Debt­watch No. 40 Novem­ber 2009: Have we dodged the Ice­berg?

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Part 1: The USA

The most recent “unex­pect­edly good” growth fig­ures for the USA appear to indi­cate that what will still be the worst down­turn since the Great Depres­sion is finally over.

How­ever this is not your usual down­turn. Not only is it acknowl­edged as the most severe since the Great Depres­sion, it has also evoked the most remark­able gov­ern­ment eco­nomic stim­u­lus ever seen. It would be bizarre if this had not had an effect on the data.

Whether a recov­ery is truly under­way in the pri­vate sec­tor there­fore depends on how the econ­omy is likely to per­form after the stim­u­lus is with­drawn.

The “reces­sion is over” reac­tion could be valid under two cir­cum­stances. Either:

  1. The fig­ures are very high even when the gov­ern­ment stim­u­lus is taken into account; or
  2. If the econ­omy could be expected to con­tinue grow­ing endoge­nously after the stim­u­lus were with­drawn, even if the aggre­gate num­bers for this quar­ter were good only because the gov­ern­ment stim­u­lus was so large.

Let’s con­sider the first option. The growth rate on an annu­alised basis for the last quar­ter was 3.5%. The BEA’s decom­po­si­tion of this notes that 1.66% of the growth was due to increased motor vehi­cle out­put, which was pri­mar­ily dri­ven by  the government’s “Cash for Clunk­ers” pro­gram. Another 0.48% was due to the growth in gov­ern­ment expen­di­ture.

There are also some ele­ments of the fig­ures that sim­ply seem, in the orig­i­nal sense of the word, incred­i­ble. For exam­ple, ris­ing invest­ment levels—up 11.5%—were a major rea­son for the pos­i­tive read­ing. But all com­po­nents of this mea­sure were either tepid or negative—except for res­i­den­tial invest­ment, which was up a whop­ping 23.4%.

That just doesn’t tally with the most depressed real estate mar­ket in his­tory; pos­si­bly this huge con­tri­bu­tion to aggre­gate invest­ment could be the result of a large move­ment from a very small base, whereas the sector’s weight in the over­all cal­cu­la­tions of invest­ment hasn’t been revised down­wards to reflect its true con­tri­bu­tion today. Or it could be a prob­lem with the data sam­ple that will be revised sub­stan­tially down­wards in later esti­mates of GDP.

Either way, the prospect that a seri­ous reces­sion, which was caused by the burst­ing of a hous­ing bub­ble, which left an unprece­dented stock of unsold exist­ing houses on the mar­ket, and which has led to an unprece­dented unsold over-sup­ply of exist­ing hous­ing stock, has been ended by a revival in hous­ing invest­ment… is sim­ply incred­i­ble.

That leaves the sec­ond option—that even though the pos­i­tive fig­ure was the prod­uct of the gov­ern­ment stim­u­lus, when this is with­drawn the econ­omy can be expected to con­tinue grow­ing on its own.

Here trends in con­sumer income and non-res­i­den­tial invest­ment are the impor­tant issues. These would both need to be pos­i­tive (or at least turn­ing from lows) for the pri­vate sec­tor to resume growth in the next quar­ter with­out the need for stim­u­lus.

Con­sumer dis­pos­able income fell at a sub­stan­tial 3.4% annu­alised rate in the quar­ter, while fixed invest­ment expen­di­ture rose by an anaemic 2.3% and invest­ment in struc­tures fell by 2.5%.

It is thus likely that if the gov­ern­ment stim­u­lus were with­drawn, both these pri­vate sec­tor areas would show even more neg­a­tive fig­ures over this quar­ter.

How­ever, another way of look­ing at whether this is the end of the reces­sion is to look at the tim­ing of turn­ing points in the data and eco­nomic recov­er­ies (this requires attempt­ing to deduce the cycli­cal com­po­nents in the data from the trend). On this and the con­ven­tional set of indi­ca­tors, it looks like the “avoided the ice­berg” call could be right. Firstly as the next graph indi­cates, dur­ing the reces­sion all fac­tors save gov­ern­ment spend­ing were below trend, and the two biggest fac­tors in the turn­around are a revival in invest­ment (dri­ving almost exclu­sively by the “23.4% rise” in res­i­den­tial invest­ment!) and net exports.

The role of net exports is unusual (though unre­mark­able), but the turn­around in invest­ment is a sign of recov­ery that has occurred in all pre­vi­ous recessions—as the next chart indi­cates.

