Rudd’s essay is on the money
on July 27th, 2009 at 9:06 am
Australian Prime Minister Kevin Rudd has followed up his critique of neoliberalism with a new essay in the Sydney Morning Herald on the causes of the crisis, and the policies needed after recovery.
With one exception, his key explanations for the crisis are the same as those identified by myself and the handful of other economists who predicted this crisis before it happened:
The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom… However, as we later learnt, the global boom was built in large part on a three-layered house of cards.
First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: “For 25 years [the West] has been consuming more than we have been producing … living beyond our means.”
In the United States, in particular, consumers went on a long, debt-fuelled shopping spree. Household debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The commentator Bill Gross summarised the US consumption boom as: “For too long it’s been McHouses, McHummers and McFlatscreens, all financed with excessive amounts of McCredit .. What a colossal McStake.”
Australian consumers also spent up big. Between 1996 and 2007 there was a 460 per cent increase in credit card debt, a 340 per cent increase in household debt, a 450 per cent increase in corporate debt and a 200 per cent increase in net foreign debt.
Second, these debts were racked up on the back of skyrocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts. The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007…
The finance sector, rather than servicing the needs of the real economy, began to primarily service itself.
The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits. From 1999 to 2006 the US current account deficit more than tripled, from $US63.3 billion to $US214.8 billion, balanced by huge surpluses in other countries, especially China. (the emphases in these and subsequent quotes is my own)
The only element of that with which I disagree is the third point–which I’ll get back to later on.
Rudd also provides some interesting “insider’s” statistics on the size of the collective efforts taken by OECD governments to try to limit the scale of the crisis:
On the fiscal front, governments from the world’s largest 20 economies are expected to collectively pump about $US5 trillion into their economies by the end of next year (or nearly 8 per cent of global GDP since the crisis began). Altogether, the measures are the equivalent of an extraordinary and unprecedented 18 per cent of global GDP.
That’s an extraordinary injection–against which the scale of this crisis should be apparent. Inject an additional 18 per cent of activity into a global economic system over about 3 years, and yet the system still falls by about 6 per cent over that period? Without that intervention, output could have fallen by 25 per cent over 3 years, which is a Depression in anyone’s language.
Where I differ again with the Prime Minister is over whether this government stimulus alone is sufficient to avoid a Depression. Though his case is far more nuanced than most, the “green shoots” phrase nonetheless gets an airing:
We have already begun to see the results. Early signs of “green shoots” have emerged in recent economic data. And this month the International Monetary Fund revised up its forecast for the global recovery, from 1.9 per cent to 2.5 per cent growth next year. An IMF report this month noted “the world economy is stabilising, helped by unprecedented macro-economic and financial policy support”. The truth, however, is the world is still a long way from recovery.
The extent to which Rudd is “levelling” with his audience is also quite welcome:
The average budget deficit for OECD economies increased more than sixfold, from 1.4 per cent of GDP before the crisis in 2007 to 8.8 per cent of GDP in 2010. Public borrowing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.
Australia’s deficit and debt position have inevitably been affected, albeit much less than in other advanced economies. The combined effects of collapses in revenue ($210 billion) and policy interventions to support our economy ($77 billion) are expected to result in a deficit that peaks at 4.9 per cent of GDP in 2009-10. Net public debt is expected to rise to 4.6 per cent of GDP this financial year and peak at 13.8 per cent of GDP in 2013-14. Both are the lowest by an order of magnitude of all major advanced economies.
Clearly, government global action has come at a cost. But as the IMF argued earlier this year: “While the fiscal cost for some countries will be large in the short run, the alternative of providing no fiscal stimulus or financial sector support would be extremely costly in terms of the lost output.”
Without government intervention, global growth, global unemployment and prospects of global financial recovery would be much, much worse.
We never got to see whether Howard or Costello would have provided a reasoned explanation of policies in the light of an economic catastrophe, because they never experienced one–instead, they were amongst the lucky incumbents who held office while the global financial excess that caused this crisis held aloft the illusion of prosperity, and lost office before The Piper called to collect on The Tune.
Had they held on to power, I have no doubt that they would have–by force of necessity–been undertaking very similar fiscal policies to those Rudd now is (though the additional expenditure may have gone on the military and border patrols rather than ports and schools). Whether they would have presented as reasoned an explanation for their actions I think would have been less likely.
Rudd also revisits the anti-neoliberalism theme of his previous essay:
As I have argued elsewhere, the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector. The central principles of this extreme form of capitalism are that markets are self-regulating; that government should get out of the road of the market altogether and that the state itself should retreat to its core historical function of security at home and abroad.
