Debt­watch No. 38: The GFC—Pothole or Moun­tain?

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The Marx­ian view is that cap­i­tal­is­tic economies are inher­ently unsta­ble and that exces­sive accu­mu­la­tion of cap­i­tal will lead to increas­ingly severe eco­nomic crises. Growth the­ory, which has proved to be empir­i­cally suc­cess­ful, says this is not true.

The cap­i­tal­is­tic econ­omy is sta­ble, and absent some change in tech­nol­ogy or the rules of the eco­nomic game, the econ­omy con­verges to a con­stant growth path with the stan­dard of liv­ing dou­bling every 40 years.

In the 1930s, there was an impor­tant change in the rules of the eco­nomic game. This change low­ered the steady-state mar­ket hours. The Key­ne­sians had it all wrong.

In the Great Depres­sion, employ­ment was not low because invest­ment was low. Employ­ment and invest­ment were low because labor mar­ket insti­tu­tions and indus­trial poli­cies changed in a way that low­ered nor­mal employ­ment.”

Obvi­ously, I did not write the above. The author was instead Edward C. Prescott, who shared the 2004 Nobel Prize in Eco­nom­ics for the devel­op­ment of real busi­ness cycle the­ory, in his 1999 paper “Some Obser­va­tions on the Great Depres­sion” (Fed­eral Reserve Bank of Min­neapo­lis Quar­terly Review, Win­ter 1999, vol. 23, no. 1, pp. 25– 31).

This state­ment is remark­able for a num­ber of rea­sons I’ll dis­cuss below. But though it is extreme, it does express a belief that is endemic in neo­clas­si­cal eco­nom­ics, that a mar­ket econ­omy is inher­ently sta­ble and will always return to a sta­ble growth path after a shock.

That com­mon belief lies behind the expec­ta­tions of econ­o­mists that, now that the GFC has played itself out, the econ­omy will return to trend growth and the emer­gency mea­sures that atten­u­ated its impact can be with­drawn.

From this per­spec­tive, the GFC was a “pot­hole in the road” caused by the Sub­prime cri­sis, a “change in the rules of the eco­nomic game” which is now behind us. With the dam­age caused by the cri­sis largely con­tained, nor­mal eco­nomic growth can resume. Over time, the unem­ploy­ment rate will return to pre-cri­sis lev­els as the eco­nomic car resumes its steady speed along the high­way of his­tory.

The alter­na­tive per­spec­tive is that the GFC was more akin to an abrupt change in the ter­rain. The “eco­nomic car” had been coast­ing down­hill with the grav­ity of ever-increas­ing pri­vate debt adding to the speed of the car. With the GFC we reached the bot­tom of the hill, and the car now has to drive uphill as it attempts to main­tain its pre­vi­ous debt-enhanced speed while also reduc­ing debt.

Visu­ally at least, the “change in ter­rain” anal­ogy stands up bet­ter than the pot­hole. I nor­mally show the debt to GDP ratio as a ris­ing func­tion, but the economy’s speed gets a boost as the increase in debt makes a pos­i­tive con­tri­bu­tion to aggre­gate demand, and is slowed down when delever­ag­ing reduces demand. So turn­ing the ratio upside down may give a bet­ter idea of the depth of the “Val­ley of Debt” into which we have fallen:

When Aus­tralia began its most recent descent into debt in mid-1964, the aver­age annual increase of 4.2% in the ratio added only a triv­ial amount to aggre­gate demand—since at the time debt was a mere 25% of GDP. But at the end of the debt bub­ble in 2008, when debt had become 165% of GDP, that same rate of debt growth added a huge amount to demand—the eco­nomic “car” gained speed as the slope of the debt moun­tain increased.

We hit the bot­tom of that moun­tain in March 2008, and now we’re start­ing to climb out of the valley—though not yet in absolute terms, since thanks to the First Home Ven­dors Boost, mort­gage debt is still grow­ing as busi­ness busily delevers (see com­ments on the data, below). But once delever­ag­ing takes hold, the accel­er­a­tion caused by rac­ing down Debt Moun­tain will be replaced by an eco­nomic car strain­ing up the Mount Debt Reduc­tion. This change in the ter­rain will con­strain pri­vate eco­nomic per­for­mance until debt has fallen sig­nif­i­cantly, as it did after the 1890s and the 1930s.