How­ever there is another fac­tor that hasn’t yet been considered—the role of credit. Dur­ing post-War reces­sion, credit growth has dropped well below trend, and the recov­ery has involved ris­ing debt lev­els. This is not the sign of a healthy economy—far from it—but this is how the US econ­omy has “recov­ered” from every pre­vi­ous post-WWII reces­sion.

Not this time it appears: if this is a recov­ery, then it’s a highly unusual one because credit growth is still well below trend—and, in fact, neg­a­tive: Amer­ica is delever­ag­ing.

We there­fore have the strange com­bi­na­tion that one accepted “lead­ing indi­ca­tor” of recovery—a turn­around in investment—appears to have occurred, while another less favoured indicator—the trend in credit growth—is still point­ing at reces­sion.

I apol­o­gise for get­ting some­what geeky here, but this is one issue that a sim­ple check of charts can’t decide—we have to delve deeper to work out which of these two con­tra­dic­tory indi­ca­tors to take more seri­ously. So the next two tables get slightly more tech­ni­cal and look at the cor­re­la­tions over time between changes in the com­po­nents of GDP and credit and changes in real GDP.

Here the data favours debt growth as the lead­ing indi­ca­tor to watch. Invest­ment is strongly cor­re­lated with GDP, but that’s hardly sur­pris­ing since it con­sti­tutes a major and volatile com­po­nent of GDP. Just as with consumption—the larger but less volatile major component—its cor­re­la­tion is high­est when coin­ci­dent with GDP. It is not a lead­ing indi­ca­tor.

The two best lead­ing indi­ca­tors are debt, and gov­ern­ment spending—with the for­mer stronger than the lat­ter. Gov­ern­ment spend­ing a year ahead of GDP is a good indi­ca­tor of which way GDP will go—something which sup­ports the Char­tal­ist approach to macro­eco­nom­ics and under­mines con­ven­tional “neo­clas­si­cal” eco­nomic think­ing. But changes in debt are a stronger indi­ca­tor still, and have a stronger effect closer to the actual move­ments in GDP.

The pre­vi­ous cor­re­la­tions cov­ered the whole post-WWII period (from 1952 till now), but there has clearly been struc­tural change in the US econ­omy over that time—especially the relo­ca­tion of pro­duc­tion to off­shore low-wage coun­tries, the growth of the FIRE sec­tor with the economy’s increas­ing depen­dence on debt, and the shift in eco­nomic pol­icy from a “Key­ne­sian” ori­en­ta­tion to a “Neo­clas­si­cal” one (prior to this cri­sis) in the mid-1970s. So the next two tables repeat the above cor­re­la­tions, but just with data from 1990.

These rein­force the argu­ment that move­ments in debt mat­ter as an indi­ca­tor of whether we’re out of the reces­sion or not—and the answer is no. It also appears that the influ­ence of gov­ern­ment spend­ing on eco­nomic per­for­mance weak­ened while neo­clas­si­cals were in charge (and behav­ing as neoclassicals—rather than “Born Again Key­ne­sians” as they are now).

So I don’t believe that this quar­ter of growth for the USA implies it has dodged the ice­berg. Instead a patch-up job has been done on the dam­age, but the USS is still tak­ing on water as the pri­vate sec­tor delever­ages.

Part 2: Australia

The Aus­tralian result of only one neg­a­tive quar­ter of growth, fol­lowed by a return to pos­i­tive growth is the best in the OECD. This was dri­ven by:

  1. The dra­matic pos­i­tive impact on house­hold bud­gets from the cut in inter­est rates by 4%, which reduced debt ser­vice from 15.4% to 10.3% of dis­pos­able income;
  2. A stim­u­lus pack­age that was equiv­a­lent to 2.5% of GDP, the largest such pack­age in the OECD;
  3. Australia’s unusual posi­tion as a com­mod­ity producer—so that we ben­e­fited from China’s huge stim­u­lus pack­age and recent stock­pil­ing of com­modi­ties; and
  4. The entice­ment to house­holds to take on addi­tional mort­gage debt that goes by the name of the First Home Buy­ers Boost.

The first two fac­tors alone resulted in a 9% increase in housh­old dis­pos­able income over the year from June 2008 to 2009—an unheard of devel­op­ment in boom times, let alone dur­ing an eco­nomic cri­sis. As Ger­ard Minack put it in his Dow­nun­der Daily on Octo­ber 9th, “If that’s reces­sion, bring it on!”

