Today Tonight’s James Thomas put together “Changing Times“, an excellent program on what a Depression is like, and the danger that we may be facing one today.
The centrepiece of the story was an interview with Eric Aarons, who at almost 90, lived through the Great Depression. His recollections frame an item that includes archival footage of the then Labor Party Prime Minister Scullin describing the turmoil of 1929 with the words “Australia is facing today the gravest financial crisis in its history”.
Plus ca change…
If you haven’t seen Changing Times yet, please do so.
PS Eric Aarons is a renowned sculptor and author–I will be launching his latest book Marx and Hayek at Gleebooks on April 24th. In an earlier phase in a long and rich life, he played a pivotal role in the Communist Party of Australia, from its inception to its voluntary liquidation in the early 1990s. The ABC produced a documentary on the Aarons family in its Dynasties series which described it as “the royal family of Australian Communism”.
Eric and I met in an incidental way via his excellent memoirs of that lifetime in the Left, What’s Left? I happened to read it while doing my PhD on modelling financial instability, and I was struck by both its wisdom and humanity.
Then some years later, Eric read my book Debunking Economics. This was primarily a critique of neoclassical economics, but it also contained a critique of conventional Marxism in a chapter entitled “Nothing to lose but their minds”. In it I argued that Marx’s philosophical logic in fact contradicted the labor theory of value, which was a linchpin of the case for socialism; with that linchpin shown to be false, so too was the case for socialism as an alternative to capitalism.
He contacted me to discuss my argument, with which he agreed. We became firm friends, and we regularly consult each other on economics, politics and philosophy. I hope that I live as long and as productive a life as has Eric–but even if I do, I will never be the artist he has become. Watch the program for its insights, but also take a close look at the magnificent Eternal Conversations that is Eric’s masterpiece in a long career as a sculptor.
February 6th, 2009 at 12:22 pm
Article from Michael West in the SMH…
Quotes from the article:
“It’s time for the Government to prove it is not a lackey for the big banks”
“In Australia, when the pain of the financial fall-out hits Main Street like a careering road-train this winter, social cohesion will become ever vital to government.”
http://business.smh.com.au/business/putting-the-cap-on-capitalism-20090205-7yes.html?page=-1
February 6th, 2009 at 1:20 pm
Everyone…give Michael West all the support you can. it’s not easy trying to fight the good and honest fight in the position he sits. He deserves support in whatever form you can give him.
February 6th, 2009 at 1:34 pm
It amazes me that Eric Aarons would agree with the view that Marx’s philosophy contradicted the labour theory of value.
I wonder if this statement is accurate.
Marx only held to a “socially necessary labour theory of value” and this is completely consistent with dialectical materialism and Marx’s organic, objective philiosophy.
For those who understand it that is. It is all too easy for the pundits to throw off statements such as Aarons/Keens. I saw an earlier comment about how Marx’s prediction of crisis was some how “wrong” ?!
I was flabbergasted – what was/is 1890, 1929, 2009 all about?!
Instead of wimpy little in-jokes kicked around the wine-bars of Sydney about Marx, how about some reasoning?
If you don’t know the difference between the pre-Marxist labour theory of value, and the Marxists socially necessary labour theory of value, then you have no right to venture into deep water.
It’s not the first time Eric Aarons has suck his own boat.
February 6th, 2009 at 1:36 pm
ERRATA
It’s not the first time Eric Aarons has sunk his own boat.
February 6th, 2009 at 2:00 pm
It may amaze you Chris, but it’s the truth. And I know a hell of a lot about the labour theory of value, and Marx’s philosophy. You might check my papers and my Masters thesis on the topic, all of which are downloadable from this blog:
(1993). “The misinterpretation of Marx’s theory of value”, Journal of the History of Economic Thought, 15 (2), Fall, 282-300.
(1993). “Use-value, exchange-value, and the demise of Marx’s labor theory of value”, Journal of the History of Economic Thought, 15 (1), Spring, 107-121.
(1990). Use, Value, and Exchange: The Misinterpretation of Marx, Masters (Honours) Thesis, UNSW.
All these papers are now available under the Research heading on this blog.
February 6th, 2009 at 3:04 pm
‘chris’ I would say you seem to have your “reasoning” in spades.
I think you will need to paddle pretty hard
(return with your own well ‘reasoned’ AND researched arguments against what I expect will be very well developed thesis ) to keep your own canoe afloat.
I certainly am not in the league to even consider these propositions – but it should make interesting viewing.
February 6th, 2009 at 3:32 pm
Like all good lecturers Steve has set some reading.
Steve has been a bit extreme in suggesting that all this refutes socialism as an alternative to capitalism (because of the lsot linchpin – above).
So Steve is swimming along side Eric’s dog-paddling?
I will read the three cited texts. But the important point is that there is a vast difference between the labour theory of value pre-Maxist(LTV) and the marxist ’socially necessary’ labour theory of value (SNLTV).
I am not aware of any argument that suggests any conflict between Marx’s dialectical philosophy and SNLTV. They match – in society.
It is not clear to me how Steve even defines capitalism because obviously socialism is the only alternative to expropriation of value from workers. If capitalism is “expropriation of value from workers” then by definition, socialism is an alternative to capitalism.