A sim­i­lar, if more extreme, pic­ture applies in the USA, where pri­vate debt is now 300% of GDP. In con­trast to Aus­tralia, the USA’s debt ratio began to rise as soon as WWII ended: on aver­age, US pri­vate debt rose 2.9% faster than GDP every year until 2008, tak­ing the debt ratio from 45% at the end of the War to 300% now. Delever­ag­ing from this level of debt must exert a sub­stan­tial break on eco­nomic per­for­mance, by divert­ing income from expen­di­ture to debt reduc­tion.

I am there­fore one of a minor­ity of eco­nomic com­men­ta­tors who regard “defla­tion and delever­ag­ing” as the main dan­gers fac­ing the global econ­omy in the near future (curi­ously, this minor­ity might include Aus­tralian Prime Min­is­ter Kevin Rudd). From my per­spec­tive, the Global Finan­cial Cri­sis marks “a change in the ter­rain”: for decades, ris­ing debt has tur­bocharged eco­nomic per­for­mance; now falling debt will be a drag on eco­nomic activ­ity.

The vast major­ity of econ­o­mists who per­ceive the GFC as a pot­hole on the road that is now behind us do not con­sider debt and delever­ag­ing in their analy­sis. Their mod­els have nei­ther credit nor money nor pri­vate debt in them, so from their point of view, there is no ter­rain at all beneath the car—merely a long flat high­way of his­tory along which the eco­nomic car dri­ves at the speed it is under­ly­ing “real” eco­nomic per­for­mance.

This fail­ure to even con­sider the role of pri­vate credit in a cap­i­tal­ist econ­omy is an endemic weak­ness in con­ven­tional “neo­clas­si­cal” eco­nom­ics, which ignores the dynam­ics of credit for a vari­ety of rea­sons that are both ide­o­log­i­cal and illog­i­cal.

The ide­ol­ogy is appar­ent in Prescott’s com­ments on the Great Depres­sion, quoted above. The lack of logic is evi­dent when you com­pare a key state­ment in that paper—that “Growth the­ory, which has proved to be empir­i­cally suc­cess­ful, says this is not true”—with the results of some very care­ful empir­i­cal research by the very same author just ten years ear­lier. There he (and co-author and Nobel Prize recip­i­ent Finn Kyd­land) con­cluded that the empir­i­cal data con­tra­dicted neo­clas­si­cal growth the­ory:

The pur­pose of this arti­cle is to present the busi­ness cycle facts in light of estab­lished neo­clas­si­cal growth the­ory, which we use as the orga­niz­ing frame­work for our pre­sen­ta­tion of busi­ness cycle facts. We empha­size that the sta­tis­tics reported here are not mea­sures of any­thing; rather, they are sta­tis­tics that dis­play inter­est­ing pat­terns, given the estab­lished neo­clas­si­cal growth the­ory.

In dis­cus­sions of busi­ness cycle mod­els, a nat­ural ques­tion is, Do the cor­re­spond­ing sta­tis­tics for the model econ­omy dis­play these pat­terns? We find these fea­tures inter­est­ing because the pat­terns they seem to dis­play are incon­sis­tent with the the­ory.” (Finn E. Kyd­land & Edward C. Prescott, “Busi­ness Cycles: Real Facts and a Mon­e­tary Myth”, Fed­eral Reserve Bank of Min­neapo­lis Quar­terly Review, vol. 14, no. 2, pp 3–18, p. 4).

One key pat­tern in actual eco­nomic data that went against the pre­dic­tions of neo­clas­si­cal eco­nomic the­ory was the rela­tion­ship between broad mea­sures of the money sup­ply and gov­ern­ment-cre­ated “Base Money”. The stan­dard “money mul­ti­plier” view is that:

  1. The gov­ern­ment cre­ates “Base Money” via deficit spend­ing, and cred­its that money to pri­vate indi­vid­u­als via social secu­rity, goods pur­chases etc.;
  2. These pri­vate indi­vid­u­als then deposit that money in bank accounts;
  3. The banks then retain a pro­por­tion of these deposits and lend out the rest, cre­at­ing credit money (and debt).