As someone who has long argued that the economic theory that underlies neoliberalism (Neoclassical Economics) is intellectual drivel, I of course support this critique.
Where I beg to differ is Rudd’s dating of this–merely the last decade? We’ve been following Neoclassical-Economics-inspired policies ever since 1975, including under the preceding Australian Labor Party government of Bob Hawke and Paul Keating (or since 1973 if we include Whitlam’s 25% overnight cut in tariffs). And of course, the last decade wasn’t one of boom and bust around the globe, which was partly the problem: the mild US downturn after the 2000 Stock Market Crash occurred because the huge runup of private debt-financed spending that was the Subprime Crisis overwhelmed the negatives of the DotCom swindle, and of course set us up for the far bigger crash we are now experiencing.
The absence of economic downturns since 1993–and the mildness of the mainly US recession after the DotCom Bubble burst–played a large role into deluding neoclasssical economists like Bernanke into believing that they had tamed the trade cycle in what they termed “The Great Moderation”:
… the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility…, a phenomenon that has been dubbed “the Great Moderation.” Recessions have become less frequent and milder, and … volatility in output and employment has declined significantly… The sources of the Great Moderation remain somewhat controversial, but … there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy … (Bernanke, 2004)
Bollocks to all that. The prediction I made in 1995 in my paper “Finance and Economic Breakdown: Modelling Minsky’s Financial Instability Hypothesis” has stood the test of time rather better:
From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind which Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm. (Keen, 1995)
A Nascent Recovery?
Like most global leaders, Rudd is now speaking as if recovery has already begun. But to give him his due, even here there is a word of caution:
The first phase of Australia’s response to the global crisis has legitimately focused on crisis management, emergency interventions and implementing a strategy for recovery. But we must now deal with two challenges that arise in the context of a possible recovery.
There is also welcome realism that a debt-financed recovery is barely possible and certainly undesirable, and an awareness that deleveraging and deflation are the major risks facing the global economy.
This crisis has shown we have reached the limits of a purely debt-fuelled global growth strategy. Not only will the neo-liberal model of the past not provide growth for the future, its after-effects will make recovery more difficult. Mountains of global public and private debt, global imbalances, and a weakened global financial system will drag on global growth for a long time. As the renowned financial columnist Martin Wolf has written: “Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect.”
Since Rudd has properly entertained the prospect that the next decade will be dominated by deleveraging rather than rising debt levels, let’s get a handle on what that might mean for aggregate demand over that decade.
Australia has experienced two previous bouts of deleveraging, in the Depressions of the 1890s and 1930s. In both those previous Depressions, deflation and falling real output drove the debt to GDP ratio higher after the onset of the crisis–something we have yet to experience–after which the painful process of deleveraging began.
In the 1890s, we began with a debt to GDP ratio of just over 100 per cent, which then fell to a low of roughly 40 per cent over a 15 year period. In the 1930s, we started with a lower level of 75 per cent, which fell over a similar period to a low of 25 per cent–but the Second World War clearly accelerated the deleveraging process, which prior to then was running more slowly than after the 1890s Depression.
In the Figure above, these historical episodes are fitted by an exponential decay process. The rate of decay in the 1890s was roughly 4% per year; it began at roughly 3% in the 1930s prior to the War, but over the entire period including the War it fell at an average rate of 8% a year.
There was no policy intervention to accelerate economic recovery in the 1890s, so 4% might be taken to be the endogenous capacity of a Depressed economy to de-lever, whereas 8% can be regarded as a policy-accelerated rate (where however that “policy” was an arms race during a global military conflict). Both these rates are considered as hypotheticals for reduction of our debt levels today.
Taking 50% of GDP as a level at which normal economic activity might resume (higher than the 40% level that applied in the 1920s and 25% level of the 40s-60s), this implies that deleveraging could take anywhere between 15 years (at the accelerated 8% rate) and 30 years (at the “natural maximum” 4% rate).
We can get a preliminary handle on what this might mean for economic growth by calculating the percentage of GDP represented by each year’s deleveraging–effectively by converting the percentage reduction in debt each year into a fraction of GDP for that same year (this ignores feedbacks between the rate of change of debt and GDP itself, but it will do as a first pass). In the first year (2009) when debt started at 165% of GDP, a 4% reduction in debt levels is equivalent to a 6% reduction in GDP; the size of this hit then falls as the debt to GDP ratio itself falls.