If Steve adopts the bourgeois definition of capitalism (ie private enterprise, free markets) and is a prisoner of bourgeois definition of socialism (ie planning, command economy), then this socialism is not an alternative to that capitalism.
But this logic is only for those who have not read Marx properly.
February 6th, 2009 at 4:05 pm
I’m glad that ‘Changing Times’ finally made it to air. It’s a pity that Steve’s direct contribution was edited down to only four sound-bites totalling 44 seconds, but he certainly made good use of those – 165 well-chosen words in 44 secs, if I counted correctly. Well done!
I wonder what ended up being thrown into the bit-bucket by the editors. (Any comments, Steve?)
February 6th, 2009 at 4:59 pm
Hi again Chris
good to see that you are up to the effort
studying Steve’s papers -
after all he has ALREADY done his work “…instead of( making) wimpy little in-jokes kicked around the wine-bars of Sydney about Marx”, and BEFORE assuming the “…right to venture into deep water” as you describe it.
And given that you further state “it is not clear to me” and IF Steve “….adopts the bourgeois definition of capitalism….” and “…and is a prisoner of bourgeois definition of socialism….”
then I expect his detaled papers should absolutely clarify his actual position for you.
Looking forward to your infromeed judgement.
February 6th, 2009 at 5:01 pm
last line should read
Looking forward to your freshly informed judgement.
February 6th, 2009 at 5:14 pm
So Chris are you the same Christopher Joye on Business Spectator? I enjoy having a good laugh at his post. He seems to have his head stuck in the sand.
February 6th, 2009 at 5:23 pm
hi steve,
forgive me if im jumping the gun here, but would like know your thoughts on the recent stimulus package . allthough there are flow on effects to spending, it concerns me that most of the jobs that are going to be lost are going to be in the service sector, and there doesnt seem to be any major direct initiatives in regards to this.
also until recently our super annuation investment holdings amounted to 100% of gdp. the recent declines in equity markets may have diminished this in a significant manner.
my question is do our super annuation holdings have any counter valing effect pushing against our debt burden . do you have any opinions on the way the government could manipulate this pool of savings to counter act the effects of the recesion thats coming
February 6th, 2009 at 7:40 pm
al49er
Judging by your comment, I am not sure you are quite across the issues.
You say that:
“…given that you further state “it is not clear to me” and IF Steve “….adopts the bourgeois definition of capitalism….” and “…and is a prisoner of bourgeois definition of socialism….” then I expect his detaled papers should absolutely clarify his actual position for you.
But where in these papers is there the necessary ‘clarification of (an) actual position’.
The first paper is a literature review that is not overly contentious, the second is a stock argument about the relationship of use value and exchange value and some supposed omission by Marx (or inadequacy of treatment) of non-labour inputs and a squabble about depreciation etc etc.
[As an aside: - It may be possible or useful to replace all of Marx's constant capital (c) with depreciation (d)]
Anyway – no paper clarifies his meaning of socialism or capitalism.
The second paper suffers from poor grammar, which is probably not so important. For example
…use-value and exchange-value are inseparable dialectical aspects of the social unity the commodity….
If this was rewritten it would make more sense, viz;
use-value and exchange-value are dialectical aspects of a commodity in a society.
It is not a big step from this sentance (above) to at least hypothesise that the value of a commidity is therefore “socially necessary” labour.
The Keen thesis is a tome and cannot be read in one sitting. So al49er, if you really thought these three documents would clatify the relevant meaning of capitalism or socialism – where, precisely, were you referring to?
I cannot find what you were referring to?
Did I miss it?
Maybe you were thinking of some definitions or explaination is other publications. This would help.
I can only restate what I said before;
It is not clear to me how Steve defines capitalism.
IN my view capitalism is the problem – not debt, debt is a symptom worth watching.
Is Steve’s project really a project to save capitalism from bad greedy capitalists so we can all live forever more under some nice progressive, democratic capitalism?
February 6th, 2009 at 8:14 pm
Hello Steve,
Along the same line as mahaish. The fact is “chasing the dragon” never works.
But what I find very distressing and incredible is the Treasury Department’s blind support to it and their yes prime minister attitude. I mean sure Ken Henry is a closet Rudd wannabe, but where among all this is the common sense?
February 6th, 2009 at 8:46 pm
“chris” you are 100% right when you say
“Judging by your comment, I am not sure you are quite across the issues.”
Maybe you didn’t read the last sentence of my FIRST posting on this matter.
“I certainly am not in the league to even consider these propositions – but it should make interesting viewing.”
The reason I ‘bought into’ your post/challenge to Steve and his mate Eric Aarons was that you came into it with such a dismissive tone
that it seemed to me you certainly had a real ‘agenda’ either with Steve or his view of the economic world and that you had started up at about a ‘9′out of 10, rather than seeking an intellectual discourse about your difference perspectives.(as regularly occurs between contributors to this site)
So when Steve came back with references to papers that he had produced, seeming to suggest that they should contain the answers you seek, then from an ‘onlookers’ point of view(and that’s what most of the subscribers to this blog are), then it seemed that the first hurdle would be whether you read (properly)the references he provided and then secondly how you would respond.