If this view were empir­i­cally cor­rect, then an analy­sis of money over time would show that “Base Money” was cre­ated first and “Credit Money” was cre­ated later, with a time lag.

In fact, what Kyd­land and Prescott found was that the empir­i­cal data was the oppo­site of this: credit money was cre­ated first, and Base Money was cre­ated later, with a lag of up to a year:

There is no evi­dence that either the mon­e­tary base or M1 leads the cycle, although some econ­o­mists still believe this mon­e­tary myth. Both the mon­e­tary base and M 1 series are gen­er­ally pro­cycli­cal and, if any­thing, the mon­e­tary base lags the cycle slightly.

The dif­fer­ence in the behav­ior of M1 and M2 sug­gests that the dif­fer­ence of these aggre­gates (M2 minus M1) should be con­sid­ered. … The dif­fer­ence of M2-M1 leads the cycle by even more than M2, with the lead being about three quar­ters.

The fact that the trans­ac­tion com­po­nent of real cash bal­ances (M 1) moves con­tem­po­ra­ne­ously with the cycle while the much larger non­trans­ac­tion com­po­nent (M2) leads the cycle sug­gests that credit arrange­ments could play a sig­nif­i­cant role in future busi­ness cycle the­ory. Intro­duc­ing money and credit into growth the­ory in a way that accounts for the cycli­cal behav­ior of mon­e­tary as well as real aggre­gates is an impor­tant open prob­lem in eco­nom­ics.

I couldn’t agree more, but this is not what neo­clas­si­cal econ­o­mists did. Instead they con­tin­ued to develop mod­els in which money and debt played no role.

Despite his excel­lent empir­i­cal work on mon­e­tary dynam­ics in “Real Facts and a Mon­e­tary Myth”, Prescott’s “Great Depres­sion” paper made no ref­er­ence to credit at all as an explana­tory fac­tor in the Great Depres­sion. Instead—I’m not joking—he blamed the Depres­sion on a “change in labor mar­ket insti­tu­tions and indus­trial poli­cies that low­ered steady-state, or nor­mal, mar­ket hours”.

Except for this bizarre argu­ment that the Great Depres­sion was the result of the vol­un­tary response of work­ers to unspec­i­fied changes in labour mar­ket con­di­tions that made labour less desir­able, this lengthy quote from Prescott is rep­re­sen­ta­tive of stan­dard neo­clas­si­cal think­ing about crises like the GFC:

Essen­tially, busi­ness cycles are responses to per­sis­tent changes, or shocks, that shift the con­stant growth path of the econ­omy up or down. This con­stant growth path is the path to which the econ­omy would con­verge if there were no sub­se­quent shocks. If a shock shifts the con­stant growth path down, the econ­omy responds as fol­lows. Mar­ket hours fall, reduc­ing out­put; a big­ger share of out­put is allo­cated to con­sump­tion and a smaller share to invest­ment; and more time is allo­cated to leisure. Over time, mar­ket hours return to nor­mal, as do invest­ment and con­sump­tion shares of out­put, as the econ­omy con­verges to its new lower con­stant growth path. The level of the new path is lower, not the growth rate along the path.

I’ve just described the response of the econ­omy to a sin­gle shock. In fact, the econ­omy is con­tin­u­ally hit by shocks, and what econ­o­mists observe in busi­ness cycles is the effects of past and cur­rent shocks. A bust occurs if a num­ber of neg­a­tive shocks are bunched in time. A boom occurs if a num­ber of pos­i­tive shocks are bunched in time. Busi­ness cycles are, in the lan­guage of Slutzky (1937), the “sum of ran­dom causes.”

The fun­da­men­tal dif­fer­ence between the Great Depres­sion and busi­ness cycles is that mar­ket hours did not return to nor­mal dur­ing the Great Depres­sion. Rather, mar­ket hours fell and stayed low. In the 1930s, labor mar­ket insti­tu­tions and indus­trial pol­icy actions changed nor­mal mar­ket hours. I think these insti­tu­tions and actions are what caused the Great Depres­sion.”

