Debt­watch No 34: The Con­fi­dence Trick

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And, at this point, con­fi­dence is what it is all about… The first thing is to main­tain some con­fi­dence in our­selves and the prospects for our coun­try over time… Unfor­tu­nately, there is no lever marked ‘con­fi­dence’  that pol­icy-mak­ers can take hold of. Our task is very much one of seek­ing to behave, across the board, in ways that will fos­ter, rather than erode, con­fi­dence.  It is such con­fi­dence that, more than any­thing else, will help to drive us along the road to recov­ery.” (Glenn Stevens, April 21st 2009)

I fancy that over-con­fi­dence sel­dom does any great harm except when, as, and if, it beguiles its vic­tims into debt.” (Irv­ing Fisher, 1933)

In his recent speech “The Road To Recov­ery”, Australia’s Reserve Bank Gov­er­nor Glenn Stevens used “the C word” 17 times–versus, for exam­ple, 15 uses of the “R” word (“reces­sion”). The mes­sage was clearly that, if only we can all be con­fi­dent, then the other “R” word (“recovery”–which received ten men­tions) will surely occur.

Another promi­nent econ­o­mist who had the same atti­tude at the out­break of a finan­cial cri­sis was Irv­ing Fisher. Speak­ing to a bankers con­fer­ence just two days before the Great Crash of 1929, Fisher argued that mar­ket down­turns were caused by a “lunatic fringe”. Once they had exited, the bull mar­ket of the pre­ced­ing years would resume:

There is a cer­tain lunatic fringe in the stock mar­ket, and there always will be when­ever there is any suc­cess­ful bear move­ment going on… they will put the stocks up above what they should be and, when fright­ened, … will imme­di­ately want to sell out… when it is finally rid of the lunatic fringe, the stock mar­ket will never go back to 50 per cent of its present level…

We shall not see very much fur­ther, if any, reces­sion in the stock mar­ket, but rather … a resump­tion of the bull mar­ket, not as rapidly as it has been in the past, but still a bull rather than a bear move­ment.”  (Fisher 1929)

Fisher’s con­fi­dence led him to hang on to his mar­gin-financed stocks (worth over $100 mil­lion in 2000-dol­lar terms). Despite his con­fi­dence, the stock mar­ket con­tin­ued its plunge from its peak of 31.3 in July 1929 to the nadir of 4.77 in May of 1932, while unem­ploy­ment rose from zero to 25 per­cent. Fisher was wiped out finan­cially, and left to pon­der how he could have got the behav­iour of the mar­ket, and the econ­omy, so badly wrong.

Three years later, he reached the con­clu­sion that he had been mis­led by two core ele­ments of the neo­clas­si­cal the­ory he had helped build: the beliefs that the econ­omy was always in equi­lib­rium, and that the debt com­mit­ments bor­row­ers had entered into to pur­chase finan­cial assets were based on cor­rect fore­casts of future eco­nomic prospects.

On equi­lib­rium, he rea­soned, even if it were true that the econ­omy tended towards equi­lib­rium, ran­dom events alone would ensure that all eco­nomic vari­ables were either above or below their equi­lib­rium lev­els. There­fore eco­nomic the­ory had to be about dis­e­qui­lib­rium rather than equi­lib­rium:

The­o­ret­i­cally there may be— in fact, at most times there must be—  over- or under-pro­duc­tion, over- or under-con­sump­tion, over- or under spend­ing, over- or under-sav­ing, over- or under-invest­ment, and over or under every­thing else. It is as absurd to assume that, for any long period of time, the vari­ables in the eco­nomic orga­ni­za­tion, or any part of them, will “ stay put,”  in per­fect equi­lib­rium, as to assume that the Atlantic Ocean can ever be with­out a wave.” (Fisher 1933)

This real­i­sa­tion in turn put paid to any notion that today’s debt com­mit­ments were based on an accu­rate pre­dic­tion of tomorrow’s eco­nomic out­comes. Instead, he iden­ti­fied over-indebt­ed­ness as one of the two key causes of Great Depres­sion:

two dom­i­nant fac­tors [are …] over-indebt­ed­ness to start with and defla­tion fol­low­ing soon after… these two eco­nomic mal­adies, the debt dis­ease and the price-level dis­ease, are, in the great booms and depres­sions, more impor­tant causes than all oth­ers put together.