It appears you have ‘read’ the papers and have seen fit to maintain your “dismissive” attitude regarding Steve’s academic perspective on the point you are discussing.
As I have made clear for some time through many of my postings to the site, I come to the broader issue (the GFC) from the sociological perspective. I’m absolutely absorbed by the global goings-on at the moment, but as I have said before one thing seems very clear to me about this.
Of all the people, over all the world, there are not too many who can claim to have set down in chapter and verse the unfolding of this particular GFC. Peter Schiff and Nouriel Roubini are two notables, both in America and both from a fairly solid ‘commercial’ perspective.
Steve Keen is the third such person but minus the same degree of commercial consideration (save to say odd book royalty which I expect will hardly make him wealthy and naturally professional academic satisfaction).
It has simply fascinated me that you have got the entire world’s, (including our country)
economists, ‘expert commentators’ and politicians as recent arrivals to an understanding of the “international crisis” and yet remaining too blind and obstinate
to give due credit ‘and a place at the table’
to those who have ‘the score on the board’.
Now whilst you can contest particular historical points(philosophical or technical ) about who meant what and what is understood in their definitions, that is quite a mute point for those people who openly (and unabashedly in my own case) admire Steve’s work.
I’m sure Steve will read the comments you have addressed to him through me – I’m sure you can go direct from this point – and no doubt he shall respond as he deems fit. And I reiterate
for the rest of us, that should be “interesting viewing”.
P.S could you also address “joshua’s” question in your next post.
Are you Christopher Joye? just to clarify things.
February 6th, 2009 at 9:07 pm
Hi Steve – I love your work, have been following in the media and just found the blog. The Today Tonight stuff is interesting – your comment about ’spruiking’ passing as economic theory was fairly humorous because there was a show on Today Tonight a few day’s ago citing a whole heap of ‘experts’ (ie real estate agent advocates) saying now was the time to buy. There has been some interesting analysis on the T.V recently, Robert Reich on 7:30 report saying that the U.S problem was partly due to the wealth gap and that the middle classes couldn’t afford to provide necessary economic activity. Paul Keating on Lateline saying that China and India needed to be brought in as major stakeholders to the IMF and the fundamental problem of saving countries pumping cash into debtor countries until they ‘explode’. He also said that America wouldn’t pay down its debt but would inflate its way out. If so, is that inflation exportable? Is it possible that the government will pursue hyper-inflation as an alternative to Japanese style deflation? Surely if Rudd got the printing presses going…..
What do people think?
February 6th, 2009 at 10:29 pm
Hi al49er
Well said! And like Joshua I’d also like to know if ‘Chris’ is Christopher Joye.
February 6th, 2009 at 10:34 pm
Chris, Karl Marx in his works does not talk or mentions dialectical philosophy, what Marx is mentioning and reasoning is dialectical materialism as major part and “conditio sine qua non” of Marxist philosophy. In simple words you can not mix apples and pears.
February 7th, 2009 at 8:40 am
I’ll reserve those for the next Debtwatch mahaish–too busy now with academic papers. But I see super as part of the problem–it’s amplified the asset bubble in effect.
I just had a good off-list exchange with a new member that I thought worth reproducing here:
———
Professor Keen:
I just found your debtdeflation website and officially registered last night.
Thanks very much.
I’ve been following the graphs of the rising ratio of U.S. non-financial debt/GDP since 1983, and as you’re no doubt aware the Jim Grant’s of the world have been predicting that overuse of debt would destroy the economy since at least circa 1986.
One question I keep asking myself, and can’t answer (and Irving Fisher’s analysis really doesn’t answer either) is, “Why Now?”
Why didn’t the massive U.S. real estate credit crunch of 1990 lead to credit use rolling over rather than a pause? Similarly, why didn’t LTCM in 1998 lead to a collapse rather than a pause?
Because I’m also trying to understand what keeps this credit crunch rolling over into a deflationary spiral instead of a very painful pause following by a bounce in debt use?
Any help would be much appreciated.
Thanks in advance,
Gary Haubold, CFA
PS: U.S. consumer debt outstanding decreased slightly in 3Q 2008 for the first time in my lifetime – it’ll be fun to see what the aggregate sector totals show for 4Q 2008 when available.
———
Dear Gary,
You’re welcome. The site is a labour of love that started as an attempt to raise the alarm before the crisis hit. I’ve been modelling debt dynamics for over 20 years, but I knew I wouldn’t get listened to until the crisis struck.
I did expect a secular correction in 87, and 2000, as well as thinking it was possible at the time of LTCM, etc. I now think that the reason it didn’t happen then is the Federal Reserve. Each rescue “worked” by reighiting private lending.
If the Fed hadn’t been there then I think the ‘87 crisis would have triggered a mini-Depression–mini because we didn’t have deflation but high inflation at the time, and that was eroding the debt overhang even while nominal debt was rising.
As a result of the rescues, however, and the Fed’s obsession with driving inflation out of the system, we had depressed conditions for long enough to push inflation down, combined with amplified activity in the fictional wealth side of the economy–the FIRE economy as Michael Hudson calls it–that added dramatically to debt levels, taking them way beyond what would have applied in an unregulated system.
