It’s just a flesh wound…”

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It seems we’ve moved from Stan­ley Kubrick to John Cleese. Rory Robertson’s reply to my “Rory Robert­son Designs a Car” post reminds me of one of my many favourite scenes from Monty Python, the fight between King Arthur and the Black Knight:

King Arthur: [after Arthur’s cut off both of the Black Knight’s arms] Look, you stu­pid Bas­tard. You’ve got no arms left. 

Black Knight: Yes I have. 

King Arthur: *Look*! 

Black Knight: It’s just a flesh wound…

Most of Rory’s com­men­tary in his newslet­ter has been repro­duced by Christo­pher Joye in an amus­ing “ring­side report” (Keen vs. Robert­son: Round V) on the Busi­ness Spec­ta­tor (inci­den­tally, Chris’s post includes an excel­lent dig at the RBA’s per­for­mance in recent years; this is well worth a read in its own right).

Tak­ing Chris’s extract as a guide, it seems that Rory’s entire con­sid­er­a­tion of my post boils down to this:

**Need­less to say, Dr Keen does not accept the assess­ment that a “school­boy error” lies at the heart of his pes­simistic fore­cast of a 40 per cent drop in Aus­tralian home prices. But instead of address­ing the key point that debt ser­vic­ing just got much eas­ier for most home-buy­ers, Dr Keen responded by invent­ing a silly story about cars and fuel con­sump­tion — to make a point that com­pletely missed the point…

Does not accept the assess­ment”? Do we have a Dead Par­rot talk­ing here, as well as an arm­less Knight? The point of my post was that Rory’s argu­ment that com­par­ing Debt to GDP is a “school­boy error” (“like com­par­ing apples with oranges”) was itself a school­boy error that betrayed the depress­ing lack of under­stand­ing that most neo­clas­si­cal econ­o­mists have of dynam­ics. In engi­neer­ing and many other prop­erly dynamic dis­ci­plines, stock to flow comparisons–like com­par­ing Debt to GDP–abound. Far from being a “school­boy error” to make them, it’s a “haven’t been prop­erly edu­cated at uni­ver­sity” error to deride them.

They can be done in error, sure–when the result­ing mea­sure has non­sense dimen­sions, or is irrel­e­vant to the issue at hand. Com­par­ing Debt to GDP isn’t an instance of either error, since as I showed in that post, the result­ing dimen­sion is “Years”. The ratio mat­ters because it tells you how long it would take to reduce debt to a given tar­get, if a given per­cent­age of income was devoted to repay­ing it.

The cur­rent answer is 1.59 Years, if all GDP was devoted to debt repay­ment (which can’t hap­pen of course–5% of GDP p.a. is a more likely delever­ag­ing rate) and if the tar­get was a zero % debt ratio (which it wouldn’t be–the 1950–70 range of 25–50% is more likely), and if reduc­ing debt didn’t affect GDP (which unfor­tu­nately ain’t the case–there will be many dam­ag­ing pos­i­tive feed­backs from reduc­tions in debt to reduc­tions in GDP).

And for Pete’s sake, a “stock to flow” com­par­i­son was the linch­pin of Friedman’s Mon­e­tarism, as a blog mem­ber here pointed out:

cheap­bas­tud said, on March 16th, 2009 at 1:22 am:

uhhhh, isn’t VELOCITY from the equa­tion of exchange a stock/flow ratio (in this case it’s a flow/stock ratio)?


Maybe I’m mak­ing a hor­ri­ble school­boy error or maybe Mr. Robert­son doesn’t know wtf he’s talk­ing about.

Spot on. The “veloc­ity of money” is the num­ber you get from divid­ing nom­i­nal GDP ($/year) by the money stock ($). Its dimen­sion is 1/years, so that the inverse of the ratio tells you how many times the money stock turns over in a year. The for­lorn attempt to prove this was a con­stant was Friedman’s key research objec­tive, since if V wasn’t a con­stant then much of the Quan­tity The­ory of Money was inval­i­dated.

Now I doubt that Rory is going to accuse Fried­man of com­mit­ting a “school­boy error” here (though in truth Fried­man is guilty of so many that there should be a Fried­man Prize in School­boy Errors–and  vir­tu­ally every year it could be awarded jointly with the Nobel Prize in Eco­nom­ics). So why accuse me?

In my long expe­ri­ence with attempt­ing to debate eco­nom­ics with neo­clas­si­cal econ­o­mists, I have become accus­tomed to an often irrel­e­vant and fre­quently false point being raised, after which dis­cus­sion is ter­mi­nated. The point of rais­ing the point is not to engage in debate, but to shut it off. So too with this patently false argu­ment that, because I use a “stock to flow” ratio, the remain­der of my argu­ments can be ignored.

In itself, there’s noth­ing wrong with argu­ing this way–in a reli­gious debate. If you have two per­spec­tives, one of which sees a God as cru­cial to under­stand­ing the uni­verse, and another which doesn’t, then they’re always going to argue past each other. But eco­nom­ics isn’t sup­posed to be a religion–it had, at least until this cri­sis hit, the pre­ten­sion of being a sci­ence.

