Who’d a thought it? Unemployment leaps 0.5% in a month
on April 9th, 2009 at 1:31 pm
As usual, the latest set of data from the ABS on the economy was “unexpectedly worse” than (neoclassical) economists had been expecting. The consensus was for a 0.2% increase over the month of March, from 5.2 to 5.4 percent. In fact, it leapt by two and a half times as much, to 5.7%.
This was right in line with what I was expecting from a non-orthodox, “Hyman Minsky” point of view. As I have argued in numerous blogs, aggregate demand is the sum of GDP plus the change in debt. Now that our economy is utterly debt-dependent, the debt-financed asset-price bubbles have burst, and debt de-leveraging has begun in earnest, the economy will tank and unemployment will explode as debt-financed spending evaporates.
The key chart I’ve published on this a number of times is the following: it shows the correlation between the contribution the change in private debt makes to aggregate demand and the unemployment rate (the red line is the change in debt, divided by the sum of the change in debt plus GDP; the blue line is unemployment, inverted and plotted on the right hand axis).
As the economy has become more and more debt-dependent–as the ratio of Debt to GDP has risen–this correlation has gone from being trivial to explaining 95% of the level of unemployment.
For those who believe that “Australia is different”, here’s the matching chart for the USA. The only difference is one of time: they began their decline in this Depression about a year before we did. But we are rapidly catching up.
The dramatic deterioration in the economy comes as a surprise to conventional “neoclassical” economists because they exclude debt (and money) from their model of how the economy works. This failed model of the operations of a market economy is why they are incapable of explaining the economy’s behaviour today.
With the debt contribution to demand now plummeting, unemployment will rise to levels that are unprecedented in the post WWII period–and they may even rival the Great Depression.
Attempts to inflate our way out of this via either government spending or quantitative easing will also fail.
The sheer scale of private debt de-leveraging swamps the government’s pump priming, while there is so much debt relative to government created money that the latter will have to be increased by astronomical amounts–and given to those in debt, rather than to the banks–to counter the collapse in demand caused by private deleveraging.
To labour a comparison I’ve made numerous times, Rudd’s stimulus package will inject $42 billion into the economy, but a 5% reduction in debt by the private sector will remove $100 billion from it.
Even the slowdown in debt accumulation will swamp the government’s stimulus. In 2007-08, the last year of our debt bubble, private debt rose by $259 billion–adding 20% to aggregate demand. The fall of this to zero–a simple stabilisation of private debt–will remove 20% of demand from the economy. This is what is causing unemployment to explode now.
On the monetary front, Bernanke has literally doubled government-created money in the USA in a matter of months, but even so the ratio of private debt to this is close to 30 to 1. He’d need to create twenty times as much (and give it to the debtors to cancel their debts, rather than to the banks in a futile attempt to maintain their facade of solvency) before there would be any chance of a monetary stimulus working. I simply can’t see him trying it.
Even if he did (and our local RBA followed suit), and even if governments maintained the scale of fiscal stimulus they are now imparting, there would still be the reality (for the USA, the UK and Australia, and some European nations) that, courtesy of the globalisation of production, they no longer have the productive capacity to employ those who are going to be thrown into unemployment via this debt-driven collapse.
The problems caused by the neoclassical economic philosophy of the last 40 years were papered over by debt. To steal a phrase from Warren Buffett, now that debt is collapsing–and debt-finance can no longer be used to purchase cheap Asian goods–the nakedness of that philosophy will be exposed by the outgoing tide.
Australia, which has for some time deluded itself that it is different to the rest of the world, and will therefore come through this crisis relatively unscathed, may in fact be the most naked of all.
For those who might like to republish this elsewhere, here’s a link to an RTF file that should make it easier to grab the graphics. It is best viewed in “Normal” rather than “Print” layout since Mathcad stuffs up the layout somewhat.