Hence the crisis now. The FIRE engine can’t be restarted–the only group below the subprimes in credit worthiness are already in gaol–while with low inflation, the debt burden has to be reduced by paying nominal debt down. We thus have the triggers for a Debt-Deflation, and that’s what we’re experiencing now.
So that’s why we’re having a fully fledged financial meltdown right now–the authorities who were supposed to ensure that “It” didn’t happen again have unwittingly set up the preconditions for the greatest Debt-Deflation in history.
Actually. I rather like what I’ve written here in response to your question as a condensation of my argument, and I might post both as a mini-blog entry.
Cheers, Steve
———
February 7th, 2009 at 9:54 am
Hi Steve and All,
I have been considering a scenario for a while and I want to put it out there to get some perspective.
The first part of the scenario has been talked about in great detail:
In the near future, I expect the Oz banks to start having more difficulty rolling their foreign bonds. A small problem can be easily corrected by a government guarantee. Oh that’s right. That problem reared its head in November. When this problem gets huge and I expect it too the following is what most expect to happen.
Our currency continues to depreciate and credit continues to get harder to find. Interest rates rise, because banks are desperate to keep their funding rolling in. The falling currency leads to a rise in the cost of imports (already happening). Failures accelerate and bingo we turn into Iceland. Massive price inflation!!!
This is the part that has troubled me:
I think the “price inflation” will only be a short term blip. The theory goes like this.
Imported goods rise in cost. But at the same time the rising interest rates wipe out many borrowers. Businesses fail and unemployment skyrockets (still the Iceland story). Now the disconnect from all the other predictions.
The rising unemployment means that incomes across the economy crash. People’s ability to pay crashes as well. Demand for everything falls. Houses crash in value and the feedback loop runs its course.
Why I think price inflation will be short term, is that Australia will have to give up on imports except for the essentials. We will have no choice because we will not be able to afford the imports and nobody will lend us the money to buy them. The international “vendor finance” will drop off massively because of fear that the exporter will never get paid. So why send the goods?
I have been trying to find out what is happening on the ground in Iceland. All the reports seem to talk about “inflation”. I know that unemployment is rising dramatically. I bet house prices are crashing and businesses are failing. To me that speaks of deflation not inflation.
What do you guys think? Prudent can you see how what appears to be inflationary turns out to be deflationary as the available credit in the economy crashes.
February 7th, 2009 at 11:22 am
That’s akin to my thinking BullTurnedBear; a currency collapse-inspired inflation would cut off demand rather than cause prices to accelerate.
February 7th, 2009 at 12:52 pm
“REAL ESTATE investment trusts have closed a tough week with more asset value downgrades and warnings of harder times ahead.
Mirvac, Dexus Property Group and Macquarie Office Trust all issued warnings yesterday, saying that while earnings remained intact in the short term, further write-downs could be on the cards.
The warnings cap off one of the busiest yet trying weeks for the REIT sector, which saw the ASX 200 Property index lose almost 15 per cent of its value”
http://business.smh.com.au/business/trusts-forced-to-downgrade-assets-20090206-8016.html
“THE nation’s biggest banks have warned shock waves are spreading into most reaches of the economy at a faster-than-expected pace, with lenders such as National Australia Bank now facing a bad debt charge in excess of $3 billion if losses continue at the current rate.
The lending giant, along with Australian & New Zealand Banking Group, has added to the slew of bad news that is coming from the bank sector, which is grappling with the highest level of bad loans since the 1991 recession, slowing lending growth and a run-up in funding costs.”
http://business.theage.com.au/business/bad-debts-spiral-amid-shockwave-fears-20090206-800b.html
And it seems the sheeple are waking up. They are taking the Krudd handouts and buying undies and toothpaste, but NOT adding to their risk burden for fear of future asset value declines.
“However, Westpac senior economist Matthew Hassan, who was expecting a 5 per cent rise in the ABS retail data, had a different view.
“Given the $8.7 billion in fiscal payments to Australian households and an additional boost from lower interest rates, the $700 million increase in retail sales month to month is decidedly tepid,” said Mr Hassan.
The ABS also revealed yesterday that building approvals had notched up their sixth straight monthly decline, falling 2.9 per cent in December compared with the market’s expectation of a 2 per cent rise.”
http://www.news.com.au/heraldsun/story/0,21985,25009485-664,00.html
Un/underemployment will worsen dramatically here despite Krudd’s spending plans. His plans for stepping up lending into CRE are going to end in disaster if enacted- making taxpayers hold the bad for handouts to large property developers, property THAT NOBODY WANTS.
All this profligate deficit spending is leading us clearly into our own little horror version of the GFC from a point earlier when our financial position was relatively sound! I don’t think a currency collapse is in our future- we have just had that. What I do think we will see is a “seizing up” of our economy as; embattled and highly leveraged banks continue to slash lending as the economy detriorates, demand for things and risk evaporates, mining capacity becomes shut in and expansion plans shelved , property values (commercial and residential) continue on their inevitable decline much much lower.
The Australian economy will eventually stabilize at a significantly lower GDP than just 6 months ago. It is unstoppable. Sending taxpayers into the poor house for a generation in hopeless efforts to fight it are despicable. We are only blindly following the corrupt and failed US model of raping another generation of taxpayers so that current Govt incumbents can be seen to be “doing something” and shoring up their own re-election prospects in the process.