I has­ten to add that I don’t see this as delib­er­ate eva­sion by Rory, nor even nec­es­sar­ily con­scious evasion–and ditto for the many neo­clas­si­cal cor­re­spon­dents and ref­er­ees I’ve dealt with over the years. They can, and do, cope with debates within the con­fines of their own belief sys­tems; so if I was argu­ing that the NAIRU (don’t bother ask­ing what it is if you don’t already know–it’s not worth the effort of dis­cus­sion!) was 4% rather than 6%, or maybe even that prices were sticky down­wards rather than per­fectly flex­i­ble, I might get an argu­ment.

But when you effec­tively chal­lenge core beliefs–by argu­ing, for exam­ple, that equat­ing mar­ginal cost to mar­ginal rev­enue doesn’t max­imise prof­its (again, don’t bother, but if you must, check here)–you get a non­sense reply to shut the debate down.

In a true sci­ence, a sub­stan­tive point is either con­tested or con­ceded. Rory did neither–though to cut him some slack here, he might not have realised why I wrote my piece either. I didn’t give him any fore­warn­ing, so he was free to make a mis­taken inter­pre­ta­tion of why I wrote some­thing about him. Instead, whether he meant to or not, he ignored my main point, and changed the topic back to the house price issue .

From his point of view, I changed the topic, which in his post was house prices–his “stocks and flows” state­ment was just an aside. But in fact, if house prices had been all Rory had talked about in the newslet­ter to which I responded, I wouldn’t have both­ered writ­ing any­thing.

It was the “com­par­ing stocks to flows is a school­boy error” non­sense that inspired me to write some­thing (and I was also respond­ing to a reader’s request that I assist him in con­test­ing that spe­cific propo­si­tion). But Rory’s take is that I made my com­ment to dis­tract atten­tion from his argu­ment about house prices:

**Regard­less, there remains a large hole in Dr Keen’s analy­sis (big enough to fit a bus?). Barely six months ago, he was high­light­ing the uptrend in the house­hold sector’s inter­est-to-income ratio as the key force that would bring house prices crash­ing down.”

Quot­ing Keen: In 1990, ser­vic­ing mort­gages cost three cents of the house­hold dol­lar — now its 15 cents, even with lower inter­est rates. …This is because of the sheer size of the debt — that’s the pres­sure that’s going to be push­ing house prices down and it’s actu­ally the same kind of pres­sure that is in the US (see here; (The Age back in Octo­ber also reported: “…Mr Keen said the lower end of the [hous­ing] mar­ket was already col­laps­ing”. Really?)”

**Now that his debt-ser­vic­ing ratio has crashed towards 10 per cent from 15 per cent, Dr Keen has noth­ing to say on the mat­ter. Fur­ther­more, with the ratio now trend­ing lower, Dr Keen has stopped pub­lish­ing the debt-ser­vice chart that once was at the cen­tre of his analy­sis. (Between Novem­ber 2006 and May 2008 the debt-ser­vice chart was reg­u­larly pub­lished in Debt­Watch; for exam­ple, see Fig­ure 21 in the Feb­ru­ary, April and May 2008 reports, and Fig­ure 12 in the Novem­ber 2006 report, see here).

**Some­one unkind might won­der if Dr Keen is steer­ing clear of key facts that directly con­tra­dict the scary story he likes to tell. Pauline Han­son might be inclined to issue a “Please Explain”? In any case, con­trary to Dr Keen’s ill-informed claim in the quote above, the sit­u­a­tions in Aus­tralian and US hous­ing and mort­gage mar­kets are very dif­fer­ent, like chalk and cheese (see charts 4–15 in the attached PDF file).”

Well, actu­ally, no Rory. Firstly, I men­tioned two forces: the inter­est rate bur­den, and de-lever­ag­ing. True, the for­mer has fallen some­what; the lat­ter is as potent as ever, and only just begin­ning to click in here, while it’s dri­ving the col­lapse in the USA and Europe. I pub­lished two charts on that in the Dr StrangeLove post (they’re repro­duced at the bot­tom of this post too), but I wasn’t ignor­ing the inter­est rate issue either.

The inter­est pay­ment bur­den, while it has dropped sub­stan­tially cour­tesy of the RBA’s belated and pan­icked cuts to rates, is still at higher lev­els than at any time out­side the period 1989–1991–when rates were three times what they are now.

The rea­son I haven’t been pub­lish­ing these charts in Debt­watch is not that they no longer make the case I want, but because the reports were grow­ing too long and–given the soft­ware I was using to pro­duce them–the lay­out was becom­ing too messy. I’m work­ing with a few blog mem­bers to pro­duce a web-acces­si­ble inter­face to all the data that will get around this prob­lem ulti­mately, but it takes time to do this.

In the mean­time, here are some of those charts. Firstly, inter­est rates and the inter­est rate pay­ment bur­den as a per­cent­age of GDP: rates and the bur­den have fallen, and sharply, but still only taken us back to lev­els that applied when aver­age rates were 16% or higher between mid-1988 and early 1991. That’s hardly heaven.

