Ross Gittins finally comes aboard the debt-deflation train, with an article in today’s (December 8 2008) Sydney Morning Herald entitled ”It’s not inflation that did us in, it’s the borrowing“. For non-Australian readers, Ross has been a regular economic commentator for Sydney’s leading newspaper for about forty years.
His economic position in the past could be described as predominantly neoclassical, with occasional dashes of Keynesianism, the odd infrequent jibe at the unrealistic assumptions under neoclassical economics, and a socially concerned orientation that was critical of both income inequality and excessive consumerism.
He is, in that sense, somewhat of a wind-vane. He is unlikely to lead debate, but if he switches direction, then maybe the debate itself is changing direction too.
His article opens with the following quite apposite statement: ”WARNING: The following comment benefits from the wisdom of hindsight. It’s an idea that’s crossed my mind several times in the past decade but now I’m sure of it: for all that time the world’s central bankers have been on the wrong tram, worrying about inflation when they should have been worrying about excessive borrowing.”
Indeed. Most of his writings have gone along with the “Inflation Public Enemy Number One” position that typifies neoclassical economists in general, and those running Central Banks and Treasuries in particular.
There are aspects of his analysis in the article that I would dispute–attributing success in containing inflation not to Central Banker’s adroit manipulation of interest rates, but “microeconomic reform”, for instance, when I expect that the globalisation of production has had rather more to do with it.
But the basic message is consonant with the one I have been running on Debtwatch for 3 years now, and in my academic research since 1993.
Now I hope to see future articles discuss the upshot of this: that conventional economic theory–especially Neoclassical economics but also stock-standard Keynesianism–is completely incapable of advising how to cope with a debt-induced crisis, since private debt plays no role in its analysis, and it presumes the counterfactual that the economy is in disequilibrium.
Finally, if you read this Ross, can I suggest some follow-up readings for you: Irving Fisher’s “The Debt Deflation Theory of Great Depressions” (Econometrica 1933 Vol 1 pp. 337-357); Hyman Minsky’s “The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to ‘Standard’ Theory”, Challenge 1977, pp. 20-27; and my own “Finance and Economic Breakdown: Modelling Minsky’s Financial Instability Hypothesis“, Journal of Post Keynesian Economics 1995, Vol. 17, No. 4, 607-635.
And of course, this blog.
December 8th, 2008 at 10:33 am
I agree Steve, microeconomic reform has had little effect on our low inflation.
Our inflation rate, and other developed countries, has been kept low by Australians purchasing cheap goods made in China.
Those same goods would have been more expensive if they were made in Australia.
December 8th, 2008 at 11:11 am
Ross is a good writer and this is a very good article. Quibbles aside, he buys in to the core message and could help greatly in getting others to wake up to the reality.
Now would be a good time to start exploring fundamental changes in how an economy is financed, and taxed, and how it trades with its partners.
It is well said: never let a good crisis go to waste!
December 8th, 2008 at 11:39 am
I disagree on Ross Gittins being a good writer. He writes in a style suggestive of a primary teacher who knows it all but is only trying to get across a few very simple facts that his uninformed readership might just be able to understand. Quite irritating. Further, when he is on tv he comes across as being fairly self-satisfied with his pronunciations, especially on budget nights.
Gary North doesn’t quite agree with you, Steve, regarding Irving Fisher and his book. A few pieces ago you wrote that because of his disastrous pronouncements about the stock market just before the crash in 1929, and the loss of his own fortune, it was a pity that his subsequent writings were not better recognised. North makes the opposite point. He argues that despite Fisher’s obvious practical failings in every single prediction, his unproven writings are still a favourite with central bankers and academic economists.
http://www.lewrockwell.com/north/north666.html
December 8th, 2008 at 11:43 am
Gittens: “wages haven’t misbehaved in any of the English-speaking economies for the best part of two decades”.
Gotta love economist speak. Translation: we have succeeded in massively increasing income inequity, causing the working class to build up massive household debt in order to maintain their standard of living rather than increasing their wages, and producing a more brutal and selfish society. Hooray!
Speaking of prominent commentators, Irving Fisher’s Debt Deflation rated a mention in Paul Krugman’s column, no less:
http://krugman.blogs.nytimes.com/2008/12/04/real-balance-effects-wonkish/
December 8th, 2008 at 11:44 am
He is a weather cock. He is better then Gerard Henderson and Michael Pascoe.