As a result of this pol­icy-dri­ven paradox—rising dis­pos­able income in a recession—Australia will not record a fall in real out­put on an annual basis in 2009, a result that is in stark con­trast to out­comes in the rest of the OECD.

So fast and mas­sive gov­ern­ment action—by both its Trea­sury and Cen­tral Bank wings—averted a reces­sion in the face of an unprece­dented finan­cial cri­sis.

This is a wel­come outcome—and one that con­tra­dicts one of the lat­est fads that dom­i­nated eco­nom­ics prior to the GFC, “ratio­nal expec­ta­tions macro­eco­nom­ics”, which argued that the gov­ern­ment couldn’t affect real out­put. As I noted in an ear­lier post, though neo­clas­si­cally-trained econ­o­mists drove the pol­icy response, they did so as “Born Again Key­ne­sians”, and if their res­cue does work, then it con­tra­dicts neo­clas­si­cal eco­nom­ics just as much as the GFC’s very exis­tence did in the first place.

Also as noted in that post, the only school of eco­nomic thought that could be vin­di­cated by this out­come is the Post Key­ne­sian “Char­tal­ist” group, which argues that any macro­eco­nomic down­turn can be averted by suf­fi­ciently strong gov­ern­ment action.

The ques­tion for the future is what the econ­omy is likely to do after the spe­cial fac­tors that turned it into a com­par­a­tive boom for Aus­tralian house­holds and exporters are unwound.

Already the RBA has started to reverse the first fac­tor above, by rais­ing inter­est rates by 0.25% at its Octo­ber meet­ing, flag­ging that it will do as much or more on Mel­bourne Cup day, and imply­ing that the reserve rate could be as high as 5–6% by the end of 2010. If the RBA fol­lowed that plan of action, then the debt ser­vic­ing costs for house­holds would rise to over 15 per­cent of house­hold dis­pos­able income. This would reverse more than half of the improve­ment to dis­pos­able incomes engi­neered by gov­ern­ment pol­icy dur­ing the GFC.

More­over, this increase in debt ser­vic­ing costs would come on top of the removal of the First Home Buy­ers Boost (FHBB)—which I pre­fer to call the First Home Ven­dors Boost.

Prior to that fool­ish pol­icy, Aus­tralian house­holds were deleveraging—reducing their debt lev­els. Thanks to it, they increased their debt lev­els so that the ratio of mort­gage debt to GDP in Aus­tralia is now at an all-time record, and exceeds the level in the USA (though not the UK). in mid-2008, the mort­gage debt to GDP ratio peaked at 84.9%, and it then fell to 84.2% by the end of 2008. Under the influ­ence of the FHOB, that ratio stopped falling and is now 88.4%—an all-time record, and five times the level that applied in 1989.

This gov­ern­ment-induced $50 bil­lion increase in mort­gage debt has been a major fac­tor in dri­ving the econ­omy upward, despite the GFC. The takeup of the boost is truly staggering—from a nation­wide total of 121 in Octo­ber 2008, to 5,385 the next month, and a peak of 20,389 in June 2009. The total enticed into tak­ing out a mort­gage will surely exceed 200,000 by the end of December—and rep­re­sent more than one per­cent of the Aus­tralian pop­u­la­tion.

How did the Gov­ern­ment get such a fab­u­lous “mul­ti­plier” out of its Boost—put in $1.5 bil­lion, get $50 bil­lion addi­tional spend­ing on hous­ing (at $7000 per recip­i­ent, times roughly 200,000 recip­i­ents by the time the Boost ends—there were 171,000 recip­i­ents as of the end of Sep­tem­ber 2009)? Because the recip­i­ents of the grants used the $7,000 to get an addi­tional $40,000-$50,000 in finance from their mort­gage lender, and then handed this over to the First Home Ven­dor (FHV) in a grossly inflated sale price.

The FHV then took this addi­tional cash and lever­aged it into an addi­tional $200,000 or so for their next house pur­chase. So the FHVB caused a bub­ble, not merely in the sub-$500,000 price range that most First Home Buy­ers inhabit, but right up to the $1 mil­lion range that accounts for more than 90% of Aus­tralian hous­ing. The lever­age on the FHBB was not merely seven to one, but closer to 50:1 given this flow-on effect.

With this gov­ern­ment-engi­neered mort­gage debt spree, it’s no won­der that the Aus­tralian house price bub­ble, which had begun to deflate in late 2008, has taken off once more. It’s rather apt that my walk to Kosciuszko (as a result of Rory Robertson’s bet with me) will start from Par­lia­ment House, since there’s no doubt about Parliament’s role in keep­ing this Ponzi Scheme alive.