How much fur­ther rates have to fall to return the inter­est rate bur­den to any­thing close to the aver­age since 1960 is indi­cated by this next chart. We’re still way above the aver­age bur­den for the last half cen­tury.

The aver­age inter­est rate used above is a weighted aver­age of busi­ness, mort­gage and per­sonal rates (and it prob­a­bly under­states the bur­den on busi­ness slightly, since I had to guess the lat­est figure–the RBA only updates busi­ness rates on a quar­terly basis, and I extrap­o­lated from the Sep­tem­ber fig­ure using the most recent gap between the 3 year fixed rate for small busi­ness and the vari­able rate for large busi­ness; this gap was the small­est it’s been in years, so the busi­ness rate is prob­a­bly higher than I guessti­mated here). Break­ing this down, and com­par­ing the busi­ness pay­ment bur­den as a per­cent­age of Gross Oper­at­ing Sur­plus and the house­hold rates as per­cent­ages of House­hold Dis­pos­able Income yields the fol­low­ing chart:

Thus while the bur­den on busi­ness is sub­stan­tially below what it was in 1990 (when the RBA’s rate hike to attempt to tame the asset bub­ble back then had a crip­pling impact on busi­ness) the bur­den on house­holds now is still more than 4% higher (as a pro­por­tion of dis­pos­able income) than it was in 1990.

The rea­son for this, of course, is the dra­matic increase in mort­gage debt over the last twenty years. Ana­lysts who believe that house prices will always rise focus just on that datum itself. I’ve argued from a Hyman Min­sky, “Finan­cial Insta­bil­ity Hypoth­e­sis” point of view, that this trend of ris­ing house prices only occurs because the debt bor­rowed to buy houses has risen faster still.  The next chart, which indexes both mort­gage debt and house­hold prices to 100 in 1996, illus­trates that point:

Finally, there are of course two forces that deter­mine the inter­est repay­ment burden–the rate of inter­est and the level of debt (three actu­ally if one looks at the real bur­den, but I couldn’t find that chart in a hurry so I’ll  leave it for another day). If you plot the level of debt as a pro­por­tion of GDP on a hor­i­zon­tal axis, and the inter­est rate on the ver­ti­cal, then you can show com­bi­na­tions of Debt to GDP ratios and inter­est rates that have an equiv­a­lent out­come in terms of the inter­est rate bur­den: thus a com­bi­na­tion of a Debt to GDP ratio of 40% and a nom­i­nal inter­est rate of 20% has the same impact as a bur­den of 400% and an aver­age rate of 2%.

Check­ing the actual time path of the inter­est rate bur­den on this chart, I sur­mised that a spec­u­la­tive boom seems to occur when­ever the bur­den falls to about the 8% level, whereas the max­i­mum bur­den we’d ever expe­ri­enced was 16.7% in 1990, with a debt ratio of 83% and an aver­age inter­est rate of 19.7%.

Also, inter­po­lat­ing from the mean gap between the cash rate and aver­age inter­est rates of 3.3%, it appeared that the debt ratio at which the min­i­mum debt bur­den would be that “good times” level of 8%, was 240%: if the debt to GDP ratio ever hit that level, then there was no way the “good times” could ever come back. That analy­sis is shown in the next chart. Though we’ve retreated from the “max­i­mum pain” line of 16.7%, we’re still well above the “good times” level of 8%–it would in fact take a fur­ther 3% fall in inter­est rates to take us back there, if there was no change in the debt ratio.

So there isn’t much room for rate cuts to reflate the economy–a 3% fall in aver­age rates would require the cash rate to fall to 0.25%, and all of the rate cut to be passed on. That head­room would fall even fur­ther if that “school­boy error” Debt to GDP ratio rose any fur­ther.

Thus the inter­est rate cuts have reduced the pain of debt ser­vic­ing, but they haven’t reduced them to any­thing near the com­fort­able lev­els of the pre-1980s. And the main prob­lem of debt-delever­ag­ing remains, and will be the main fac­tor dri­ving the econ­omy down, as the con­tri­bu­tion that change in debt makes to aggre­gate demand plunges. That effect is already patently obvi­ous in the US data:

And the first signs of the same process are now turn­ing up in the Aus­tralian data, with the most recent “unex­pected” increase in the unem­ploy­ment rate:

The impact of de-lever­ag­ing is the main force that I see dri­ving us into Depres­sion, and tak­ing house prices down in the process. There may well be a fil­lip to the bot­tom end of the hous­ing mar­ket out of the Government’s ludi­crous boost to the First Home Buyer’s Grant, but the weight of delever­ag­ing will, I expect, soon tell against that.

And Rory, let’s lighten up here please. My Dr StrangeLove post was meant to make in a comic fash­ion a point that obvi­ously hadn’t got­ten through via seri­ous dis­cus­sion: that stock to flow com­par­isons are, if done cor­rectly, legit­i­mate aspects of analysing a dynamic sys­tem. Con­cede that point, and I’ll tickle you with my next sword thrust, rather than slic­ing your legs off.

