Play the ball and not the man
on October 21st, 2008 at 12:20 pm
The import of Gerard Henderson’s diatribe in today’s SMH is that the media has done a “soft” job on my views, which have only gained notoriety because of the extreme prediction I have made—about the forthcoming economic downturn qualifying as not merely a recession, but a Depression. It seems I’ve only got attention because of my extreme views, while the media has let the side down by doing a “tabloid” job only and not subjecting my views to scrutiny.
In fact, as many in the media know, I have gained attention because of my Debtwatch Report, which will be two years old as of the next issue (No. 28, to be published in November the day before the RBA meeting). The journalists who have reported my views—including of course Kerry O’Brien, who gets special attention from Gerard in his mockumentary—have read my analysis for two years now. I saw no sign of any attention to the analysis behind my predictions in Henderson’s piece—apart from possibly a “just in case” concession towards the end where he noted that “His predictions of a debt-induced decade-long depression … may be correct.”
In that case, the commentator who deserves the approbrium for “tabloid” journalism is Henderson himself, and not the ABC nor the Daily Telegraph, nor Sixty Minutes. They, after all, read my research, have quizzed me extensively about it, and made the decision based on investigative journalism that my views deserved coverage.
For this, I applaud them—for standing up for the principles of the Fourth Estate. Standard economic commentary has been dominated by the cheerleaders for the policies which have led to this crisis, while the authorities themselves and the academic profession of economics itself have turned a blind eye to any arguments that questioned the mantra in favour of deregulated finance.
I know this from extensive experience. I have made five applications for ARC funding to investigate the dynamics of debt-deflations and Depressions in the last ten years; all have been unsuccessful (including one time when I topped UWS researchers on the ARC’s then published referees’ point scores, after which seven UWS researchers received funding—but I was not one of them).
I made a submission to the Wallis Committee in July 1996, in which I warned that securitisation of loans could lead to a crisis exactly like the Subprime crisis that has now unfolded—and of course my comments were ignored.
I wrote to the RBA in June 1998 offering to hold a seminar on the “Financial Instability Hypothesis”, which is the foundation of my argument that we are likely to experience a Great Depression. The offer was declined.
As has often been said, official channels are often clogged to make sure information and criticism doesn’t get listened to. When I saw the debt that Australia’s speculative bubble in real estate (and belatedly shares) had got us into, I decided to turn to the journalistic profession to raise the alarm. To their credit, since I made a good case and the empirical evidence was compelling, journalists listened to me.
So Gerard, maybe you should do some investigative journalism now too. Go to my blog www.debtdeflation.com/blogs, where you will find Debtwatch Reports going back to November 2006, and academic papers on debt deflation published as long ago as 1995 (maybe even read Debunking Economics). And if you’d like to take a real risk and play the ball rather than the man, I’m more than willing to give a seminar on debt deflation at your Sydney Institute.
Over to you.
JPMorgans economist is now predicting that unemployment will double by late 2010 http://business.smh.com.au/business/jobless-rate-may-double-as-china-slows-20081022-5622.html I thought industry economists were always optimistic. What’s worse is maybe that is the optimistic view.
Steve, a year ago, when I worked at a major bank, the ‘economist’ (often seen on television) said in an internal briefing “that Australians don’t have enough debt”. Also the Oz economy was going great and was going from strength to strength.
I’ll believe Henderson far more when he brings people like that to task, rather than attacking people who consistently warned of the problem coming. Actually given his history, if Henderson says it is sunny outside, I’ll check myself just in case he is ‘being creative with the truth’ again.
Love your book by the way, bought it years ago, it really exposes just how useless the whole mainstream economics field really is.
Marx, Keynes and Minsky, the ‘giants’, when oh when will Marx and Minsky finally get the credit they are due. And when will everyone stop twisting Keynes work to whatever it is they don’t like, some nutjobs even blame Keynsianism for the current mess!
One thing the inflationists keep touting is that the government is going to print so much money and drop rates so low that hyperinflation will be the end result.
Personally, I don’t think that governments will be able to decide the fate here – it will be up to the people. If people continue to leverage up, continue to pay top dollar for assets, and continue with their perceptions of good times, then yes, we could see inflation. Certainly this is not what people are seeing at the moment. Think of the market as an “early adopter”. The market is literally telling you that the “mood” will soon be one where people expect lower prices in commodities, real estate and stocks. If the mood was going to be otherwise, markets would be going right up as the governments try to pump the system up again.