Thus over-invest­ment and over-spec­u­la­tion are often impor­tant; but they would have far less seri­ous results were they not con­ducted with bor­rowed money. That is, over-indebt­ed­ness may lend impor­tance to over-invest­ment or to over-spec­u­la­tion.

The same is true as to over-con­fi­dence. I fancy that over-con­fi­dence sel­dom does any great harm except when, as, and if, it beguiles its vic­tims into debt.” (Fisher 1933)

One would hope that eco­nomic the­ory had learnt from the Great Depres­sion, and in par­tic­u­lar from Fisher’s insights. Unfor­tu­nately, eco­nom­ics was eager to unlearn these lessons, because the very phe­nom­e­non of a Depres­sion was anath­ema to a pro­fes­sion that had always sought to eulo­gise the mar­ket econ­omy, rather than to under­stand it. Equi­lib­rium came back again in the guise of the “Neo­clas­si­cal-Key­ne­sian syn­the­sis” in the 1950s. By the 1990s, all ves­tiges of Keynes had been thrown away–and noth­ing of Fisher had been even assim­i­lated in the first place (sker­ricks of his thought are per­co­lat­ing through now though: see The Econ­o­mist for a pretty good overview of Fisher).

Today, macro­eco­nomic mod­els like TRYM (the TReasurY Macro­eco­nomic model that is used to pre­pare the Aus­tralian Fed­eral Bud­get) pre­sume that the econ­omy tends towards a “long run equi­lib­rium”. The appar­ent dynam­ics such mod­els dis­play are sim­ply the con­ver­gence of the model from an ini­tial start­ing point to the assumed long run equi­lib­rium.

For exam­ple, the fig­ure below shows the TRYM model’s pre­dic­tions for unem­ploy­ment from March 1995 till March 2010 (Fig­ure 10: Dynamic Adjust­ment towards Steady State — Unem­ploy­ment; Mod­el­ling Sec­tion, Macro­eco­nomic Analy­sis Branch, Com­mon­wealth Trea­sury, The Macro­eco­nom­ics Of The Trym Model Of The Aus­tralian Econ­omy,  Com­mon­wealth of Aus­tralia 1996). The model “pre­dicted” that unem­ploy­ment would fall from around 9 per­cent in 1995 to just below 7 per­cent in 2010, sim­ply on the basis that unem­ploy­ment was assumed to con­verge to an a long run equi­lib­rium rate of 7 per­cent over time (the actual level fell well below this, and the  assumed equi­lib­rium unem­ploy­ment rate–the “NAIRU”–was there­fore later reduced to 5.25 per­cent).

Vir­tu­ally every­one knows Keynes’s quip that “in the long run we are all dead”. Yet very few realise that Keynes’s tar­get was pre­cisely this approach to eco­nomic modelling–of assum­ing that the econ­omy would sim­ply tend to return to equi­lib­rium after any dis­tur­bance:

But this long run is a mis­lead­ing guide to cur­rent affairs. In the long run we are all dead. Econ­o­mists set them­selves too easy, too use­less a task if in tem­pes­tu­ous sea­sons they can only tell us that when the storm is long past the ocean is flat again.”   (Keynes, 1923)

Hob­bled by this naive belief in equi­lib­rium, the eco­nom­ics pro­fes­sion was as unpre­pared for today’s cri­sis as it had been for the Great Depres­sion. Now that the cri­sis is well and truly with us, all con­ven­tional “neo­clas­si­cal” econ­o­mists can offer is the hope that the cri­sis can be over­come by a good, strong dose of con­fi­dence.

From Fisher’s point of view, such a belief is futile. In an econ­omy with an exces­sive level of debt and low infla­tion, he argued that con­fi­dence was irrelevant–and in fact dan­ger­ously mis­lead­ing, as he knew from painful per­sonal expe­ri­ence. Given over-indebt­ed­ness and low lev­els of infla­tion, a “chain reac­tion” would occur in which: 

(1) Debt liq­ui­da­tion leads to dis­tress sell­ing and to

(2) Con­trac­tion of deposit cur­rency, as bank loans are paid off, and to a slow­ing down of veloc­ity of cir­cu­la­tion. This con­trac­tion of deposits and of their veloc­ity, pre­cip­i­tated by dis­tress sell­ing, causes

