The Today Tonight segment has been delayed till this evening (Wednesday February 4th)–which is a pity in a way because I will also be speaking at a public forum tonight at Circular Quay organised by the Property Knowledge Forum: An excerpt from the promotional flyer:
ARE WE HEADING FOR A DEPRESSION?
When will the bottom hit? Are we in store for 40% drops in property or has the recovery already begun?
It is almost impossible to escape the negativity surrounding the global economic crisis. While many experts predict the worst economic crisis of our time others point to positive indicators such as population growth, supply shortage and differences to the US and foreign markets. Is the government’s stimulus measures poised to combat what appears to be an inevitable period of economic turmoil or are we indeed entering into a depression where property prices may drop as far as 40%? Three of Australia’s leading thought leaders in property will help shed some light on the subject, in what is promised to be an engaging and interactive evening not to be missed!!
Speakers: DR STEVE KEEN, UWS Associate Professor School of Economics and Finance (“As seen on 60 minutes”)
LOUIS CHRISTOPHER Adviser Edge Head of Property and Real Estate Commentator for Seven’s Sunrise
NICK COMMISSO Northpac Constructions Property Developer 20+ years industry experience
Time: Wednesday, 4 February 2009, 6:45-8pm
Venue: Bridge Bar – Level 10, 2 East Circular Quay / 3 Macquarie St, Sydney (access lift near Dendy)
The organisers have a decent crowd, but they’ve emailed me that they were “wondering if you have any people that are interested in coming on the night- we want to get as many to the event on the night as possible and in that respect do you have any others that are interested in coming?? Numbers are good but we just need as many as possible?? The tickets will be complimentary of course.”
So if any readers of the blog would like to attend, please email the organisers at info@propertyknowledge.com.au.
And maybe set your recorder to catch the program on Today Tonight. I think you’ll find Eric Aarons’s recollections of the Great Depression fascinating.
February 4th, 2009 at 7:21 am
Steve, a diplomatic suggestion: You dub your opponents “neoclassical” economists. What do you call those who, such as me, are fans of the likes of Stanley Jevons, Eli Heckscher, and the other pioneers of the marginalist revolution, who are open to various forms of macro-economic analyses, but who do not subscribe to rational expectations, financial engineering, or the use of calculus as anything more than a rough heuristic device?
I’ve always considered myself a neoclassical economist; maybe these other guys should be dubbed something else — Samuelsonians, later 20th century orthodox academicians, or just plain mathematical economists?
February 4th, 2009 at 7:42 am
Hi BornAgainDemocrat,
In fact, I call the whole school neoclassical: as much as Jevons might want to disown Lucas, Sargent, Bernanke, etc., they are his direct descendants.
My book Debunking Economics is a critique of the entire edifice of marginalism–not because I’m anti calculus of course, but because I’m anti equilibrium thinking, and the marginalist model only works (but badly) in equilibrium.
You might find it worthwhile to check that book out to see why. Ultimately I believe we need a different theory of value as a foundation of economic thinking, in which what is worthwhile in neoclassical and Austrian thinking turns up as an embellishment on a different foundation, and not the centrepiece. I discuss that a bit in my unpublished paper “A Marx for Post Keynesians”, which I’ve put on the Research page here.
February 4th, 2009 at 8:30 am
News–or lack of it–update. The Today Tonight piece has again been put off, for one instead on the banks passing on yesterday’s 1% rate cut.
Hopefully it will go to air tomorrow.
The talk tonight, however, is definitely going ahead. It would be nice to meet some of the blog community there (we now have over 600 members…).
Cheers All, Steve
February 4th, 2009 at 9:18 am
Hi Steve
You made it to the SBS late news last night. Not living in Sydney I’ll haver to mis the Public Forum, but will be tuned to Today Tonight tonight.
February 4th, 2009 at 9:58 am
O, Dear, I hate to say this, but that is never going to fly. Dielectrics and Organicism? You are being way too ambitious, which means that your very credible analysis of the current financial crisis is never going to be taken seriously.
And sense when are economists condemned by their so-called acolytes? Not one would ’scape whipping.
February 4th, 2009 at 10:22 am
Economics has become a bit of a farce lately. Why? For the last 200 years the root cause of economic downturns has been the same: land speculation. Consider American history:
1. Panic of 1818 – preceded by a huge land bubble (which popped due to exoberant debt and an increase in land taxes)
2. Panic of 1837 – preceded by a huge land bubble, speculative frenzy in canals (which popped due to the Specie Circular)
3. Panic of 1854 – speculative frenzy in lands near railways and canals (popped due to exoberant debt)
4. Panic of 1873 – speculation in commercial property (popped due to exoberant debt)
4. Panic of 1893 – another land boom in silver lands
5. Panic of 1907 – overbuilding due to land speculation
6. Great Depression – huge levels of mortgage debt in city areas, farm banks collapsed due to excessive land speculation in farm lands – in Chicago a huge land boom occured, so big, in fact, that after 1928 not one property was built there 1948!
7. 1954 and 1960 – tightened monetary policy (albeit, it did hurt the housing market, which simply implies housing is a transmission mechanism for consumption and investment).
8. 1970 – land boom
9.1975 and 1983 – huge residential property boom, millions of acres of farm land were displaced for the purposes of residential housing (hence, why inflation in agricutral lands was occuring *even before* any oil shock) – companies had invested millions in land, and when interest rates were hiked, these turned into malinvestments
10. 1990- commercial property boom
11. 2001 – housing did contract, although its probably a false negative
12. 2008 – just another part of the story – excessive investment in land which fuelled consumption and investmetn.
