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.
Hi Mahaish,
I agree with your post on the bet. Steve seems to be prepared to walk because a less than 20% peak to bottom would occur in the next cycle. However, if over the cost of 10 to 15 years a peak to bottom of Steves predicted magnitude occurs will rory walk? I doubt it probably Steve and rory must have taken it offline and agreed to something or Steve thought the decline is underway and would continue not expecting to loose the bet on this technical ground. One thing for sure is if Steve walks thats it!
Hi Steve Keen!
Let’s hope you teach them well for them to see the utter foolishness of their currently bubble-blowing government. Hopefully, some of them will climb their way up the government economics job ladder.
Good grief… the private debt to GDP ratio in China surged from 122% to around 148% in around 6 months!
KBH,
I do concede that neither the church (1st estate) nor the laws/parliamentary systems have really been very successful at restraining sociopathic behaviour. The inquisitions are one example of that failure in the case of church, in the case of law there is China.
Reflecting on China, it seems to me that it was a beautiful culture (relatively speaking) where even peasants wore silk. It also could have provided the rest of the world with a model for sustainability as it maintained a large population over centuries without the damaging hacks (chemicals/fertilizers/fossil fuel machinery) that we rely on.
From my limited understanding it seems that the motives and methods by which China of old was destroyed can be described as nothing less than pure evil. A few wealthy western individuals co-opted state armies to force opium upon the chinese to satisify their own greed. This resulted in the majority of young men becoming opium addicts. In return they extracted porcelain, silk and other goods. The westerners in this case were in effect drug lords. Indirectly they caused the environmental disaster, and possibly soon, the industrial disaster that is modern day China. An immature, overpowered culture toppled a mature, long standing giant among civilisations.
So I admit that if the mighty, ancient civilisation of China could not stand against the forces of greed/capitalism, it would certainly require something very exceptional from everyday people like you and me. However, if it should collapse under its own weight, it might provide an opportunity to learn and recreate something admirable from its lessons. Of course you might be correct, this might require us to give most of our mineral and fossil fuel resources to the Chinese in lieu of our debts that they may well end up owning.
MMitchell
Whether the Chinese culture was “beautiful” or not, I really don’t know. Many cultures have had their ‘golden’ periods. China has suffered it’s share of internal wars, power struggles, invasions, cultural clashes, suppressions & revolutions.
My view on history is that all societies go through the same phases, and they all end in decay & corruption. The same happens in nature, say in the growth & demise of a tree.
What I was trying to show in the few posts on this subject, was that businesses go through the same cycle. But there is a renewal process that works. It means changing the short term focus & assumptions. It’s painful, yet it’s stimulatory and increases the likelyhood of survival.
Individuals & countries can do the same, but they must be prepared to endure pain in the short term, and revisit the assumptions/beliefs that create create complacency & ossification.
Life & the world is dynamic.
Credit Suisse brokers facing trial: accuesed of lying to hide debt risk
http://www.news.com.au/business/story/0,27753,25895247-462,00.html
clive
here’s some more dodgy brothers
http://www.zerohedge.com/article/feds-ust-pomo-pyramid-scheme-exposed
Steve
Without your grasp of the current dynamics of the endogenous money creation system versus the fiat one I feel a constant need to ask questions like the following. Do these fed dealings alter your expectations of the fed’s ability to create inflation?
KBH,
KBH,
I see what you are saying. I interpret it as:
“There are cycles of good and bad times and people in power will commit all sorts of crimes. We should not worry about this, it is the natural order. There is nothing we can do about it.”
If I and everyone else accept this statement then we should just express our frustration in some futile form (perhaps poetry) while we get on with our lives, let the criminals run society and hope they don’t enslave or kill us.
KBH
Hang on a second – maybe it is already too late? Aren’t we all already debt slaves? We must be at the end of the cycle – things can only improve from here!
ak,
“It worked in the 1990-ties during the boom but now it has become one of the main factors working against us.”
I don’t see how IPR ‘worked’ during the 1990s but not now. In fact, I don’t see how it ever could’ve worked since IPR was invented around the 15th century, given the alternatives today.