(3) A fall in the level of prices, in other words, a swelling of the dol­lar. Assum­ing, as above stated, that this fall of prices is not inter­fered with by refla­tion or oth­er­wise, there must be

(4) A still greater fall in the net worths of busi­ness, pre­cip­i­tat­ing bank­rupt­cies and

(5) A like fall in prof­its, which in a “ cap­i­tal­is­tic,”  that is, a pri­vate-profit soci­ety, leads the con­cerns which are run­ning at a loss to make

(6) A reduc­tion in out­put, in trade and in employ­ment of labor. These losses, bank­rupt­cies, and unem­ploy­ment, lead to

(7) Pes­simism and loss of con­fi­dence, which in turn lead to

(8) Hoard­inq and slow­ing down still more the veloc­ity of circulation.The above eight changes cause

(9) Com­pli­cated dis­tur­bances in the rates of inter­est, in par­tic­u­lar, a fall in the nom­i­nal, or money, rates and a rise in the real, or com­mod­ity, rates of inter­est.” (Fisher 1933; The Debt Defla­tion The­ory of Great Depres­sions)

One key phe­nom­e­non that Fisher empha­sised was that defla­tion could make the debt bur­den worse even as bor­row­ers reduced their nom­i­nal debt levels–something I have termed “Fisher’s Para­dox”. In Fisher’s words:

Each dol­lar of debt still unpaid becomes a big­ger dol­lar, and if the over-indebt­ed­ness with which we started was great enough, the liq­ui­da­tion of debts can­not keep up with the fall of prices which it causes.

In that case, the liq­ui­da­tion defeats itself. While it dimin­ishes the num­ber of dol­lars owed, it may not do so as fast as it increases the value of each dol­lar owed.

Then, the very effort of indi­vid­u­als to lessen their bur­den of debts increases it, because of the mass effect of the stam­pede to liq­ui­date in swelling each dol­lar owed. Then we have the great para­dox which, I sub­mit, is the chief secret of most, if not all, great depres­sions:

The more the debtors pay, the more they owe. The more the eco­nomic boat tips, the more it tends to tip. It is not tend­ing to right itself, but is cap­siz­ing.”

This is a “dis­e­qui­lib­rium” phe­nom­e­non par excel­lence, because not only does it occur out of equi­lib­rium, it actu­ally dri­ves the sys­tem fur­ther from equi­li­bium. And it is indeed what hap­pened dur­ing the Great Depres­sion: America’s debt to GDP ratio rose even as nom­i­nal debt lev­els were reduced. The debt ratio rose from 175 at the end of 1929 to 235 per­cent in 1932, even as nom­i­nal pri­vate debt fell from US$163 bil­lion to US$134 bil­lion.

Even though the public’s ini­tial attempt to reduce its debt bur­den was foiled, the reduc­tion in debt nonethe­less did have an impact: it drove the econ­omy into Depres­sion. In the credit-dri­ven real world in which we live, aggre­gate demand is the sum of GDP plus the change in debt. The public’s attempt to reduce debt meant that the reduc­tions in debt sub­stan­tially reduced demand, and this delever­ag­ing was the unstop­pable force that made the Great Depres­sion “great”.

As the next chart shows, dur­ing the Roar­ing Twen­ties, the annual increase in debt was respon­si­ble for up to ten per­cent of aggre­gate demand. But when the Great Crash brought this period of lever­aged spec­u­la­tion to an end, the delever­ag­ing that Fisher described meant that the change in debt started to reduce from demand–and at its peak, the reduc­tion in debt in 1932 reduced aggre­gate demand by 25 per­cent.

As is obvi­ous, unem­ploy­ment sky­rock­eted as aggre­gate demand col­lapsed. When debt reaches the sky high lev­els it did before the Great Depres­sion, delever­ag­ing becomes the dom­i­nant force deter­min­ing the level of unemployment–but obvi­ously there is a lag. Unem­ploy­ment is the clas­sic “lag­ging indi­ca­tor”, because firms take time to respond to a drop in demand, firstly by ceas­ing to hire new work­ers and then by sack­ing exist­ing ones.