A good 95% of economic downturns in America are preceded by housing or land booms (the causation is easy to see: credit exapnsion and capital inflows raises prices, resources that are allocated into housing must reallocate itself once prices fall), and 100% of cases there is a decline in the value of housing. Even Marx, in one of the last papers he ever wrote, conceded “most surplus value and circulating capital is captured in land values”.
Thus, as I point out in my book, we will *continue* to have boom bust cycles until we address the LAND QUESTION and untax wages and profits and tax economic rents! I have not heard Henry George mentioned once on this blog and yet his book, Poverty and Progress, is the best selling economics book of all time. Today, George is rarely, if ever, even discussed in economics. George argued that we should abolish all taxes on production (i.e. income, corporations, consumption taxes) and replace them with a 100% tax on the non-added value of land (i.e. just the land not the property or improvements on the property). I imagine this would be implemented over 10-20 years.I personally support a 100% betterment levy (i.e. a Mills tax) with most other taxes abolished.
Mason Gaffney in his book “Corruption of Economics” showed that neoclassical economics(and this might interest you Steve) was the direct response to Henry George! Landowners and vested interests actually paid economists to come up with theories and formulas which shifted the focus away from land and onto labour and capital. This is exactly what Frank Knight did. Interestingly, however, economists from the moderate left (Bill Vickery, Joseph Stiglitz) and the right (Friedman, Hayek) all agreed land tax is superior. Georgism is about reality, it is ideological neutral.
ps fear not – a betterment levy or land tax is the only tax which creates employment (causes vacant stores to be used), standard of living (makes housing more affordable and direct savings into investment not speculation), levels of competition (monopolies who withhold sites due to competition must sell them to people who will use them) and can fund all of government services (read Stiglitz’s ‘Henry George theorem’ – aggregate rents equal aggregate government expenditure – I have found, however, that in most cases aggregate rents can, in fact, be MORE than government expenditure).
pps – Property developers ought to be fans of land tax, if only they *understood* economics – there would be not boom bust cycle and money will be funnelled back into development and improvements (e.g. like in Pittsburugh, where housing construction and development exploded when they taxed land) – obviously 20 projects over 18 years with a capital gain of 55 000 is better than 10 projects with a capital gain of 100 000 (which is mostly land inflation, which goes up and down).
February 4th, 2009 at 10:23 am
Btw, Steve, what taxes do you support? What are your views on Henry George? Would you be willing to advocate a “single tax” or at least a betterment levy in public?
February 4th, 2009 at 11:28 am
Would it not be better to only have a consumption based tax system , such as GST or VAT – have it at a higher rate and have no income tax , apply this to individuals so irrespective of where and how you derive or acquire income its tax free .
Once you start spending it you then incur tax – this would be simpler and cheaper to manage – their would be no reason for individuals to hide or avoid income, there would be no cost to individuals and there would big incentives to increase savings and investment ?
It will level the tax differentials between wealthy and poor – those who spend more will pay more tax and you have the choice to spend or not to spend ( some basic items can be tax exempt ?)
I’m sure this has been put forward before and I would be interested in what the short comings would be ?
Regards George
February 4th, 2009 at 12:39 pm
George,
The answer is NO. I am tired of hearing about consumption taxes (like the GST), albeit I am midly in favour in retaining consumption taxes on “bad” things (e.g smoking, alcohol etc).
Why, George, is a consumption tax better than a betterment levy or non-value added land tax? Let us compare my model (a 100% betterment levy with all other taxes abolished except, perhaps, some small taxes on say cigars)and your system (a consumption tax which replaces the income tax).
On efficiency grounds, my model is superior. It generates no deadweight loss (yours does), cannot be passed onto anyone in the longrun, the tax is simple to administer and allows government to roughly anticipate its revenue. Moreover, the GST involves endless deductions, paperwork, which eventually becomes a nightmare to administer. LVT involves no exemption and like in Hong Kong can be administer by a 1000 people not 30 000 like under your model. http://www.masongaffney.org/essays/The_Sales_Tax–History_of_a_Dumb_Idea_3_2005.pdf
On *equity grounds*, consumption taxes are simply code to destroying the poor. Currently, in the the UK, for example (I’m in Australia, but I’m sure similar results willl occur here), when you factor in all taxes, the poorest 20% of people pay 41% of their income while the richest pay only 31% (thanks to ‘hidden’ consumption taxes, which eat away at peoples earnings). What *exactly* is progressive about that?
A consumption tax will not create employment, a land tax will. First, LVT encourages vacant, idle sites to be USED FOR PRODUCTIVE purposes. Thus, vacancy rates drop and industry thrives. This has happened *everywhere* LVT has been introduced, particularly, Hong Kong and Pittsburgh. Indeed, in Pittsburgh prior to LVT there were 4000 vacant buildings. After LVT, there were only 200. That’s 3800 extra commercial sites, fuelling the loccal economy. It is the only place in America not to become a victim of the housing bubble. It also unlocks idle land and reduces business costs. Finally, it forces monopolies, who withhold land to sell them, allowing capitalists to access the market place.
Moreover, I have collected, the world over:
A. 45 studies prove that when towns adopt LVT, a spurt in new construction and renovation results (cheap land means money for building).
B. 63 studies conclude that towns switching from taxing buildings to taxing land always out-constructed and out-renovated their neighbors who were subject to the same economic-growth influences.
C. 83 studies concluded that most voters paid less with a revenue-neutral building-to-land tax switch. In 2 studies, most voters paid slightly more.