Steve, I can’t see how you come to the conclusion that “I expect we’ll see the purchasing power of $A rising domestically against domestically sourced goods”
People are losing jobs left right and center, as a result domestic production is declining, but there is the same number of people competing for the decreasing supply of goods and services that remain. Seeing a vast chunk of domestic goods is locally produced food, how can you explain the $A being able to buy more of that? To me more people competing for a shrinking resouce drives prices up.
- Ernie.
Essential reading:
http://arxiv.org/PS_cache/arxiv/pdf/0904/0904.1426v1.pdf
Research shows that there are positive feedback loops in the US federal reserve system that allowed essentially unlimited growth of credit (up to the point where it collapsed back on itself). From what I can see the same flaws exist in the Australian system. Further evidence that “Cavaliers of Credit” is correct.
Steve
I’m approaching this from the point of view of Coarse Economics…or I Don’t Know Much About Economics But I Know What I Like.
What I do have is a breadth and depth of knowledge of legal and financial matters which few have, including experience of markets at top level – for instance I am currently advising the Iranian government on alternative financing methods.
See here
http://www.slideshare.net/ChrisJCook/introducing-the-petrotrust-presentation
and more recently here
http://www.slideshare.net/ChrisJCook/petro-clearing-january-2009-farsi-4-presentation
I’ve finally got my own blog up and running here
http://nordicenterprisetrust.wordpress.com/
My approach is based upon an entirely new – 21st Century – approach to the legal protocols we take for granted and which provide the binding framework for our economic interaction.
I realised almost 10 years ago that the direct Peer to Peer connections of the Internet change everything, and that is where I have been concentrating my efforts.
Chris Cook
Yes, it’s something my colleague Trond Andresen has also argued. I’ll see if I can expand the Cavaliers model to include the sale of loans to depositors once I’m fully into writing the new book.
The same phenomenon occurred during the Great Depression Ernie: people losing their jobs outweighs any decline in production, and margins are cut by distressed sellers. Irving Fisher made this phenomenon a centrepiece of his own analysis.
Check the model in Roving Cavaliers too–it generates the same result. Prices fall during a Depression or a severe Credit Crunch.
For those people interested in the extent to which the real estate market might fall, Steve: of the $2.1 trillion we spent on real estate during the course of the bubble (from 1999 to 2008) some $590 billion (28%) was above the ‘bubble line’ on the Land Values Research Group’s barometer. That will have to be liquidated if history is a guide.
Also, from ABS Catalogue 5204 Table 61, Australia’s total land values were at 2.7 times GDP in 2008. Going back to 1911, the long term average has been 1.1 times GDP. So I’m looking for a reversion to the mean over the next few years. FWIW.
Where do you get the pre-1989 data on land values from Bryan? I’d like to incorporate this in my reports and my forthcoming (as in 2011) book.
I got those earlier data on land values from Table 4 (21) “The Taxable Capacity of Australian Land and Resources” in Australian Tax Forum Volume 18, Number 1, 2003, by Terry Dwyer.
Dr Dwyer, in turn, provides further references in that article.
Dwyer is from Canberra, and I believe you met him at the talk you gave to Prosper Australia members in Melbourne last year, Steve.
Statswatcher said:
To pay off our debts all we need to do is make sure our exports do not fall from current levels and cut imports by 71% or $13,865 per worker for the next 20 years.
There lays the crunch. As Steve Keen said.
Even if he did (and our local RBA followed suit), and even if governments maintained the scale of fiscal stimulus they are now imparting, there would still be the reality (for the USA, the UK and Australia, and some European nations) that, courtesy of the globalisation of production, they no longer have the productive capacity to employ those who are going to be thrown into unemployment via this debt-driven collapse
I agree with Steve’s diagnosis of the problem and understanding of it’s underlying mechanics. Were I disagree with him is in the solution, with one exception. I agree that real incomes for the average worker must rise, but given the comparative advantage by the Asian Countries in general I don’t see how this is going to happen. Workers wages are subject to relentless downward pressure as a result of globalisation.