As ‘TheEngineer’ has pointed out, the IPR system works for his/her firm, but this is no evidence that there is no better system of technological advancement. Clearly there is for many industries covered by IPR.
One book that altered my thinking about IPR is: Boldrin, Michele and Levine, David K. 2008. Against Intellectual Monopoly (UK: Cambridge University Press). It is available online at: http://levine.sscnet.ucla.edu/general/intellectual/againstfinal.htm
Before I read this book and subsequent articles, I thought that every area covered by IPR required an alternate system to replace it. Not so. The book is packed with examples from ancient and modern-day technologies that were created in spite of, and lacking, IPR. In some areas of the economy, having no government intervention in the form of IPR or any alternate system (allowing maximal competition) would actually be the best policy to pursue.
The government can create it’s own ‘Software Development’ department which would employ tens of thousands of IT professionals in permanent full-time jobs to create a never-ending stream of software which is deemed relevant and useful to society. All software products would be available for free (at its marginal cost) or delivered by post.
An extensive network between the state, university and open-source sectors would result in the advancement of software R&D light-years ahead of what the private sector could do under IPR.
After all, hardware and software technology was created by the state-university system in the US & UK over the decades where the risks and costs could be socialized so that Bill Gates and Michael Dell et al could privatize the profits.
Software in the form of digital information has the characteristics of a public good so I fail to see why it is been perverted into a private good.
Boldrin and Levine show that software firms would still exist in the absence of IPR. As you would know as an IT professional, a lot of software (not all of course) requires a great deal of after-purchase support and maintenance. The mean and lean private sector firms would still exist but I wouldn’t hold out much hope for Microsoft et al.
In summary, the burden of proof lies upon those who advocate IPR, not those who criticize it. Till this day, the burden of proof has never been met (now into the 7th century and counting).
It continues for two reasons: (1) it is simply (but falsely) assumed that IPR is the best method of advancing technology and (2) business as a system of power is never going to give it up.
Much like the new atheists (Dawkins et al) who go out of their way to show that religion is dangerous even though the burden of proof is upon the believer, others will have to do the same with IPR because it is simply too dangerous (especially in pharmaceuticals) to exist.
MMitchell
No I’m not saying that – you have made a bizzare summation.
Among other things, I said “There is a renewal process that works. It means changing the short term focus & assumptions. It’s painful, yet it’s stimulatory and increases the likelyhood of survival”
You may think it’s just poetry. I believe in action. The developing world is getting motivated while our complacency will cost us dearly.
No more philosophy for the moment, let’s just agree to disagree. Thankyou.
http://globaleconomicanalysis.blogspot.com/2009/08/dismal-unemployment-situation-in-chart.html
An excellent breakdown of the ongoing jobs crisis gutting the US. This is where 70% of US GDP (20+% of global gdp) is originating and it’s looking very sick indeed.
I have a few questions about real estate prices that I can’t seem to find answers to. Most people seem to think that houses only ever go up, however, the banks have been lowering their Loan to Value Rations (LVRs) recently. Doesn’t this imply that the banks think that houses are going to go down in value? Also, apparently mortgage insurance premiums are going up. Again, doesn’t this imply that they are expecting defaults to go up?
What am I missing?
KHB,
I must apologise for that last post. It was cynical. Seems I am becoming a grumpy middle-aged man. In fact I need to thank you, because I think you have helped me work out something that is very important (I had some help from a colleague over lunch).
You are right, things do go in cycles. This is unavoidable. What we have now is that most countries economies are so interconnected that we effectively have one massive system. When this system crashes the effects will also be massive. If there is war it may well be global.
This is exactly why we need decentralised, localised economies. Then there are many systems operating at once. All will be at various stages in their cycles, some will be crashing some will be thriving, however, it is unlikely that the entire system will crash at once. This requires that each one keeps out of each others business, as if we start to get one group that says it knows best how to run another, then we get centralisation starting again.