The following chart shows each year’s deleveraging as a percentage of GDP, at the rates of 4% and 8% per year:
We are currently deleveraging at the 4% rate, and debt has fallen from 165% of GDP in March 2008 to 159% today–a 6% fall as a percentage of GDP, as noted above. At this rate, debt will not fall below 50% of GDP until 2038, and the annual reduction in debt will be equivalent to 3% of GDP until 2028.
To compare this to what happened during the 30s and 40s, the next Figure shows the impact of deleveraging in the 1930s: the actual 3% rate that applied from 1932 till 1939, what a “natural maximum” rate of a 4% fall per year would have meant as a percentage of GDP, and how bad things might have been without a World War if the achieved rate for 1932-45 of an 8% reduction had come via reducing debt rather than increasing GDP via a huge militarisation effort.
Even the worst rate of 1930s deleveraging (including WWII) only just compares to the impact of deleveraging today at the 4% rate–because the debt ratio in 2008 peaked at 2.2 times the peak level in the 1930s. And throughout the 1930s, deleveraging never subtracted more than 3% from GDP–again because debt was so much lower then than it is now.
While Rudd is therefore aware that deleveraging will probably be the defining economic experience of the next decade, I doubt that he is aware of the scale of its potential impact. Though Treasury–if it has had any input into Rudd’s paper–seems more aware of the dangers of deleveraging than the RBA, deleveraging is surely not factored into Treasury’s economic modelling of the post-crisis recovery scenarios on which some of Rudd’s budget predictions are based. These presume a return to real economic growth of 3%+ by 2010, which imply a capacity for the economy to grow at upwards of 7% per annum in real terms, to counteract deleveraging subtracting more than 5% from GDP every year till 2015.
If we rely upon the “natural maximum” process of deleveraging, we face a 30 year period in which changes in debt will cut at least 3% from the growth potential of the economy
This is why I propose a far more radical policy to deal with the crisis than the government stimulus package that Australia and other OECD nations have followed to date. These policies are attempting to address a crisis caused by irresponsible private lending, yet they involve continuing to respect this debt. They attempt to counteract private deleveraging by running up public debt instead. And they drastically underestimate the impact of deleveraging: rather than achieving a return to growth by 2010, these policies alone are likely to result in zero or sub-zero growth for most of the next decade.
That private debt does not deserve respect. It was irresponsibly lent in the first place, and the financial institutions that lent it should pay the price–not the public nor the public purse–via deliberate debt reduction. This of course would bankrupt those financial institutions, but as should be obvious from the US experience, these institutions are effectively bankrupt already.
A Copernican Switch on Savings
I noted above that the one aspect of Rudd’s analysis of the crisis that I disagreed with was the proposition that:
The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits.
This is the “Savings cause Loans” perspective of the conventional model of money. As I explained in The Roving Cavaliers of Credit, this model is rather like the pre-Copernican view that the Sun orbits the Earth: it’s easy to understand (we still speak of “sunrise” and “sunset” after all) and also completely wrong. Just as the Earth orbits the Sun, “Loans cause Savings”.
The “excess savings” of the East were thus caused by the excess borrowing of the West. Chinese, Japanese and Middle Eastern accounts accumulated money because Western consumers and firms borrowed up big, and spent that borrowed money buying goods produced in China, Japan and the Middle East. Now that the borrowing binge in the West has come to an end, those “excess savings” in the East should start to diminish.
Conclusion
Rudd’s essay shows a stronger appreciation of the causes of this crisis, and the fragility of the economy in its wake, than I’ve yet seen from any other official source (with the sole exception of the Bank of International Settlements, where Bill White‘s influence appears to remain, even though he is no longer its Economic Adviser–check this story on Bill and his forlorn attempts to raise the alarm during the Bubble).
Its one weakness is continued reliance upon neoclassical economic models to predict the future course of the economy after this crisis–when those same models ignore the role of private debt (which caused the bubble in the first place) and deleveraging (which will in fact drive the future course of the economy).
We can expect Rudd and Swann to continue with a large scale fiscal stimulus, in the hope that this will end the crisis. The next stage will come when this stimulus fails to achieve the level of growth predicted by neoclassical economic models, and as a result unemployment exceeds forecasts, public debt continues to run up, and deficit reduction strategies get pushed back in time.
So though Rudd is aware of the problem of deleveraging, he hasn’t yet taken developed policies that directly tackle it. But awareness of the problem is a necessary first step in addressing it, and Rudd has taken that first step.
PS Gittins on the Boil
Ros Gittins wrote a far less flattering review of Rudd’s essay in this morning’s SMH (Rudd’s new bogy: fearing the pain of recovery, SMH July 27 2009).