D. 30 studies concluded that LVT had various miscellaneous advantages – for example, tax defaults decreased, which is what you would expect if buildings are taxed less.
E. 6 studies concerned farmers: in three studies, farmers essentially broke even with a shift to LVT, in one study farmers would pay slightly more, and in two studies farmers would pay slightly less. Australian farmers have generally voted to adopt LVT.
F. 8 studies listed endorsements (also, there are literally hundreds of endorsements by prominent authorities listed elsewhere).
A consumption tax does not pay for itself, a land does tax. As noted earlier, Stiglitz’s Henry George theorem shows that AR = AG. Thus, infrastructure (e.g. roads) funds itself lifting up land values which are recycled back into the Treasury to build more infrastructure.
A consumption tax will not prevent the boom bust cycle. A land tax will – would there been a housing boom in the US and a subprime crisis if land tax was in the manner I or Henry George suggested? Of course not!
Thus, efficiency and equality are not mutually exclusive forces under a Georgist system. Under your system they are.
February 4th, 2009 at 1:14 pm
Hi everyone,
there’s been such a rush of people from the blog that the Property Knowledge group have exhausted their supply of complementary tickets. But they are still willing to offer blog members a $40 entry fee rather than the $60.
So if you still wish to attend and you haven’t already got a ticket, contact them and arrange a $40 fee.
Cheers, Steve
February 4th, 2009 at 3:15 pm
Is it possible to obtain a recording (eg. audio recording) or the text of the seminar tonight for those not in Sydney?
February 4th, 2009 at 3:30 pm
I think it is recorded, and if so I’ll post a link to the recording on this site.
February 4th, 2009 at 10:25 pm
Hi Steve,
Two nights of that rubbish is enough. I’d like to see this story but it’s not worth sitting through the ridiculous piffle.
February 4th, 2009 at 11:29 pm
Hi guys, excuse me for being a lamer in the field of economics but i am trying to look at this crisis from a logical point of view. My current understanding is that there is a debt bubble that could only explode or be slightly patched up only to explode at a later date.
The best outcome for this country would be for the bubble to burst with as little impact as possible (ie now not later). With all the “smart” economists in this country can someone please explain to me how a government can be advised to move forward on an idea of a stimulus package which has proven even just recently in December last year to have short term, if any effect on an economic recovery? It’s just stupid!
Is it feasible to propose a government policy which concentrates on acquiring a significant number of assets that have been borrowed against, which in turn will have a significant number of mortgages paid back in full. Would spending $42 billion on a policy like this help soften the blow instead of fueling it? Sorry in advance if this doesn’t make sense.
February 5th, 2009 at 7:59 am
Sorry about that Muzz!
I’ll post a link to the item when it’s finally broadcast.
February 5th, 2009 at 8:22 am
Hi Steve,
I enjoyed the panel last night though was expecting a bit more solid debate from Louis and Christopher.
You mentioned a seminar you are involved with next week (month?) looking at vulture funds but I’ve not been able to find any information regarding this under “Talks”. Can you please give some more info on this please?
Many thanks.
Rosalina
February 5th, 2009 at 10:25 am
I watched KR’s address to the nation just before the ABC news and he said that “WE” are treating this as a “National Security Crisis”.
Does anyone know what implications this has for the sort of thing the Govt is allowed to do under this mode of operation? Deserters are shot etc? Deploy army forces inside the territory against protesters etc?
I dont’ think “Security” is in the context of Fincanial Securities so I am wondering… Who is the enemy/threat? Is it us mortal taxpayers? And who needs protection?
February 5th, 2009 at 5:26 pm
I thought that whilst our own media is mired in the rubbish surrounding whether KRUDD
‘the White knight’ should be allowed to instantly hock us up for $43billion, having made an art form of “ACTING DECISIVELY”, (which by definition seems to exclude seeking the prospect of better responses from elsewhere), that we might just for a moment consider how ’small’ we are in the ‘real game’
and take a sniff of some of the other prospects
that others foresee when they consider “serious trouble”.
‘Hoges’ might have put it to Kev thus,
“that aint, ’serious trouble’ –
THIS is ’serious trouble’ ”
taken from “The Automatic Earth” -link follows.
It’s Not Going to Be OK
by Chris Hedges
“The daily bleeding of thousands of jobs will soon turn our economic crisis into a political crisis. The street protests, strikes and riots that have rattled France, Turkey, Greece, Ukraine, Russia, Latvia, Lithuania, Bulgaria and Iceland will descend on us. It is only a matter of time. And not much time. When things start to go sour, when Barack Obama is exposed as a mortal waving a sword at a tidal wave, the United States could plunge into a long period of precarious social instability. At no period in American history has our democracy been in such peril or has the possibility of totalitarianism been as real. Our way of life is over. Our profligate consumption is finished.
Our children will never have the standard of living we had. And poverty and despair will sweep across the landscape like a plague. This is the bleak future. There is nothing President Obama can do to stop it. It has been decades in the making. It cannot be undone with a trillion or two trillion dollars in bailout money. Our empire is dying. Our economy has collapsed. How will we cope with our decline? Will we cling to the absurd dreams of a superpower and a glorious tomorrow or will we responsibly face our stark new limitations? Will we heed those who are sober and rational, those who speak of a new simplicity and humility, or will we follow the demagogues and charlatans who rise up out of the slime in moments of crisis to offer fantastic visions? Will we radically transform our system to one that protects the ordinary citizen and fosters the common good, that defies the corporate state, or will we employ the brutality and technology of our internal security and surveillance apparatus to crush all dissent? We won’t have to wait long to find out.”