The reason our system is crashing is related to what was said – I think it was Jefferson – that democracy requires vigilence. However, unless changes and decisions impact significantly on peoples lives, they are unlikely to take much interest or take action. Over time the vested interests take over. Localised ecomonies in fact might be less suspectable to crashes because changes and decision making does more directly impact peoples lives.
So thank you KHB for helping me with this. I apologise for my thoughtless and rude statements earlier.
Hi BTB,
I cannot see any dramatic trend reversal this year upto mid of next year. Right now we are seeing the effects of the stimulus and MSM keeps talking about a recovery so sentiment will not change even if there is a stock market correction. Once the stimulus effects subside and if things revert to what it was before then I expect the correction to happen. According to me we they might have postponed it a few years ahead and who knows how much stimuls they will apply then? Who knows what is the limit and when this occurs? The reality is people like us may wait and wait and wait….. and not enjoy life hopelessly engrossed in all this and hoping for a crash when it may be years off?
So the only conclusion I can reach is live within your means. If you cant taken on a pile of debt then dont. If you have substantial savings so that your debt is considerate is it really worth to differ buying because prices could fall substantially in 5 to 10 years?
This is my current sentiment
Philip,
The situation in mid-1990ties was different because there was boom financing of the IT sector in the US. That’s why it worked so well. After the burst of the last big bubble circa 2001 we are left with a more “mature” ecosystem dominated by semi-monopolies.
There are constant attempts to seed a new bubble in the form of Facebooks, Twitters etc but this will not change much. The “good” times will never return again.
I am in favour of getting rid of software patents and retaining copyright protection of the code. The rights of vendors should be slightly trimmed to enhance customer rights (there were attempts to delegalise re-selling of a license). Reverse-engineering should not be prohibited (people do it anyway).
Open source and closed source could coexist quite well or compete in some environments. Banning closed-source software seems ridiculous to me. It is as ridiculous as attempts made by Microsoft to undermine the open-source ecosystem.
If I write code I can decide what to do with it.
The problem is with the environment created by and for the behemots and with the current financing model. The financing model in China or Singapore involving the state may be better on the long run than big fat corporations and “venture capitalists” of the wild west.
I would like to see a government-financed project in Australia like “build a rocket capable of delivering people to the Moon” but related to new carbon-efficient economy. This is the proper place for open-source.
For example a project “Modern City 2030″ should start in Australia with an initial $10bln research budget. New vehicles, new urban design, new public transport concepts, new tools to work remotely and avoid travelling. This is way better than FHOGs.
Does this sound anything like a recovery?
http://www.reuters.com/article/businessNews/idUSTRE5745JP20090805?feedType=RSS&feedName=businessNews
“The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday. Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.”
“We project the next phase of the housing decline will have a far greater impact on prime borrowers,” Deutsche analysts Karen Weaver and Ying Shen said in the report. Of prime conforming loans, 41 percent will be “underwater” by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said. “The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding,” the analysts said. Prime jumbo loans make up 13 percent of the total market.”
marvenger,
It depends whether the credit created by the fed is sufficient to negate the endogenous credit being destroyed.
I think Steve would say it’s not nearly enough, and therefore the fed is reducing deflation rather than creating inflation.
Whether it has this effect permanently depends on whether the US Govt ends up paying the debt back to the Fed or not.
Bullturnedbear, I really enjoy your posts. Many of your predictions from times gone by have been pretty accurate.
Peter Si, you ask a very good question. The MSM and self interest groups are playing their cards very close to their chests. A good friend (RE Agent) is putting another auctioneer on to handle a specific caseload of mortgagee sales in a 1st/2nd homebuyer’s market. Some weeks they’ve had 10! Interestingly, they won’t advertise the auction as a mortgagee sale because it ‘depresses the market’.
On a similar note, he tells me vendors and agents in a popular coastal town are purposely avoiding mass advertising of their properties. Whilst 50-70 may be public, an equal if not greater number can be inspected at the agent’s discretion. This is the same town that recently commanded a two page spread in a major suburban newspaper under a heading of ‘boom times are back’ or the like.
I wouldn’t be hasty in admitting defeat on this one Steve. If the property bulls are so confident they won’t mind a double or nothing.