December 8th, 2008 at 1:04 pm
gordon, Irving Fishers writings pre and post depression are very different. I assume losing your fortune may change many views about the world.
Gittins writing style seems to be deliberately chosen to be pedantic, in that he is attempting to explain economic theory. It would be nice if he went on to explain to the public why excessive growth of debt is not good.
December 8th, 2008 at 7:33 pm
Gittins actually made some remark last week I think about ‘less respected’ (or similar phrase) economists who had predicted dramatic falls in housing prices. I thought at the time this was a thinly veiled barb aimed at Steve – maybe it was. He certainly doesn’t give Steve even a mention in today’s article, despite having shared the stage with him in at least one forum I’ve seen and heard these same ideas coming from Steve.
Personally it would be most satisfying for me if these ideas not only changed the way we address this sort of problem now and into the future, but also demolished that tiresome triumphalism of the ‘boom’ (and the Howard/Costello sickening hubris, claiming it to be all their doing) we supposedly all lived through in the past decade or so.
December 8th, 2008 at 9:27 pm
This is my first comment here. As an economist of roughly Steve’s vintage, I feel I may have some positive contributions to make. In similar vein to Steve, I have, even in my undergraduate days, seen significant gaps in neoclassical theory, but such views make one very unpopular within academic circles. OK, enough of the bio, onto some comments. I’d like to make my comments as non-academic as possible, so as to make them accessible to the general readership. Much of economic theory is predicated upon similar goals as psychology: to understand, interpret and correlate human behaviour. The current real estate bubble with its attendant explosion of debt is perfectly understandable. When asset prices rise beyond wage growth, the individual will always try to buy before the price exceeds their ability to purchase. The Perth property market is a perfect example. In 2006, Perth property prices increased by approx 40%. Those who were saving their deposit during 2006 saw their plans dashed, unless they were prepared to borrow far more than they had anticipated. To do so was ‘rational’ if such a trend were to continue. Personal debt, even if it is high, is feasible and rational provided there is a sufficient income stream to service the debt over time. Fluctuations of the property’s value during the loan period is not a consideration per se, unless one crystallizes the loss; banks don’t make margin calls on residential mortgages. To my mind, it is unemployment that is the key here. Unemployment disrupts cash flows, forces mortgagee sales and crystallizes losses. While aghast at Rudds exhortations to the recipients to spend his $10b ‘gifts’ and not reduce debt, in the short run, it may alleviate the crisis. But what then? After the dollars are spent and some retail jobs are saved, we are left with the same problem. The first quarter of 2009 will be telling.
December 8th, 2008 at 10:25 pm
I really think the debt issue is a symptom, not the actual core problem. The core problem is the unregulated derivatives market (nominal value = $600+ trillion and, guess what, still growing). This monster is not part of any official economic model and yet it now represents an enormous weight on the world economy. Let’s list a few of the problems it causes:
Debt: Collatoralised Debt Obligations are a creation of the derivatives market. These lovely instruments allow debt to be bundled up as an asset and sold, effectively transferring the risk associated with holding the debt from the institution that lent the money to whichever muggins end up holding the CDO. There are many obvious examples where the final holders of the asset had no concept of the risk involved. Essentially this has allowed the lenders to keep lending, regardless of risk. Thus the debt problem in the US. A short note on debt in Australia. I personally think the actual lending practices have been at least a little better in Australia, and that our wages growth has been substanially better than the US (meaning that consumer have greater capacity to service debt). Despite this we do have a problem due to our heavy reliance on commodity exports. History suggests a big reliance on commodities equals a big exposure to internation economic shocks. I couldn’t speculate as to where the balance will lie, but, being a bit of an Aussie patriot, I’m hoping that our egalitarianism will mean that the worst affected don’t suffer as badly here at least.
Too Big to Fail: This seems often to be the result of a bizarre instument called the Credit Default Swap (essentially buying insurance against a company going broke). Essentially, as I understand it, this transfers the risk of a company failing away from the owners of the company. This logically has much the same effect as insuring against losses at a casino. Even worse, in the current unregulated marketplace individuals can take out insurance against the failure of a company they actually have no interest in – effectively gambling (and presumably often using insider information to provide an “edge”). Where things are stable, the people taking the bets make a pile without adding any value. When things go bad, guess what – the payouts have an enormous effect on the real economy because the bookies have to sell stuff to pay off the bets (witness Lehman Bros).