There were a few elements of his argument I agreed with, but most of it I reject. The points he made that I agree with include:
- That Rudd’s definition of neoliberalism is bogus–or at least incomplete. As Gittins puts it:
“The notion that the Libs could be fairly described as “neo-liberal free-market fundamentalists” is laughable.
And yet Rudd boasts about the success of the Hawke-Keating government’s micro-economic reforms and promises more reforms of his own.
Micro-economic reform and neo-liberal mean the same thing. As an ideological warrior, this guy’s a phoney.”
True–as I noted above:
We’ve been following Neoclassical-Economics-inspired policies ever since 1975, including under the preceding Australian Labor Party government of Bob Hawke and Paul Keating (or since 1973 if we include Whitlam’s 25% overnight cut in tariffs).
- The false claim that our national balance sheet is healthy:
“He boasts his intention is to maintain Australia’s position as having “the best national balance sheet of the major advanced economies” (I didn’t know we were a major economy). Really? With a net foreign debt equivalent to 56 per cent of gross domestic product?”
True again. But Gittins himself has rarely (once from memory–see below) acknowledged the parlous state of private debt in general in this economy. Rudd’s essay did discuss that, and he drew the implication of the danger of deleveraging as well, which applies to all debt, whether owed domestically or overseas.
- And finally, the fact that most of Rudd’s reform agenda is no different to anything else proposed at any time in the last two decades–in other words that it’s still reading from the neoliberal script, which of course is written by neoclassical economists:
“First is regulation and competition reform… Next is infrastructure (nothing new here), innovation (the national broadband network “will arguably be the single greatest multiplier of productivity growth”; I certainly hope it isn’t the best we can do), skills (nothing new) and tax reform (waiting for the Henry report). Then comes the “broader reform agenda”: retirement income policy (waiting for Henry), health and ageing (may do something in response to the imminent report) and climate change and water (nothing new).”
But that’s about it. Otherwise
- Rudd had an accurate analysis of what caused the crisis, on which Gittins had no comment; and
- Based on this analysis, Rudd warned of the dangers ahead in deleveraging and deflation, while Gittins seems to have bought the “it’ll all be over by Christmas” sentiment. For instance:
“Rudd fails to explain just why it will be so tough to get the budget back to surplus. It shouldn’t be, when you remember that all the official stimulus spending is once-off and the budget’s “automatic stabilisers” will eventually bring back the revenue they took away.”
and…
“I’m starting to see the motive for all this talk about tough times ahead: you make it sound terrible so that when it turns out it isn’t so bad, voters are more relieved than angry. It’s spin, in other words.”
Yes there was certainly some spin there. But there was also a better appreciation of what caused this crisis than I’d previously seen from an international leader. In practice, Rudd may well have set the grounds for what is needed politically if, as I expect, things turn out to be a lot worse than most neoclassical economists and commentators like Gittins expect.
Anyone who read Gittins’s diatribe before reading Rudd’s essay would probably conclude that it wasn’t worth the effort to do so anyway. That would be a mistake. It’s rare that a major essay in a newspaper actually (a) identifies the cause of this crisis and (b) notes the dangers that lie ahead. The former has happened only once, so far as I can recollect in any of Gittins’s own columns (“It’s not inflation that did us in, it’s the borrowing“, SMH 08/12/2008–see my blog entry on this “Ross Gittins finally comes aboard“), the latter, never.
On that point alone, reading Rudd’s essay is a far more rewarding activity than reading Gittins’s critique.
More on China………………
This from yesterday’s Daily Reckoning penned by Bill Bonner (Who’s earlier books ‘Financial Reckoning Day’ & ‘Empire of Debt’ predicted our current crisis);
There are two big bubbles now. There is the familiar one in federal government debt. The other is the Peoples’ Republic of China.
Andy Xie says China is a ‘giant Ponzi scheme’ fed by new investors hoping to get rich. Of course, the China story is an attractive one. China’s growth rate is spectacular. Even in a worldwide financial meltdown…and the biggest depression since the ’30s…China is still growing at greater than 8% per year – or so the figures tell us. New cities are still being built…at a breathtaking pace. Stocks on the Shanghai exchange are up 80% so far this year. China has the biggest pile of cash on the planet – $2 trillion worth. And it has more bright, well-educated engineers, accountants and economists than anywhere else… In fact, it has so many economists trained at Western universities, it is almost sure to blow itself up…
Maybe this is the Chinese Century. Maybe it is not. Either way, it seems inevitable to us that the Chinese bubble economy is going to pop. Banks are lending three times as much as they lent last year. You can’t increase lending at that rate and still maintain credit quality – if there was any in the first place. A lot of buildings are going up that won’t find tenants. A lot of factories are expanding that won’t find customers. A lot of speculations are going on that investors will later regret. That’s just how a bubble works!