When work­ing with annual data at the time of the Great Depres­sion, this lag appears to be about one and a half years. Apply­ing that lag to the period from mid-1929 till mid-1938 (when Gov­ern­ment spend­ing and arma­ments pro­duc­tion for the loom­ing war in Europe started to boost demand and caused unem­ploy­ment to fall), the cor­re­la­tion between debt’s con­tri­bu­tion to demand and unem­ploy­ment was –0.85. The change in debt’s con­tri­bu­tion to demand thus explains 85 per­cent of the unem­ploy­ment expe­ri­ence of the Great Depres­sion.

This is not good news for us today, for three rea­sons. Firstly, debt lev­els today are far higher than they were prior to the Great Depression–the force of delever­ag­ing is thus likely to be greater now than it was in the 1930s. Sec­ondly, given this higher level of debt, the cor­re­la­tion between the debt-financed pro­por­tion of aggre­gate demand and unem­ploy­ment is even stronger now than it was dur­ing the Great Depres­sion. Thirdly, given the greater depen­dence on debt today than ever before, and the social changes that have gone with the Ponz­i­fi­ca­tion of Cap­i­tal­ism, the lag between a fall in the debt-financed com­po­nent of demand and a rise in unem­ploy­ment has dropped to just two months.

The change in debt is there­fore the best–and most ominous–predictor of future unem­ploy­ment lev­els. Though well down from the peak level of being respon­si­ble for 25% of aggre­gate demand, pri­vate debt is still gen­er­at­ing 10 per­cent of demand in the USA. Yet even with still pos­i­tive debt-financed demand, unem­ploy­ment has risen to 8.7 per­cent. If delever­ag­ing results in debt reduc­ing aggre­gate demand by 25 per­cent as it did in the Great Depres­sion, then unem­ploy­ment is going to go much, much higher.

The same analy­sis applies to Aus­tralia. Since the cri­sis has yet to hit Aus­tralia as strongly as it has the USA or Europe, the belief that “we are different”–which I call “Kan­ga­roo Eco­nom­ics” in hon­our of our national fauna–is still preva­lent here. So too is the belief that, if we do suf­fer a reces­sion, it will be due to exter­nal forces rather than to our own eco­nomic cir­cum­stances.

The data begs to dif­fer. Though our aggre­gate debt level didn’t reach Yan­kee heights–our peak debt to GDP level was about 165%, ver­sus 290% in the USA before defla­tion started–our rate of growth of debt was much higher, so that at its peak the growth in debt was respon­si­ble for 22% of aggre­gate demand. Now that debt is start­ing to fall, unem­ploy­ment is start­ing to rise. There is every rea­son to expect delever­ag­ing in Aus­tralia to drive unem­ploy­ment well into dou­ble dig­its.

So con­fi­dence is not “all it is about”: con­fi­dence played its role over the last thirty years as it “beguiled its vic­tims into debt”, in Fisher’s evoca­tive phrase. We don’t need more of it now, so much as less of it back then–but of course, we can’t amend his­tory.

The vic­tims of past over­con­fi­dence include Cen­tral Bankers, whose res­cues of the finan­cial sys­tem sim­ply encour­aged it to search out a new group of poten­tial bor­row­ers to replace those who had already been debt-sat­u­rated. They were vic­tims of debt, as much as were the bor­row­ers, because the naive the­ory of eco­nom­ics they fol­lowed ignored the role of debt com­pletely. They there­fore couldn’t see the process that was lead­ing to cri­sis, even as their inter­ven­tions egged that process on to heights that it could never have reached with­out them.

Had Greenspan and his equiv­a­lents around the world not inter­vened in 1987, it is quite pos­si­ble that we would have expe­ri­enced a mild Depres­sion back then–mild because debt was only equiv­a­lent to 1929 lev­els then, because a larger Gov­ern­ment sec­tor than in the 1920s would have coun­ter­bal­anced the pri­vate sec­tor down­turn, and because higher infla­tion in the late 80s would have helped reduced the real bur­den of debt.

Now we are sit­ting on the precipice of a moun­tain of debt twice as high as in the Great Depres­sion, with low infla­tion turn­ing into defla­tion as Fisher warned, and with Cen­tral Bankers who do not have a clue why the econ­omy has sud­denly gone from “the Great Mod­er­a­tion” to “the Great­est Cri­sis Since the Great Depres­sion”.

Over-con­fi­dence in the face of ris­ing debt did beguile us dur­ing the long boom. Con­fi­dence in the face of delever­ag­ing will not save us dur­ing the com­ing Depres­sion.