The full bit and more is here.
http://theautomaticearth.blogspot.com/
In Australia we are still ‘playing on the beach’ believing that what is rolling in, is simply an ‘extra big surf’. no ! it’s a tsunami
Get your heads out of the sand.
February 5th, 2009 at 7:16 pm
Well the item finally went to air, and I don’t know what the rest of you thought (if you saw it), but I thought it was excellent–well put together, excellent archival footage, and a lovely interview with my good friend Eric Aarons as the centrepiece of it.
I’ll post a link to it tomorrow, once it is up on the Today Tonight website. In the meantime, a hearty congratulations to the journalist who put it together, James Thomas.
February 5th, 2009 at 8:08 pm
yes I agree it was ‘quite’ good.
Every time I see or hear you, I’m very impressed about how measured yet assertive you are in on delivering the point that people haven’t yet got a clue what they are in for and that essentially all we are seeing at the moment is froth and bubble dare I say ‘foreplay’.
So I guess, I am waiting for a ‘real’ journalist who can think outside the square and who determines to do a really ‘in-depth’ piece with you, so that you are able to take them through ‘chapter and verse’ of how essentially you have not only got it all right, to this point but that you have progressively laid it all down in black-and-white for people to see and trace back through the archives.
IF the leaders of our country who try to tell us that we are in a “national and international crisis” that essentially will change things for ever, and yet refuse or are incapable of mustering available resources
by finding people
WHO HAVE THE SCORE ON THE BOARD
in order to help point the way forward,
will we are truly buggered.
It his very clear to see that KRUDD is totally focused on his ’self image and place in history’ and will ensure that nothing and no one will upstage him or rob him of his ‘rightful place’ (as HE sees it).
I would probably be doing a more significant group and injustice to say that so far as I can see there are barely a ‘handful’ of people in the world who have foreseen this “debt deflation” AND who have actually committed their predictions “in writing” over such an extended period of time and in such detail -for posterity.
Nouriel Robini and Peter Schiff are two, both in America. But they have also done it in such a way through their associated businesses, to benefit in a significant personal way.
Here we have in Australia a bloke who is so far ahead of not only the best minds that we have but most of his peers throughout the world, and the worst we can say is that he got a few royalties from the publication/s that have ‘laid out for us’.
Steve has been (so far as I can see) relentless and selfless and it makes me extremely angry to see all these self appointed ‘experts’ (who are actually ‘cockheads’to use a colloquialism)
failing to acknowledge the one bloke, (here)
who has got it right and to whom they should be deferring whilst the politicians seek his counsel.
It’s a bloody disgrace, but hang on Steve (as I know you are) your day will come and you will have a very solid cheer squad.
February 5th, 2009 at 9:43 pm
I think by Today Tonight standards it was excellent. Much better than I was expecting. Bravo!
February 5th, 2009 at 10:28 pm
I have been reading this blog for about 6 months and finally decided to join. I have been impressed with the thoughtful comment by the regular contributors, and do enjoy the monthly debtwatch piece.
Just a quick worrying thought about an unrelated but important topic and interested to get peoples ideas.
It seems to me that protectionism is back in vogue. From the UK encouraging their financial institutions to “lend British” therefore implying “don’t lend elsewhere” to the bailouts of uncompetitive companies to the “Buy American Steel” only provisions in the US bailout package we are entering a period of reduced trade. Even the daily telegraph today was encouraging people to spend their $950 in ways that would ensure the money stayed in Australia.
Fingers are already being pointed (admittedly not for the first time) about the valuation of the Yuan.
I have also seen some trade figures out of Asia showing massive drops in the last few months.
My understanding of the Great Depression was that a major factor was a massive drop in trade. Despite the rhetoric by world leaders my guess is that this trend will amplify as countries engage in tit-for-tat responses and make the problems that we are facing far worse.
Interested in other peoples thoughts….
Also I missed today tonight and the circular quay debate/seminar- is there any way to see these?
February 5th, 2009 at 11:33 pm
Welcome aboard mightycats,
It would take a very long post to explain why, but the arguments that protectionism caused or contributed to the Great Depression are overblown, and the case for free trade is extremely weak. On the latter point, search for papers by Dani Rodrik, who has done the best evidence-based demolition of the “free trade is always good” perspective of conventional dogma.
One of the leading original advocates for free trade, Harry Johnson, once did a quantification of the theoretical gains from trade. He came up with a figure that was equivalent to four to six months growth–and was palpably disillusioned.
A focus on nationalism is also inevitably going to happen when America (and for that matter Australia) realises that a large proportion of people who once were employed in finance, insurance and real estate will have to find other activities if they are ever to be employed again. Manufacturing is the only option then.
February 5th, 2009 at 11:36 pm
PS the Today Tonight story is up on their website under the heading “Changing Times” on the “Featured videos” link. It will probably have a permanent link as of tomorrow. It was very good, and I do recommend people watch it.
February 6th, 2009 at 6:50 am
Steve,
(repeat comment from other thread) Here are some ideas about what could be done. To what extent do you think they would work.
- Zero income tax for most people (up to at least the median income.
- Eliminate the monopoly on a “reserve” account currently only available to banks. Allow anyone to open a “reserve” account (one account only) with the bank of their choosing. The balances of these accounts is not included as the bank’s asset.
- Zero OCR on the reserve deposit for the reason that “reserve on call” deposit is zero risk and therefore should not receive any interest.
- A “stamp duty” on all transactions – say 3 to 6% takes the sting out of the speculative money go-round (but encourages trading in cash, so can’t be too high).