So the Great Depres­sion was a con­scious choice by Amer­i­can work­ers to enjoy more leisure, in response to unspec­i­fied changes in the labour mar­ket  ([Later in the same essay, he states: “Exactly what changes in mar­ket insti­tu­tions and indus­trial poli­cies gave rise to the large decline in nor­mal mar­ket hours is not clear.…”).

It would be bad enough if Prescott were merely an obscure aca­d­e­mic econ­o­mist, but he is far from obscure: he and Kyd­land shared the Nobel Prize in Eco­nom­ics for the devel­op­ment of neo­clas­si­cal growth the­ory. As ridicu­lous as his argu­ment is, it does accu­rately state the con­clu­sions of the neo­clas­si­cal “real busi­ness cycle” model. As is often the case, you find a much clearer—and there­fore far more obvi­ously absurd—statement of neo­clas­si­cal eco­nomic the­ory when you go to the source, rather than rely­ing on a sec­ond-hand account from a text­book or run-of-the-mill prac­ti­tioner.

So the con­fi­dence that the vast major­ity of econ­o­mists have that the GFC is now behind us, and the “nor­mal” trend rate of growth will resume, is fun­da­men­tally based on the belief that credit and debt dynam­ics do not mat­ter.

I beg to dif­fer. Though the enor­mous gov­ern­ment stim­u­lus has atten­u­ated the imme­di­ate impact of debt delever­ag­ing, it has done noth­ing to reduce the out­stand­ing level of pri­vate debt. Instead even sub-par growth has become depen­dent on con­tin­u­ing gov­ern­ment stim­uli, and when­ever those stim­uli are removed, the econ­omy will fal­ter.

Total pri­vate debt rose by a mere A$1 bil­lion last month, ver­sus as much as A$30 bil­lion dur­ing the height of the debt bub­ble. But were it not for the First Home Ven­dors Boost (let’s call it what it is), Aus­tralia would now be firmly in the grips of delever­ag­ing.

END OF COMMENTARY

COMMENTS ON THE DATA—A Mortgage & Government Led Recovery?

Total pri­vate debt rose by a mere A$1 bil­lion last month, ver­sus as much as A$30 bil­lion dur­ing the height of the debt bub­ble. But were it not for the First Home Ven­dors Boost (let’s call it what it is), Aus­tralia would now be firmly in the grips of delever­ag­ing.

Nonethe­less the debt to GDP ratio fell yet again, because the rate of growth of debt is now sub­stan­tially below the rate of growth of GDP—even though that is now also anaemic.

The break­down of debt shows that the busi­ness sec­tor is rapidly delever­ag­ing, while mort­gage and gov­ern­ment debt is escalating—and both those are the result of gov­ern­ment pol­icy.

With­out the First Home Ven­dors Boost, it is highly unlikely that mort­gage debt would still be ris­ing today. Mort­gage debt peaked as a per­cent­age of GDP in March 2008, and fell for the remain­der of the year until the First Home Ven­dors Boost.

The quar­terly change in mort­gage debt was also trend­ing down from the 2005 peak, and that down­ward trend has clearly been reversed by the impact of the Boost.

House Prices

The Boost has cer­tainly had the impact the gov­ern­ment desired, of arrest­ing the fall in Aus­tralian house prices.

It will also almost cer­tainly guar­an­tee that I’ll be walk­ing (and run­ning) to Kosciuszko under the first half of the bet with Rory Robert­son.[1] The sec­ond half of the bet, that the fall from peak to trough will be of the order of 40%, may still see Rory also walk­ing some years hence—and the with­drawal of the Boost may make this occur sooner rather than later.

The rea­son is twofold. Firstly, the Boost has obvi­ously brought for­ward some buy­ing by First Home Buy­ers that would have occurred any­way, as well as entic­ing in oth­ers who might not have con­sid­ered it oth­er­wise. The with­drawal of that demand will have a strong impact on the sub-$500,000 price range.

But the with­drawal will also affect houses in the $1 mil­lion to $1.5 mil­lion range as well, because the Boost did far more than merely boost sub-$500,000 prices.