February 7th, 2009 at 6:15 pm
hi bullturnedbear-
agreed- we should all run for cover if our current account deficit ends up being a surplus due to the short fall in the capital account due to the inability of our banks to raise funds overseas and the fall off in demand for imports.
but im wondering in the current climate wont there be a contraction in supply AND demand for credit. will there really be a funding shortfall. the banks might not be able to get the money to lend,let alone want to lend it out to anyone but those who dont need it. but there might not be too many people wanting to borrow the money in the first place. im thinking the level of angst will be so great, people wont want to spend there own money or someone elses.i acknowledge the fact that the nature of financing in certain industries does present some unique challenges.
and if there is a shortfall perhaps the government might be inclined to set up some funding vehicle like its proposing to do to help out those poor property developers , you know the forgotton minority. or are you anticipating a short fall that will dwarf any government attempts to cover it.
as far as interest rates are concerned, are you suggesting that the reserve will defend the dollar if it de values too steeply or do you think there is going to be a major disconnect between official interest rates and what the banks are charging. i can only see official interst rates going down and staying down approaching the 1% mark this year and next. do you think the exchange rate risk for the banks will be another factor in rising interest rates.
i would be curious to know when in the past these disconnects have occurred if at all. would you know when this has occurred.
also i seem to recall iceland having interest rates at over 20% recently- do you know if this policy has worked in terms of attracting capital or have they been unable to get money at any price due to there tanished reputation.
i think reputations are going to be important in determining how bad the credit crunch is going to be and who is going to attract capital. this is where i think we have an advantage due to the fact that the long term fundamentals for resources are good.
iceland might not be able to get captial at any price but people might still be willing to do deals with us.
or perhaps we should begin to flirt with some chinese sugar daddies like some of our resource companies are allready doing to cover the funding shortfall.
insightfull as ever, keep up the good work
February 7th, 2009 at 7:14 pm
Non-Farm payrolls in US showed a loss of 600000 jobs. Article explains
http://business.smh.com.au/business/us-jobless-rate-soars-payrolls-plunge-20090207-805f.html
Also last years figures revised from 2.6 million jobs lost to 3 miilion. First time since the data has been collected in this manner (since 1939) that there has been 13 straight months of job losses. Also the 600000 is the biggest monthly drop since 1974 and 5th biggest ever. Unemployment rose to 7.6%. Pretty ugly really and a sign of worse to come.
Interestingly the DJIA actually rose- apparently because the payroll figure means that the stimulus package that will miraculously save the world is more likely to get through quickly.
I heard a couple of analysts say that without the package that unemployment in US will go past 10% but the package will avert this. Is it just me or are these people in blissfull denial?
Since WW11 the unemployment rate in US has only risen above 10% once-peaking at 10.8% in December 1982 and perhaps this leads people to a false sense of security.
http://www.miseryindex.us/urbymonth.asp
The simple fact is that the growth in the last 25 years that has supported low unemployment rates has been fuelled by increased leverage- a point that Steve and other contributors to this site seem to comprehend but the wider community including the “experts” seem not to.
The previous bailouts TARP etc have not worked and this one and the next one they do in 6 months won’t either.
Everytime I hear a so-called “analyst” say that things will start recovering in the second half of this year or early next year it just makes you wonder.
The Debt Deflation will take a long time to work through to me it is inevitable that unemployment will continue to increase while this happens. The 10% barrier in US will be breached by Christmas and my belief is that unemployment will keep rising (perhaps at a slower rate) in both 2010 and 2011- a peak of 13-14% would not at all surprise me no matter how much money they throw at it.
In Australia it seems that company balance sheets are in better shape and our banks better regulated (although this remains to be tested when property prices dive). The unemployment rate is also currently much lower 4.5%.
The fact remains though is that the debt-fuelled boom is over and that de-leveraging has begun. As the shit is taking longer to hit the fan here I think unfortunately it will probably also slow down the debt deflation process. Therefore whilst we may avoid 13-14% unemployed as in US … and peak somewhere around 10% I think unemployment may be high in Australia for perhaps even 5-6 years.
I would be interested to hear other opinions on the peaks of unemployment in US and AUS and how long it will take to “run its course”.
Cheers
February 7th, 2009 at 9:49 pm
Professor Keen
A big thankyou
I have been a lurker on your site for some time. I thought now might be a good time to let you know that I have taken you newsletters and views onboard in relation to my financial affairs over the past two years. Over the past 12 months, my husband and I retired at 50 – sold our highly leveraged property and relocated to a small country holding which we own outright. I put all of our remaining funds from that sale into shorter term investments which have been switched and accessed quickly. Needless to say we are now in a position to ride out what is about to come.
I don’t say this smugly, as I unfortunatly was unable to convince all my family or friends of the oncoming train wreck and feel most concerned for their futures. I just wanted to say thanks to you personally and to the other posters for their views and the links which directed me to a myriad of sites to learn so much. (My husband blames them all for the late time at which I have been on the net the past twelve months) I now have a much greater understanding of economics, albiet I have been dragged kicking and screaming, into studying (online) a subject which once before, at Uni, I found incredibly boring. Not now though.
