Always look on the bright side of … eco­nomic data?

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If things are really grim, it helps to have an inde­fati­ga­ble nature, and there’s no doubt that RBA Deputy Gov­er­nor Ric Bat­tellino has that in spades—at least in the speeches he makes at pub­lic con­fer­ences. Were I being cru­ci­fied, I’d like to have Ric up there with me, singing “Cheer up Brian!…”, to take my mind off the nails.

But were I still in the Gar­den of Geth­se­mane, and actu­ally try­ing to avoid the Romans (and an extended Pilates ses­sion the next day), I think I’d want some­one else on look­out duty.

Last month, in his Address to ITSA’s 7th National Bank­ruptcy Con­gress in Syd­ney, Bat­tellino looked at the data on Aus­tralian house pric­ing, and saw no rea­son to expect them to fall all that much.

Curi­ously, he argued that the Aus­tralian mar­ket was actu­ally ahead of the US—that we’d already peaked in 2003, three years before the US mar­ket hit the peak from which it is still pre­cip­i­tously falling:

First, the cycle in the Aus­tralian hous­ing mar­ket, rather than fol­low­ing the US mar­ket, is in fact at a more advanced stage; it is prob­a­bly lead­ing the US mar­ket by three years or so. The Aus­tralian hous­ing mar­ket was at its hottest in 2003, whereas the US mar­ket peaked in 2006.”

Strange then that the ABS data put the index of Aus­tralian house prices at 101.5 at the end of 2003, ver­sus 130.7 in June of this year. So … Aus­tralian house prices fell minus 27 per­cent from their peak? We indeed live in a Lucky Coun­try, if house prices rise when the mar­ket cools.

In fact, the index did reached a mini-peak at the end of 2003, and fell 1.5 per­cent in 2004. But it then regained momen­tum, and rose another 30 per­cent above the tiny dip in 2004.

Battellino’s con­sid­er­a­tion of other data was not so obvi­ously Orwellian—he noted the short­age of sup­ply here ver­sus an over­sup­ply in the USA, and that is clearly the case.

But he also ignored other read­ily avail­able data when pre­sent­ing what he described as “an objec­tive look at the state of house­hold finances”.

How about the objec­tive data, as recorded in the Demographia sur­vey, that Australia’s median house price, at 6.3 times median income, is the most unaf­ford­able in the OECD? Or the RBA’s own data that which shows that, rel­a­tive to house­hold dis­pos­able income, house­hold debt in Aus­tralia is actu­ally slightly larger than in the USA?

Clearly our eco­nomic man­agers are torn between not want­ing to spook the mar­ket, and want­ing to present objec­tive guidance—so much so that debat­ing whether eco­nomic pro­jec­tions reflect sci­en­tific fore­sight, or polit­i­cally inspired spin, has become the con­test du jour in Ques­tion Time.

In this, both sides of our House are miss­ing the point. If Trea­sury and the RBA had got it right, we wouldn’t be in the Gar­den of Geth­se­mane in the first place—we’d be in the Gar­den of Eden instead

The US Congress’s Over­sight Com­mit­tee got closer to the mark, when it forced Greenspan into the admis­sion that the eco­nomic phi­los­o­phy he’d been fol­low­ing for the pre­vi­ous 40 years was wrong.

This phi­los­o­phy led him to not merely ignore asset bub­bles, but to renew Wall and Main Streets’ spec­u­la­tive manias after each bub­ble burst, by rekind­ing the growth of pri­vate debt until it hit the unsus­tain­able lev­els that have pre­cip­i­tated this cri­sis.

At least Greenspan—though admit­tedly in retirement—had the gump­tion to admit fault. Our eco­nomic man­agers, caught in a cri­sis they didn’t see com­ing, are still using the same mod­els that didn’t antic­i­pate this mess, and still look­ing for the glim­mers of bright­ness amidst the sta­tis­ti­cal gloom.

Days after Battellino’s speech, the ABS released its update to the house price index, which showed that prices had fallen 1.84 per­cent in the Sep­tem­ber quar­ter.

Cheer up Brian!…”

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • pru­dentsaver

    Now it seems they will push the long end down, by print­ing money. Like Japan did lead­ing up to 2003. There­fore mak­ing hous­ing more afford­able. I think the psy­chol­ogy towards bor­row­ing would change if the exchange of the dol­lar fall, and infla­tion starts to head up.