Over to you, Mr Joye, for the ring­side com­men­tary.

About Steve Keen

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

    It is mis­lead­ing any­way to say that you are mak­ing a ‘com­par­i­son’. There is a dif­fer­ence between a com­par­i­son between apples and oranges, and using a ratio of apples to oranges. It may not be use­ful to com­pare apples to oranges, but if my apples to oranges diet ratio is to high, my teeth will fall out and I will get scurvy and prob­a­bly die.

  • evan

    Not quite as enter­tain­ing as Jon Stew­art vs Jim Cramer but not bad…

  • otway-jack

    Pro­fes­sor of soci­ol­ogy at the Uni­ver­sity of Ore­gon, John Bel­lamy Fos­ter, is falling for a “school boy error” also. He has been warn­ing of the dan­gers of high debt to GDP ratios for many years.

    Here is an arti­cle from May 2000

    And an update in May 2006

    Steve Keen and John Bel­lamy Fos­ter come from two dif­fer­ent views or ideology’s but they both artic­u­late the prob­lems of the debt to GDP or dept to dis­pos­able income ratios being to high.

  • Frank

    Also I don’t think draw­ing anal­ogy between ‘debt’ and a ‘stock’ (as in some quan­tity) is valid. ‘Debt’ to my mind, is pres­sure, though inter­est and the effec­tive­ness of the legal/police insti­tu­tions are aspects of that pres­sure too.

  • Suit­ablyIron­ic­Moniker

    …(Steve) is adored—nay loved—by his legion of impas­sioned, apoc­a­lyp­tic fans”

    Let it be known that I have never, and will never, be part of any “legion”, impas­sioned or not. And as for love, shucks, what with the the noble brow and schol­arly glasses in the pic­ture *blushes*.

  • Frank

    Another thing that strikes me. How can ‘debt’ have any mean­ing *with­out* being com­pared to GDP, or some­thing like it. 

    I mean if total debt was a hun­dred tril­lion AUD you might think that was lot until some­one told you that GDP was a tril­lion tril­lion AUD

    Really I don’t know what that other guy is talk­ing about. Peo­ple throw terms around lightly but when you get into the phi­los­o­phy of these things its a real quag­mire.

  • Fur­ball


    A good part of me would like Rory to ignore your offer to let him off lightly — if he acknowl­edges the valid­ity of the Inter­est Pay­ment Bur­den cal­cu­la­tion.

    Amaz­ing, he would even men­tion stock / flow issues — I pre­sume he has come across plenty of account­ing val­u­a­tion ratios in his time — plenty of those are stock / flow calcs. Valid for all the same rea­sons.

    I won­der how­ever, about this para­graph:

    Also, inter­po­lat­ing from the mean gap between the cash rate and aver­age inter­est rates of 3.3%, it appeared that the debt ratio at which the min­i­mum debt bur­den would be that “good times” level of 8%, was 240%: if the debt to GDP ratio ever hit that level, then there was no way the “good times” could ever come back. That analy­sis is shown in the next chart. Though we’ve retreated from the “max­i­mum pain” line of 16.7%, we’re still well above the “good times” level of 8%–it would in fact take a fur­ther 3% fall in inter­est rates to take us back there, if there was no change in the debt ratio.”

    8% Inter­est Pay­ment Bur­den / 160% Pri­vate Debt requires a 5% aver­age inter­est rate, weighted across house­holds & busi­ness.

    Are you say­ing that inter­est rates would need to drop by 3%, to a weighted aver­age of 5%, before the weighted rate would indi­cate an Inter­est Pay­ment Bur­den across House­holds and Busi­ness of 8% of GDP?

    Could you make a lit­tle clearer the aver­age spread for home & busi­ness rates ?

    I also think a spread­sheet to illus­trate the var­i­ous pos­si­bil­i­ties going for­ward would be handy.

    e.g. Cash Rate; Spread to Home Loan; Spread to Busi­ness Loans; with result­ing Inter­est Pay­ment Bur­den cal­cu­la­tion.

    If you would assist with the data, much appre­ci­ated. I’ll prob­a­bly end up doing it any­way.

    Cur­rently, overnight rate is widely antic­i­pated to go to around 2.5%. Sug­gest­ing a fur­ther 0.75% drop in the loan rate, to around 4.5% (if all passed through), so let’s work with 4.8% loan rate. House­hold Debt then con­tributes 4.8% (100 / 100 * 4.8%) to the Inter­est Pay­ment Bur­den.

    Leav­ing” con­tri­bu­tion of 3.2% avail­able for busi­ness. 3.2% / .60 = 5.33% busi­ness loan rate.

    NAB’s busi­ness plus rate is cur­rently 7.38%, I don’t know if that’s an appro­pri­ate rate ?

    But, it would seem that sans de-lever­ag­ing, the cur­rent rate out­look would put us about Inter­est Pay­ment Bur­den at 9% of GDP.