The derivatives markets seem to be a classic example of complexity meeting greed and lack of proper governance – and the world is now paying the price. The only solution I can see is for world leaders to somehow cordon off the derivatives market and send in the investigators to sort it out before it does any more damage.
Sadly, all I can see so far is the people who created the problem being given responsibility for solving it, and their solutions seem to involve handing large amounts of taxpayer largesse to their colleagues rather than conducting a disciplined forensic examination of their past deeds.
December 8th, 2008 at 11:26 pm
rycoka
As an engineer I see both the debt and the corporatisation of this debt not as a cause and effect but as parts of a feedback loop. This loop has been unstable and heading for disaster for a long time (20+ years). Both are contributing to the problem. Do the people given responsibility to solve the problem explain what is going to happen when the Rudd “helicopter drop” of dollars is all spent?
Another important issue which is an important part of this runaway control loop and which is neglected by these people is the CAD. In effect the inflation has be kept under control by a large “helicopter drop” of cheap cargo. We have not fully paid for this cargo and it has been partly controlled by the Chinese communists who cotrol wages in their country and their country’s exchange rate. This has damaged the Australian economy in two ways; it has dumbed us down to third world technological status, and added to the debt burden.
The former government exacerbated the problem by their obsession with fiscal surplusses this has ensured that most of the $AU600,000,000,000 foreign debt is owed by private entities and nowhere as secure for the foreign creditors as if it were owed by the government.
There is no one cause, there are many and dangerous feedback. Perhaps when is all comes apart we should send the culpable to face the law and wrath of the creditor nations.
December 9th, 2008 at 7:07 am
Hi Gordon,
On Fisher vs Mises etc., and Gary North, all North’s quotes about Fisher are from his pre-1931 writings–which are standard neoclassical fare that I demolish for my students in Financial Economics and other subjects at UWS.
It’s his post-1931 writings that are worth reading, and they are the polar opposite of his Theory of Interest type works.
I set an Honours student the task of researching the reception of Fisher’s “Debt Deflation” analysis versus his pre-capitulation writings in economic journals after 1945. The stark fact was that his pre-1931 papers were cited ten times as often as his Debt Deflation writings were!
That is the nonsense that our current economic managers mean when they refer to Fisher.
December 9th, 2008 at 7:17 am
Dear Greenstar,
Welcome to the blog.
On the rational bubble issue, I agree that it is entirely rational to ride one when it develops. However I’ve shied away from that literature because I disagree with the neoclassical definition of rational (which to my mind is really a definition of “prophetic”).
Nonetheless it’s entirely reasonable to describe people leveraging into an asset price bubble as rational in the correct English meaning of the word-and as others have noted here as well, borrowing to make a leveraged profit on a rising asset market is doubly attractive when real wages growth is systematically suppressed.
And yes, 2009 will be telling indeed. Aggregate spending should collapse compared to 2008 levels as debt stabilises–since aggregate demand is the sum of income plus the change in debt. As I’ve frequently noted, in calendar 2007-08, the increase in private debt was $259 billion and GDP was 1,080 billion (Brightspark will point out that I should use GNI here!); if we fall back to zero debt growth, we say goodbye to 20% of aggregate demand.
Added to that will be a collapse in the income side from plunging terms of trade, and a drop in export volumes, and the feedback effects on GDP/GNI from the faltering of the debt bubble.
Then when people and companies start actively trying to de-leverage, given that we are starting with close to $1.9 trillion in debt, the downward pressure on spending will be immense.
This process has already begun in the USA–where its comparative figures were roughly a US$4.5 trillion increase in debt on a US$14 trillion economy–and it’s why the wheels have fallen off the economy so rapidly, with a 0.5 million person increase in unemployment last month.
December 9th, 2008 at 7:33 am
Dear Rycoka,
Debt is the problem–or part of the feedback loop as Brightspark points out from a systems theory perspective–but the true symptom of financial excess is indeed the derivative market.
That, as you note, is measured in the hundreds of trillions. It was supposed to net out to comparatively trivial sums, but of course that depended on all the counterparties to these “heads I win, tails I lose” bets remaining solvent and being able to pay out on their losing bets as well as collect on their wins.
I always found this ironic, since a major component of the derivative fiasco is, as you mention, the Credit Default Swap, which pays out when the company being gambled about goes bankrupt!