Like you, I feel we must cut down our imports but I’m not a big believer in tarrifs, what I am a big believer is in an import certificate program regulated by the central bank in order to maintain balanced trade. Imports would become more expensive and local substitution would become economically viable. As our unions are stronger and our society generally accepts that workers have a right to the greater share of the pie, real wages would rise, enabling people to pay off their debts. The flip side of this though is that there would be less products to choose from until we generated enough exports to purchase products we could not locally produce.
Steve Keen:
I’ve had a chance to read your “Cavaliers of Credit” piece and, Wow, very impressive. You really are one the few original thinkers in Western Academia at the moment. When do you plan to next come to Melbourne?
A few points from that article relevant to this dicussion. Personally I think that credit creation is demand driven but supply limited, and in the abscence of demand(either through banks restricting lending or consumers not wanting to lend) a central banker is really pushing on a string trying to stimulate the economy through an increase in money supply. I think “incentivising” debt by rewarding people who borrow money is more likely to stimulate borrowing, just as we have seen with the First Home Owners grant.(Giving people money if they borrow)
Secondly: The financial system is inherently unstable because of modern central banking as it undermines the traditional fractional reserve banking concept. In the abscence of a central bank, interest rates would rise, as you have said, as the theoretical limit of lending is reached, putting a brake on credit excess. However by targeting a certain interest rate, the central bank ensures that in the presence of insatiable credit demand supply would be limitlessly available. This in effect by-passes the fractional reserve requirements and hence puts no brakes on lending, allowing a country to go into ruinous debt. If we compared the (M3-M0)/M0 ratio for Australia, we would see that one dollar of currency supports 23 dollars worth of debt, Australia as a “bank” is running on about a 3% reserve ratio.( I could be wrong abot this)
Finally, steve would forgiving peoples debts stop them from borrowing more recklessly in the future? I think moral hazard has had a big role to play in this debacle. Both the punters and the banks have gambled on the assumption that if things got ugly, the government would be there to bail them out. No wonder no one took due care.
mahaish and AK
The predator prey situation is commonly used (by mathematicians) as an example to illustrate the solution of problems using differential equations. In this case the rate of growth (in populations and size of animals) must be equated to actual number of animals. This does include flows and quantities, mathematicians solved this dichotomy over two hundred years ago.
These equations show that a sustainable ratio of predators to prey can be calculated and that at this ratio the animals are in “equilibrium”. They also show that if they change from these equilibrium figures the ratio after some time can return to equilibrium. They also show that if the changes exceed certain limits one or other of the populations will go to zero.
The applet below from Colorado State university mathematics department is an interactive program which illustrated this. It may help enlightened neoclassical economists understand the depth of their ignorance.
http://cauchy.math.colostate.edu/Applets/PredatorPrey/predatorprey.htm
If we start with a large number of slow growing prey such as Bilbies by setting the growth rate to .001 and number to 500. You will see that we get a rapid rise in prey numbers (foxes), until the number of bilbies can no longer sustain the population of predators. The number of predators then collapse to zero, extinction. This applet lets the number of foxes go negative but obviously it is game over at zero foxes.
The similarity to the GFC is that the exponentially rising level of credit “consumed” all of the available borrowers and has now gone into rapid decline.
What surprised me was that my attempt to model credit creation gave the same rapid decline without the rise becoming non linear. Of course the non linearities are at full pace now with “bailouts” and “rescues” but the collapse was triggered by the rapid rise not the bail outs. This implies to me that the timing of the GFC was possibly predictable while its inevitability has been obvious for more that a decade.
I agree with Steve, you do not need to understand the work of Nyquist to understand this. Nyquist’s work relates to stable systems running in the steady state, in “equilibrium” (eg aircraft autopilot). The economic system never seems to survive the start up transients and has never been in equilibrium for the last 200 years.
SteveZ,
I think that Steve has mentioned that real wages can be increased though a centralized wage/labor system that used to exist during the post-war decades. Wages can be increased by government decree and all businesses will have the knowledge that they can pass these higher wages along as higher product and service prices, thus leading to higher prices – inflation. The chances of this occurring is zero with neoclassicals in power.