    I think the next round of expla­na­tion needed is around this dynamic. 

    Actu­ally, you’ve explained, so per­haps a spread­sheet tool ?

    But a bur­den of around 9% wouldn’t seem too bad, in the con­text of your ear­lier analy­sis.

    Why do you use an aver­age rate of 7.5% => 12% Inter­est Pay­ment Bur­den is one of your cen­tral graphs on this post ?

    Steve, thanks for mak­ing the effort.


  • speckie

    Actu­ally the propo­si­tion that any com­par­i­son of the level of debt to GDP is erro­neous, because it com­pares a stock (the out­stand­ing level of debt) to a flow (GDP) is not an idea incom­pat­i­ble with Neo Clas­si­cal eco­nom­ics.

    The econ­o­mist, Cecil Pigou acknowl­edged an inter­play between a stock and a flow as he argued that falling prices could stim­u­late out­put and employ­ment because they increased con­sump­tion by rais­ing the level of real wealth,(a stock or assets com­pris­ing money and gov­ern­ment bonds) par­tic­u­larly dur­ing defla­tion.

    But a prac­ti­cal exam­ple of the inter­play between stocks (assets) and flows (income and expen­di­ture) is the evap­o­ra­tion of people’s home equity and the con­se­quent col­lapse of spend­ing on new auto’s. A pri­mary fac­tor account­ing for a dis­as­ter­ous fall in expendti­ture on new cars in the US has been the col­lapse of expen­di­ture was financed from home equity( a stock).

  • juk

    How hard is it to realise that the debt to GDP ratio is a mea­sure of debt ser­vice­abil­ity. Or am i tainted by my engi­neer­ing edu­ca­tion?

  • Tres­sob

    It appears to me that a lot of ego is involved here!

  • stephen


    Rory Robert­son and his friends at Mac­quarie have steered the shareprice from $97 to $20. Is there any need to say any thing more? They have pro­vided zero cap­i­tal growth over a 10 year period. If he and his friends at mac­quarie are so good why is their com­pany share price not reflect­ing their bril­liance.


  • Aac

    Dr. Keen

    This idea that you can throw a few dif­fer­en­tial equa­tions together and come up with the ‘mean­ing of life’ is intrigu­ing — excuse the stretch. Even thoough your effort’s to debunk the estab­lished view of econ­o­mists has merit and your sim­u­la­tions do show some sem­blance of the real world. 

    How­ever, aren’t you wor­ried that your mod­els are incom­plete. For exam­ple, even the Schro­dinger wave equa­tion was ques­tioned for com­plete­ness by Ein­stein for years and even to this day there are many para­doxes yet to be explained – ie. Young’s dou­ble slit exper­i­ment.

    In other words prov­ing some­one wrong does not mean that you are right and just maybe you are tak­ing debunk­ing eco­nom­ics too far. For exam­ple, take your paper “Profit max­i­miza­tion, indus­try struc­ture, and com­pe­ti­tion: A cri­tique of neo­clas­si­cal the­ory”.

    I first asked myself, what was the pur­pose of this paper:

    - Was it to dis­prove a neo-clas­si­cal equa­tion
    — Was it to dis­prove the cap­i­tal­ist view that the free mar­ket is the most effi­cient

    Now let’s look at your con­clu­sion:

    “Con­trary to the beliefs of the vast major­ity of econ­o­mists, equat­ing mar­ginal rev­enue and mar­ginal cost is not profit-max­i­miz­ing behav­ior, the num­ber of firms in an indus­try has no dis­cernible impact on the quan­tity pro­duced, price exceeds mar­ginal cost in ‘‘com­pet­i­tive’’ indus­tries, the ‘‘dead­weight loss of wel­fare’’ exists regard­less of how many firms there are in the indus­try, and instru­men­tally ratio­nal profit-max­i­miz­ers do not play Cournot–Nash games. Mov­ing from Hol­ly­wood to The Bard, it appears that the dom­i­nant neo­clas­si­cal the­ory of the firm is ‘‘Much Ado About Noth­ing’’.

    You con­clude that the num­ber of firms have no dis­cernible impact on the quan­tity of goods pro­duced. And you go on to say that in a com­pet­i­tive envi­ron­ment firms are actu­ally inef­fi­cient — ie. dead weight is car­ried.

    What I don’t under­stand is why didn’t you pref­ace your con­clu­sions with some­thing like “to the extent that our mod­els are com­plete…”. Or, con­trary to ‘our’ model’s pre­dic­tions many indus­tries (wine grow­ing – what­ever) have existed for gen­er­a­tions and are prof­itable for those that are still in the busi­ness.

    Thus my view is yes the neo-classical’s are prob­a­bly wrong in most of what they for­mu­late and you may be a lit­tle less wrong but in essence you are all wrong. The whole idea of using the term “quan­tity” of goods is absurd – what about qual­ity. And who say’s the absolute goal is to pro­duce as much stuff and as fast as pos­si­ble — it’s not. Even if it was though, alter­na­tives in his­tory have pointed to the free mar­ket as being the most resilient. How do I know this, well in an evo­lu­tion­ary sense the other’s have ceased to exist.