I think the deleveraging will continue as people shun debt. Without the willingness to take on more debt, what are banks going to do to continue the growth of money – demand customers take out loans and over pay for assets? This is where the whole inflation argument falls down for me – but I don’t deny inflation could be the outcome. Even if people do take on debt, who says it will be for asset prices in the US (or Australia?). There are many borrowers in Japan, but carry trades mean that money finds a home elsewhere. I will be very happy to take out a loan in Aussie dollars at 0% as our dollar devalues while I put it overseas to make money. Asset prices in Japan have barely budged.
I reckon that on the way up, asset prices are driven by speculation and what the last person was willing to loan out money for based on what the last person paid. Prices have very little to do with fundamental valuations. On the way down, asset prices fall to levels that make economic sense and have nothing to do with speculation anymore. You can print as much money as you want, it won’t cause inflated asset prices once the dam has burst unless that money bypasses banks and goes straight into the hands of the people. This is why inflation did not take off in Japan and why I don’t think it will work here.
Just a general comment, not aimed at anyone at all.
The ‘market’ in some quarters has taken on an almost mythological status.
“The market does this”, “the market has predicted this”, “the market has factored in this”, “the market thinks this” and so on.
A ‘market’ is just the sum total of people’s decisions, thats all. Now people are smart, dumb, lazy, emotional, logical, …. sometimes all at once. The fact that the ‘market’ is going in a direction means no more than a crowd of lemmings (or yeast). Social psychology has proven again and again that people in groups have herd mentality, and a group of people is often more stupid, risk taking and irrational than an individual.
A simple trick to cure yourself of ‘market’ worship. Everytime your hear the word ‘market, translate it mentally to ‘mob’. Let try it:
“The MOB does this”, “the MOB has predicted this”, “the MOB has factored in this”, “the MOB thinks this”.
See how ridiculous it sounds.
OldSkeptic,
reading between the lines I have to assume your comment was a little bit directed towards mine – but I hear your point and it is a fair comment so allow me to clarify.
I guess what I am saying is that the “market” or the “Mob” is collectively indicating that it sees deflation. On the way up, the market saw credit being extended forever and asset prices never falling. On the way down, it is seeing deflation and values heading towards zero. Both of these are wrong in the long term, but in the short term the market is clearly telling us what the collective mob thinks. I honestly don’t see how this is ridiculous or how it is worship. The market is clearly irrational (just like people can be) and has had me shaking my head many times, but it does give hints to where it sees the future.
My assertion is that the market is indicating deflation. Question: Best performing stockmarket in 2007? Answer: Zimbabwae, rising far faster than mere CPI. Did the market see deflation there? If the market was seeing hyperinflation it would be going up. As would be treasury yields. Neither are. If this turns around swiftly, I will re-look at my deflation hypothesis but until I see that, I can’t see inflation as the likely outcome.
Samuel said,in October 22nd, 2008 at 5:37 pm
The message is for Mr_Clean.
‘The Lucky Country’ is the title of a book by Donald Horne. I think you will find this book very interesting.
Yes that was mention to me yesterday. I picked up a copy. I understand now ! BTW Henderson had another go at Keen on Crickey – follows –
Gerard Henderson: Steve Keen is no psychic
Gerard Henderson writes:
I refer to Associate Professor Steve Keen’s comment in yesterday’s Crikey (Crikey, Tuesday, item 4, “Steve Keen: An invitation to Gerard Henderson”). He also wrote to me direct.
Initially, I should state that I share Dr Keen’s pain that he has made five unsuccessful applications for ARC funding over recent years. Life can be tough in the taxpayer funded academy. To help relieve Dr Keen’s personal burden, I have offered to purchase his Surry Hills apartment for 40 per cent below what he has told me is his reserve price. In view of Dr Keen’s prediction that property values will decline by 40 per cent over the next few years, this is a reasonable offer. I look forward to a prompt exchange of contracts.
I have not been so impolite as to ask the learned professor why he has a reserve price – in view of his educated opinion that property values will fall dramatically and remain low for around a decade. I can only trust that he is not publicly preaching a property-values-will-fall mantra while privately assuming that his own property can remain at its current market value.
Steve Keen commenced his email to me yesterday with the following comment: “I’m pleased that you have read some of my work and of course what I’ve written doesn’t prove that a Great Depression is inevitable”.