  • icon­o­clast

    yep, it prob­a­bly will be the next thing they do, as you said, they’ll start to walk up the curve push­ing it down as well, but that may not nec­es­sar­ily trans­late to marked changes to the retail rates, given the bankers are going to try and keep as much as they can to rebuild their shat­tered bal­ance sheets.

  • pru­dentsaver

    When inter­bank rates, and every­thing finally comes close to 0 %, and given that things goes to the side of defla­tion in the next 2–5 years then I am pretty sure there will be some kind of boom. Japan went crazy on those inter­est rates. How­ever, the money did not went domes­tic. It could be a final blow off phase, tak­ing mad­ness to the utter level, the 0 % boom. If that don’t hap­pen, it will be a pump prim­ing boom, like the 1932–1937 boom, also a 0 % boom. I just think the kind of crazy liq­uid­ity will come back, if bank lend­ing rates come down to the cen­tral bank rates.

    Every­one is going to push rates down to 0 %.
    China is com­ing from 7,4 %, I think they might, might, have a room for expan­sion as they are com­ing from a pretty high level. Much more than the US, it’s a remote pos­si­bil­ity, that there will be some sort of carry trade between old and new economies, sim­i­lar to the trade the last years.

  • chris

    Cap­i­tal­ism and the spec­u­la­tive mar­kets will clearly fall and will be replaced by some­thing bet­ter. If this doesn’t hap­pen in the next 5 years then it will defen­itely in the next 500 years.

    You can’t pos­si­bly pre­dict the future look­ing at the past 100 years only. Try pre­dict­ing and explain­ing the cap­i­tal­ism to the feu­dal soci­ety based on your expe­ri­enc in the pre­vi­ous 100 years of feu­dal­ism.

    With the glob­al­i­sa­tion the needs of this world have changed and it now also needs a bet­ter sys­tem. The gobal warm­ing and a small aster­oid col­is­sion with the Earth will play a big role in this change of the whole planet … for good. Human­ity needs to align its under­stand­ing of the uni­verse with the real­ity and needs to find and set clear evo­lu­tion­ary goals and base the replace­ment of the Cap­i­tal­ism on those goals if it wants to sur­vive and grow.

  • joshua

    Has any­one read the lat­est fig­ures of the US. They have expe­ri­enced defla­tion and are ner­vous about it. Any com­ments?

  • Phil

    Chris,

    Cap­i­tal­ism is unlikely to change for a long time to come. Even though it has been trash­ing the envi­ron­ment for a long time (since the incep­tion of mar­kets, accel­er­at­ing with the indus­trial rev­o­lu­tion), the prob­lem with what we call cap­i­tal­ism is two-fold.

    First is prob­a­bly the most obvi­ous that peo­ple can see: cor­po­ra­tions. They are state-charted insti­tu­tions that are unde­mo­c­ra­tic and total­i­tar­ian in orga­ni­za­tional nature. Its exec­u­tives, even if they do care about the envi­ron­ment and other impor­tant mat­ters, are placed under extreme pres­sure to max­imise short-term profit regard­less of the con­se­quences. Com­bine that with their con­trol and influ­ence over gov­ern­ments, their “rent-seek­ing” has enor­mous costs to the tax­payer, soci­ety and indi­vid­u­als. Essen­tially cor­po­ra­tions are legally oblig­ated to act like a sociopath to make money for those who already have more than they need.

    Aus­tralia is a for­tu­nate nation where we have some­what strong pro­tec­tion of the envi­ron­ment, labour, the poor, etc. How­ever, Aus­tralia is one of the few coun­tries in the world with such pro­tec­tion, along with the other West­ern coun­tries.

    The other major prob­lem is the the­ory that dri­ves pub­lic and pri­vate eco­nomic pol­icy: neo­clas­si­cism. As Keen has shown, it is rather pseu­do­sci­en­tific in nature, and is about as use­ful as an astro­nom­i­cal model of the solar sys­tem with the sun, moon and grav­ity miss­ing. Even if a new brand of eco­nom­ics that truly under­stood mar­kets was to be devel­oped tomor­row, cor­po­rate power couldn’t much care less about it. 