Mr. Xie says, for example, that the cost of property in China is about the same as in the United States. But wait, the average income in China is only 1/7th what it is in the USA. How can the Chinese afford American prices? Well, they can’t. They’re all betting on the ‘greater fool theory’ – that they can pay any price, because some greater fool will come along and pay more. Trouble with that is that the Greatest Fool of All finally shows up…and then the whole structure collapses.
AK,
are you suggesting that we adopt Scandinaviaism?
__
I must say that I am eagerly awaiting the next debtwatch report. This post has well over 300 comments and this pages is becoming a behemoth at over 1 MB in size.
It’s out on Monday right?
DrBob127,
I think that Steve should configure the website to display, as the default setting, the last 30 or so comments, and to also provide a link which allows users to see all comments. That way, both the webhost and users can save on time and bandwidth.
Rustypenny,
If I interpret your words correctly you think that there might have been a slight misallocation of resources but otherwise we live in the best possible system which has magic (to me) self-regulating properties.
….
I wouldn’t say a slight misallocation of resources, I’d say there has been a catastrophic misallocation of resources.
I also do not believe it is a system that has self-regulating properties, but self-correcting properties. The correction usually occurs via events unforeseen and undesirable.
That said I can’t see the correlation between this and your view on IP law.
—-
Personally I would not underestimate the capacity of the current neoliberal system to get rid of itself especially with a little help from the developing countries like China. The process of getting rid of itself is progressing remarkably well in the US.
….
Correct, I do not see the system as “neo-liberal”, rather it is a “neo-liberal” ideology in the pilots seat of the system. They brought all their hubris, wankery and social disorder, and now the system (as unforeseen and unwanted by the neo-liberals) is correcting them and their behaviour.
From the debris will arise a new tenant for the pilots seat, not all too dissmiliar from variations in the past. We will still have rule of law, IP law, seperation of the executive administration and the judiciary and individuals free (for the most part) to pursue what they believe to be best in terms of prosperity.
They may choose ring tones, 4WD’s and financial services, theymay not. But whatever they choose, resources will be allocated there by risk-taking enterprises, not decree from bureaucratic or autocratic forces.
—-
To clarify – I would like to see a mixed system replacing the current one (inspired to some extent by the Scandinavian social democracy experiments) rather than any kind of -ism.
….
What you’ve said is still as “-ism”.
If you look at some other WordPress sites with large threads eg. this one:
http://www.climateaudit.org/?p=6547
You can see they have turned on post numbering and various other features to make it easier to refer/quote/link to a specific post.
Dr Bob, Phillip and Ernie….you have my support on Steve’s blog problems.
It has become rather clunky that’s for sure. I think going forward, as the false dawn turns out to be a sour lemon, this site will see far more traffic. I have been an enthusiastic reader for more than 18 months now since returning from the UK.
Here in Australia we have a very limited supply of informative contrarian sites to go to in order to see the ‘REAL’ picture in Oz. Perhaps one of the main reasons could be, we as a nation, are far too optimistic in our economic outlook. When that changes (read sea change in attitudes towards debt) I think Steve will have his day in the sun….expect this site to get bombarded !
Come on Steve……you need to revamp a little so that all the contributors to your cause can get better use from your great site.
I believe Steve will have his day as well. I also agree with Bob comment, that is very difficult to get the true nature of what is happening in Australia. My feelings many people are doing it tough, however it is not being reported on. After all arn’t we being told by our Leaders that you only have to be optimistic.
I couldn’t believe that the economist from Access Economics describe the erosion of wages in Australia as beautiful.
If this has already been posted my apologies if not it’s a good read. It’s a rundown on how things look up to now. By Satyajit Das
On 14 June 2009, Wolfgang Münchau writing in the Financial Times (“Optimism is not enough for a global recovery”) eloquently summed up developments: “Instead of solving the problems to generate a recovery, the political strategies have consisted of waiting for a recovery to solve the problem. The Europeans are relying on the Americans to generate growth. The Americans are relying on the Chinese, who in turn are waiting for the rest of the world.”
The placebo effect is a pervasive phenomenon in medicine. A sham medical intervention may cause the patient to believe that the treatment will change his or her condition sometime causing the actual condition to improve. Conditioning, expectations and motivation all can play a role in placebo effect.
