The Parliamentary Library arranged a debate between myself and Rory Robertson of the Macquarie Group on the financial crisis today. We had a good audience of about 70 Parliament House denizens. You can download the Powerpoint Slides slides for my presentation, and the Vissim model of Minsky’s Financial Instability Hypothesis which was part of the presentation ( Right click and choose “Save As” since this is a text file; then install the viewer, which can load the file and let you run it (I’ve also loaded the EXE file of the viewer onto my site as another way of getting the program). You can make changes too, but they can’t be saved).
The Library has put the recording of the debate up on its Vital Issues page. Since this will change over time, shortly I’ll add the MP3 file to my list of podcasts.
Was it a K.O Steve or did you just get a points decision?
Also was it recorded for publication or were they too embarrased ?
Rory actually rates as a “bear” amongst market economists, though a fair distance from me in the growl stakes. The discussion was pretty amicable, and it came down to whether or not the RBA had the power to manipulate (i.e., keep high relative to incomes) house prices via dropping interest rates.
We took a bet on the issue. If house prices drop less than 20% peak to trough, I lose; if they fall 40% or more, Rory loses, and the loser has to walk from Parliament House to Kosciusko.
The audience was pretty focused on my analysis, and it included a large number of advisors (though the only MP present was the Chair, Sharryn Jackson [Labor, WA]).
We’ll see what comes of it. I gave the most analytic presentation I’ve yet given on the topic (outside the presentation I gave to the Centre of Excellence in Complex Systems), mainly because I think people working in parliament don’t need to know the facts–which they get pummelled with every day–but some theory that makes sense of them.
No recording so far as I’m aware though! It would have been interesting…
Steve
I was at the talk this afternoon and throughly enjoyed it. Quick question I didnt get to ask. What is your opinion on the rising credit card debt and its implications for the current financial crisis.
The focus is clearly on interest rates but the lowering of rates by the RBA appears to have little to no impact on credit card rates ?
Thanks
a.
Steve,
I find your heterodox views on economics intriguing. You are certainly one of the few economists in Australia that I have any time for, I certainly have no time for Treasury or the Reserve Bank! I have been reading your blog for some time now and your comments in the media.
I agree with many of your views, especially your view that this crisis is primarily a result of too much debt in the economy. A recession is needed to deflate the bubble asset prices that have built up recently and reduce debt in the economy. The government should let the recession run its course rather than making problems worse by attempting to continue reckless consumer lending and bubble asset prices.
Still, it is apparent that your views do not entirely represent the “Austrian School” of economics, which in my view contain all of the explanations for this crisis. I think the actions of governments in Australia and the US in making this problem worse and not allowing the massive build up of debt and asset prices to wind down quickly will lead to a severe depression and ultimately lead to the discredit of most modern economists and reserve bankers and the end of the fiat monetary system.
It is pleasing to see Peter Schiff’s (Austrian economic) views in the United States are gaining momentum. You can see his views by reading this link:
http://au.youtube.com/watch?v=TP_aJ7LcAAA
Regards
David
I’m not certain that losing the bet is a bad thing, that section of the Australian Alps Walking Track http://www.australianalps.deh.gov.au/parks/walktrack/index.html is beautiful. Maybe Rory is a bushwalker ?
I hope someone is keeping a record of the pronouncements of the OECD and various economists. For anyone writing a book it would be great to start a chapter with the appropriate “The crisis is over” quote just before the next disaster.
Steve,
It would have been an interesting debate and I would have loved to have been there.
Would it be possible to view the powerpoint presentation provided by Rory Robertson assuming, of course, that he made his delivery via Powerpoint? Perhaps you could consider placing it on your blog.
Cheers
Anthony, credit card debt is only a small proportion of total debt, about 2-3%. The high interest rate reflects the increasing risk seen by the banks; they have no idea of the risk for many customers. There is nothing stopping someone who loses their job and doesn’t having any assets from having a big spend and then declaring bankrupt.
steve,
what happens if house prices drop more than 20% but less than 40% ? You both walk?