It is a pity that, in public, he makes no such concessions. On 19 September 2008, Dr Keen was asked by the Daily Telegraph: “When will Armageddon hit”. He replied: “Any time in the next couple of years”. On 60 Minutes last Sunday, the following exchange took place – Liz Hayes: “Recession or depression, which are we heading for?” Steve Keen: “Unfortunately a depression”.
The fact is that Professor Keen cannot actually predict the future. It is not (in his terminology) playing the man rather than the ball to point this out. If someone makes an irresponsible prophecy in the public debate, he or she should expect some responses. It seems that Professor Keen is somewhat sensitive to criticism.
Here’s hoping that your man gets an ARC grant and that he attains appropriate rental accommodation to write up his findings.
“Talk sense to a fool and he calls you foolish”.- Euripides.
The public are starting to catch on now Steve. That’s why you’re starting to ruffle a few feathers.
After the total bias that the media has shown towards the housing market and it’s infinite price rises, how every interest rate cut is heralded with trumpets and angels singing, how they preface every story about the market “picking up” again with “…in good news today…” and describe even any slight stagnation or levelling off as if it’s hell on earth, it’s bloody refreshing to hear the other side of the story.
Thanks Prof. Treat ‘em mean and keep ‘em KEEN!
Perhaps the attack on Steve by Henderson and then the relentless attacks on Dr Ken Henry by opposition politicians are signs that the political, business and media elites are scrambling to position themselves in a new era as the earth is shifting below them.
I find it disconcerting that the media and politicians are choosing to attempt to pull down some of our best and brightest, and most experienced, economic thinkers. At inflexion points like this, don’t we need “all hands to the deck” and vibrant debate to ensure that our remodelled system is as robust as possible?
Australians will be all the more poorer – literally – if our best decided that the personal costs of continuing to contribute to the debate and to our society were too great!
Time to muzzle the attack dogs and pull together.
BTW, for a “soft” interviewer (according to Mr Henderson), Kerry certainly had Mr Turnbull tied in knots last night!
Good response Steve, but seriously, Henderson’s views are so out of touch these days. Like someone stuck in a 1950′s time warp.
Does anyone pay any attention to Henderson any more? Come to think of it did they ever.
If you ran the rule over Gerard’s prognostications over the last ten years, what would the ratio of hits to misses be? Low indeed is my guess. The big kahuna for the commentariat is of course Iraq – how did Gerard go with that one? In fact, how did Sheehan or the Devine woman go? Anyone seen a retraction, let alone a mea culpa from any of them? Pretty good lurk isn’t it – being comprehensively wrong on the great questions of the age and still getting your cake, and eating it too. These people must satisfy some powerful constituencies to still be working, and that’s the real point of Henderson’s attack. Mr Keen has made uncomfortable some of the owners of the hands you would find up Gerard’s jumper, if you were inclined to look.
The other great theme of Gerard’s oeuvre over the last decade has been the defence of the halcyon Howard years on several fronts. Well, the inactive coasting that constituted economic policy over that time has been exposed by the receding tide of the market. Strike two.
The byline under his name should read ‘Official Establishment Hack’. I’d wear his opprobrium with pride Steve.
Whilst an alternative is not in the wings, everyone will continue to plug the holes in the tank, and downplay the seriousness.
Eventually someone will have what it takes to get a new tank.
“A wise man once said – don’t argue with fools…because people staring at you can’t tell who is who!” ~Jay-Z.
Keep up the great work Steve! There’s no need to tangle with a boob like Henderson….your time and energy is better spent informing people who want to learn & succeed without making the mistakes of the past.
Clearly the purpose of Mr Henderson’s piece was to promote his agenda. This may or may not be related to economic discussion. Personally I thought it was designed to sell newspapers rather than engage in any meaningful discussion.
I doubt he his qualified to play the ball – indeed cannot – so naturally resorts to playing the man.
Time will tell whether Mr Keens predictions come to pass. There is no doubt that the debt merchants have been given unfettered carte blanche for the last 20 years and that this has lead naturally to excessive debt in all sectors, both here and abroad all predicated on speculatively priced asset values aided and abetted by a skewed taxation and regulatory system.
The real question is I suspect whether the debt servicing can continue or not. If it can then a depression may be averted. If it cannot then the house of cards looks very shakey indeed. The ability of the regulators to influence this is limited by globalization – hence we are in uncharted waters.
Of course the risk here is the exposure of every sector – not just one.
One thing is for certain on an individual level: now is not a time to be in high risk asset classes. Nor be leveraged into them.
Time will tell.