Perhaps they’ll even consider a taste of their own medicine……conditional upon the RBA raising monetary policy (by say 4.25%!) and the feds slapping a $39K tax on first homebuyers. We may then have a level playing field from which to lay a bet. That shouldn’t be a problem, after all there is a shortage of property isn’t there?
Marvenger,
Thanks, great Whitney article. It blows away the Govt and MSM propaganda we are being subjected to on “green shoots” and “recovery”.
This one also explains why the US growth story is a myth;
http://globaleconomicanalysis.blogspot.com/2009/08/wages-and-salaries-fell-47-most-on.html
“Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday.”
So, with 70% of US GDP dependant on consumers ;who are increasingly jobless, sufferring paycuts, lowered workhours and increasingly impoverished as property price declines send them underwater on mortgages; we are expected to believe recovery and growth are underway and the worst is past.
With their propoganda, Govts and their MSM are banking on their citizens to be and behave like imbeciles. Like lemmings- following one another blissfuly off the debt cliff.
1. “The extraordinary profit is required to recoup the outlay made in developing the product in the first place. Without it, you serverly, if not eliminate all together proper development structures.”
Oh yes here is one of the greatest inventions we want to protect – the infamous 1-click from Amazon. Without the adequate protection the development structure may be eliminated – I wish it happened today.
http://en.wikipedia.org/wiki/1-click
“Method and system for placing a purchase order via a communications network”
http://v3.espacenet.com/publicationDetails/biblio?CC=US&NR=5960411&KC=&FT=E
I don’t want to waste time and space here discussing more similar “inventions”.
……
Then why create a strawman argument to begin with?
The “1-click” is hardly the sole or pinnicle of human creative endeavour.
The IPR system protects the financial outlay the enterprises risk to advance technology. Come up with an alternative.
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2. “Sorry, this is just contentious.
The chinese haven’t invented and spread a global reaching piece of technology since the wheelbarrow.”
Microsoft has hardly invented any piece of technology either. True, they wrote some code spending gazillions of dollars on something which has an open-source functional equivalent (often working better).
….
That is why the second criteria of my quote is ‘spread’. Microsoft has also made an incredibly complex piece of technology accessible to laymen, and provided the support systems for it to be deployed on enterpirse wide scales.
Both are things open-source technology has failed to provide for.
Most enterpirses will not deploy these systems for two reasons.
1) The systems are too complex for most users to operate
2) If failure occurs, there is no one to repair it, or it is too expensive to repair.
Alleviating the risks associated with 1 and 2 is why microsoft has succeeded.
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“The guy who invented this stuff was called Alan Turing
http://en.wikipedia.org/wiki/Alan_Turing
and was forced to commit a suicide because he was gay. This was his reward which he recieved from the British society.”
….
And this is a problem that can be resolved by abolishing IPR laws how?
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“Regarding the Chinese they simply make products and compete with our manufacturers. We are happy enough to give them unfair advantage by defining constraints on our development process in the form of IPR. They also pay lip service to IPR but it is obvious how it works there.”
…
Yes, it is very obvious, my wife used to work in IP law for companies moving from Australia to China.
The concessions in regards to IP are being made for access to market share. Everyone knows the game.
However, China can rip off all the IP it wants for domestic consumption and low-tech global consumption. However once (if) it reaches parity, then it has to use its own ingenuity to the progress ahead of everyone else.
As I said, they haven’t displayed this sort of ingenuity since they gave us the wheelbarrow, and they don’t really have the social infrastructure in place (see singapore) to indicate they will if such a time comes.
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“We will get what we are asking for once they get enough sophistication what will happen very soon. TD-SCDMA is an example of technology created to avoid paying patent ransom fees to Qualcomm.
“The Chinese government wants the Chinese 3G technology, TD-SCDMA, to gain a 20 percent share of the overseas 3G market by user number by 2020, according to a long-term development plan for mobile communication drafted by the Ministry of Industry and Information Technology (MIIT), an industry expert told Interfax on June 2.”
http://www.cn-c114.net/583/a418611.html”
…
Once it is technology deployed outside of China, then they will be subject to those respective sovereign IP laws.