    Thus Steve, do con­tinue your research as its all we have at present but I do think that broad gen­er­al­iza­tions about free mar­kets etc.. is way too com­pex a topic to be tack­led by sim­ple equa­tions.

  • Frank


    Even if it was though, alter­na­tives in his­tory have pointed to the free mar­ket as being the most resilient. How do I know this, well in an evo­lu­tion­ary sense the other’s have ceased to exist”

    Quite the oppo­site, young grasshop­per. Take a look at China, and don’t tell me Rus­sia is a free mar­ket, and yes while the cities oper­ate in a lais­sez faire man­ner, on the whole these are com­mand economies. It is Cap­i­tal­ism that has failed today.

    But any­way, to the thrust of your mes­sage, as I have said already I think that all eco­nomic mod­els are des­tined to be wrong until, in a reflex­ive or recur­sive man­ner, they incor­po­rate human behav­iour and their reac­tions to the model being adopted or pro­posed. As some­one very wise once said, ‘think­ing peo­ple are part of the prob­lem we have to think about’

    But every model has to start some­where, and since we’re on the topic of macro­eco­nom­ics, why not at the top? Pre­sum­ably these mod­els can be refined and refined until they do include invidi­vid­ual humans, and refined and refined until they include neu­rons, and refined and refined until they include atoms, but at every stage dynamic mod­els and feed­back loops can ade­quately describe.

  • Hi Aac,

    The pur­pose of the paper was your first guess, and def­i­nitely not your sec­ond.

    The rea­son we didn’t pref­ace our con­clu­sions with a state­ment like the one you sug­gest was because there was a 6 page word limit on all sub­mis­sions to that par­tic­u­lar vol­ume. Get­ting what we did say into that limit was itself a strug­gle.

    Qual­ity (amongst sev­eral other issues) is vital to include, and if you’d like to see a paper that does, check An Agent-Based Model of the Evo­lu­tion of Mar­ket Struc­ture and Com­pe­ti­tion by my friend and occa­sional co-author Paul Ormerod. For my take on what a the­ory of mar­ket behav­iour should be, check my lec­tures on Man­age­r­ial Eco­nom­ics. You’ll find that I agree with your final con­clu­sion as well.

  • glob­alin­sights

    Steve, I like your web site and your detailed sta­tis­tics.
    I noticed that quite a few vis­i­tors came from your com­ments page to visit my blog at:

    I have added a link to your web site to my blogroll.

    Today I have added another arti­cle on tax havens and off­shore bank­ing:

    Who Has the Courage to Pros­e­cute the Unlaw­fully Megarich?

  • Bull­turned­bear

    It has occurred to me that the more we look to Amer­ica for a cause or cure, the more we risk miss­ing the esca­la­tion of the col­lapse of credit.

    Now it is very pos­si­ble that the cure or esca­la­tion in this cri­sis could come from Amer­ica. While ever the US con­tin­ues to bailout at all cost though, the risk of esca­la­tion could come from Europe or else­where.

    If we believe that allow­ing AIG to fail would have been the cat­a­lyst for sys­tem­atic col­lapse. Then it fol­lows that we must sup­port AIG at all costs. But!!! What if another large insti­tu­tion in another coun­try is liq­ui­dated. That could eas­ily be a trig­ger. Other coun­tries may not share the same con­vic­tion to prop the sys­tem.

    A chain is only as strong as its weak­est link. So if the UK, Ger­many, France, Japan, etc allows one of its large insur­ance or bank­ing insti­tu­tions to fail. The whole ship could sink regard­less of America’s insis­tence in prop­ping up its fail­ures.

  • vk

    — Its (veloc­ity of money) dimen­sion is 1/years —
    The engi­neer in me has few things to say about that.
    1. The dimen­sion can not be 1/years. Should be 1/time instead.
    2. There is a name for the dimen­sion 1/time: fre­quency. Mea­sured in hertz.
    3. Veloc­ity is mea­sured in distance/time, there­fore the term “veloc­ity of money” is wrong — should be “fre­quency of money”.
    Notwith­stand­ing the manda­tory use of the met­ric sys­tem in Aus­tralia, I will under­stand if econ­o­mists do not embrace the unit micro­hertz for rep­re­sent­ing what is wrongly labeled as “veloc­ity of money” 🙂

  • Have to agree vk. I refer to the ration as a fre­quency of turnover in my own mod­el­ling of a pure credit money sys­tem. As with much of eco­nomic work, econ­o­mists have bor­rowed the wrong term from another dis­ci­pline.

  • Thanks glob­alin­sights, I’m a fan of your site as well, as are many of my now about 1,000 strong com­mu­nity of blog mem­bers.

    I am not up to date with my own links–too much to do as a sole oper­a­tor jug­gling this site plus teach­ing, research and media work–but as you note, lots of com­ments on my site do refer through to yours.