Steve,
Would you mind explaining how the US can experience (deflation other than in the short run) when the Fed’s balance sheet has grown from US$800 billion to $US1.3 trillion in a few months and expected to go to US$2.5 trillion by the middle of next year.
You may also wan to explain how we could possibly experience deflation while the world’s major central banks are embarking on a huge monetary expansion.
Bill Monks, you have to look at the total flow of money from debt compared to the flows achieved through monetary and fiscal policy. Example: Australia. Last year private and business borrowings were $200+ billion. The future fund, surplus, the reserve spending its reserves etc are not going to replace that. As well, most of the various reserve banks money is also only guaranteeing existing debt or bailing out defaults, it is not going to expand debt at anywhere near the rate it was.
Love your work Steve, don’t let the likes of Henderson get to you. Pascoe attempted a hack job on you today in Crikey.
Little does he remember his piece early last year that stated the subprime problems in the US were little more than a beat up!
The US also has a limit to how much paper it can issue. At some point, who knows when it will be, the bond holders will lose faith and start selling off the paper. It will then be hard for the US to go on issuing IOUs without raising interest rates.
Secondly. Increasing money supply is demand driven. Consumers are very nervous and they are not borrowing new money. Debts are being written off or repaid through choice and forced sales. This act is reducing the money supply not expanding it.
Heads of state of major countries off to the US to discuss the “World financial crisis”!!! Do I smell Bretton Woods 2 ???
Bill Monk, inflation will occur if the US govt. decides to monetize this debt that they now have on their balance sheet. They more than likely will fiscalize this debt, i.e., raise taxes and thus pass the burden onto the current and future generations of US taxpayers, or alternatively borrow via selling US treasury bonds/bills to the Chinese, Japanese or oil rich middle-east countries that have plenty of US dollars. For them to attract investors to more of their more of their paper, they will need to provide an attractive yield, ie, increased interest rates. In short, if they fiscalize the debt the money supply would not increase, but if they monetize the debt then they will have allowed the inflation genie out of the bottle and we will then see an inflation explostion.
The US Fed is now paying interest on funds of financial institutions that are hoarding money deposited and parked the cash with the Fed. banks. The Fed is turning around and feeding this money straight back out through their various emergency facilities that they have set up like TARP, MMIFF etc. to prevent deflation.
The current process of deleveraging, all assets are being repriced downwards, the corresponding debt money associated with these assets, which once added to the expansion of the money supply during the time of asset price inflation, is now doing the exact opposite and in fact the money supply is contracting, which is causing deflation. The Fed is running out of tools to prevent mass deflation. The Feds funds rate is at 1.5% nearing zero bound or a liquidity trap!
John Quiggin has just given Steve a vote of confidence, btw:
http://johnquiggin.com/index.php/archives/2008/10/23/steven-keen-on-debt/
Dear Steve
I just love the way Gerard Henderson classes UWS as a ‘suburban university’ in effect dismissing it as it as irrelvant. Also, the hack job on you is just comical….how about challenging him to a debate on this blog or at the Sydney Institute in front of his right-wing hacks….that woud be commical….
Emil, sorry it was not directed at you at all, just your mention of ‘market’ crystalised a thought I had been getting by reading through the other posts (and a lot of other blogs, etc).
You are right, inflation, except as a short term blip, is not possible in a delationary environment. That being said, but:
Inflation is the totality of all prices. One of the great ponzi moves made, here in Oz, as well as the rest of the world, is that asset inflation did not matter. Many countries decoupled, or reduced, their housing costs from their CPI measures (the US was one of the worst), but so did we under Keating.
This has meant that total inflation has systemically been underestimated for ages. Interest rate rises and house price rises are a major component of the weekly budget.
Now we can have a deflationary environment with increasing prices in some areas, e.g. energy or food. Plus Oz is so import dependent that a low dollar will increase some prices (e.g. oil). The totality of prices will drop, but a lot of people are really going to suffer because some products, including some basics will increase, perhaps a lot. In Perth the electricity supplier has applied to the regulator for a 40% increase in prices, ouch. As the endless drought carries on, food prices will continue to rise.
Basically the CPI is a basket, a lot of things will go down, but some things will go up. The total CPI may be low or even negative, but that loaf of bread may double in price.
The sad thing is that the RBA, if total housing costs had been part of the CPI that they watched, would have clamped down on the ‘boom’ ages ago and Oz would be in a much better place to weather the storm now.