    Capitalism’s biggest polit­i­cal ene­mies are not the fire­brand trade union­ists spew­ing vit­riol against the sys­tem but the exec­u­tives in pin-striped suits extolling the virtues of com­pet­i­tive mar­kets with every breath while attempt­ing to extin­guish them with every action ” (p. 276).

    Rajan Raghu­ram G. and Luigi Zin­gales. (2004). Sav­ing Cap­i­tal­ism from the Cap­i­tal­ists: Unleash­ing the Power of Finan­cial Mar­kets to Cre­ate Wealth and Spread Oppor­tu­nity

    The con­sump­tion of oil is a dri­ver in defil­ing the envi­ron­ment. A good exam­ple of this is the cost of petrol: it’s mis-priced by a fac­tor of 5 to 15, when its exter­nal­i­ties are fac­tored in. http://www.icta.org/doc/Real%20Price%20of%20Gasoline.pdf

    One of the delu­sions that big busi­ness and its pet econ­o­mists have cast upon soci­ety is that cor­po­rate cap­i­tal­ism = a gen­uine demo­c­ra­tic mar­ket sys­tem. Noth­ing of the sort. A well func­tion­ing mar­ket sys­tem is more than just stuff­ing more dol­lars into the wal­lets of the aver­age worker. A demo­c­ra­tic eco­nomic sys­tem is about sub­or­di­nat­ing the profit motive to worker democ­racy – an end in itself. The var­i­ous eco­nomic schools of thought don’t much deal with the con­cept of eco­nomic democ­racy. Marx­ism appears to deal with some of it, but I don’t think any­one would want to live under the sys­tem it pro­poses.

    I won­der what Steve’s posi­tion is on cor­po­rate power, given that we already know what he thinks about con­ven­tional eco­nomic the­ory. What do you guys and gals think about it?

  • Ernie

    The clas­sic with US defla­tion is they already run a bogus pumped up GDP fig­ure as men­tioned above.

    http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers

    So it’s way worse than their gov­ern­ment makes out.

    Even our RBA is yet again talk­ing up the econ­omy to boost pub­lic con­fi­dence instead of telling them what’s really hap­pen­ing.

    http://www.news.com.au/business/story/0,27753,24675554–462,00.html

    - Ernie.

  • icon­o­clast

    re: “One thing I don’t under­stand though: If the gov­ern­ment and/or cen­tral bank wants to com­bat defla­tion, what can’t they just print money and hand it out a grate­ful pub­lic?”

    car­bon­sink, this is pre­cisely what the Rudd govt. is doing right now with the $10 bil­lion plus the $300 mil­lion injec­tion.

    The $10 bil­lion has been handed out to that part of the com­mu­nity that has the great­est propen­sity to con­sume, ie, pen­sion­ers and the low income earn­ers.

    The govt. is putting money straight into their hands of those that will spend and hop­ing, pray­ing, that they will go out and spend it to prop up the col­laps­ing aggre­gate demand. 

    How­ever, the low income earn­ers who are also debt slaves will prob­a­bly pay down their debts and hoard the rest, thus no demand side stim­u­lus from that part of the com­mu­nity.

    The next part of Rudd’s ‘Hail Mary’ is to get their recent $300 mil­lion stim­u­lus to local govt. around Aus­tralia, where they will as quickly as pos­si­ble start to inject the money into their local economies, and thus spread the stim­u­lus across the entire nation.

    Local govt. will spend this stim­u­lus on projects that do not have a long lead time til imple­men­ta­tion, as com­pared to infra­struc­ture projects that typ­i­cally have long lead times in the order of years.

    The gov­ern­ments fis­cal stim­u­lus will be dis­mally insuf­fi­cient to fill the decline in the GDP as a pro­por­tion of debt based con­sump­tion.

    How­ever, it is not only debt based con­sump­tion that is in deep decline, cor­po­rates are cut­ting their cap­i­tal expen­di­ture, and with com­mod­ity prices hav­ing col­lapsed this will put a stop to export income flows as vol­umes are now declin­ing, as well as, price declines early next year when con­tracts are rene­go­ti­ated.

    The RBA will be con­strained with mon­e­tary pol­icy as the AUD crum­bles, i.e., fur­ther reduc­tions in inter­est rates is debat­able given they may need to fur­ther defend the cur­rency, since their open mar­ket oper­a­tions have not been suc­cess­ful and their inter­na­tional reserves will be insuf­fi­cient.