END OF COMMENTARY

Comments on the Australian Data

Debt lev­els in Aus­tralia are very close to falling in nom­i­nal terms, and in fact only mort­gage debt is still ris­ing: both busi­ness and per­sonal debt (other than mort­gages) have fallen in the last few months. It is con­ceiv­able that, were it not for the “First Home Buy­ers Boost”, mort­gage debt as well would be falling now too (the scheme is more aptly described as the “First Home Ven­dors Boost”, since prices at the low end of the mar­ket have been dri­ven up by far more than the $7,000 increase in the grant).

As a result, the debt to GDP ratio has fallen for the last four months–though this is to some extent masked by Australia’s prac­tice of sum­ming the pre­vi­ous four quar­ters of GDP data to derive annual GDP, ver­sus the Amer­i­can prac­tice of sim­ply mul­ti­ply­ing the cur­rent quarter’s GDP fig­ure by 4. Using the Aus­tralian approach, our debt to GDP ratio is now 160%; using the Amer­i­can, it is 162%, since GDP fell by 0.5% in the pre­vi­ous quar­ter.

Whichever way you cut it, delever­ag­ing is now well and truly under­way, and unem­ploy­ment will there­fore rise dra­mat­i­cally in the next few months. Most neo­clas­si­cal econ­o­mists are pre­dict­ing 7.5% unem­ploy­ment by mid-2010; I expect it will have entered dou­ble fig­ures by early in 2010.

Table One

Table Two

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  • tom­myt

    Thanks Dr Bob127!

  • evan

    Icon­o­clast

    On uses and abuses of state power, par­tic­u­larly the media, the best blog I’ve found is:

    http://www.craigmurray.com

    Craig Mur­ray was the for­mer British Ambas­sador to Uzbek­istan. He was sacked for speak­ing out about Uzbek human rights abuses dur­ing the “War On Ter­ror”. Much of the con­tent con­cerns the UK but is entirely rel­e­vant to the polit­i­cal sit­u­a­tion in Aus­tralia. His blog appar­ently received 75,000 unique vis­i­tors last month with zero media cov­er­age which is a fan­tas­tic effort. His books are also supurb. 

    On War­ren Buf­fet… surely read­ers of this blog have worked out that only cor­rupt insid­ers are allowed to become the rich­est in the world. You don’t col­lect $50 bil­lion in spec­u­la­tive win­nings through hon­est busi­ness deal­ings. The world doesn’t work that way. Like the tooth fairy, sto­ries of hon­est bil­lion­aires with the integrity of saints are pro­pogated to help chil­dren sleep well at night.

  • Bull­turned­bear

    Hi Boma,

    I think it pos­si­ble that US trea­suries are in a cor­rec­tive phase, not a bear mar­ket. They were over bought and are now sell­ing off a bit. 

    It’s also pos­si­ble that all the neg­a­tive talk is sim­ply a reflec­tion of their poor per­for­mance of late. Equi­ties are cor­rect­ing their rise and as a con­se­quence all the media is pos­i­tive toward equi­ties. They are all sheep aren’t they? 

    Wait ’til equi­ties turn south again and start test­ing their March 9 lows. Then I think you will see that a new rally in trea­suries is well under­way.

    More on China’s fear about los­ing on US trea­suries. China must have been buy­ing trea­suries pro­gres­sively over the last 10 or 15 years. China must be so far ahead on that invest­ment. Surely their trea­suries have been the only invest­ment to make them money in the last 5 or 10 years. Any direct invest­ments into equi­ties that they made over that period would be under­wa­ter.

    China is upset about the one invest­ment that has made them money. How per­verse is that?

    Also, When equi­ties start crash­ing again and trea­suries rally to a new high (low yield) I bet China holds their posi­tion and hopes for more. I bet they don’t take the oppor­tu­nity to reduce their expo­sure. It is clas­sic investor fail­ure. Cry­ing over miss­ing the top. But when the next oppor­tu­nity to get out presents, you don’t take it because you want to make even more.

  • Philip

    evan said:

    You don’t col­lect $50 bil­lion in spec­u­la­tive win­nings through hon­est busi­ness deal­ings. The world doesn’t work that way. Like the tooth fairy, sto­ries of hon­est bil­lion­aires with the integrity of saints are pro­pogated to help chil­dren sleep well at night.”