First Home Buy­ers who were enticed into the mar­ket by the addi­tional $7,000 geared that up with addi­tional debt by at least a fac­tor of 4, to result in some­thing like a  $35,000 price jump for sub-$500K houses. But the sell­ers of those houses—the real ben­e­fi­cia­ries of the Boost—then received an extra $35,000 in cold hard cash. They then used this as a boost to their own deposits on their pur­chases of houses fur­ther up the chain—and if they also geared by a fac­tor of 4 (ie a 80% mar­ginal level of gear­ing, which is well within cur­rent lend­ing prac­tice), then the prices they paid for houses in the $750K-1.5M range would have risen by $140,000.

This works in reverse as well. When the Boost is with­drawn, not only will sell­ers of sub-$500K houses find that buy­ers have $35K less to spend than dur­ing the boost, the sell­ers of $750K-1.5M abodes will find their buy­ers short about $150K com­pared to dur­ing the boost.

2010 could be an inter­est­ing year for Aus­tralian house prices.


[1] If the index breaks its cur­rent max­i­mum level of 131 in the next release of ABS 6416, I will walk (and run) from Par­lia­ment House to Mt Kosciusko as required by the bet in the last weeks of Feb­ru­ary 2010.

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  • elliottwave

    I guess thats 1 nil to me then BTB.

    Keep fol­low­ing Prechter on gold and you will be the one that gets slaugh­tered and that i will guarantee.He has been wrong and will always be wrong because he believes fun­da­men­tals dont count.

    Keep short­ing gold, i love tak­ing your money.

  • ak

    Is there a con­spir­acy to poi­son our nation with debt? No, not at all. A con­spir­acy would require keep­ing things secret.

    LANDLORDS are claim­ing $11 bil­lion in tax deduc­tions a year as a neg­a­tive gear­ing frenzy grips the prop­erty mar­ket.
    The tax grab from prop­erty “losses” — the rich­est poten­tial deduc­tion for indi­vid­u­als — is about four times the amount claimed 10 years ago.”

    http://www.news.com.au/business/money/story/0,28323,26029676–5017313,00.html

    Here we have an arrange­ment which is known per­fectly well to any­one and the major­ity of peo­ple in Aus­tralia actu­ally accept it.

    Will it lead to a melt­down? I am not sure. But for sure it makes our econ­omy less com­pet­i­tive. Imag­ine that in coun­tries where hous­ing is less expen­sive you can pay an employee $500-$1000 less per month and still the same amount of money is left for other con­sumer goods. We have a very effi­cient income and wel­fare redis­tri­b­u­tion sys­tem.

    Another rea­son why we are stuck in trade deficits for a long period of time is that our cur­rency is loved by for­eign investors dri­ving it higher (by buy­ing bonds and invest­ing directly). Again this is a prin­ci­ple of the eco­nomic pol­icy — not an arte­fact. The Chi­nese are some­times called mer­can­tilists what places them in the 18th cen­tury but we are a mod­ern highly devel­oped ser­vice based econ­omy. We should run deficits.

    This is an anti­quated arti­cle explain­ing why run­ning deficits would be good:
    http://www.nationalreview.com/nrof_bartlett/bartlett200311050823.asp

    What will hap­pen when the inter­na­tional finan­cial mar­kets finally “take fun­da­men­tals into account”?

  • scep­ti­cus

    BTB, great reply to EW — con­cise yet com­pre­hen­sive.

    Regard­ing jobs and that CR link, my take is that jobs are the big thing now. Next, it’ll be deficits and the debate over tax­a­tion of future gen­er­a­tions, which then leads directly into a young vs old con­fronta­tion that’s brew­ing just over the hori­zon, to be fought on the fronts of welafre, health­care, savers vs bor­row­ers and immi­gra­tion. After that, peak oil.

    Exit­ing times. Our hearts are going to be in our mouths for two decades, which will no doubt pro­vide plenty of gold spikes and oppor­tu­ni­ties for EW et al to say I told you so.
    How­ever as you noted the gold price sim­ply bobs about on top of these other fun­da­men­tals.

    What fun we are going to have.

  • elliottwave

    Scep­ti­cus

    You call high unem­ploy­ment and peo­ple on the streets “fun”.

    Gold is ris­ing not for fun or spec­u­la­tion but because the world is going to hell and it is ring­ing an alarm bell, use it to insure your­self, not spec­u­late and have “fun”

    Buy google if you want to have fun and spec­u­late

    GOLD IS MONEY AND INSURANCE.