Many others here leave me feeling incredibly undercooked about my recent two year learning curve. But I will continue to watch, listen, read and learn. I guess, since I haven’t been taught from any particular school of economics, I am lucky in that I have been able to sift the mountain of divergent opinion and information. I have not been blinkered by adherence to any one thing or another. After watching your piece of today/tonight, I now can put a face to your words. Due to your blog, I and my family (who we can help out during the coming years)are going to survive this mess.
February 7th, 2009 at 10:08 pm
Hi Mahaish,
I agree totally that banks have heavily tightened lending standards and that borrowers have reduced their demand big time. That is not the problem for the Australian banks.
The bonds that Oz banks sell, roll over for several different terms with staggered maturities. I am informed that over the last decade Oz banks mostly rolled their bonds for three year terms. At the end of that period the bank would either rollover that bond with the existing investor or simply find a new investor to take out the old one. (Ponzi style). Therefore, funding growth in lending is not the problem. As risk aversion increases Worldwide, funding the existing book is the critical issue. If a bank can’t roll a significant bond or group of bond issues they may be technically insolvent.
I was speaking with one of my very wealthy clients on Thursday. He had spoken to a high up contact at the CBA. Because this is third hand I can’t confirm the validity because something may have been lost in translation. With that disclaimer out there. This is what he said.
Because of the very expensive prices banks had to pay to raise foreign money last year. And because investors were not willing to lend money for longer terms. Most Oz banks only rolled their bonds for 1 year. Meaning that their rollover requirements will be twice as high this year. He also went on to say that an industry rumour was that ANZ had the largest amount to roll and may have difficulty. For the moment though, the bank spin is telling us that the government guarantee is making it easier to roll bonds. Do we believe the spin and how long will that support help? Especially considering that credit is still being destroyed daily around the World and fear and risk aversion is rising.
The numbers we are talking about here are in the hundreds of billions. I fear that with Government guarantees the money will continue to come for a while, but the price (rate) may rise considerably.
On rates, I see two potential problems.
1. Oz is small and a long way away from the rest of the World. Demand for our minerals is falling hard. What else do we have that the World wants? I believe our economy has structural limits to how low the RBA can lower rates without crashing our currency and seeing a flood of money out.
2. Our banks will have to pay more to encourage foreign investors to keep rolling over bonds when our economy enters recession. As 50% of our banks’ funding comes from foreigners. Local interest rates will have to rise.
I think our reputation is great around the World. But we have a very high net foreign debt and our economy is largely consumption based. I believe fear and risk aversion will trump reputation any time.
When thinking the consequences of the credit crunch through remember this. Wealth and money is being destroyed at unprecedented levels all around the World. It is not just Australia that is and will be trying to raise foreign debt. The competition is intensifying and the pool of available funds is shrinking. The World has been functioning at bubble levels of debt and money supply. How will the World and more importantly Australia function now that the bubble has burst?
February 7th, 2009 at 10:29 pm
I too thought agree that this Today Tonight piece was very well done.
The interview of Eric Aarons reminded me of the conversations I had with my father, particularly those I had when I was certain that we were in for another depression. He died 11 years ago so I’ve been thinking of this for more than 11 years he suggested that this time it will not be so bad for two reasons, more advanced technology and more advanced social security systems.
One thing that happened then and has already been creeping into the employment system was what was then called job sharing, and is now called part time casual employment. Should the government and other large employers now be thinking of softening the effect of unemployment by job sharing? This would provide social equity and maintain workplace skills by sharing work around. Surely this would be preferable to retrenchment and facilitate recovery? A more permanent than “casual” status would improve the workers credit worthiness and also provide more emotional security.
To do this and keep track of what is going on as regards unemployment the work of COFEE at the University of Newcastle should be used, the ABS unemployment statistics are garbage.
February 7th, 2009 at 11:23 pm
Chris said
“Is Steve’s project really a project to save capitalism from bad greedy capitalists so we can all live forever more under some nice progressive, democratic capitalism?”
Steve is pretty good at bagging the neoclassical economists, but he’s pretty much in the same camp.
But credit where credit is due. Steve has done a very good job of explaining and demonstrating some of the particular problems within capitalism. But I think the answer to your question is obvious Chris, of course that is what Steve’s project is all about. I’m surprised you would ask that question.
A quote from John Bellamy Foster:
“ 19 century classical political economy was explicit about not only class but also the political nature of economics. As Marx explained in Capital, only when the capitalists had conquered the state in the 1830s and 40s did scientific political economy turn into vulgar political economy. Neoclassical economics (“vulgar political economy”) was based on a class-analytic perspective that could no longer be openly confessed. Its interests were no longer revolutionary, as in the early stages of capitalist economics, but had given way to the, ”bad conscience and evil intent of apologetics.”
“Eventually, political economy was renamed economics.”
“In order to struggle effectively today, we need, for starters, to change economics back into political economy, making the economy a political / public issue once again.”