    Take Bill Gates and Microsoft as an exam­ple. The risks and costs of com­puter tech­nol­ogy (soft­ware and hard­ware) has been social­ized by the pub­lic over the decades, and when the goods and ser­vices are fit for com­mer­cial­iza­tion, it is given away to the cor­po­rate sec­tor so prof­its can be pri­va­tized. This is essen­tially the old story of pub­lic sub­sidy, pri­vate profit.

    Thanks to state inter­ven­tion in the form of IPR, Microsoft has become one of the world’s largest cor­po­ra­tions due to monop­oly pric­ing, anti-com­pet­i­tive prac­tices, rent-seek­ing, exter­nal­iza­tion of costs, legal but ille­git­i­mate manoevours, mas­sive state sub­si­dies, and large-scale theft from the infor­ma­tional pub­lic com­mons — and Bill Gates has the gall to crack down on peo­ple who pirate his over­priced junk! He is prob­a­bly the great­est cor­po­rate wel­fare freak and pirate in exis­tence.

    I would assume that Buf­fet has care­fully cul­ti­vated his image through the use of pub­lic rela­tions, as any busi­ness or politi­cian would do. After all, expen­sive PR fees is but a drop in the ocean for him.

  • ned

    Hi Phillip,

    I don’t think you know much about Buf­fet and you are mak­ing gen­eral assump­tions about him based on the fact that he is wealthy. He sure as hell couldn’t be stuffed wast­ing time and money on PR I can assure you of that. He could afford a thou­sand Lamborgini’s and dozens of man­sions as this would also be a drop in the ocean for him but he still draws the mea­ger salary of $100K and is still liv­ing in the house he has occu­pied for 50 years. He was one of the good guys, I’m just not sure if he’s going to con­tinue to be one.

  • DrBob127

    Maybe there are some sim­i­lar­i­ties between W. Buf­fet and I. Fisher??

    I didn’t know that China was expe­ri­enc­ing defla­tion.
    http://business.theage.com.au/business/world-business/china-slips-deeper-into-deflation-20090511-b060.html

  • Philip

    ned,

    That’s why I said “assume”.

  • MACCA

    Hi BTB,

    Look­ing at China’s skewed expo­sure to US Trea­suries and the poten­tial ser­vic­ing bur­den that implies for the US, I’m sure both par­ties fer­vently hope for a lev­i­tated US bond mar­ket.
    We shall see. 

    http://blogs.cfr.org/setser/2009/05/09/chinas-compensation-for-taking-dollar-risk/

    But the risk of over­sup­ply is very real. Especailly now when we can see the extent to which the US Fed/Treasury is oblig­ated to bail­ing out what essen­tially is the entire US finan­cial sys­tem, Detroit, Agen­cies as well as mas­sive Obama deficit. Absent another panic over a poten­tial global finan­cial melt­down to soak up that enor­mous sup­ply, US Trea­suries could very eas­ily be a buy­ers mar­ket and for a long time.

  • rluk

    Otto,

    Get­ting prices is usu­ally no prob­lem (non-pub­licly traded derivates have over the counter mar­kets and futures have stan­dard pric­ing for­mu­las) – whether you like them is another mat­ter. The argu­ment is that as mar­ket liq­uid­ity has dried up the prices are not valid and banks should not have to mark to mar­ket.

    As to your other fear, the net (i.e. un-hedged, spec­u­la­tive posi­tions) posi­tion of the derivates “black box” would be a lot smaller than the head­line fig­ure. That is not to say derivates have no risk. Given the mas­sive lever­age on deriv­a­tive instru­ments, if indi­vid­ual ‘rouge’ traders cir­cum­vent con­trols losses can be huge and bring down the bank (think Bar­ings). Trad­ing credit risk is also a con­cern at the moment. Banks need to make sure their expo­sure pat­tern to coun­ter­par­ties doe not leave them open if some­one goes down.

    All that said, I would be much more wor­ried about ris­ing non-per­form­ing loans!