- A greater emphasis on taxing on equity/capital, rather than labour. In other words drive investment towards productive real outcomes. Taxing income is an easy calculation but assets is difficult. The aim should be to drive cash towards investment (this is the tough question).
- The reaction of the Government to this situation should be spending on real investment. I don’t see why such spending needs to be matched by any bond issues or any fund raising. ie it’s a legitimate reason to run a deficit and the right investment “pays for itself”. The difficulty is that Government’s find it difficult to to pick winners and the stimulus programs inevitably end up being hijacked and becoming giveaways (the kind of spending that should be “paid back”).
February 6th, 2009 at 8:39 am
I watched it over here:
http://au.video.yahoo.com/watch/4431991/11880793
great work!
Btw, I was also in the seminar the day before. enjoyed it immensely.
February 6th, 2009 at 10:55 am
More Steve Keen videos here: http://video.google.com.au/videosearch?q=steve+keen&hl=en&emb=1&aq=0&oq=steve+kee#
February 6th, 2009 at 12:55 pm
fred
That treasury bond issue (200G$) is needed to cover the current acount defecit. While the libs have crowed about surplusses, historically low unemployment, and no debt. We have had unbroken current account deficits for 33years, sold most national assets, had real levels of unemployment which in an historical context were similar to the great deprssion and we have “racked up” a mountain of national debt.
Even taking the debt free government into account the country as a whole is deep in debt. Our retail sector has been, and is dependent of a steady flow of cargo from overseas, Check any shop.
We have not been paying for this for the past 33years. We have been “free trading” insolvent. Even in a minerals boom we needed to borrow to cover the short fall the banks did this but they are all suss now. The government needs to take over and take on this debt (if it can find a lender) from overseas. This to keep the show on the road a little longer, and get us deeper in debt.
So this package is really double pronged, stimulus and borrow. Inspite of what Turnbull says the maxing of the credit card is not down to the stimulus but 33years of mis-management by both parties and slavish adherence to neoclassical economic theory.
Various economists have even won nobel prizes for causing this mess.
February 6th, 2009 at 1:18 pm
Brightspark…G’day
You are sooooo wrong!!!!! hehe if I knew how to put a wink in there i would!
We have run one Current Account Surplus in 50 YEARS!!! I think 1971 from memory!!!!
It’s so much worse than you think. It’s been something like 53 years or more of mismanagement!
Steve…
Why is everyone ignoring the pressing implications of the External Account? I haven’t watched your videos yet but i don’t see you mention it in any serious way. It doesn’t get a mention in these pages. I know from our correspondence years ago you realise the implications. Do you think it is just too much for the average moronic Economist and politician to grasp at all?
Have Howard and Costello done a sufficiently good snow job on everyone that talking about the External account is just too damned hard and too difficult a message to get across? I know everyone i talk to about it says “What the hell are you talking about? You’re wrong! We run a huge surplus!”
February 6th, 2009 at 6:27 pm
Spark,
Seems to me the fact that the Government “has to issue bonds to cover the deficit” is part of the banking system’s con on all of us.
Here’s my simple way of thinking about it (after reading this website and a number of other sources). In a normally functioning capital economy every investment opportunity would be taken up and there wouldn’t be anything a Government could do with printed money that wouldn’t severely distort the market place. Example, bank gets bailout money uses it to unfairly compete with the other good banks, or roading contractor gets a Government handout and puts the competition out of business.
But there are ways (surely) a government could spend money (by just printing it) run up a deficit and not have to pay anything back, and not need to raise a bond. It just needs to find an opportunity that has been missed by normal commerce, and these must be around, in times like these.
So for example, the Government could print some cash and contract some builders to build some houses, when the houses are constructed, there’s a bunch of contractors with money in their pockets/bank accounts and the Government has an asset on it’s balance sheet, worth exactly what it cost to build them. So there is extra money in the system, and the Government deficit equals the cost of building the houses. Where’s the rule that says the Government then has to “raise the money” from the banking system to “Pay” for the houses, which it had already “paid for” by paying the contractors. I suppose the thinking goes like this. There’s extra cash in the banking system, this would be inflationary, therefore the Government has to issue bonds to soak it up again.
But here’s what could happen instead, or as well. The houses are a good investment (impossible for the Government to find in normal times) and they are rentable, they are rented out, money goes into the Government’s coffers and starts extinguishing the debt, or alternatively, the Government could sell them and extinguish the debt that way.
The opposite could happen, they aren’t rentable and can’t be sold, it’s a white elephant, the Government was sold a pup. Now that type of stimulus has to be paid for.
So the point I am making is that are “good” deficits and “bad” deficits. Good ones result in an asset on the balance sheet (that should be sold), and no need to raise a bond. In normal circumstances there shouldn’t be any investment that the government could do better than private enterprise. What I am saying is that right now there must be some, and these would be legitimate targets to just print money to employ people to do (I can think of a few). The challenge is to find these.
So my question is that when the Government deficit is mentioned is it net of an increase in assets.
February 6th, 2009 at 11:23 pm
Hello Outback Oracle,
You are quite right, it is rare to hear anybody talk about the external account, and when Howard and Costello have told us time and again how well they managed the economy (even Peter Costello’s memoirs recently published bear the subtitle “The Age of Prosperity”), the external account does not get a mention. As best as I can tell it is not mentioned once in Costello’s book.
In past years I bought the argument that the Conservative parties are better economic managers than Labor, but I now wonder whether there is that much of a difference between them. In a sense it could be said that the previous Coalition government squandered opportunities to put Australia in a stronger economic position, firstly because along with other nations it continued a weak regulatory regime that allowed excessive debt and secondly because we let the resources boom pass without strengthening our external account.