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3. “There has never been a long-term under-utilisation of labour capacity. In fact it looks to be quite the reverse. We will never saturate ‘demand’.”
Demand for what? Ringtones for mobile phones? Financial services? Oversized 4WD cars? Or maybe food as I think that there are indeed people dying of hunger in some countries.
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Ringtones, Financial Services, 4WC’s.. yes. That is what the population are choosing. This labour is allocated here not for fun, or out of a random algorithm allocating them there, but because of this choice.
And they can be provided because less labour is required in the farms and factories while providing the same output.
Are you advocating less choice?
Are you advocating everybody work less hours?Are you advocating this labour return to the farms to provide surplus food and factory goods?
We have surplus food, we have surplus resources to provide for starving people.
These starving people have ben receiving aid for decades and it doesn’t appear to be relieving their hunger. I would suggest the problems that exist here have nothing to do with how we allocate our resources.
So I can’t see a coherent structure you’re proposing here either.
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There was no underutilisation of labor in some Western countries because of the Ponzi financing. That’s why we are having GFC now.
…
OK, there has been a misallocation of resources, I agree with that.
But the system does sem to provide us with the best possible outcomes out of every system trialled, and with that we must accept the downsides that occur with it.
But until I see a proposal that indicates something better, what is it you want from people reading your posts?
MMitchell,
No problems –
Interestingly, history shows some of what you speak of in a broarder sence.
This is history -
When the Western Roman empire broke up (5th Cent), it was succeeded by numerous smaller states.
These were amalgamated again by Charlemalne (8th Cent) and his successor to forge the Holy Roman Empire, which lasted 1,000 years.
It was shattered again by the French Revolution (18-19th Cent) & it’s consequences, which gave birth to modern Nationalism.
Hilter tried to revive a version of the Roman Empire (Germanic), but was thankfully defeated.
Late in the 20th Century, globalization has worked to create yet another stranger version of it.
Because of technology (communication & transport), the areas involved are larger, but the concepts seem similar. This time the rulers are the bankers, captains of buiness & politician.
Most cycles started with a form of logical justification for the times.
Each produced plenty of sociopaths, corruption, violence & warfare, and generally ended with a bang, when the moral bankruptcy of those in power could no longer be hiden or contained.
Looks much the same to me this time.
“That shouldn’t be a problem, after all there is a shortage of property isn’t there?”
I have found that that there is indeed a shortage. You may call it an artificial shortage or whatever you like but a shortage is still a shortage and that is it. This determines buyers to pay more by taking on more debt. Whether Banks should be capping the loans to reduce price hikes is an entirely different question. I have been busy for the last 9 months and found this to be true.
KBH
Yes, thanks for that. I am very comfortable now with this as an explanation of what has happened and why in an abstract sense.
Reconciling the problem of cycles which you raised and my desire to be able to know what to do about our problems was what was causing my frustration. I am confident that the solution to such problems in the future (at least problems on a grand scale) is to avoid empire building entirely and instead work on better cooperative approaches between sovereign regions, perhaps nations but in the case of Australia and America probably much smaller. I don’t think this needs to exclude high tech advances, jointly funded central or distributed universities could be used to create social IP in conjunction with perhaps regional organisations that specialise in particular industries. Similar agreements could be made for military protection and disaster assistance. The benefits of this is that by having multiple parties involved in military decisions and operations we might avoid suspicions about secret operations around the globe and have more barriers to entering conflicts. Closer local communities might also eliminate both the threat and need for our draconian terrorist laws.
The problem Joshua isn’t so much a shortage per se, it’s more about expectations. The last time I drove through the likes of Toorak or Vaucluse strangely enough I couldn’t find any new estates there! We recently entered the rental market full of kids and pets and had properties thrown at us, some with offers of free weeks thrown in. I’m not buying this shortage talk, you may be surprised at the elasticity that exists once the chickens come home to roost. People need to lower their expectations a little.
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.
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.
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.