  • dino67
  • boma

    Hi btb

    Yes I’m with you on China. In com­par­i­son to every­one else they’ve got a great hand at the moment but, as that old song goes, you’ve still gotta know when to hold ‘em and know when to fold ‘em. Ditto with their cur­rent com­modi­ties binge — they’ll get burnt there as well. As Steve says, it’s just a mat­ter of time before the irre­sistible force of debt delever­ag­ing comes back into the pic­ture again. The green shoots are the result of fis­cal stim­u­lus, noth­ing more. But if we do get to a 50% retrace like in 1930, no doubt we’ll have to with­stand bar­rage of guff from the boost­ers trum­pet­ing Australia’s sur­vival of the ‘great reces­sion’ with barely a scratch. And to tell you the truth I’m find­ing the upswing in mood at the moment some­what of a relief from the gloom of the last 9 months—- but sooner or later some­one has to pay the piper!

    With respect to cap­i­tal rais­ing I expect that gov­ern­ments and cor­po­ra­tions will keep rat­tling the tin until the bot­tom falls out, but at some point the law of dimin­ish­ing returns has to kick in. And the prob­lem will be that the sums required to off­set bad debts as well as pro­vide enough stim­u­lus to keep the sight of a recov­ery in a rea­son­able time frame will just keep get­ting big­ger. Something’s gotta give.

    Cheers b.

  • Tel

    “Hor­ri­ble bond auc­tion” lifts long-term rates 

    First signs of infla­tion creep­ing in, but still bal­anced against debt delever­ag­ing (i.e. defla­tion). With a big par­cel of gov­ern­ment deficit com­ing through from the bailouts, and China reluc­tant to throw good money after bad buy­ing more trea­suries, you can expect both infla­tion and ris­ing inter­est rates com­ing to the US econ­omy soon.

    I would argue that in the­ory if cur­rency infla­tion had been care­fully bal­anced against debt delever­ag­ing (i.e. defla­tion) then the Fed could in the­ory have kept the ship upright and sail­ing. Blowout deficit spend­ing is going to ensure that the bal­ance falls on the infla­tion­ary side.

  • mahaish

    thanks for the post, icon­o­clast,

    think its all about us and them ,

    as far as the yanks are con­cerned, if you arnt “one of us” then you are “one of them”.

    being “one of them” is the axis of evil, and any­one else they dont trust, which is just about every­body.

    as far as they are con­cerned the world is full of pinko’s and trai­tors, anachists like noam chom­sky included.

    the yanks prob­a­bly think some of the biggest trai­tors walk the cor­ri­dors of the UN and west­ern euro­pean par­lia­ments and beau­racra­cies

    when you are “one of us” you can get away with what ever you like, because you are “one of us”.

    when you are “one of them” then you are a trai­tor to be delt with any way they like.

  • Ernie

    Is there any way of find­ing out who is buy­ing our Trea­sury Bonds that go on ten­der each week? I would like to know for exam­ple if our banks were buy­ing them.

    - Ernie.

  • Jim

    dino67,
    Thanks for the link. This was a “Gem” and is a “must read” arti­cle! The five storms that will hit the US will pro­duce title waves that will go right round the world! Here is the link again in case any­body missed it:-

    http://www.moneyandmarkets.com/five-economic-storms-raging-now-2–33662

  • DrBob127

    I sup­port Jim’s nom­i­na­tion of the ‘five storms’ arti­cle as a gem. It really is worth the read.

  • evan

    Report back from an Irish friend of mine who lives in Dublin. I’d asked him how things were going there…

    Things are pretty bad on the ground. Unem­ploy­ment up from below 5%, to nearly 12%. May pay pack­ets will be hit fol­low­ing our April bud­get. The pub­lic sec­tor worst hit due to a pen­sion levy – fair enough in the­ory as it recog­nises they will ben­e­fit from a guar­an­teed pen­sion pay­out, but it wasn’t imposed because it is good in the­ory, it was imposed to get taxes in by every means pos­si­ble. And because the exchange rate with ster­ling is so good, every­one is dri­ving up north to buy every­thing from gro­ceries to cars, which isn’t help­ing the sit­u­a­tion! We are worse hit than other coun­tries because we had let our tax sys­tem depend on the boom­ing hous­ing mar­ket — cap­i­tal gains tax and stamp duty, when that sud­denly crashed we had a huge hole in the pub­lic finances. And then we remem­bered how much more of a social­ist state we are than the UK when we sud­denly all realised that our unem­ploy­ment ben­e­fit is unbe­liev­ably 3 times that of the UK: 210 euro a week –v- c. 58 pounds. And a lot of peo­ple are get­ting the 210 a week!”