Isn’t this the most likely outcome?
Question to all,
If reflation is so easy and obvious, why didn’t Japan just reflate 15 years ago?
Is it possible that there is a more powerful force than loose monetary and fiscal policy?
Another excellent presentation! I see you’ve successfully added Ponzi finance into your Minsky-sytle model. Looks good!
To David: the problem with traditional Austrians is they don’t like to put numbers on things, so it’s hard to test their ideas. Steve’s models incorporate much Austrian and post-Austrian thinking.
Given that people are starting to listen, I would like to see you make some specific comments on the Keynesian approach of the government, the extent to which the RBA has gone down the US path, and what alternatives should be considered.
You might also comment on the kind of path we’re likely to see here, given that we do not share the same currency, housing, banking or political system with the US.
Bullturnedbear,
As Steve has pointed out on numerous occasions, implementing his idea of government controlled wages is absolute heresy within the neoclassical school of thought.
As the Japan experience has shown, decreasing the interest rates (BoJ 0.1%) will not reflate the economy, as individuals/households/businesses will use their incomes and lower interest rate loans to pay off existing debt rather than consume and invest. Furthermore, a low interest rate may well contribute to the formation of asset bubbles years down the track, thus facilitating the cycle once more.
A podcast of the Parliamentary Library Vital Issues seminar with Steve and Rory can be found on the Parliament website at http://www.aph.gov.au/library/pubs/Vis/index.htm
A podcast of the Parliamentary Library Vital Issues seminar with Steve and Rory can be found on the Parliament website at http://www.aph.gov.au/library/pubs/Vis/index.htm
Copies of Steve and Rory’s powerpoint presentations are also avaliable at this page.
I am quite amazed at the continuing total consdideration of the External Account. Let’s assume that Rory’s expectation that the Reserve Bank can lower interest rates enough to refloat the real Estate bubble comes to fruition. Bloody bewdy!!!!!! We have a boom again at no cost to anyone….this is pure alchemy!!!
Let’s look at what the real result will be
1. Smash the real wealth of the prudent in our society and tax them for the privilidge of losing all their money.
2. In the process make it clear to all Australians that it never pays to save and it always pays too overspend.
3. Substantially enlarge Australia’s overseas debts (currently something over $600 Billion i.e. $600,000,000,000 – I suppose a zero here and there never hurt anyone?
4. Require the sale of even more of our resources to opverseas interests. I understand that foreign ownership is now about 80% of the Mining industry. The food chain is long since sold and most major companies supplying goods and services to the population are overseas controlled.
As I understand a balanced economy it is this (contrary to modern economic thinking)
1. The private sector is balanced – income roughly matches expenditure with a fair percentage of saving providing capital for the corporates and other requirements for new capital.. Debts are controlled and manageable without having to resort to artificially low interest rates.
2. The Government sector is balanced. Again Income roughl;y matches expenditure, especially when measured over a number of years.
3. The external account is balanced. The Current Account is in balance or in some surplus depending on the circumstances.
What we have at the moment is a Government sector that is balanced…BUT!!!!…at the expense of a seriously unbalanced household sector AND an external account that is now so out of whack that it can never be balanced!! Costello Henry et al managed to balance the budget…but not through any great wisdom. It was balanced through the reckless stimulation of the household sector, resulting in more income for the Government but, at the same time, more household debt and more owed to foreign governments, foreign institutions and individuals, as well as the reckless disposal of the nation’s assets and the destruction of the independence and pride of a nation.
Why is everyone so hell bent on ignoring this very important aspect of this whole debt, saving, interest rates scenario?
Because we are ruled by a bunch of bloody psychopaths who don’t give a rats about the nation, it’s children or their future. We are governed only by the total self-interst of those with their snouts in the trough.
A few good calls Outback,
Especially the call on taxing savers. Problem is they might try to do it, because everyone in the west has turned into a borrower. Politics will dictate that Governments will try to favour the borrowers.