In recent times, investors, markets and governments have all come to believe in the ‘recovery’ sometimes by selective interpretation of facts to support the conclusion that they need. Given reluctance or inability to deal with the real problems, it is not entirely clear whether the GFC cures are real or inert treatments. It is also not clear whether current improvements in market and economic conditions are sustainable or merely a short-term placebo effect.
http://www.rgemonitor.com/globalmacro-monitor/257383/gfc_cures__placebo_effects
In regard to the site sometimes it’s a bit slow, perhaps they’re doing a backup. A reverse Ip doesn’t show that many sites on the server but then again I don’t know what’s driving it. Maybe pagination would help.
GB is really copping it.
Record number of insolvencies
A record number of people have been declared insolvent as the credit crisis marks its second anniversary, new figures showed on Friday.
http://www.telegraph.co.uk/finance/financetopics/recession/5987864/Record-number-of-insolvencies.html
Pjbink,
Sorry looking back over other’s recent posts I noticed yours.
“The Future Eaters” was written before Tim’s current expeditions into the scientific unknown. I accept that there is doubt about the role of the Aborigines on the mega-fauna etc. However, Tim’s real area of expertise is indigenous anthropology, and a lot of that book is about indigenous practices and cultures. I have not investigated his claims on Aborigines not hunting in their reserves, but I heard on my own travels around Australia of areas in which hunting was forbidden (can anyone else verify this?). There are also accounts from early explorers of Aborigines near-starving during droughts (sorry I cannot recall the source of this) so his account seems feasible to me.
Well Clive this line says it all;
‘Highest level since records began in 1960′
I remember when this GFC first started and all we could do was to compare to last year. As it got worse we started to compare to the last 2 to 3 years, then the last 5 years, then the last decade, then since 1987, then the 70′s. Now we have to go way back to the 60′s……..how long before we have to go back to the 30′s ?
And if it gets really, really, bad then what time in history do we refer to….the fall of the Roman Empire ?
Scary stuff !
Doh !!!
Forgot……not here in Australia though because we have Koala bears and Kangaroos !
There are accounts of aborigines near starving in the Sydney area too MMitchell, through being unable to catch enough fish. Also the early white settlers could only ever catch enough for immediately needs and there was ever enough caught for preserving even though they did have the means to do so. It does put some of the claims of overfishing today in perspective.
It’s understandable that they might begin to starve when food was scarce, but that they would do so when food was available seems far fetched.It does rather contradict his claim that they wiped out the megafauna in a blitzkrieg of hunting.
Folks – Last post tonite – Promise !
This just in from Bloomberg – The markets are going vertical….
‘U.S. Payroll Losses Slow, Unemployment Rate Declines (Update1)
Share | Email | Print | A A A
By Shobhana Chandra
Aug. 7 (Bloomberg) — The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time since April 2008, the clearest signs yet that the worst recession since the Great Depression is easing.
Payrolls fell by 247,000, after a 443,000 loss in June, the Labor Department said today in Washington. The jobless rate dropped to 9.4 percent from 9.5 percent.’
More MSM Spin or genuine green shoots ?
Herbicide Mr Steve Keen – where can we get some ?
Forget;
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAhwM5BTkOSU
AB
I watched the markets, the whole of Europe was negative, some -1.5%. Then AIG makes a profit. That’s right over billion. Yep that’s the same AIG that’s owned by the US taxpayer. The one that’s flat broke.
How about the way they collected the figures this time rather than do it through employers they did a household survey. probably Bernanke’s St. No one out of work there their all got jobs with GS. It really is institutionalised corruption.
I think it’s backfired though been to some of the traders sites and none of them believe it.
Sorry I lied,
That is the same AIG that Hank Paulson put over a barrel and had his personal way with, loaned TARP funds to and then his former employee Government Sachs – on cue – took it right back via the crooked world of credit derivatives.
Folks – I am starting to sound just like Max Keiser, Matt Taibbi, Satyajit Das, Mike Shedlock, Karl Denninger, Peter Schiff, and Steve Keen all rolled into one. It is an absolute bloody sham !
Oops started swearing…about time we all got very bloody angry !!!!
Steve
Thanks for the reply.
It sounds familiar. Corporate politics almost. If there’s no real reason for someone to strive for something better, they just need to appear correct and that suffices.
You can try to point out the errors, try to encourage a debate, with the intention of making something better, but in so doing they accuse you of looking for conflict.
I will try and persuade a friend of mine to take a look at this stuff – he teaches economics at a university here. He’s into Austrian stuff a bit though (anyone who grew up under communism think Austrian stuff is the bees knees). Maybe I can persuade him to get his students to do critiques.
All the best
I think that the common misconception about GFC is that it is Great Depression Mk 2.
It is not.