I hope I got this one right.
Steves (both Keen and Z)
I am blown away to discover that the root cause of all of this trouble is that central banks have not allowed the market to set interest rates. SteveZ are you sayings, it is because the cerdit/debt market is not able to regulate its supply by setting the market-price, the supply of debt has ballooned and completely overbalance the global economy.?
I wonder does this mean that for the past 40 years (or at least for as long as interest rates have been artificially determined) that the market would (on average) have priced credit above when the FedReserve has priced it?
I don’t know how you could work this out. But I can see how the Fed could, in trying to do its job too well, stimulate the economy to grow (for short term gain) while all the time leaving the credit flowing like a gas-tap, as the debt-bubble got bigger.
I guess it had to pop eventually didn’t it?
H SteveZ,
I don’t believe that a market mechanism–rising interest rates at a time of rising credit demand–would eliminate bubbles, because during an asset bubble, expected levels of capital gain dwarf any feasible interest rate, especially when gains themselves are leveraged.
If you expect a 40% rise in asset prices in a year, you’d be willing to pay 25% interest to get your hands on sufficient credit to buy a position. Then if the gain actually transpired, you’d make 15%: borrow $1 million, buy $1 million worth of an asset, sell it for $1.4 million, pay back the loan plus interest.
This is the sort of dynamic I saw in operation during the 80s bubble–when by way of illustration, the share market in Australia appreciated 80% in the year leading up to the crash.
On the debt moratoria idea, it shouldn’t be implemented on its own since it would just set you up for another cycle; I also match that with reforms to the definitions of capital assets to reduce the potential for substantial capital gains.
I won’t be coming to Melbourne for a while I’m afraid–teaching obligations will lock me into Sydney for the next two months.
Dear DrBob127,
That’s not my explanation of the problem; read the “Roving Cavaliers” post to see my analysis. The idea that a market rate would equilibrate demand and supply for funds is more an Austrian one.
Last year, as I recall March/April or so, T2 Partners gave a great pesentation on the US housing market- timely, as we all know how it imploded over the last 12 months. Well, there are those now who see some “green shoots”. T2 Partners latest presentation might give pause to that;
http://www.scribd.com/doc/14166113/T2-Partners-Presentation-on-the-Mortgage-Crisis4309-3
US Consumer demand is being driven lower by declining weekly wages, higher unemployment and collapsing asset values (as the T2 Partners presentation highlights)- all impacting very negatively on household wealth. As long as that dynamic is intact, global economic recovery is a dream, such is our structure of economic growth fuelled by growth in debt.
With the continueing waves of US mortgage defaults that are arriving (now including Prime Mortgages), US Banks will be dependant on taxpayer bailouts for some time yet.
would eliminate bubbles, because during an asset bubble, expected levels of capital gain dwarf any feasible interest rate, especially when gains themselves are leveraged
You are quite correct, bubbles could still occur, but they would be limited as once the fractional reserve limit is reached(provided this could be enforced) there would be no more lending. Funds for lending would essentially dry up. The fire basically burns out of fuel and a collapse ensures. Fractional reserve banking limits the damage by limiting the size of a the bubble, but it doesn’t stop bubble formation.
Bubble formation requires borrowers who feel that they can make a profit from borrowing money at whatever terms(just as you described above) and bankers(the guardians of capital) who are prepared to lend at those terms. For instance, the Florida property bubble burst in 1926 but it did not take down the whole country since it was a localised phenomena.
Speculation will always be with us, sometimes it serves a useful legitimate financial function but the problem is how to distinguish it from a Ponzi scheme and how to limit its damage if it comes into being.(Ponzi recognition seems to a function best suited to capital regulators not bankers, as they seem totally inept and the incentive structure that they have set up works against systemic best interest).