I recently read that on a per capita basis only Spain and Greece have a worse balance of current account deficit than Australia and there are many with a surplus, including countries that are resource poor.
I also read somewhere (maybe on Steve Keen’s Debtwatch) that net foreign debt on capital account reached $450 billion near the end of the Howard-Costello years, 2 ½ times greater than when they took office.
Then there is that article by Michael West on 17th November 2008 in the SMH that refers to a Merrill Lynch global economic report that ranks Australia as the riskiest country out of 60 countries studied. Now I admit I don’t know how valid these findings are, but even if we’re just below average it isn’t good enough.
Just before the last election in 2007 I produced a chart showing the DJIA and All Ordinaries since Federation in 1901 and as expected there was a close correlation between the two indices; I figured that the stockmarket is as good a measure of the broader economy as any. I then overlayed the periods when Conservative and Labor governments were in office. This showed that, apart from part of the Hawke-Keating reign, whenever Labor was in office the Dow (and the AOI) was on the low side. It’s obviously impossible for Australian politicians to influence the US economy, so it could be argued that the perceived poor economic performance by Labor governments is a fallacy. Perhaps the influence that any government has on economic performance is over-rated?
February 7th, 2009 at 12:05 am
On re-reading my posting above, I’d like to modify the question at the end:
Perhaps the influence that any Australian government has on economic performance is over-rated, because the main drivers of the Australian economy may be the global environment, particularly that of the the US, China and Japan?
February 7th, 2009 at 12:32 am
Thanks for your supportive comments Otto. Sometimes i get lonely out here!!! BTB also cheers me up.
Source RBA Statistics Gross Foreign Assets and Liabilities
Numbers in BILLIONS
March 1996 around the time of the election of the Howard government Gross foreign Assets $189.40 GF Liabilities $461.8 Net liabilities (my deduction) $272.4 BILLION
Dec 2007 (Rudd elected) Net liabilities $671.6 BILLION
Sept 2008 (las numbers available) net liabilities $709.6 BILLION
All this going on during the greatest resources boom of all time, We should be a CREDITOR country like Norway!!!
You can see that it is a disaster whoever is in power.
Mate…not too sure what the Stock market has to do with Economic performance!!!!!!!!All you have to do is announce to the world you will sell them anything they want….bingo….
February 7th, 2009 at 12:47 am
Similarly CAD – The CAD when Howard came to power the 12 month CAD to June 1996 was $21.607 BILLION (we thought that was bloody awful!)The CAD to June 2008 (Howard finished DEC 2007) was $70.211 BILLION….that is $70,211,000,000 every bloody year!
We just have a bunch of psychopaths on both sides of the House…none of them give a damn about anything but their own bloody egos.
As I said i can no longer find stats on foreign ownership of Australian resources and businesses. The last numbers i saw published were about 12 years ago. I have sought assistance in various forums on that stat but noone has ever come up with anything…so if anyone has anything I’d appreciate the details.
As to politics…I am by birth and inclination ‘conservative’ but…….it’s all just a total disgrace…
February 7th, 2009 at 2:38 am
G’day Oracle, fred, and Otto C.
I see the external account as a separate and important issue that I believe is, if not the cause of the current problem, would have resulted in the same debacle soon. The adverse consequences are immense. Internal monetery matters are important but compared to the CAD pale into insignificance
As we are talking of Marx I like to talk of his concept of “means of production” and I see it not as a corporate asset but the property of a nation state and its individual people. This because much of it cannot be owned by a corporation. I refer to common infrastructure, educated people, and an education system including universities public and private.
Australia has “traded” away the very substantial capabilities (means of production) that we possesed in the seventies, and racked up a mountain of debt in doing so, causing an enormous double loss. Sure we still have the schools and universities but the engineering and science faculties are decimated with students, for several decades, prefering to study, law, commerce, economics, and social sciences instead. We can no longer reliably maintain our technological infrastructure.
The time delay to re-establish this will be huge as will the cost.
This double effect has been caused because neoclassical economists have ignored the current account imbalances (described as a problem by J.M.Keynes), because the idiots think that everything is “in equilibrium”. This inspite of exponentially increasing CADs in our mendicant countries. They have no logic and no maths, anything undergoing continual expontial increase is by definition in no state of equilibrium they are idiots.
Oracle, I am begining to understand your psychopath theory, they show the same unawareness of logic and maths that parallels the typical psychopath’s (and the neoclassical economist’s) unawareness of social values. Having, like a cancer only a short sighted aim of self satisfaction. Their idiocy is boundless however, I do not think that they are enjoying the current situation.
Could I add two other countries which have had continuous CAD’s Iceland and Turkey.
Oracle, my politics are similar to yours, having grown up in a family that admired Menzies. I am not sure that I do not still have a soft spot for him but the rest, both sides of the house, … a total disgrace. Your comments help me realise that I am not alone.
Otto if they have no influence, what use are they? A competant Australian government could have at least campaigned against the mess on world forums long before this happened! They could have taken control of some of Australia destiny! — nah they are all useless wastes of space.
February 7th, 2009 at 6:49 am
Great discussion Bright, Outback, Otto and Fred,
One of the best feeds in a long time. I would like to add that I fear that we are getting very close to the time where we have to pay the piper. Increasingly the World wants their money back.
Most banks and financiers are gone in Australia now. Only 4 to 7 genuine competitors remain. Suncorp is dying. I believe their Corporate spin is very different to reality. The reason the banks are gone is because they were not able to keep raising foreign bonds. The strongest have survived so far.