    The Rudd gov­ern­ment with the RBA are cer­tainly see­ing some really scary scary num­bers.

    They are attempt­ing to cur­tail the decel­er­a­tion in the veloc­ity of money through this process, but it’s just not going to be suf­fi­cient.

  • icon­o­clast

    re: “An inter­est­ing post @ 4:15 on Nov 18th. I was with you all the way until the cli­mate change denial­ism, sorry, “skep­ti­cism”.”

    car­bon­sink, con­trol of pop­u­la­tion growth is where our focus should be and cre­at­ing a new eco­nomic sys­tem that does not rely on year-on-year com­pounded growth, so as to achieve a truly sus­tain­able soci­ety.

    The points above are destroy­ing this planet faster than the absur­dity of a dele­te­ri­ous anthro­pogenic impact on the increase of CO2 trace gas in the atmos­phere.

    As a con­trol sys­tems engi­neer, where my area of exper­tise is in the math­e­mat­i­cal mod­el­ing of non-lin­ear dynamic multi-vari­able con­trol sys­tems, and hav­ing been trained in the sci­en­tific method I can not eas­ily accept what the cli­mate change lobby is attempt­ing to por­tray as fact. 

    There is exten­sive debate in the sci­en­tific com­mu­nity regard­ing the accu­racy of these math­e­mat­i­cal cli­mate mod­els.

    It is not dif­fi­cult to string together a few math­e­mat­i­cal mod­els to give you any­thing you want to see, if you try hard enough. 

    With the non-lin­ear dynamic nature of the cli­mate sys­tem with it’s unknown num­ber of pos­i­tive and neg­a­tive feed­back loops, link­ages and cou­plings, these global warm­ing fear mon­gers are rely­ing more on voodoo than sci­ence.

    I’d rather believe in what the geo­log­i­cal his­tory tells the sci­en­tific com­mu­nity than on some ques­tion­able math­e­mat­i­cal mod­els.

    Delu­sional pseudo-sci­ence is not appar­ently restricted to only neo-clas­si­cal econ­o­mists.

    P.S.

    Just as an exam­ple as to why I don’t accept the anthro­pogenic fear mon­ger­ing:

    http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/11/16/do1610.xml

    It is the nature of the human species to reject what is true but unpleas­ant and to embrace what is obvi­ously false but com­fort­ing.

  • icon­o­clast

    re: “An inter­est­ing post @ 4:15 on Nov 18th. I was with you all the way until the cli­mate change denial­ism, sorry, “skep­ti­cism”.”

    Con­trol of pop­u­la­tion growth is where our focus should be and cre­at­ing a new eco­nomic sys­tem that does not rely on year-on-year com­pounded growth, so as to achieve a truly sus­tain­able soci­ety.

    The fac­tors above are destroy­ing this planet faster than the absur­dity of a dele­te­ri­ous anthro­pogenic impact on the increase of CO2 trace gas in the atmos­phere.

    As an con­trol sys­tems engi­neer, where my area of exper­tise is in the math­e­mat­i­cal mod­el­ing of non-lin­ear dynamic multi-input, multi-out­put con­trol sys­tems, I can not eas­ily accept what the cli­mate change lobby is attempt­ing to por­tray as fact. 

    There is exten­sive debate in the sci­en­tific com­mu­nity regard­ing the accu­racy of these mod­els. It is not dif­fi­cult to string together a few math­e­mat­i­cal mod­els to give you any­thing you want to see, if you try hard enough. With the non-lin­ear dynamic nature of the cli­mate sys­tem with it’s

    This delu­sion is not appar­ently restricted to only neo-clas­si­cal econ­o­mists.

    P.S.

    Just as an exam­ple as to why I don’t accept the anthro­pogenic fear mon­ger­ing:

    http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/11/16/do1610.xml

    It is the nature of the human species to reject what is true but unpleas­ant and to embrace what is obvi­ously false but com­fort­ing.

  • icon­o­clast

    re: “An inter­est­ing post @ 4:15 on Nov 18th. I was with you all the way until the cli­mate change denial­ism, sorry, “skep­ti­cism”.”