  • scep­ti­cus

    EW I have some gold thank you very much, and am com­fort­able with the amount of my assets I have allo­cated to it, which hap­pens to be a rea­son­able pro­por­tion.

    With that done, and so much unknow­able (and not dis­cern­able in charts because charts don’t do pol­i­tics) I like to spec­u­late on what’s in store 5, 10, 20, 30 years down the line. I have kids, loved ones and a career to look after and all these mean more to me in the short medium and long term than the price of gold. If gold goes to $10,000 per ounce we shall all prob­a­bly be dead, with or with­out gold, so I’ll con­tinue to spec­u­late on alter­na­tive, and IMO more likely out­comes.

  • elliottwave

    What other invest­ment is there out there that can trump gold as an invest­ment class?

    I know of no other that can even come close.

    If your “career” is your insur­ance than you need no other, it will be enough to get you through the greast­est depres­sion that your chil­dren will ever live through, how do you insure for that?

  • Tel

    Gold has a few things going for it right now. Cen­tral banks spent decades push­ing down the price of gold as the sold off their hoards. Com­pare this to other tan­gi­ble assets such as land where cen­tral gov­ern­ments have done their best to pump up the price of land and houses. Any asset is good pro­tec­tion against infla­tion, and at least in the USA, infla­tion is com­ing for sure. No way can the Fed­eral Reserve print tril­lions after tril­lions in US dol­lars backed by noth­ing with­out ini­ti­at­ing a wave of infla­tion down the track.

    The Great Depres­sion saw a sim­i­lar effect with steep delever­ag­ing fol­lowed by grind­ing infla­tion. Our Key­ne­sian gov­ern­ments have shov­elled deficit into the hole caused by delever­ag­ing but they have no way of unshov­el­ling when it filps over to an infla­tion­ary stage. Aus­tralia is not as bad, China is buy­ing our com­modi­ties and for­eign investors still love us.

    Aus­tralian mort­gages have become the new stealth tax. Gov­ern­ment spends the money on “stim­u­lus” and runs up a deficit. This in turn gen­er­ates infla­tion so Gov­ern­ment allows the banks to up inter­est rates “because we have to con­trol infla­tion”. Banks take the dif­fer­ence out of the mort­gage hold­ers, then the gov­ern­ment takes the tax out of the banks. Ta da! Wealth dis­tri­b­u­tion. Take from the mid­dle class, push some of it down to the poor, some of it up to the wealthy.

    Get­ting back to gold, aside from the infla­tion pro­tec­tion it offers, the poten­tial for upside comes down to how we move for­ward recon­fig­ur­ing inter­na­tional trade. It seems obvi­ous that US dol­lars can­not remain the core of inter­na­tional trade for­ever. The Fed­eral Reserve print­ing press is beat­ing that mes­sage into the whole world and the com­ing wave of US infla­tion will beat the mes­sage even harder.

    China is exper­i­ment­ing with var­i­ous options right now. They are mak­ing deals with Rus­sia for bi-lat­eral exchanges… not sure how suc­cess­ful that might be. They have pur­chased some IMF SDR paper (pre­sum­ably pur­chased with US dol­lars), but it remains to be seen what this IMF paper can do.

    My feel­ing is that we will end up with some com­mod­ity bas­ket as the ref­er­ence for inter­na­tional trad­ing, and both gold and sil­ver will be in that bas­ket. No doubt a lot of closed door nego­ti­a­tions are under way, no doubt the doors will stay closed until the very last minute to ensure none of the small-time pun­ters get the advan­tages that the insid­ers get.

  • Bull­turned­bear

    Hi Elliot­wave,

    I don’t know where you get the 1 nil from. But go for it all you like. Call it 100 to nil. I have said repeat­edly, I don’t care if gold goes up or down and it will go up and down all the time. If gold fell $40 or $50 in a few weeks will you say that you were wrong? Of course not!

    I can’t go past your com­ment “What other invest­ment is there out there that can trump gold as an invest­ment class?”. That is sim­ply a crazy com­ment.