Why didn’t they? Greed and stupidity. As long as so many people were making gobs of money (banks, builders, speculators, State and Federal Govts, etc, etc, etc) is was all a case of “monkey see no evil, hear no evil .. give me some money”. That’s one of the reasons why people like Steve got shut out, spoil the party, no way.
Thinking about the future? Thinking about the long term future (1 year +) is not a big part of the human cognitive matrix. Plus we have the curse of optimism, which inevitably leads to cognitive dissonance.
Steve, you are a public figure now – you have to expect this. This is the price of entering the debate in such a public way. Please keep the analysis coming.
Steve, Mr Pascoe is also on the job of trying to pull your ideas down. Quoted below is Mr Micheal Pascoe’s critique of you. Your colleagues seem to be getting very gealous of your media exposure. Yoy must be doing something right!
Mr Pascoe quoted verbatim:
Economists can occasionally be dangerous things when radical or simply wrong ideas fall on fertile ground. Karl Marx, for example, never personally hurt anyone that I know of, but some of his ideas eventually helped cause incredible suffering and death.
Domestically, an associate professor at the University of Western Sydney, Steve Keen, is currently scaring the easily-frightened with especially dire forecasts about the Australian economy. Keen’s predictions aren’t taken very seriously by most economists, but he’s still enjoyed plenty of media attention, much of it unquestioning. Some of my media colleagues are happy to search out the most extreme and alarmist views – they make bigger headlines.
Keen is predicting the economic equivalent of the earth splitting open, spewing forth fire, toads and serpents, the seas turning to blood, the Four Riders of the Apocalypse loping off random heads and limbs and so on. He represents a tiny minority of economic opinion.
(Part of Keen’s appeal to populist media is that he has put his unit on the market, claiming housing prices are going to crash. As Rory Robertson, Macquarie Bank’s respected interest rate strategist, observed, Keen would have more credibility as a housing forecaster if he had sold his unit last year.)
Journalists can be as dangerous as economists too when they needlessly scare their audiences and perhaps provoke them into doing the wrong thing. I’m writing this on a flight to Perth and have just watched the Channel 9 Inflight News with a couple of prime examples.
There was doom and gloom story that treated the rash of redemption freezes by mortgage funds as if it news – it’s been going on for months. And the report used the sorry house of Citi Pacific as its main case study. Citi Pacific blamed Kevin Rudd – I think the over-geared Gold Coast outfit should look much, much closer to home for the root of its problems. Quite frankly, Citi Pacific was on the nose with the stock market before the sub-prime crisis hit.
More importantly, a serious young English reporter (well, young compared with me) filed a cliché-riddled yarn from Shanghai that gave the impression China might be grinding to a halt and that it would take the rest of the world down with it.
What rubbish.
China is slowing, but slowing from an unsustainably high growth rate to what remains strong growth in anyone’s language. The 9 per cent growth it recorded in the September quarter would of course be the envy of any other country – down from more than double-digit growth last year.
If you want to know what China is doing, turn to the experts, the two companies that are intimately entwined with the China story: BHP and Rio.
Last week Rio released its quarterly production numbers and included the comment that the expected re-bound in Chinese demand from the Olympics close-down looks like being delayed from the December quarter and was more likely early next year. That caused a sharp sell down of Rio and other resources shares.
It’s perhaps not accidental then that Rio’s chief economist, Vivek Tulpule, turns up in an interview in today’s Sydney Morning Herald putting a bit more perspective on those China remarks. As the SMH reports:
“He said the downturn in metals demand in China during the second half of this year had taken the market by surprise.
Thanks SAVEME2, I wonder what robust analysis Mr Pascoe conducted to arrive at his conclusion – “Keen’s predictions aren’t taken very seriously by most economists”.
And thanks also to James Haughton for pointing us to John Quiggins blog topic for today where he says “I’m generally in sympathy with the arguments presented here [Steve's CPD paper]. However, having made similar arguments for a long time and having been continually surprised by the durability of the asset price boom/bubble let me offer a couple of counterarguments/cautions…….[go to blog to read specific points]….Obviously, the opposing arguments I wanted Keen to respond to look a lot weaker now. Whatever qualifications I might still want to make, Keen got the basic points right, and those who are criticising him now should concede this.”
And I notice on the news the politicians were now gunning for Glenn Stevens today, after having a good go at Ken Henry on the previous two days.
Looks like it’s open season on economists – except, of course, for those employed by the banks and other vested interests because they ARE “respected” (though Mr Pascoe didn’t tell us by whom).