    Con­trol of pop­u­la­tion growth is where our focus should be and cre­at­ing a new eco­nomic sys­tem that does not rely on year-on-year com­pounded growth, so as to achieve a truly sus­tain­able soci­ety.

    The fac­tors above are destroy­ing this planet faster than the absur­dity of a dele­te­ri­ous impact on the cli­mate sys­tem due anthro­pogenic CO2 trace gas emis­sions.

    As a con­trol sys­tems engi­neer, where my area of exper­tise is in the math­e­mat­i­cal mod­el­ing of non-lin­ear dynamic multi-vari­able con­trol sys­tems, I can not eas­ily accept what the cli­mate change lobby is attempt­ing to por­tray as fact. 

    There is still debate in the sci­en­tific com­mu­nity regard­ing the accu­racy of these mod­els. It is not dif­fi­cult to string together a few math­e­mat­i­cal mod­els to give you any­thing you want to see, if you try hard enough. 

    The non-lin­ear dynamic nature of the plan­ets cli­mate sys­tem, hav­ing known and unknown pos­i­tive and neg­a­tive feed­back loops, link­ages and cou­plings, which are still not well under­stood is far far more com­pli­cated than the cli­mate mod­els that are being used by the anthro­pogenic cli­mate change com­mu­nity.

    I’d rather believe in what the geo­log­i­cal his­tory tells the sci­en­tific com­mu­nity than on some ques­tion­able math­e­mat­i­cal mod­els being put for­ward as fact.

    Cli­mate change is a fact of life, it has always been with us, we only need to look at the earth’s geo­log­i­cal his­tory for that. How­ever, it does not infer that it is chang­ing because of anthro­pogenic CO2. There are other influ­ences some known and cer­tainly oth­ers unknown that have influ­ences on the cli­mate sys­tem, exam­ples, vari­a­tions in solar out­put and oceanic cycles.

    Delu­sional psuedo-sci­ence is not appar­ently restricted to only neo-clas­si­cal econ­o­mists.

    P.S.

    Just as an exam­ple as to why I don’t accept the anthro­pogenic fear mon­ger­ing:

    http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/11/16/do1610.xml

    It is the nature of the human species to reject what is true but unpleas­ant and to embrace what is obvi­ously false but com­fort­ing.

  • pru­dentsaver

    I am very doubt­ful about Aus­tralian House prices going down much at all in nom­i­nal terms.

    The rea­son is that real estate seems to track the metal gold. Gold is still going up in AUD terms. Down in USD, but not in AUD.

    I think this rela­tion­ship with gold and real estate holds in a way that means that the house price infla­tion from 2003, actu­ally strange as it sounds, was a defla­tion of the house price bub­ble from 1996–1997, after house prices started ris­ing in 1993. This is also con­firmed by look­ing at oil and other “hard assets”. Now I am wait­ing for the 0 % rates, and the wave of infla­tion as bonds sell off.

  • pru­dentsaver

    Just let me explain it.

    I think gold have increased from 250–300 to 1000 USD, now down to around 800 USD. Real estate have increased far less.

    I think that means that house prices in the last boom maybe have went down in real terms, not up, espe­cially in coun­tries with col­laps­ing cur­ren­cies that have lost 40 % against USD or YEN like Aus­tralia. Mean­ing that the boom from 2003, actu­ally deflated the last boom through infla­tion. Maybe this trend will go on in the future. A nom­i­nal rise in house prices, but still a decline in real terms com­pared to gold.

  • pru­dentsaver

    I also think there is a huge, impor­tant dif­fer­ence in this boom start­ing in 2003, not being very present in 1997, and that is that much of this increase have been due to houses hav­ing a hard asset sta­tus. Very much like buy­ing gold using lever­age. In the first part of the boom from 97 it was very much the paper part of houses that drove the rise. But in the last cycle from 2003, I think there was a shift from the paper side to the hard asset side of houses that drove the increase. Just as there occurred a shift in the gen­eral infla­tion cli­mate in year 1999–2000, or the paper vs hard asset trend, very sim­i­lar to what hap­pened after the Viet­nam War, last­ing into the sev­en­ties.

    Much of the infla­tion at that time, came from a low level of lever­age to, mean­ing inter­est rates were much more effec­tive. But that mech­a­nism is also present today, in emerg­ing economies, indi­rectly dri­ving infla­tion in our coun­tries, with­out the wage price spi­ral.