    And I couldn’t agree more re your cur­rent post: it’s time to pros­e­cute this lot of car­pet­bag­gers and get the loot back from them. Given how cat­a­strophic a finan­cial dis­as­ter has been caused by this lat­est klep­to­cratic phase in cap­i­tal­ism, we need to scare the beje­sus out of those who might be tempted to emu­late them some five or six decades hence.

  • tcgib­ian

    Every so often I am reminded why I like to read your blog. Hav­ing a unique view­point helps, hav­ing a fin­ger on the pulse does as well, but the wry sense of humor is the clincher.

    The cur­rent dis­cus­sion about com­par­ing a flow to a stock is impor­tant and quite to the point, but I believe I see in your words the acknowl­edg­ment that hard-bit­ten Neo Clas­si­cal econ­o­mists will find the means to avoid being impressed with your logic. Their “sci­ence” has degen­er­ated into a reli­gion and you are chal­leng­ing the true believ­ers on items of faith. I hope you will per­sist. You may not have much luck with these insti­tu­tion econ­o­mists until their ship sinks and takes them down, but you should be com­mu­ni­cat­ing with a wider audi­ence, any­way.

    If one’s the­ory is cor­rect, one will be able to explain the past and pre­dict the future. So far your track record is rather good. Per­haps Mr. Robert­son will put his money where his mouth is, and los­ing the for­mer will shut the lat­ter.

  • Fur­ball


    Have you looked at more detailed seg­men­ta­tion of your model ?

    Here I mean the dif­fer­ent Inter­est Pay­ment Bur­den of dif­fer­ent socio-eco­nomic classes.

    It seems to me that those out West, who’ve already suf­fered 30% price declines vs those with more (rel­a­tive con­cept, and imbues the replace­ment model, where another sol­dier steps into the breach of any fallen sol­dier) ) secure jobs nearer the city, face a very dif­fer­ent Inter­est Pay­ment Bur­den com­pared to those who do not. 

    Not to sug­gest immu­nity, just dif­fer­ent co-effi­cient in your dif­fer­en­tial equa­tions.

    I saw men­tion of your Agent Based Sim­u­la­tion papers. By way of a tip, have you ever checked out — owned by Sun Microsys­tems. $1 / CPU hour, scal­able as you require. Allows test­ing of large scale soft­ware sys­tems with­out invest­ing heav­ily in the hard­ware required to oper­ate same, if get­ting access to seri­ous com­pute power were an issue.



    Join­ing the dot’s yet again.
    I note CBA’s recent warn­ing that they are con­cerned about the exten­sion of the FHBG and how it is being leapt on by young Aus­tralian fam­i­lies. CBA cite wor­ries of a bub­ble occur­ring at the low end of the prop­erty mar­ket. Hmm­mmm, I don’t think that is CBA’s worry. No doubt they are look­ing ahead at the com­ing wave of ris­ing unem­ploy­ment (D&B fore­cast 7%+ unem­ploy­ment this year alone, well beyond Govt esti­mates) and see some nasty pro­vi­sion­ing to be done.Quite pos­si­bly also a sig­nif­i­cant num­ber of highly sen­si­tive, high pub­lic­ity (media adverse)foreclosures.

    CBA’s recent announce­ment of a pay­ment hol­i­day (no details as yet)for those becom­ing unem­ployed also sounds like a work­out might be pos­si­ble for those hav­ing to accept reduced incomes. The grow­ing trend in this down­turn seems to be wage reduc­tions where pos­si­ble rather than lay­offs. I expect this will be a phase rather than dis­place­ment of lay­offs. As Australia’s econ­omy adjusts to a world where our major trad­ing part­ners exports have cliff dived (China down 40%+ yoy, Japan down 25%+ yoy), even­tu­ally out­right clos­ing down of many estab­lish­ments will dom­i­nate our econ­omy.

    Which looks to be soon if any cre­dence is to be placed in this arti­cle. Canada’s econ­omy shares many sim­i­lar­i­ties with Aus­tralia, bar the big one; a major reliance on exports to the US. So, this report from Canada, now suf­fer­ring their own housing/ com­mod­ity bust- and with­out vested inter­est colour­ing their assess­ment- is worth not­ing from the main­stram media;

    “The Aus­tralian hous­ing mar­ket faces a “per­fect storm” of finan­cial pres­sures which could push prices down as much as 30 per cent, accord­ing to a report by BCA Research in Canada.
    “But high mort­gage debt, over­val­ued homes and ris­ing unem­ploy­ment could begin to push local house prices down as the Aus­tralian econ­omy slows, accord­ing to the report. ”
    ”“The hous­ing mar­ket is look­ing par­tic­u­larly vul­ner­a­ble, with over­in­flated prices, dete­ri­o­rat­ing afford­abil­ity and slow­ing house­hold income growth,” the report said.
    “There is an increas­ing pos­si­bil­ity of a major hous­ing bust in Aus­tralia.”$pd20090318-Q8KQP?OpenDocument

  • al49er

    Hi ‘Aac’.