End quote
February 7th, 2009 at 11:55 pm
thanks for the insight bullturnedbear,
i shall ponder.
just a thought though, i heard tanner mention the posibility of changing the rules as far as reserve assett ratios for the banks were concerned . would this be one way the banks could partially cover the shortfall by allowing them to leverage up.
your point about interest rates are interesting-i suppose we would need to maintain some kind of competitive interest rate differential to keep attracting capital. in fact the NAB has basicallly intimated this fact in recent days saying it may not be able to pass on further cuts.
you mentioned 50% of funding comes from foreigners-would you know who the big players are.
February 8th, 2009 at 1:18 am
hi macca,
couldnt agree with you more.
whats the harm, lets pile an extra 200 billion on to the debt. how morally bankrupt is this.
all our leaders seem to care about is maintaining the level of spending and consumption.
we have spent too much and consumed too much.
walk through the shopping malls of this land and see how many shops have opened up in the last 10 years all because people were too lazy to save a dollar.
we should all walk through our homes and see all the crap we have bought to fill our lives and give it some meaning , and yet look at the mess we have bought ourselves into.
there is clutter everywhere, in our homes, in our hearts and minds. rush , rush everywhere. put it on the credit card have it now, why wait. what an impatient rabble we have become.
how is it that we have built a society where people cant afford to put a roof over their heads though the efforts of their own labours and instead have to enslave themselves to a lifelong debt
is it any surprise we have hit this brick wall
how much is enough.
the real reason we have the debt is the emotional debt we feel inside and we feel we need to compensate with material possesions
this obsession with economic growth
how about an obsession with spiritual growth instead.
lets start conserving money, conserving energy, and conserving each and every moment in our lives as we possibly can.
February 8th, 2009 at 7:44 am
I read a large volume of MSM stories out of the US and UK. Most of the stories to do with banking still focus on the need to clear banks’ balance sheets so that “they can start lending again”. Very few question what is happening to the demand for new loans.
When I talk to commercial bankers in Oz. They tell me that it is harder to get deals through. “The credit guys are walking around as if they own the place”. The second thing that bankers say is that “demand for loans is down big time”.
Australia is at the outset of this banking problem. Therefore imagine how much demand for loans is down in the US and UK?
I believe this comes from the politicians’ need to “show that they are doing something”. So the pollies spin that if they could unclog the banks’ balance sheets. Lending would start again.
Don’t believe the spin:
1. All the greatest minds in the World have not come up with a plan for how to fix the balance sheets of the failed banks.
2. Even if they came up with a plan that worked. The borrowers’ demand has fallen of the cliff.
Also in discussions with bankers they fear that the desperates and high risk takers are very keen to borrow at the moment. As well as those whose previous funding sources have dried up. The quality clients that wish to invest for future income growth and to grow production, do not want to borrow any more funds. This group have shelved expansion plans for the time being.
February 8th, 2009 at 7:47 am
Thank you JustThinking,
When I first took a good look at the Australian debt statistics (in December 2005), I realised that what I had modelled as a theoretical possibility for the previous 15 years–a debt deflation–was about to become a reality.
The close look at the data came about serendipitously. NSW Legal Aid involving a family that faced eviction from their home after defaulting on the seventh loan they had taken out over their property, all but one of which had been organised by the one solicitor’s firm, acting as a form of loan broker for a sequence of non-bank lenders. To save the family, Legal Aid had to persuade a judge to overturn a contract, when lawyer’s whole careers are based on defending them–and most disputes are over interpreting them.
There is a provision in the Consumer Law code that allows a contract to be overturned if it has deleterious impacts upon third parties–non-signatories to the contract–and Legal Aid wanted to run the argument that this loan contracts of this nature impacted badly on the rest of society. They asked around for an expert on the macro-effects of debt, and with my published record on Minsky’s “Financial Instability Hypothesis”, they were eventually directed to me.
Though I knew a lot about the mathematical dynamics of debt, I hadn’t kept a close eye on the actual statistics beyond an awareness that the debt to GDP ratio was probably rising–one has to specialise in economics to some degree, and mine foci had been in developing dynamic analysis, which is seriously under-developed in economics, and critiquing neoclassical economics and its pretensions to scientific behaviour.
As I was writing the outline of my report, I made the throw-away line that “Debt to GDP ratios have been rising exponentially in Australia”. I realised that I couldn’t leave that hyperbole in the report–hyperbole is a barrister’s job in a lawsuit–so I checked the Australian data… and saw an almost purely exponential increase in debt levels since 1964, disturbed only by two super-exponentials beginning in 1972 and 198x (and probably also 1994, since the end of the 1990s recession where debt to GDP levels fell when the recession ended).
Quite literally, my personal reaction was that a serious debt crisis was imminent, someone had to raise the alarm, and that someone–given my knowledge of what was likely to come–was me.
Raising the alarm had two aspects to it. Many, many individuals were effectively being led like lambs to the slaughter, by people in authority who were themselves blind to what they were either causing (if they worked in a financial institution) or allowing to happen (if a regulator, policy maker or politician). My advice would warn those like yourselves who were concerned that something bad was approaching, and they could reorganise their finances to avoid it. But primarily I wanted to be known for having called it before the event, so that in its aftermath I could have a serious impact on both the rescue effort and the design of a new financial system that might be able to avoid this fate in the future.