The massive debt problem is going to be fixed. The fix has already begun. That is, the greatest debt deflation in history (even greater than The Great D) is underway. The Governments of the World have NO IDEA!!!! They are changing their minds and policies by the week. They have NO POWER TO FIX THIS THOUGH. It will just run its course.
The overriding powerful forces in action are risk aversion and increasingly pessimistic sentiment. This risk aversion will continue to see borrowers pay back debt and lenders reduce the amounts they lend. This will go on until it has gone too far. The train is moving and you better get out of its way. In the next two years there will be mass bankruptcies and many bank failures.
I don’t believe Economics has an answer to this one. The answers are all at the individual level and are as follows:
1. GET OUT OF DEBT. Even if you are going to make a loss on what you need to sell.
2. Sell shares, houses and any junk you don’t need. Convert to cash.
3. I mean physical cash. As much as possible. Do you know how hard it is to get money out of the banks. The RBA has run out of $100 notes. You also need to book in at least a week to get a significant amount of cash out of the banks.
4. Be patient. This will take a long time to play out.
5. Be prepared for wars, terrorism, societal breakdown.
6. Get a dog and a seed bank.
There is probably more to add to the list, I have run out of time. If anyone wants to add to this list that would be fun. I you think I am a total nut, great also. Time will tell.
Outback Oracle, you got the main points right I reckon. There is a no real intention by the government policy makers to rein in debt. (One thing: looks like Aus debt is closer to $1082b)
Govt has encouraged ridiculous amounts of private debt via negative gearing and interest only loans for investment properties and shares. Cutting the CGT in 1999 was the green light for investors to go on a spending spree; tax payers destined to pick up the tab.
Most debt in Aus is property debt: http://www.rba.gov.au/Statistics/financial_aggregates.html
$674B = Owner occupied Housing debt
$308B = Investor property debt (heavily subsidized by tax payers)
There is another $151B in personal debt (credit card, cars, furnishings etc) and business debt is $770B (85 percent is associated with services within Aus that produces no export income).
$1082B in property debt produces not one cent of export income. On top of that there may be up to about $654B of business debt, also not earning export income associated with housing that produces nothing.
Little wonder Aussie dollar is marked down.
Does anyone else think it is ridiculous that we have built an economy on the sands of housing debt? Housing produces no export income and therefore does nothing positive for the Balance of Trade figures.
I look forward to the day the policy makers sit down and consider the future of Australia, rather than propping up prices for benefit of rental portfolios.
Changes to the Capital Gains Tax and negative gearing would have had very little effect on where we are now. The exponential growth in debt is much the same irrespective of these factors. The reason is that dropping below the trend and the economy tanks, so the RBA will never let that happen. They can encourage borrowing by dropping interest rates just as effectively as changes to the tax system.
This is the basic problem. Once an economy is driven by increasing level of debt stopping this will result in a recession, as in 1992. Not starting the debt train would have meant dealing with 10% unemployment in some other way. By 1996 the curve was already upwards and has continued until this year. Now we have a much bigger recession than the one we could have had if this had been stopped years ago.
Hi Steve,
I’d wonder if you might indulge me on this: you mention in your case of debt deflation that Japan tried excessive printing of money one year and prices actually fell the next year, which in your mind suggests that the ‘black hole’ of debt repayments will suck printing money from consumer prices circulation preventing the inflation to affect consumer goods.
Could you perhaps go back and check how the Yen faired during that time period… whether it appreciated or lost value? Because, and I may be wrong here, even though money printed may funnel into the debt repayment black hole, the value of the currency will still decrease with the increased printing of money. So while you may have a situation where the price of goods fall legitimately (and I do believe that deflation is the outcome), I fear the governments response in printing money till the cows come home will ultimately result in a currency collapse, which will give the same result as if we had hyperinflation.
Is that a possibility?