    If I am read­ing it cor­rectly you seem to have a sig­nif­i­cant degree of respect if not admi­ra­tion for Steve’s work whilst enjoy­ing the intel­lec­tual thrust and parry of test­ing his propo­si­tions, mod­els and the­o­ries.

    Some of the tech­ni­cal stuff you raise is beyond my abil­i­ties of com­pre­hen­sion in this area, how­ever I think it’s a bit unfair of you for exam­ple to sug­gest that Steve
    ”… throw(s) a few dif­fer­en­tial equa­tions together and come(s) up with the ‘mean­ing of life’.….”
    It is the sort of com­ment that sug­gests you may apply dif­fer­ent rules to your assess­ment of his work than you do to the vast major­ity of other (espe­cially neo­clas­si­cal) econ­o­mists.

    You sug­gests that Steve should always be qual­i­fy­ing his work (state­ments etc) with such phrases as “to the extent that our mod­els are com­plete…” and even deny him mak­ing from time to time some broad gen­er­al­i­sa­tions (espe­cially when pro­vid­ing responses hav­ing dis­cus­sions on this site).

    And yet in my obser­va­tion, each time he is chal­lenged he by and large can pro­vide an excel­lent direct response or indeed a detailed ref­er­ence to pre­vi­ous work which spells out in chap­ter and verse the propo­si­tion to which ref­er­ence was being made.

    My take there­fore is that a lot of the appeal and admi­ra­tion for Steve comes from peo­ple like myself who have for many years believed, from a soci­o­log­i­cal per­spec­tive, that ‘this crap sim­ply can­not sus­tain’ –the unend­ing increase in debt, the cre­ation of the most unbe­liev­able suite of prod­ucts it is pos­si­ble to imag­ine, CDO’s etc, cor­po­rate behav­iours like the appalling remu­ner­a­tion pack­ages and so much more — much of which seems to do noth­ing more than prop up or cre­ate facade for peo­ple (because in the end it is all about indi­vid­u­als) who when stripped bare, appear to have lit­tle sub­stance, less char­ac­ter and very often zero morals.

    So we see gov­ern­ments, instru­men­tal­i­ties RBA’s etc, econ­o­mists, edu­ca­tors, the media etc. etc. all act­ing in uni­son to sup­port prac­tices and atti­tudes that at least for a small num­ber of peo­ple are beyond com­pre­hen­sion and the ‘real-world’.

    We have known it is wrong, we have known that it has to col­lapse and that it has been the most clas­sic case of “The Emperor has no clothes”. 

    Then we stum­ble upon the work of peo­ple like Steve, Nur­ial Robini, Peter Schiff and oth­ers who have been putting down their pro­jec­tions about what is now hap­pen­ing for some years back and in great detail, and yet vir­tu­ally every­thing main­stream con­tin­ues to deny them.

    To me Steve stands out among them all as a per­son of absolute con­vic­tion who has given ordi­nary peo­ple (and the more tech­ni­cally capa­ble like ‘bull­turned­bear’ and oth­ers includ­ing your­self) a forum that gives vent to their frus­tra­tion whilst expand­ing their abil­ity to put flesh on the bones of their (our) inher­ent feel­ings and beliefs, a forum for oth­ers to expand on sup­port­ing and con­test­ing ideas, the­o­ries, mod­els and asso­ci­ated issues etc all with very lit­tle per­sonal gain (com­pared to those men­tioned above for exam­ple who seem to made very prof­itable busi­nesses from their pre­dic­tions), save for pos­si­bly some well over­due recog­ni­tion (as yet nowhere near enough) in the aca­d­e­mic sense and an avenue for gain­ing ‘a few pen­nies’ in order that he can extend his work.

    So to those ‘smart assess’ out there (and I don’t count you among them ‘Aac’ in the vit­ri­olic sense) who are hat­ing the increas­ing level of expo­sure and recog­ni­tion being given to Steve( the real stuff is still to come) I hope you are sick in the guts about how wrong you have been and the immi­nent expo­sure of you and your ilk, and I only wish that you have not been cun­ning enough to cover your tracks, build up your reserves and be able to ‘sur­vive’.

    To ’ Aac’ I think it has been shown over some time now that Steve responds pretty well and respectibly to your prod­dings and con­text of ideas, and I’m happy that that should con­tinue.

    I just hope you apply the same stan­dards in your ques­tion­ings of “the other side”, assum­ing of course that you are not actu­ally your­self the other side.

    N.B. peo­ple who think the way we (I) do, are unabashed about our sup­port and admi­ra­tion for Steve, which is hard some­times for oth­ers often totally con­sumed by fal­sity in their lives to com­pre­hend. This is largely because they are not used to ‘giv­ing’ any­thing to any­one.

  • jc1

    Hi BTB

    I was enjoy­ing our debate about tax­payer back­ing of deposits in banks accounts. I left a post to your last one in the ‘Bnet inter­veiw’ thread — just in case you missed it.

    I was inter­ested ot hear your response if you have the time!


  • Aurac

    Elo­quently and justly said, al49er!

    My sen­ti­ments exactly.