The problem that I see is this. The big 4 Australian banks raise up to 50% of their funding (to stay in operation, not growth) from overseas. The foreign tap is being turned off, because the World has just lost a big chunk of its liquid assets in the last 18 months. What cash the World has left is staying at home (wherever that is) in increasing amounts.
All throughout the year (every year) the banks are rolling and renegotiating their bonds with overseas purchasers. As risk aversion and loss in overseas markets rise. There will come a time when Australian banks can no longer roll their bonds on commercial terms and in large enough volume. The Oz Government will step in to fill the gap initially. The numbers are too large for the Government to fill the gap on a large scale though. Hence the system will collapse.
I hope the Government is aware of the risky game they are playing. As it becomes clear that without the foreign money our banks are insolvent. The Government risks swapping private foreign debt for government debt. What a crap situation. If on the other hand they let the banks sink or swim, the foreign debt would be defaulted on.
Very painful process, but much better on the other side.
February 7th, 2009 at 11:19 am
Horsome “Is it feasible to propose a government policy which concentrates on acquiring a significant number of assets that have been borrowed against, which in turn will have a significant number of mortgages paid back in full. Would spending $42 billion on a policy like this help soften the blow instead of fueling it? Sorry in advance if this doesn’t make sense.”
One of the primary functions of the Government is to protect the property rights of it’s citizens, and that includes money in the bank, and as far as I can tell it’s the only reason why taxes are collected (because otherwise it would just be printing money to cover it’s spending degrading the intrinsic value of the money held by the citizens). Well if they are chucking printed money at the banking system for no obvious real return or asset then isn’t that a breach of trust?
Mortgage Backed Securities are like that (assets with a mortgage over them), and I wouldn’t be surprised if the Government has already bought some off the banks to help them out. If they are such a good deal, then why can’t the banks sell them to someone else? Oh they tried that already
.
If you are going to inject 42 Billion then why not bypass the banks, invite bids, from anyone, to build a (real) asset to be owned by the Government, only proviso is that it has to be able to show a return, and not involve huge amounts of foreign exchange. The resulting asset is then sold by the Government, to extinguish the debt (which was only paper money in the first place). Result the real economy is stimulated directly. The Government effectively becomes a banker (of first resort).
February 10th, 2009 at 12:35 am
Fred, I recall that the govt set aside $4B for buying mortgage securities for mid-tier institutions. See
http://www.news.com.au/couriermail/story/0,23739,24407699-952,00.html
February 12th, 2009 at 6:08 pm
Fred…do yourself two little flow of funds charts. If i knew how to do it I would post one.
Costello ignored the external account! KRUDD and Waybe Duck are now ignoring the external account along with every supposed ‘guru’ (aka moron) on MSM.
In teh first one you would have say US$50 Billion coming in from overseas, which is changed to A$ by teh banks and lent out into the economy. We then buy a whole lot of stuff..including a whole lot of imported stuff..so we have to pay USD 50 Billion overseas. We have it because we vrought it in before.
Now if we don’t get the USD 50 Billion from overseas and instead print, the only thing on the chart has changed is the money coming in and instead we have a printing of the equiv of USD50B going into the economy. All things else being equal. we import all the same stuff which leaves us USD$50B worth of stuff we have imported we cannot pay for!!! We can’t pring USD! (Well N Korea had a go!) You see Economists and Analysts everywhere are ignoring the external account. You have just made the same error IMHO
There is an external account whether we like it or not
There is no way out!!!
February 12th, 2009 at 7:47 pm
Outback – agreed, there is that proviso, it would depend on what the money was spent on and if it involved a high proportion of overseas funds then that would have to be paid back and it would be self defeating. Infrastructure spending is only part of the answer, the other part has to be providing local small scale development funding where people can apply for funding of local small scale projects. There will be plenty of ideas out there.
February 13th, 2009 at 2:55 am
G’day Fred and Outback
Fred
It doesn’t matter what it is spent on it has not provided a means of earning the foreign currency to enable repayment. This fiasco started 33 years ago when we were more capable with better technological involvement and earning capacity. Since then (libs and labor) have further crippled us.
I call it the Keating Howard cargo cult hypothesis.
Note that we (in someones imagination perhaps) have some obligation to pay interest on and perhaps even pay back the principle of these overseas loans. Or so hope the creditors.
But we still needed to borrow more even in a mining boom, and even needed to borrow the interest. There is a word for the practice of borrowing to pay the interest “insolvency” and this country has been this for at least 33 years.(Perhaps 50 Outback?) I think Minsky called this Ponzi finance.
Howard and Costalot crowed and crowed about their precious “surplus” but this was the governments surplus the country was always in deficit, borrowing much more to meet payments, like some failed broken down tycoon. They also sold off all the family (national) “silver”.
We could not earn enough even in a mining boom, we have deindustrialised, we have turned our back on technology, we now have no way to pay the interest, and, the principle. The creditors are realising that we and big brother USA (and as a consequence they) are broke.
JMKeynes realised that this type of imbalance had occurred in and may have caused WD1. He proposed a solution to ensure that is couldn’t happen again, they ignored him because of their stupidity. So now we have WD2.
If some Engineers did something as stupid as this they could look forward to a long spell in jail. These people (neclassical economists) got bonuses!
We need a functioning industrialised economy like we had in 1970. At that time we could fair trade internationally and earn the money to pay for imports.
Vale the cargo cult.