If central banks had not continually advanced funds to poorly managed banks since the 1980′s during financial crisis, the debt ratcheting mechanism that you described in your previous posts would have been impossible. We would have had a deep recession/depression in 1990 and the financial system would have been cleansed of its idiot bankers then, speculative investors would have been chastised. The point is the central banking/financial regulatory system as it currently stands, continually bails out the financially irresponsible while punishing the fiscally conservative. You can’t really say capitalism doesn’t work because every time it undergoes its “cleansing phase” it is stopped from doing so by massive injections of fresh capital at discounted rates to those who by rights should financially perish. It’s the opposite of Bagehot.
The megabubble that is bursting at the moment would have been impossible without modern central banking.
The idea that a market rate would equilibrate demand and supply for funds is more an Austrian one.
It’s implicitly your idea as well. From the Revolving Cavaliers of Credit:
Once a bank reaches its lending limit, the lending stops. The only way it can lend more is by getting more funds usually from its friendly central bank(or from other banks). If that source of funds is not available, guess what happens to interest rates in a credit crunch? Volker restricted money supply to the banks while maintaining reserve ratio in the early 80′s and by this mechanism drove up interest rates.
The only way by which a massive credit expansion at low interest rates could happen is when money supply is provided at such a rate to balance supply and demand at the rate chosen. This is my understanding of open market operations.
Take a look at the Fed Funds rate at the New York Federal Reserve. It has consistently been below target rate for most of last year. The banks aren’t bidding for the funds because there is less lending going on and so they are flush with reserves. Lots of supply, no demand, price(interest rate) goes down.
Steve Keen.(I’ve got the day off so I can post a bit)
You are quite right that bubbles can form in high interest rate environments, though its less likely. Likewise measures increasing the cost of speculation(through taxes which increase the realisation of speculative profits) won’t stop a bubble if the profits exceed the costs; they’ll just decrease the probability of it happening.
I don’t think that there is any real way to stop bubbles, I think that we have to expect that they are going to happen from time to time and we should make sure that the damage they do is limited.(Economic history should be a mandatory subject of all economic graduates)
The best we can hope for is to educate bankers and regulators in rule of thumb calculations to prevent bubbles and see that these rules are enforced and transgressors meaningfully punished. Things such as 20% deposit, the square meterage of a house should not exceed some percentage of a workers wage, lending should be limited to some multiple of a single workers income etc are such rules Furthermore these rules should be enforced by a non political body which can override government policy as populist measures are usually bubble forming. Many people will have a problem with that last idea.
Phillip:
As I understand it there are two types of inflation:
(1)Demand inflation; scarcity of goods relative to money. Not enough money for the goods.( Things cost more because there are not enough goods)
(2)Supply inflation: More than enough money for the goods.(People pay more because there is more money and enough goods)
One and two are not the same since the supply/demand equilibrium is not a simple as it first appears. In a fixed market pushing up wages decrease profits, and those profits don’t just go to making the capitalists rich, they go into investment; decrease profit and you decrease investment which in the long term decreases profit and employment. On the other hand effective aggregate demand is stimulated by having a decent disposable income spread as far and wide in a community. i.e having a big as possible middle class. There is a sweet spot between workers wages/company profits which economic policy should be geared towards. Russia has a small pool of fabulously wealthy oligarchs and the rest of the population which struggles in poverty. Cuba has very little income disparity as it has hardly any rich, both countries are economic failures. The aim of any successful policy is to expand the size of the middle class. Workers best interests are served when the company makes healthy profits to which they get a fair share, unfortunately many workers are just as greedy as their bosses. Unions have driven businesses to brink just as effectively a rapacious CEO’s.
Thank you GSM for the link to T2 partner’s presentation. I found the Fed graph of Household Borrowing 1990-2008 (page 35) most interesting. Shows it contributed nearly $1,200 billion to consumption at its peak and dropping to probably around $50 billion.
Just as Steve predicted, this drop in pump priming the economy will have severe impact upon unemployment for example.
Another interesting graph was that on page 32 (unemployment rate = 8.5%). In addition the average work week dropped to 33.2 hours. Pity we do not have a graph or statistics on this. I would not be surprised if this is at least equal to the unemployment rate, bringing underutilisation of labour to around 17%. Now surely this should also be a major shock to demand in the economy.