    Almost all com­modi­ties greatly out­grew gold in the last 10 years and all blew gold off the planet in the last 30 years. Ura­nium rose some mas­sive fig­ure (I for­get, can’t bother look­ing it up) say 1,400% in the last 10 years, before crash­ing 60 or more % last year. From 1980 to today gold has risen in $US by $45. That’s a .34% per annum return. Go gold. That’s a ter­ri­ble return.

    Even AIG and Citi have risen 300% or 600% in the last 5 months. You are obsessed with gold and you can’t see it. 

    Gold might rise or fall. From an elliot wave POV there is a strong bull­ish case and a strong bear­ish case (the out­look is uncer­tain). I said that on this site 4 or 6 months ago. 

    Take a look at sugar instead. Sugar just blew off to a multi decade high top of $24.85 (front month). It has now fallen impul­sively to $20.50 (intra-day low today) in a few days. Look­ing at the graph I would have much more con­fi­dence short­ing sugar that could fall under $10 than going long gold that is a few dol­lars from its all time high. Not to men­tion that I have made 10 times more short­ing sugar in the last week than I would have going long in gold. Gold rose 5% or 6%. Sugar just fell over 20% in less than 5 days.

    Also have a look at Nat­ural gas. It is form­ing an end­ing diag­o­nal (ter­mi­nat­ing pat­tern) into its low of the last 10 years and a very long term low point, if you exclude the 2001 bot­tom. Nat gas makes much more sense if you want to go long as it is bot­tom­ing. Why buy at the top. Sell high (against the herd) and buy when no one else wants it (against the herd). I have no posi­tion in nat gas yet. The pat­tern is not com­plete. I think some time in the next 6 months nat gas will bot­tom and turn out to be the best invest­ment of the next 2 or 3 years. 

    What ever I have dis­cussed here is just my opin­ion. Not invest­ment advice.

  • elliottwave

    Not if but when hyper­in­fla­tion (a cur­rency event not an eco­nomic event), occurs their is noth­ing that will com­pare to gold.You per­haps do not under­stand how bad the world will look like within a years time?

    The amount of pain finan­cially and emo­tion­ally that the world will com­mence to feel by May of 2010, will be some­thing that one does not wish upon their worst enemy.

    I feel sorry for fam­i­lies with young chil­dren they will be scarred for years.

    I do not want gold to rise but it is out of my hands and is the only way to insure ones self.

    This will be the worst expe­ri­ence that we as a human race will ever face and it all starts in May 2010.

  • Bull­turned­bear

    Hi Elliot­wave,

    Please explain to me how there can be a cur­rency induced hyper-infla­tion every­where? Cur­ren­cies are rel­a­tive. If one cur­rency were to crash, it is in rela­tion to oth­ers.

    How can spec­u­la­tors crash all the world’s cur­ren­cies simul­ta­ne­ously. Or are you just sug­gest­ing a hyper-infla­tion in the US. ($US value of gold would rise, but $A value may stag­nate or fall) or a hyper-infla­tion in Aus­tralia where the $US value of gold may rise or fall, but the $A value of gold would sky­rocket?

    I think I have asked this ques­tion of you 4 times now. You don’t have to answer me. Please ask the ques­tion of your­self.

  • elliottwave

    Ask the the peo­ple of Ice­land that ques­tion i am sure they will be able to answer that ques­tion for you.They seem to be more expe­ri­enced in the art of finan­cial chit hit­ting the fan.

  • Bull­turned­bear

    Please explain how Ice­land is rel­e­vant? I am one of the dum­mies that posts on this site.

    Ice­land has had a cur­rency event, agreed. But that has not trig­gered global hyper-infla­tion.

  • elliottwave

    BTB

    I have put out what i know will hap­pen, but i still have no idea what the hell you think is hap­pen­ing or what will hap­pen?

    I gave you the bot­tom in gold and you mocked me, then when it bot­tomed in July and is on a tear now you still mock me.

    Who on this web­site has made a ballsy call like the one i made on gold and the other call of 1224 by Novem­ber 5, who has actu­ally said any­thing con­struc­tive of this web­site that HAS ACTUALLY HAPPENED, NOT WILL HAPPEN INYEARS?

    You actu­ally have the hide to mock me.