It was sold (i.e., marketed and spun) as a form of insurance–if Corporation X owed you money, then to insure against the possibility that they might go bankrupt and not be able to deliver, you buy a CDS from company A; then if X does fold, A has to pay you.
Wonderful “hedging”, and low cost too since unlike a standard insurance contract, the “insurer” doesn’t keep idle reserves handy in case the insured-against event actually occurs…
Now, as once solid companies like AIG collapse, counterparty after counterparty disappears and those still holding derivative instruments are exposed to unhedged positions–and then liable to bankruptcy themselves when any losing bet is called in.
When we look back and do our sums on this era, the level of debt recorded now will seem trivial to the actual outstanding obligations, when all this garbage is factored in.
It’s why I argue for debt moratoria–well thought out of course, but largely across the board. The financial system has clearly failed, and this crisis, as painful as it will be, should be taken as an opportunity to start again, with a system less prone to Ponzi speculation.
Of course, such a drastic move is only possible once the system’s failure is evident to everybody. The USA is approaching that state–and most of its financial institutions have either gone bankrupt or are lurching towards it–and only their ideological hangups have stopped them properly nationalising the financial system.
In Australia there is still a widespread belief that our financial institutions are sound. While they didn’t indulge as much in derivatives or subprime lending, they have generated as much household debt per disposable income dollar as in the USA, and as Greenstar noted, unemployment will be the crucible in which their soundness is truly tested.
December 9th, 2008 at 9:39 am
I have read several references recently to “synthetic credit default swaps” where there seems to be no underlying asset or loan at risk of default. This just seems like a bet between two parties but alarmingly the two parties represent major finacial institutions who are at the root of the current problems and who are the recipients of massive Government largesse to save them from bankruptcy. Does anyone have knowledge of how these operated?
December 9th, 2008 at 10:47 am
“To my mind, it is unemployment that is the key here.”-Greenstar.
I fully agree.We have already seen a clear and significant decline in house prices in Australia. This has occurred with employment being at near record lows. Should unemployment rise (as looks certain from recent data) major stress will be put on debt servicing. The result will be in much more housing stock hitting the market for sale.Prices must fall further then.
This is not lost on the banks or Govt so I expect there will be plenty of behind the scenes discussions going on right now with plans for mortgage workout plans, not to say they will work. In the US more than 30% of those type of workouts has ended in re-default.
So all things considered, it will indeed be a very tough 2009 for the Aussie economy and households.
December 9th, 2008 at 5:54 pm
I believe far too much is made of the derivatives market,OTC or otherwise. Let’s remember that derivatives contracts are really insurance policies. One might look at the exposures of, say, companies that insure household properties and contents, and extrapolate those contingent liabilities into some vast sum which could never be met if called upon. But what are the chances of 50%+ of those properties burning to the ground?
Short of bolide impact, mega-tsunami or super-volcano, it just isn’t going to happen. Likewise, derivative exposures, as titanic as they are, are not likely to to crystallize en masse.
December 9th, 2008 at 5:59 pm
brianwh,
the FTAlphaville site [http://ftalphaville.ft.com/blog/2008/12/02/18962/synthetic-cdos-not-saving-anything/] has a very lucid article that discusses the lunacy that was allowed to run in the CDO market.
A particularly sobering analysis, which discusses the creation of what was called a super-senior AAAA tranche above AAA rating that is not at all recognised in ‘real’ world rating.
December 9th, 2008 at 6:16 pm
Greenstar
They are far more likely to collapse “en masse” than real asset insurance because they are coupled. One company failure could cause the issuer (or issuers) to default which could trigger more claims which could also trigger another to default and so on.
This could cause a chain reaction or avalanche. The result would be similar to the natural disasters you quote but more like a nuclear fission explosion. Magnitude measured in gigadollars not kilotons.
December 9th, 2008 at 6:23 pm
GreenStar,
this all depends on the terms of the derivative contract and what the derivative is infact protecting.
The idea that a large swath of supposed ‘high’ quality MBS were to all default at the same time, forcing the underlying CDO’s to be next to worthless with the subsequent triggering off of the CDS attached to these CDO’s was pretty damn near impossible, as these so called experts had believed, it would never happen, but it did.
When an industry is allowed to create all many of derivatives that add to the fragility, brittleness of the system then we move into a universe in which a bolide impact is no longer unlikely, rather it becomes part of daily life.
