t have quite so much time, so I am willing to cast my net a bit wider.

There is also an issue of whether one should restrict one’s views to only an elite audience. Yes the Daily Tele is a tabloid, and a lot of its coverage and manner I object to; but it sells over 300,000 copies each day, and mainly in Western Sydney.

Its readership base is the core of the current debt implosion, and the group that largely gave Howard political ascendancy (remember “Howard’s battlers”?). If I ignore them, via ignoring a major news outlet that reaches a substantial proportion of them, then what ideas might guide them should economic conditions turn really ugly, and at their direct expense?

So I think that I–and, for example, other intellectuals who are experts on global warming, peak oil, and all manner of other issues that the Daily Telegraph may on occasions take a “reactionary” stand on–to engage with it and its audience when the opportunity presents. If we don’t, and if, on these issues, intellectuals (or some of them anyway) are right–as in “right vs wrong” rather than the political dimension “right vs left”–then it’s a mistake not to engage with the Daily Telegraph and its audience when the opportunity arises.

Then there’s the issue of the original Telegraph story itself, and it’s effectively personal attack on Stevens. That was juvenile. But so too was the child who said loudly “But Mum, the Emperor is naked!”.

In other words, though the expression was intemperate, the insight was valid: here is someone that we are told we cannot criticise, but from where we stand, he has things badly wrong.

So I feel for Glenn Steven in being lambasted that way in public–it’s not nice, and I fully agree with you that he is sincere in what he is trying to do. Also, I agree he is encumbered by government policy; though the RBA has a free rein on matters monetary, they make their decisions in an economic context that is dramatically affected by fiscal and institutional policy too.

But someone has to break with the crowd that won’t criticise the Guv’nor because of royalty an’ all that, and unfortunately it’s more likely to be someone from the rougher end of town who does it first. I knew they’d be lambasted for the personal nature of the attack (and quite rightly too), and for criticising the policies–and here, wrongly. So I started to write a blog on the topic, and then the Tele contacted me to ask me to write a feature–so the blog entry became a feature as well.

So I appreciate your disappointment, and like you I wish that all public discourse, and indeed all of the public, was considered and intellectually informed. But since that’s an imagined world, one has to work out how to engage with the real one. I tried to do so, not by cheering on the personal side of what the Tele said about Stevens, nor supporting them on the arguments they made that were clearly wrong, but by pointing out where the essential cause of their frustration was correct.

I think what we’re seeing here is, at least in part, the inability (or unwillingness) of many real estate asset holders to grasp or comprehend that what they believe is an ‘always appreciating’ bricks-and-mortar perpetual motion machine might, quite possibly, be nothing of the sort. Deflating prices simply can’t be happening, therefore I’ll hold out/hold up until reality realigns itself with my wishes.

That thread will break at some point, probably the ‘max pain’ point.

From my analysis of history this kind of psychological disconnect seems to be very common in the early stages of an asset deflation.

In Australia’s case, Steve’s charts show quite clearly that the rate of debt expansion is not yet decelerating in Aus as much as the USA, so no wonder house prices are still holding up because the ‘artificial’ demand is still there.

If the banks can’t find buyers, then the “asset” has a big fat market value of zero. That’s reality, not theory.

Theoretically, housing prices were supposed to go to the moon and everyone in Oz could afford any amount of debt, but that’s not reality, and that’s what got us to this current point of debt crisis. So theoretically, I guess the banks can say whatever they like about their “assets”, but the reality is that they have solvency issues, not liquidity issues. The egg timer is still ticking.