Do you work on household consumption and the fluctuation in employment/labour underutilisation at all Steve? How great will its impact be on the economy at large in your opinion? Thanks for all this hard work, I find it most interesting.
YW rooivis.
I recall that John Mauldin maybe 18 months ago provided some very pertinent grapical studies of the effect of MEW (mortgage equity withdrawal) on US consumption and GDP.It represented (according to Mauldin’s data)something like 2/3rds of all US consumer outlays in 2006/7 but was very significant from 2001. Note here that the US consumer represents around 70% of US GDP. US GDP is about 25% of global GDP.Of course that MEW debt accumulation has now imploded on household balance sheets.The implications for the world economy are clear.
Not only has that debt fuel now been removed from US consumption, the collateral backing the debt has collapsed sending those effected households into technical bankrupsy.The result being that not only has the US economy hit a wall, it is now going flat out in reverse. I have been trying to find seperate data on performance of servicing MEW debt but not been successful.I’ll keep trying.
I agree that without Central Bank rescues, the system would probably have gone into a mini-Depression back in 1987, at a level of debt that was slightly less than that of the Great Depression. What has taken this from a fairly standard “free-banking” financial cycle–like those that afflicted the US in the 1800s–to a cataclysmic event for capitalism itself is those rescues that simply renewed the Ponzi-lending scheme with a different class of borrowers and a different target of speculation each time.
On the interest rate issue however, open market operations aren’t driven by an “interest rate as price-equilibrator” process as most economists believe. The rate is a “reference price”, while the Fed supplies whatever funds are required to meet interbank settlement needs–and that tends to be a tiny fraction of the aggregate money supply on any given day. The mechanisms are too complex to go into in a reply here–maybe I’ll do a post on it one day–but if you have the time I suggest you read my ex-Honours student Liam O’Hara’s thesis on the topic.
My problem with the Austrian school is that it treats the money market as just another commodity market where supply and demand determine price, and implicitly supply is constrained by rising marginal cost. That ain’t the case in most real markets, and it certainly isn’t the case in money–as I point out in the Roving Cavaliers entry.
Thanks Steve
I’ll have a read of the thesis.
BTW do let us know if you are coming to Melbourne.
If you are not using
http://www.shadowstats.com/
for US governmental stats, you will be using misleading numbers.
All OECD members have problems with the useability and accuracy of economic stats that come from goverment.
However the US governmental economics stats have been subject to gray propaganda manipulations.
Many computer models that rely on official US governmental economic stats fail regularly, a sign of manipulations.
I’ve had a read of the thesis and from my understanding of it there seems to be nothing which contradicts what I said(or perhaps expressed badly).
I agree with you that under the current system the central bank can supply limitless amounts of credit at the chosen rate as long as its the “cheapest” player in town. Money supply is “pulled” through the system by commercial bank generated credit by provision of required funds to their reserve balances. Should however their reserve balances be flush with funds there is no need to borrow from the central bank and rates will then go down, the reserve bank then has to “defend” the rate by withdrawing funds from the reserves.
From the New York Fed (pretty much applies here as well):
The reserve bank is able to “achieve its target rate” by treating money as a commodity, adjusting its supply to market demand in amounts(and rate) of it’s choosing.
What has taken this from a fairly standard “free-banking” financial cycle–like those that afflicted the US in the 1800s–to a cataclysmic event for capitalism itself is those rescues that simply renewed the Ponzi-lending scheme with a different class of borrowers and a different target of speculation each time.
Hypothetically, if everyone stopped borrowing and started saving. Interest rates would fall unless the central bank removed funds from the system. As central banks have said, you can control rates or quantity but you can’t control both.