Taking a handful of MBS, car loans, credit card receivables and any other fixed-income stream you think of, dividing it up into separate income streams packaging them up into a CDO portfolio, creating another CDO from the previous CDO, then creating yet again another CDO from the previous CDO and then attaching a CDS to that CDO, and then being asked, as a portfolio manager, to manage risk with these types of securities, make this market a powder keg.
December 9th, 2008 at 8:40 pm
brianwh said,
in December 9th, 2008 at 9:39 am
I have read several references recently to “synthetic credit default swaps” ….. Does anyone have knowledge of how these operated?
Try:
December 9th, 2008 at 8:52 pm
Sorry – from above:
http://www.portfolio.com/views/blogs/market-movers/2008/11/28/understanding-synthetics
http://www.portfolio.com/views/blogs/market-movers/2008/12/01/whats-a-super-senior-tranche?tid=true
http://ftalphaville.ft.com/blog/2008/12/02/18962/synthetic-cdos-not-saving-anything/
December 9th, 2008 at 9:44 pm
Steve,
I was chatting to someone recently about the $250B added to the economy last year through debt and they suggested that much of the impact of this debt was soaked up in asset appreciation. I took this to mean that much of the $250B went into an increase in asset values, and that its actual impact on the “cash flow” of the economy was nowhere near that amount. The corollary is that the reduction in debt creation will have a much smaller impact on the economy (given the reduction in asset values) than might seem logical from a bare statement of the numbers. The extension from this is that the actions of the government to “prime” the economy can still have a significant effect. Does that make sense?
December 9th, 2008 at 10:24 pm
Alan Greenspan seemed to think that the last bubble was worth it. Bubbles are fun, and they boost innovation. I don’t think housing bubbles are worth it though, for a number of reasons. Would a FuelWatch style monitoring of rental return help investors assess the underlying value of property? Would this help prevent similar bubbles in the future, and even restore confidence once this all bottoms out? (I say rents, because renters are more market rational, for a number of reasons). I’ve put some ideas on the bubblepedia wiki ( http://bubblepedia.net.au/tiki-index.php?page=HouseWatch ), any inputs would be cool.
December 10th, 2008 at 12:53 am
Rycoka makes an interesting point above re: much of the $250B increase in debt going into an increase in asset values. Would a more accurate figure of debt financed spending be to subtract the corresponding increase in mortgage related debt over the same period from the $250B? Or would this be neglecting the impact on consumption from perceived rising/decreasing personal wealth. Interested to hear any views.
December 10th, 2008 at 9:26 am
actually thats a very good point.
http://www.investordaily.com.au/cps/rde/xchg/id/style/5469.htm?rdeCOQ=SID-3F579BCE-67341CF3
total outstanding mortgage debt is around a trillion and rose 10% – so lets say 100 billion of that 250 billion. but how much of that was home equity withdrawal to pay for consumption?
how much did credit card debt rise last year? anyone got a system to calculate the ballpark figure on how much of the rise in debt was for consumption from published numbers?
still looks like a massive number to me.
by the way – i like the big RG (i’ve been reading him for decades and think he’s spot on most of the time) – but that side comment in the mortgage article was an underhanded swipe at steve – anyone following the debate would have spotted it a mile off. i think ross is underestimating the effect that this massive debt is going to have on the severity of the coming recession. or maybe he’s coming around, i don’t know. his other articles don’t seem to have born it out though.
December 10th, 2008 at 9:45 am
Rycoka and Profile21,
When the increasing private debt is spent on housing it is being injected into the economy.
Consider the following:
1. When there is a buyer, there is also a seller. In a rising market. The seller gets a windfall profit and is cashed up. They will also buy, spend or both.
2. When people buy houses, money flows to the government (stamp duties), real estate agents and banks. Money also flows to many small players like pest inspectors, lawyers etc. Money flows to tradesmen as many people change or renovate after buying. The list goes on.
3. The wealth effect from rising real estate encourages people to take on extra debt for consumption. Boats, holidays, private schools, bigger houses, etc.
4. When credit is growing the money supply is expanding. When the money supply is expanding it is a sign that people are more confident/optimistic. Therefore people are likely to spend more and invest more which multiplies the effects of the original purchase of a few houses.