    You think by trad­ing nat­ural gas futures or stocks will get you out of trouble?You are truly delu­sional and have no idea what­so­ever is about to tran­spire in the world.

    WAKE UP BTB

  • Bull­turned­bear

    Thanks for that Elliot­wave.

    You are the guru!

  • elliottwave

    Very intel­li­gent response, keep short­ing equi­ties and trad­ing nat gas futures that will keep you safe.

    Your view on finan­cial mar­kets does not exist? Bit dif­fi­cult?

  • AUSUSD20090907

    Although Aus­tralia is regarded as a debtor nation so indebted it should be suf­fer­ing from its own cur­rency cri­sis, the AUD has gained impres­sive ground in the past 6 months.

    AUD/USD has gone up to 0.85 from the Feb­ru­ary low of 0.65. That means the Aus­tralians are buy­ing more from the US with the same amount of AUD. I won­der this cur­rency cri­sis will some­day per­me­ate thru to other debtor nations like Aus­tralia.

    Dr Keen believes that the impact by pri­vate debts con­trac­tions could ham­per the author­i­ties reme­dies. I think Dr Keen’s model has not taken into account the pro­por­tion of risk-free pri­vate debts. E.g., some of the hous­ing loans bor­rowed by over­seas stu­dents are guar­an­teed by their wealthy par­ents who would bring in mil­lions in cash once their son or daugh­ter gained a foothold in Aus­tralia.

    What role is this inflow of pri­vate cash funds play­ing in the larger econ­omy?

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  • blueinca

    I actu­ally agree with the basic the­ory of: debtjunkies
    Sep­tem­ber 1st, 2009 at 3:34 pm

    Here is another arti­cle that con­firms the increas­ing debt bur­den of exces­sively priced hous­ing.

    http://business.smh.com.au/business/debt-burden-spoils-retirement-party-20090831-f5df.html.….….….….….….….….……

    I have long main­tained that while inter­est rates are rel­a­tively low, that hous­ing prices would rise, espe­cially if so-called experts start­ing talk­ing about the finan­cial cri­sis being over. These grabs to ‘ordi­nary man or woman on the street’ who are in the mar­ket for an owner-occu­pied prop­erty has trig­gered an unprece­dented splurge on prop­erty in recent weeks.

    I take a great inter­est in the inner to mid north­ern sub­urbs of Mel­bourne, and if you think prices were out­ra­geous last year, then pre­pare for what is to come. There was a win­dow for the first cou­ple of months of this year- where prices had actu­ally started to gen­uinely come back, there was lots of talk in the media about con­cerns of the greater econ­omy- Steve’s points were even start­ing to stick! Unfor­tu­nately inter­est rates held firm low then, and so we now have this extra­or­di­nary sit­u­a­tion where peo­ple are pay­ing even more than 2007/2008- and there­fore tak­ing on even more debt.

    My research on prop­erty in Mel­bourne North’s at it’s most updated- ie: yes­ter­day!: an unren­o­vated cream BV on a small block two doors down from fibro com­mis­sion flats sold for $609,000- undoubt­edly it would’ve made no more than $420k last year at the prop­erty market’s peak. Another unren­o­vated ‘beauty’ red brick in North Coburg- not Coburg, not Thorn­bury, not NOrth­cote- but North Coburg, almost at the ceme­tery sold for $561k, undoubt­edly would’ve strug­gled to reach $400k at the peak last year.

    One con­tem­plates what sort of loan approval analy­sis are banks going through- the cha­rade they play over approvals includ­ing what val­u­a­tion they place on the prop­erty are far­ci­cal. The amount of debt if cur­rent activ­ity con­tin­ues into sum­mer, is going to be mon­strous. If gov­ern­ment pol­icy con­tin­ues in the same vein as I have alluded to from debtjunkies post above, there’s going to be a lot of hands grab­bing for the gov­ern­ment hand­out pot, espe­cially when inter­est rates go up, or can Wayne Swan wan­gle his mates at the RBA to leave them alone til next year- if he does Armaged­don may arrive sooner than the ordi­nary man expects, even worse the ordi­nary man prob­a­bly isn’t even aware of it’s com­ing- he too busy ser­vic­ing his debt under the illu­sion he’s pay­ing off the prin­ci­ple.

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