It’s still some way before I will have that systemic impact–I fully expected to be ignored, and probably derided, by those in authority at the start of this process, since I am mounting a direct attack on the core beliefs of neoclassical economists, and they, like followers of any other ideology, react vituperately when those core beliefs are challenged. Fortunately most journalists, who like yourself are more generalist in their thinking than beholden to any particular factional position, reacted well to my arguments–they could see instances of what I was talking about at the personal level, and they shared that unease that something had to be wrong. Hence I got the coverage I did, where of course the sniping at me began by the more public defenders of the neoclassical religion.
I am not an insensitive bloke, but I’ve learnt over the years to wear that stuff (since I’ve made similar waves within academic economics via my book Debunking Economics, and my mathematical critiques of its so-called theory of the firm–see Chapter Six of that book, “Size Does Matter”). Nonetheless, the personal feedback I’ve occasionally received from people like yourself has certainly been a welcome fillip in the other direction. So thank you for letting me know.
February 8th, 2009 at 9:05 am
There is an alternative for the banks and other organisations to roll over overseas debt…
The Govt creates a new bank, or more simply, nationalises at least 1. Pours in (say) $70B in new capital and that enables about $700B of debt to be created (roughly enough).
This switches the external debt to internal and has the advantage of being at a lower inerest rate.
Thats the easy part though and herin lies a real danger to Australia that will take a lot of skill and luck to avoid.
Rolling over debt (say a bond issue) means paying it back to one organisation/person by borrowing again from them or from another. If this is denominated in $AUS, this is less of a problem, because the Govt can replace it (by say People’s Bank or straight Govt bonds or even cash) though this has risks or having to pay higher interest rates than desirable or even putting out too much cash out into the world, risking the currency rate.
The other case, debts denominated in a foreign currency, is far more tricky, given Oz’s low foreign currency reserves. Essentially there are only 2 main options, negotiating exchanging low risk longer term Govt debt for the higher risk short term bank/corporate debt … and the Govt taking on the foreign currency risk. Difficuly but probably doable, but will be very expensive.
The other option is really only a total crisis option (with companies going down and the currency in freefall), let the respective companies go under, letting the overseas debt disappear and nationalise the assets (phoenix job). The risks are obvious and would kill Australia’s credit rating for decades.
Failing that, then its the IMF, then we will have no control over what we do.
February 8th, 2009 at 10:22 am
Financial Coup d’Etat: http://solari.com/blog/?p=2058
February 8th, 2009 at 11:39 am
There are opportunities however for a smart Govt, buying back some of the foreign debt at a discounted price.
Basically a lot (some estimates as much as 50%) of Australia’s mortgage and some business debt was securitised and sold off overseas. Some of this is being severally discounted or even nearly worthless now(being impacted along with all the other securitised mortgages).
A smart Govt, would be working with the banks and to try and identify at least some of this and then buying it back at a discounted price (or swapping).
The idea is basic, save taxpayers some money as we are going to be on the hook for a lot of Govt debt real soon now. Any reductions are welcome.
Plus anything that reduces our huge interest payments overseas helps towards reducing the ‘horror scenario’ … Australia runs out of foreign currency and has to be bailed out.
Sadly this risk is far, far higher that most commentators or the MSM are admitting. We have to borrow foreign currency just to pay our interest payments and this will get worse as commodities sales collapse.
Anything that tranfers external debt to internal debt is welcome, internal debt can be managed, external….?
February 8th, 2009 at 8:08 pm
Hi Oldskeptic,
Great to have you with me on this discussion.
A new bank idea has been discussed quite a lot. My fear is that it crashes the system. There is a huge risk of a run on the old banks. When there is a run, we know that less than 10% of people can get their money out. That leads to insolvency and credit money shrinks dramatically. This would accelerate deflation.
A result of that process would be falling house and commercial property prices. This would eventually cause the collapse of the new bank as its first burst of lending would be a long way under water. Due to falling income and asset prices. Also do people want to borrow from the new bank anyway?
February 12th, 2009 at 11:14 am
otway-jack
That was a useful contribution.
For sure, when Marx demonstrated the obvious conclusion of political economy – the discipline was terminated by the then establishment.
You can only keep your profits “under cover” so free academic enquiry into these areas has never been encouraged.
So progressive students had to fight and struggle to get political economy reinstated.
“Political economy” is the true understanding, “university economics” is just the current pragmatic rationalisation.
University economists tend to get infatuated with the rigor of mathematics, without recognising the need to deal with actual living humanity with all its attendant lack of rigor.
Consequently too many university economists accept capitalism on the basis of their short-term pragmatic rationalisation – and do not have the intellectual integrity to examine the underlying political economy.
Its not much use wailing about debt – when the problem is capitalism.
February 12th, 2009 at 2:13 pm
Chris:
There was a somewhat parallel “debate” on the comment stream below, with the Marx icon, concerning the “roving cavaliers of credit”. You might find something of Steve Keen’s responses there. Though complaining that the problem is capitalism and not debt is, er, a bit “rich”.
February 14th, 2009 at 10:15 pm
Power Shack…
Note also how one picnic visitor to Jackson Hole admits the mess this August is WORSE than last year. Arrest all the central bankers! Their failures are now totally obvious to even dimwitted people. Which, of course, excludes politicians. They are stil…