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played itself out, the economy will return to trend growth and the emergency measures that attenuated its impact can be withdrawn.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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170 Responses to Debtwatch No. 38: The GFC—Pothole or Mountain?

  1. elliottwave says:

    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.

  2. ak says:

    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”?

  3. scepticus says:

    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.

  4. elliottwave says:

    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.

  5. scepticus says:

    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.

  6. elliottwave says:

    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?

  7. Tel says:

    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.

  8. Bullturnedbear says:

    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.

  9. elliottwave says:

    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.

  10. Bullturnedbear says:

    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.

  11. elliottwave says:

    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.

  12. Bullturnedbear says:

    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.

  13. elliottwave says:

    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

  14. Bullturnedbear says:

    Thanks for that Elliotwave.

    You are the guru!

  15. elliottwave says:

    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?

  16. AUSUSD20090907 says:

    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?

  17. Pingback: Pothole or Mountain? The common belief behind the expectations of economists that, now that the GFC has played itself out is that the economy will return to trend growth and the emergency measures that attenuated its impact can be withdrawn. Think again &

  18. Pingback: A housing bubble illustration | Bear Market Investments

  19. blueinca says:

    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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