The underlying mechanism which triggered the slump is the same – debt deleveraging. The main difference however is the reaction of governments and central banks. I don’t know whether recession has been stopped on its tracks or whether we are heading towards second wave of bankruptcies in the European Autumn. If this happens more money will be pumped in etc…
Followers of the Austrian school of economics will be disappointed. Governments and financial oligarchies of western countries are not interested in preserving the value of money. They have to do whatever they can to prevent a collapse in the existing structures – even if these structures deserve to be thrown away immediately.
The social cost of letting the existing banks fall, temporarily nationalising the system to provide liquidity and credit to the real economy and re-privatising retail banks in a few years time when the crisis is over would be much lower than injecting trillions into the entities listed by Austrian Bob.
But everything is too big to fail (except for the finances of families in country towns – who cares?)
So we have already recovered from the recession. The next stage of the mess will be basically more of the same. Next little bubble then a bit of deflation and bailouts. You can always blow a bubble. This is our road to ruin.
First let me comment on the data from China. Yes they have enormous bubbles. Yes these bubbles will burst. No they don’t care. No this will not do much harm to their economy. Because they do not have to obey the same rules. It has been mentioned that some people reading this forum have personal experience with the communist system (including me).
Instead of choosing the path of least intellectual resistance (and following the Austrian rather than Marxist version of scholastics) we should rather apply our knowledge and experience to explain what is going on in China.
The system there in the microscale is clearly capitalist. Price signals are processed by the independent agents and owning of private property is allowed in order to motivate people to deliver higher return on invested capital.
However the system there in the macroscale is clearly controlled by the technocratic oligarchy. They are
responsible for the nation as a whole not for the wealth of transient structures (banks, corporations) and the middle class.
Which may work in some circumstances better than our system. Because of the artificially lowered costs of their labour compensating for slightly lower efficiency of the system. Not because the system is better in general.
There is no middle class in China and will never be as long as the Party rules. People with money are good if they build the wealth of the nation. People with money (and corporations) are bad if they want to influence the decision making process. This is not called a democratic process. This is called corruption and punished without mercy.
If someone is unhappy with the social order the riot police rather than psychologists can cure his disorder. One day you own a billion. Tomorrow all you have left is your communist party membership card – don’t worry, you will have another chance if you are obedient. If you are not happy you can go to the same place where Mister Hu can contemplate whether it is better to be loyal to the Motherland or to Rio Tinto.
The same applies to some extent to modern Russia. Putin can shout at Deripaska. Deripaska will do whatever Putin tells him.
http://www.thefirstpost.co.uk/48454,news,russian-prime-minister-vladimir-putin-humiliates-oligarch-oleg-deripaska-in-pikalevo
If Deripaska is unhappy he will be placed in the same place where Khodorkovsky lives. Just imagine Obama shouting at Wall Street executives or sending them to jail.
(Oh some of you would like to see them in jail for sure. But we live in free countries where rich people can do almost everything if they have good lawyers except for what Bernie Madoff did – this was too much. We live in free countries with freedom of expression – money is free to speak).
In China if your lawyer is too good he will go to jail with you.
So what will happen in China when the bubble bursts? Nothing special. The same thing happened there about 10 years ago. They had a period of hyperinflation during the war. They have been dabbling with the fiat money for the last 2300 years not only for the last century.
Some people will suffer losses and numbers will be reset. If the currency inflates because of the bubble – this is what they want to achieve. If there is a deflation they will print more money. This is how it works.
Dear Austrian Comrades from the Eastern block you should remember this. They don’t care about the interests of corporations, banks and middle classes or whatever rubbish we have invented in our society to give us excuses for our laziness.
But this is not a centrally planned economy. The productive economy is build on sound principles of free markets allocating workforce and goods. Without the IPR rubbish and hoards of corporate lawyers on what I have already commented. Corporate lawyers are treated as pests there (because indeed they are – sorry about that).
Now everyone will say to me – what you are writing is rubbish, you don’t understand anything from the economics, you are a communists hating corporations, a luddite or a moron. This will not work. The Chinese system is not as effective as the pure capitalism based on personal freedom, proper property rights (including IPR) and democracy. Once the dust settles from the current crisis the US will sprint ahead powered by the unlimited spirit (vodka? sorry they drink whiskey) of innovation and private enterprise.
We will see who is right. So far round 1 and 2 are for China. The system in China may be unstable but I think that they will start experiencing serious problems in 20 years time when they finish building their wealth and destroying the environment.
The myth of efficient resources allocation has been debunked in the Steve’s book by the way.