  • MACCA

    Is Australia’s unem­ploy­ment only 5.2%? If it is not, then what is it?

    Here are some Unem­ploy­ment num­bers;

    ABS – 5.2%

    Roy Mor­gan Research Unem­ploy­ment – 8%
    (includes dis­en­chanted unem­ployed peo­ple who have not looked for work in the past four weeks, as well as those who are unem­ployed but are unable to begin work in the ref­er­ence week)

    Roy Mor­gan Under employ­ment +Unem­ploy­ment – 14.3%
    (includes annual ABS mea­sures of under­em­ployed per­sons and added them to the Roy Mor­gan mea­sure of unem­ployed per­sons)

    Com­bined All Totals: 18%Unemployed ‚Dis­en­chanted , Under­em­ployed + Discouraged(includes inter­po­lated annual ABS mea­sures of dis­cour­aged work­ers).

    Here is the arti­cle.
    http://www.henrythornton.com/article.asp?article_id=5654

    Australia’s For­got­ten Work­ers”
    “The ABS sur­vey is based on the USA unem­ploy­ment sur­vey. This was designed when there were few part-time work­ers, few con­trac­tors, no peo­ple work­ing from home using the inter­net and very few peo­ple work­ing the tele­phone from their home, car or a table in a cof­fee shop.”

    Are the ABS num­bers a con­fi­dence trick? Can we there­fore put ANY trust in num­bers ema­nat­ing from Govt?

  • joshua

    Hi every­one!

    The book­ies should have taken bets for the out­come of FHOG. With the gov­ern­ment dou­bling the price money for some type of bets won and increas­ing it three fold for oth­ers. Maybe the state gov­ern­ment could also pitch in and top up what­ever the gov­ern­ment is offer­ing.

    The win­ners will be receive so much stim­u­lus. And imag­ine if all Aus­tralians place win­ning bets. There would be abun­dance of stim­uli and green shoots prop­ping up every­where. Stock mar­ket would be fly­ing and we would be read­ing an arti­cle how Aus­tralia fought off the reces­sion.

    Who cares where the money comes from or how much debt it cre­ates? All we care about is con­fi­dence effect and peo­ple using buzz words like green shoots!

  • BrightSpark1

    MACCA

    Here is another source of hon­est unem­ploy­ment sta­tis­tics from the Uni­ver­sity of New­cas­tle.

    http://e1.newcastle.edu.au/coffee/indicators/indicators.cfm

    Steve bought this site to my atten­tion some time ago.

    The ABS fig­ures are a non­sense because the def­i­n­i­tion that thay use makes no sense at all.

  • evokadevo

    BrightSpark1.… I didn’t know there was any such thing as hon­est unemo­ploymnt sta­tis­tics. How do they account for “self-employed”, cash in hand etc? Check out this link re FHOG http://www.bloomberg.com/apps/news?pid=email_en&sid=azjnQbCD2dm8even the lenders can see prob­lems down the track. Any­thing for a good bud­get out­look tonight, I sup­pose.

  • joshua

    Wow what real­is­tic projects of 8.5% peak unem­ploy­ment by 2011 and GDP recov­ery in 2012, 2013 that too 4.5%!

    For is the need to scare every­one if the prob­lem is not so seri­ous?

    Steve we need a blog on this one pretty please!

  • Com­ing Joshua. Of course that’s the fal­lacy that I focused on too–assuming 4.5% growth in 2011–13. Yeah, right…

  • gor­don

    Steve,
    Although now lean­ing left-wing, I still retain a grain of my old right-wing sen­ti­ment. More to the per­sonal and less of the bull­shit from me: we all want to know per­son­ally how this is going to affect us in the shorter and longer term. I am close to retire­ment des­per­ately salary sac­ri­fic­ing since I regret­tably switched from defined ben­e­fit to pro­fes­sional gam­bling when the mar­ket was for­ever upwards. How is it fair to take from peo­ple like me sav­ing for retire­ment to donate from those who have not done so? I don’t grudge them the money, but surely there is another source of tax­a­tion — such as cap­i­tal gains? Can I ask you to address this in pass­ing?

  • DrBob127

    I think that a prob­lem is that in the cur­rent cli­mate the cap­i­tal isn’t gain­ing.