When the trend in credit growth declines or reverses it is probably a sign that people are less optimistic and more risk averse. This change in buyer/borrower sentiment is a sign that all the “positive” effect go into reverse and turn to “negative” effects.
The entire system is linked. Also sentiment leads the system. Sentiment leads the news. It does not follow it.
December 10th, 2008 at 9:48 am
Robert Shiller have done comparisons with the WW1 debt of Germany, leading indirectly to the war and the debt our current circumstances. I am more and more convinced if this debt things become suffocating can evoke similar responses in the younger generation towards the baby boomer generation, both when it comes to taxes supposed to support to big pension obligations, and the burden of deflation, if it takes hold. If one person stop paying debt, it’s not a problem, but if everyone does, then it becomes a problem, I can easily see this turning into something of a populist issue for “the next generation” politicians. That even Obama belongs to. That one day the younger generation will strike out against the whole system.
The issue that I see coming. That could be causing the deflation to never materialize is that, even the quantity of US debt is very huge, not to mention the derivatives ,the quality is barely BBB- . The credit default swap premiums on US debt now, is equal to a level that is nowhere near AAA, many companies with much worse rating than AAA have cheaper insurance. That means that I think the stock market, and housing market in the US are at a bottom now, not so much because of any real economy scenario, but simply because of the inflationary surge that will occur when money moves from the treasury market because of perceived weakness in the quality of those bonds, into asset’s again.
December 10th, 2008 at 10:32 am
Hi Prudent,
Did you see that during trading last night the US 3 month T bills were trading at a yield below zero. I know you will scream bubble. I agree that T Bills are over bought and due for a correction. But I disagree on the interpretation of how the yield curve got so flat and how the 3 month could go negative.
I say DEFLATION!!!
Risk aversion has become so high that the borrower is being paid by the lender to hold the money.
CASH IS KING is what deflation is all about.
The amount of money out there and the velocity of money in the system has falling a long way and is still falling fast.
December 10th, 2008 at 10:58 am
“The Banks are bouncing back” screams the Oz!
“Consumer sentiment surges” says the SMH/Age
Have Kevin and Glenn managed to reinflate the Australian economy just in time for Christmas, even as the economic tsunami rolls in from the US and China?
Comments anyone?
December 10th, 2008 at 11:38 am
Hi Carbon,
The share market has been pretty much range bound since October. That type of market can signal to many people that a floor has been put under price. They then jump in. The market is cruel. In a bear market once the market has corrected from its falls long enough to suck the remaining optimists in it finds a new low.
The Markets will probably find a new low in the next month or less. After that low we should see a better correction. That is, a more upward correction, less sideways. That will signal to many that “the worst is over”. Once that correction has run its course the bear market will continue. 2008 and 2009 may go down in history as the worst period on record for stocks .
It all comes back to sentiment. Positive sentiment drove the biggest debt and asset bubble in history and now negative sentiment will drive the worst share market falls in history. The caveat is that this may take longer to play out than I expect. The falls and the “wake up” has occurred much slower than I expected.
In terms of the Australian Banks. They are smart to raise capital now. The whole world has turned risk averse. Even the Oz banks. If the debt unwind gets really bad, like I expect. The banks will need every cent of capital to survive. Only the strong survive. Most lenders in Australia have already dropped out of the race. There is only a handful left. Will be interesting to see who the survivors are and who the government bails out.
December 10th, 2008 at 11:50 am
Carbonsink,
Kevin and Co. are engaged in a massive media campagn with it’s single intent on mitigating negative consumer sentiment. He is being actively aided by both the the printed and TV media. I have detected evidence of this from when Swan returned from his US trip about 6 weeks back as white as a sheet, and all stops were pulled then by Rudd on getting money into the economy. Shortly after, Rudd went on air on Channel 7 diametrically opposing Steve Keen on Channel 9’s A Current Affair.
Big media news will be made of blips up in any sentiment readings. Besides, something had to come soon after Business leaders and economists so dramatically forecasted recession next year in yesterday’s report.
As an aside though, I’m googling regularly for articles on property prices to trawl up what is reaching print. SE Qld property is taking a very large hit now. So I for one am certain Steve’s take on the future of property prices is coming to pass.
December 10th, 2008 at 12:22 pm
Hi Steve,
Your site seems to have been subjected to a nasty script injection called “yahoo-coutner” which is occasionally successfully loading internet nasties on to my computer when I view your blog. Search any of your page’s source for “Yahoo! Counter starts” to see what I’m talking about. Guessing it is a wordpress vulnerability, but not sure.