February 15th, 2009 at 4:25 pm
Floating exchange rates (automagic – I like that) and lifting restrictions on capital flows, were comparatively recent, and allowed individuals to bet against governments (eg. Soros) allowed the rise of hedge funds, so I can’t see why there has to be a Govt guarantee on wholesale deposits, it should be “buyer beware”. We have a standoff “if we go down we are going to take you all with us” unless you provide a guarantee. Call their bluff I say.
4 Bn to buy mortgage backed securities, couple of comments, why has the market for these has “dried up”, what are they really worth and second (I’m not sure whether these are sold like a bond and the repayments are treated like a coupon payment or whether they are sold at a cash value) but either way they are (ie can only be) less than the face value of the underlying loans right? So that would mean – surely – a need for either additional equity or reserves. If the RB was paying for these at “fair market value” why aren’t other parties buying them. And here’s another way of looking at this, if I’m borrowing money at a rate, and lending to others at a higher rate, and then sell some of the loans I’ve (worked so hard to) made then there’s a third party clipping the ticket on the way through. What’s up with that? I’m sure the practitioners call it spreading the risk, I have good ability to sell loans, another party has a better ability to raise capital cheaply.
If the RB has money to spend buying assets, how about seeding some start up community investment banks focussed on getting people into work.
“Industrialised Economy” A lot has changed, it’s impossible to compete with with Asian rates and conditions, Henry Ford got it right when he said that the worker on the production line has to be able to afford what is made on that production line.
February 15th, 2009 at 11:26 pm
http://www.crikey.com.au/Business/20080421-RBA-puts-11billion-into-mortgage-securities-Whats-up.html
The RBA provided $2.35 Billion in REPOS on mortgage backed securities up to the end of April last year. The banks were already jammed then and couldn’t lend. So I’ve heard about enough of the rubbish that our Banks are so strong and well regulated.
One presumes that the RBA will just roll the REPOS over when they are due to be repaid!! Nothing like a few debts we can’t repay to keep trying to “sustain the unsustainable”
February 15th, 2009 at 11:36 pm
Brightspark
On the ‘re-industrialising’ issue your comments on the decimation of Sciense and Engineering faculties is spot on. For example in my day, at UQ we graduated (memory fades a bit:) ) about 70 Graduates. Last year the Faculty produced…..7.
We are so busy educating Social Sciense graduates and people qualified to be “Life Coaches” or some such c..p. I wonder that they have the hide to call most of it “education”
Bring back “Technical Colleges” instead of all this “University” rubbish!
February 16th, 2009 at 12:17 am
The housing issue is not simple for buyers now. In our area of Brisbane prices have dropped about 20%. I am basing this on looking for a house for the last 18 months. So I can compare very similar houses from then and now and a 20% drop is about right for houses that have actually sold (as against prices asked for/removed from market/ put up as rentals). I still think another 20% fall is likely however if you are buying to live in it for 10 or 20 years and the right place turns up now…. maybe it is worth wearing that drop. It could be another year before something else turns up and rentals here run at about $30K per annum.
You might pick the bottom of the market, but there might be nothing you want at the bottom.
February 16th, 2009 at 1:56 am
Outback
About education and the technical colleges. One thing that has gone unheralded and un-noticed are the changes in the TAFE colleges throughout the country. They are no longer involved in Technical and Further Education but in “Training”. The engineering TAFE schools are in the final process of closure, and the trade schools have been reduced to training and assessing simple skills. They call it “Competency” based training where the “competency” is a noun meaning “skill” in old speak.
The former liberal federal government set up ten “Skills Councils” and attached them to ten industry groups not even aware that a particular trade or para-profession has always found employment in more than one industry. They even assigned one skills council the “industry” of “inovation”,”Inovation and Business Skills Australia”. Yet another skills council has wriiten a “Diploma in Research”. I could write a book about it. I will try to post some details for download.
The products of these skills councils are called “training packages” and these are very limited in detail so the quality of the “training” will vary from trainer to trainer. Also in most cases they prohibit an education component.
Again the soft skills have also taken over, the “technical” has gone.
The TAFE electrical engineering school that was the largest in the country in the 1970’s is closing down completely in june 2009.
I fear that the era of the incompetent tradesman is upon us.
Tafe colleges are now life skills training places, not technical colleges.
We are going to need revitalsed engineering faculties at Universities and complete replacement TAFE engineering and trade schools. That is unless K.Rudd can arrange the continuation of the free cargo drop from China, but even if he can do that, vital infrastructure will fail for lack of expertise.
Cheers
February 16th, 2009 at 2:13 am
Fred
Yes it is impossible to compete with the rates and conditions in Asia, that is why this country in in debt to the tune of 600 billion dollar and we need to increase this at the rate of 80 billion per year to go on living like we have been.
We need protection from this garbage the world just cannot go on with cargo drops to the west with debt accumulation that has no chance of being repaid. The time to pay the piper has arrived.
The deputy PM has uttered words about “free trade” and she means “tariff free”, not really free, because she knows no better.
The oposition leader has railed against the debt accumulation caused by the rescue package likening it to the Whitlam governments debt accumulation when the Howard government accumulated 400 billion dollars debt far more than Whitlam even in real terms. He seems to think that “Australia” comprises only the federal governments because he knows no better.
We need better informed polititions, heaven help us!
February 16th, 2009 at 6:35 pm
Buying RMBS, as of April last year to improve liquidity, so how’s that going? Surely the problem with the RB buying these things is that their value drops in a falling interest rate environment and here we have a clear case of conflict of interest. Buying these things at the same time as controlling the lever that determines the value of them. And the other thing paying 7.85% where are the margins!