I think this is the central issue with regard to the financial crisis. Why do people make dumb “investment” decisions? And why are people prepared to take on so much debt? Minsky’s great insight (as well as Benjamin Graham’s)was that the market collectively acts like a manic-depressive, swinging from optimism to pessimism cyclically, it is not necessarily a rational operator. These mood swings are reflected in the community’s economic activity. The quantity of money in the system is basically irrelevant to the answering of this question. The cost at which money is provided is perhaps more important, but even that is not significant if, even at high cost, entrepreneurs can see profit.
What killed Western Economic Prudence? My own thoughts are that it is the psuedo-Keyneism that sees bankruptcy as the ultimate evil and increasing debt its remedy, this system furthermore punishes the financial prudent. A sort of reverse Darwinism, survival of the economically unfit. At the last G20 meeting, the Anglo’s were hammering the Germans for not spending more money in order to bail them out. Kudos to the Germans for standing firm. The welfare mentality has truly spread to the corporate sector. Our current financial mess is a cultural-political problem. Our societies seem politically unable to administer the appropriate Ponzi prevention measures (or let Ponzi participants suffer) due to the nature of our system.
Anyway they are my thoughts on the matter.
ueberbaer
I, too, have experience in renting in Germany, and I had a very good experience. Actually, I would say
RENTING IN GERMANY WAS BRILLIANT!
The kitchen business, well clearly if you buy the kitchen from the previous tenant, you can sell when you move (or take it with you).
Sounds like you had to shift a lot, perhaps you had some short term stints.
I had a stint of over a year. I found private a rental – a two room apartment in Munich (in Bogenhausen) – one of the toughest rental markets in Germany – 10 minutes walk to the English garden, next to the the US Consellor General’s residence, and not far from one of Borris Becker’s houses (might be sold now since he ran into tax problems
). The premises was probably worth 10,000,000 Euro, but the owner offered at reasonable rent that even a scientist could afford.
Anyway, the point is that there is a much more diversified rental industry there (and in Europe in general) – large investment companies, and private rentals.
The young Germans that I knew were pretty happy with the situation (I never heard any complaints, and when I explained our situation here they weren’t too impressed).
Personally, being a long term renter in Australia, I would relish the opportunity to rent a home for 10 or 15 years and make it the way I want it.
(Perhaps your disappointment is partly related to the overall challenges of living in another country – I can relate to that – my wife still doesn’t want to go back to France.)
Which leads me to say that even renting in France was better. We had a very basic apartment – a blank canvass which we did nothing with because we were only there for a year – but gee it was great not having even 1 inspection all year!
When we left, we insisted that the inspection be carried out in our presence (as we always do here). They were a little puzzled, but agreed. They told us that they had never seen an apartment left so clean.
The point being that our system is all about the agent/owner being overbearing on the tenant – as if always guilty unless proven innocent (which you can only prove on vacating the premises). And I said earlier, I don’t think this is by accident – partly it is because our system is dominated by small scale investors, many with their entire life savings tied up in one or two investment properties (many bought during booms with owners subsequently realising that it was not a path to riches afterall) – but ultimately all of these factors keep funnelling young Aussies towards that abstract construction – “the property ladder”….
As I said, I didn’t hear any young Germans complaining about their rental system. But I would make this point – any young Aussie who has bought into the “property ladder” over recent years – if they do actually go through with trying to “climb some wrungs” – will surely do plenty of refurbishing themselves, and will pay much more in realestate agency and other fees through selling than will somebody who takes out several long term leases in their adult life.
Steve,
There’s a slight problem with your argument about market setting of interest rates, ie. that it wouldn’t stop people borrowing in the expectation of rising prices – ie. asset inflation.
If asset inflation is being caused by the availability of credit – and this is one of the implications of my paper – then the condition that you’re citing couldn’t exist in the presence of a fixed supply of loans, and market setting of prices, i.e. interest rates for them.
There would be no expectation of rising prices, and hence no ability to pay excessive interest rates to get loans to exploit them.
I think one of my greatest concerns about the current crisis is that we throw the baby (markets), out with the bath water (an exploited banking system). Markets do work, even if they aren’t efficient in the sense that economists generally mean.
… jacky