Regards
Rhys
December 10th, 2008 at 1:19 pm
I enjoy reading all the blogs, but my economics knowledge is very basic, and I approach it all through my circumstance of being a self-funded retiree watching hard earned money dissolving. There are plenty of doom and gloom and ‘ain’t it awful’ stories all outdoing each other in the media, but I don’t read or hear of any analysis of doing what’s needed to avoid it happening again. There was a glimmer of hope to hear Prof Ian Harper (previously Fair Pay Commissioner and now with Access Economics) on the ABC PM program yesterday admitting the theory recommended by the Wallis Enquiry in 1998 on financial deregulation with its ‘light touch’ regulatory structure was flawed’. ‘The whole idea of securitisation, trading securities to provide finance rather than balance sheets, seems to have come horribly adrift’, with the “efficient markets theory” that ‘markets are possessed of all the information they need to make rational and efficient decisions.’ He’s now recommending the Government establish a committee of inquiry that ‘can begin to think through how the intellectual foundations have changed, which would warrant us thinking afresh about how to regulate the system once we’re out of the crisis’. ONCE WE’RE OUT OF THE CRISIS worried me! Is ‘anyone’ looking at all this? Is it included in the Tax Reform Inquiry being done by Treasury? Or do we just have to keep drifting along waiting for the crisis to finally run its course?
http://www.abc.net.au/pm/content/2008/s2441921.htm Call for new Australian financial system inquiry
December 10th, 2008 at 2:16 pm
Welcome Effit,
You are assuming that a change to the system will result in a better system. Don’t be so sure.
In a democratic western world. Politicians make decisions that the populace want so that those politicians can get re-elected.
By the time the populace realises they want/need something it is way too late.
Have you noticed that policy in the US is trailing the carnage not leading it? Have you also noticed that Oz is copying the US only on delay? EG, The US Cut rates dramatically at the start of the year. We have cut dramatically now. The US pumped a fiscal stimulous package of $180 Billion (via a cash payment to individuals) in May and June. Our government is now paying out $10 Billion.
Our Government has even loaned money into the car industry to prop up floor financiers and car financiers.
As risk aversion increases our Government will also start rescuing companies that are deemed “too important to fall”. It’s all bull!!!!!
December 10th, 2008 at 2:35 pm
Has anyone heard Glenn Stevens ‘press club’ address yesterday? he said in his opening remarks”……I do not know anyone in the world who has predicted this economic crisis…”
Wow what arrogance!I was flabbergasted after reading this blog for the last couple of years!! stunned!!
December 10th, 2008 at 7:35 pm
A further explanation for the effect of rising debt is the scenario where I borrow $100,000 and then proceed to spend the money. In the process I have a great time and it employs some other people which makes the economy look good for a while.
But this is silly, the bank is not going to lend me money for no reason. But they will lend me an excessive amount for a real estate purchase which means I give someone an extra $100,000 they spend it and have a good time making the economy look good for a while.
Unfortunately in both scenarios I end up with an excessive debt so I don’t spend as much in the future and everyone else eventually stops borrowing so there is less spending and we have a recession.
December 10th, 2008 at 11:51 pm
Bullturned bear:
I still think there will be inflation. Not only inflation but an inflationary boom with Obama. It’s just that we are at the fallout, right before the new expansion and selloff in worthless treasuries. If I am right, emerging markets will grow debt like crazy. I have noticed every wild boom have occurred when the growth rates have been around 4 % in developed countries, like the 80-90 boom. This 4 % level is projected for the emerging economies next year, so if inflation follows the trend down in countries like brazil and the like, it means interest rates will come down from a 12 % level in brazil, to levels that are going to cause huge credit growth and a booming economy. The bank UBB is now worth around 400 billion, it’s a very large number, the bank holds around 20 % of
local debt in brazil, but I think it’s going to grow.
If the US is bankrupt, how can there be deflation?
http://www.freerepublic.com/focus/f-news/1053684/posts
This article by Warren Buffet pretty much explains the fundamentals.
July 27th, 2009 at 10:04 am
[...] did us in, it’s the borrowing“, SMH 08/12/2008–see my blog entry on this “Ross Gittins finally comes aboard“), the latter, [...]