So we are back to the normal – 15% poorer (in terms of our wealth illusion) than in 2008. The process of destruction of the current global economic order will progress slowly. The Chinese will keep flooding the markets with cheap goods of ever increasing sophistication and quality (even if they have hiccups like bursting bubbles). The Americans will be happy to keep getting rid of any means of production and flexing their muscles-on-steroids everywhere they can (and can’t) do it. The Europeans will keep worrying about the inflation of their currency Deutsche Euro. The Russians will keep playing their game of 6-dimentional nuclear chess in Eastern Europe.
We may need maybe 5 maybe 10 years more of the “normality” for the next Suez Canal crisis to finally remove the shroud from the dead naked body of the American supremacy.
Of course I cannot exclude the possibility of another shock delivering a coup de grace to our neoliberal illusion of wealth much sooner.
hi paul andrews,
re the fed,
from what i gather , steve thinks benanke’s logic of the printing press isnt enough this time around,
only thing i would say , is that it depends on how much the electronic and real printing press is used and who the money is given too.
not much point bailing out bankers and their insurers, if they dont end up repairing the balance sheets of the people who actually owe the money.
i figure when plan A runs out of steam, plan B will be implemented, which will include the usual recriminations and scandals associated with plan A, benanke will be fired or at the very least sent on gardening leave, and then the government will start writing out a lot of cheques to its citizens who actually owe the money.
and all the while , foreigners who own greenbacks and other US assetts, will don their adult diapers and sit on the side lines and cheer, atleast until it dawns upon them how worthless their assetts may become in the long run.
then we will witness the distinctive aroma that eminates from the said diapers wofting through the forex markets of the world, as every body heads for the toilet door at the same time.
hi austrian bob,
funny you should mention the fall of the roman empire,
this isnt economics i know,
but how the jarvanese handle their own powder keg of an empire to the north of us, is going to have a significant bearing on our fortunes over the next 30 years.
the fall of rome or the constantinian split is going to look like a storm in a tea cup, compared to the troubles awaiting the jarvanese and as a consequence us.
Hi ak!
We believe that too.
But then, after talking to our Chinese friends in Shanghai earlier in the year, they told me that if the Chinese government let property bubble pop, it will screw up the economy.
In the larger scheme of things, maybe China will not be hit by a depression if their spectacular bubble burst because they don’t follow the same rules. But certainly, in the short term, it will screw up and piss off a lot of the richer middle class in the coastal cities.
In changing the comment structure of the blog (I only mentioned the size of this page, I was not complaining about the comments)
It may be easier to follow a thread of comments between two members in a hierarchical comment structure (like the comment structure at slashdot.org) however this may mean that newer posting are missed because you are focused on a different part of the ‘tree’.
I actually quite like the simplicity of this blog. Yes, it does mean that I have to read every comment that is posted, but I think that is one of the good things about this community; everyone’s point of view is recognized as being valid (mostly) and thus everyone’s comments are read by the community.
Yes this does place a higher ‘reading burden’ on all members, but I think that is what differentiates this blog from others is that most of us are willing to put in the time listening to what other people have to say.
I think that we should be wary about trying to change aspects of this blog (it is after all entirely up to Prof. Keen). I am not sure how the Prof sees the evolution of this community, but I do think that things are working so far.
The idea that we’ve have been following neoliberal policies since the 1970′s is laughable. Sure there have been moves to free up the market but it’s hardly been laissez-faire.
If companies and individuals (yes Howards “Aussie Battlers” and Rudd’s “Working Families” (a term which reeks of anti-bourgeois sentiment and alludes to red army hats and collective farms) were allowed to fail. Rather than fall in a plush net of government bailouts and social welfare.
Maybe then you could have argued that the failures of the past are due to neoliberalism. You may well say it’s Government interference with the economy that has led to the current situation (Fannie Mae, Freddie Mac, deficit blow outs in government expenditure etc, etc, etc)
Re #409: Hello Bankruptcy Ben,
The essay you’re commenting on was written so long ago that I had to check it to see what I had actually said.
What I wrote was:
“Where I beg to differ is Rudd’s dating of this–merely the last decade? We’ve been following Neoclassical-Economics-inspired policies ever since 1975″.
I stick by that comment. I didn’t use the term neoliberal but “Neoclassical-Economics-inspired” policies, and that theory of economics has been the fountainhead of virtually every change to government policy since that date.
Of course this doesn’t mean laissez faire has ruled since then: the first change in the direction of policy doesn’t immediately thrust us to its polar opposite. But I think it would be rather difficult to find a policy move that increased, rather than reduced, the effectiveness of government regulation of finance (in particular) since 1975.