Seen some comments here:
I have to agree with an opinion I heard awhile ago. A housing bubble is a natural occurance of any fractional banking system and here’s why.
Most of the loans that people get (by value) in in housing. This is mainly a function of our lifestyles. New loans create new money in the system via the fractional banking/securitisation process.
This in turn dilutes the money supply helping inflation of tangible assets (this includes housing). Since the loans are spent on housing first however the inflation effect is most predominant here as the money drives up the price of housing. The first users of the borrowed (almost counterfeited) money get the most benefit from the dilution of money as it becomes concentrated in their hands (hence punishing the savers who money has been diluted through this process).
By the time the money has worked its way through to wage owners it has been diluted and its inflationary effects mostly realised hence the value to the wage earner is a lot less than the initial borrower.
This inflation and bidding for house prices forces new entrants into the market to borrow more for the same thing diluting the money supply even further and causing the cycle over again.
America had this land banking system before. We have it now through the mortgage securities market.
Inflation dilutes the money supply causing inflation, reducing the real borrower’s debt burden and increases the value of his asset purchased at the same time (i.e a double position – short on money, and using proceeds to be long on asset). If everyone does this in a country and with housing they must (since they need to live somewhere) there will be enough people to keep making this money and using it to prop housing until the wall hits – the interest bill on the money created exceeds real income.
Therefore I’m afraid I don’t see the boom-bust cycle disappearing unless we can get fix how the system works.
Yes Oracle I think you forgot a few things:
1) The most important thing a gun. Actually probably allot of guns, and ammo.
2) Empty jars to store urine in, you never know when you’ll need it.
3) 1000 rolls of aluminimum foil used to make hats to block the satellites from reading your thoughts.
4) either a bunker or a unibomber style shack, not sure which would be best, probably both, as long as the expense doesn’t take you into debt of course.
Bullturnedbear
You may be interested in the following sites:
michael-hudson.com (contains excellent radio
interview on “New Kleptocracy” and article
published in Harpers 06 on collapse of
housing bubble with reference to Ponzi))
max keiser (follow the money)
alex jones (a bit of rant, some leads)
itulip
Steve – an interesting debtate – don’t stop.
bullturnedbear – why convert to cash? buy productive assets – i.e. equipment that can make useful things. Cash is just the vehicle for exchange, not useful in and of itself. If we are heading for the mess you envisage I wouldn’t exchange cash for anything, but I’d exchange food and clothes for someone that can build a big wall!
Hyperproductive,
As a result of deflation the price of “productive assets” will fall dramatically. The price of food and clothes will also fall dramatically as well. Until the “bottom” is reached. To hold cash now, will allow you to buy more productive assets later when nobody has any cash.
Cash has already risen in value dramatically in the last 5 months. In terms of shares it is worth double, Oil 3 times, etc. This process will continue as debt deflates.
Most people have either debt or illiquid assets. When the debt tap is turned off and the assets fall in value, there will be no cash left. Only those with cash (the super minority) will have buying power.
To Ned,
I guessing from the sarcasm that you think I’m a nut. That’s cool. Time will tell. What are you suggesting we do?
Hey Bull2Bear,
All I’m saying is that it in my life experience it is extremely rare that the grandest or the gravest predictions turn out to be correct so I am not going to get too steamed up just yet. Be prepared sure, but selling every asset I own to hold a fiat currency wouldn’t make me feel more secure. The dollar is a product of debt, if all our debts were paid back there wouldn’t be a single dollar in existence!!!
But if debt is the problem and the world as we know it is going to collapse over it’s debt then holding a few pieces of plastic or a bank statement with a number printed on it will do little to improve your situation. If your predictions are correct then precious metals or oil or other hard assets that you can store will be the things you want to hold in my opinion. Cash will be worthless in the world you are predicting.
Oh yeah, and the oldest bit of investment advice I can remember is don’t hold all your eggs in one basket, if thing go hyper inflation then cash is as worthless as in the post-apocalyptic scenario. Diversify.