The impact on Australia’s finan­cial posi­tion was dra­matic and will, in the long run, be very, very bad. It has encour­aged us to go back to the same unsus­tain­able trend of ris­ing debt to income lev­els that caused the GFC in the first place. It has also engi­neered an unnat­u­rally fast return to ris­ing debt lev­els: in the 1990s reces­sion, it took 29 months to go from “peak debt” (85.34% of GDP in Feb­ru­ary 1991) to “trough debt” (79.14% in July 1993). This time it has taken just 14 months (from 164.8%in March 2008 to 158.84% in May 2009).

After the 1990s reces­sion, debt lev­els took off in the Great Aussie Mort­gage Bub­ble, ris­ing from 85% to almost 165% of GDP in just 15 years. If we are to get out of this cri­sis the same way we escaped from “The Reces­sion We Had To Have”, then debt lev­els would need to con­tinue ris­ing rel­a­tive to GDP. Which raises the ques­tion, “Who Are You Going To Lend To?” Both house­holds and busi­nesses are car­ry­ing more debt than in any pre­vi­ous reces­sion, and the busi­ness sec­tor is still deleveraging—only house­holds are tak­ing on more debt.

All these fac­tors lead me to expect that 2010 will be a bad year for the Aus­tralian econ­omy:

  • The com­bi­na­tion of the RBA’s rate rises and the end­ing of the First Home Buy­ers Boost will in all like­li­hood prick the house price bub­ble inspired by the Boost in the first place—and lead as many as 175,000 house­holds to be very angry that they were enticed into this spec­u­la­tive bub­ble in the first place. If this hap­pens, there is lit­tle prospect of mak­ing the House Price Souf­fle rise twice by yet another fool­ish entice­ment into debt.
  • The polit­i­cal pres­sure on the gov­ern­ment may lead it to unwind its stim­u­lus, which will remove a key prop from the econ­omy; and
  • Delever­ag­ing, which has been the loom­ing prob­lem that gov­ern­ment pol­icy (espe­cially the First Home Ven­dors Grant) has sim­ply delayed, will kick in as it has in the USA. The most likely man­i­fes­ta­tion would be a decline in dis­cre­tionary con­sump­tion and non-min­ing invest­ment.

I there­fore expect that the RBA won’t get to com­plete its intended pro­gram of rais­ing inter­est rates, but will be forced to go into reverse in 2010 as it was in 2008. It shouldn’t be for­got­ten that the RBA was still rais­ing rates in mid-2008 to fight infla­tion. They didn’t see the GFC com­ing, and I believe that they’re mak­ing a sim­i­lar mis­take this time—believing that it’s all behind us when the spe­cial fac­tors that min­imised the impact are ter­mi­nat­ing.

So no I don’t believe we have dodged the iceberg—we’ve merely pushed it below the sur­face, from where it will rise again to dent out eco­nomic hull once more. And all the while the neo­clas­si­cal econ­o­mists who didn’t realise they were in an ice field in the first place are busily rear­rang­ing the deckchairs on the Titanic.

Table One

Table Two

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  • mfo

    Quote of the week. “Build­ing approvals are still less than demand because peo­ple can’t afford hous­ing, there­fore prices can only go up.”

    Just about says it all.

  • Paul Andrews

    Can any­one explain to me why the GDP Price Defla­tor is so far out of whack with CPI the last two quar­ters?

    I’m get­ting this from http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/LookupAttach/1350.0Data+Cubes-28.10.095/$File/13500DO005_200911.xls

    Table 3, cells H35 & H36, show this mea­sure of infla­tion run­ning at –1.4% and –2.2% (per quar­ter) respec­tively in the last two quar­ters. Am I inter­pret­ing this cor­rectly?

  • ak

    GSM,

    Let’s leave alone for a while what peo­ple think should be done to fix the debt prob­lem. I will again try to explain the dif­fer­ence between what you think may hap­pen if our gov­ern­ment con­tin­ues cur­rent poli­cies and what Bill Mitchell thinks about it. My goal is to con­vince you to chal­lenge him directly as it might be very inter­est­ing to see the argu­ments of both sides.

    The point he is try­ing to make is that the neo­clas­si­cal eco­nom­ics is incor­rect when it comes to describ­ing how the cur­rent mon­e­tary sys­tem works. He says that apply­ing the same rules which were in force when cur­ren­cies were bound to gold stan­dard is plainly incor­rect. It is not that Mitchell advo­cates money print­ing — he sim­ply acknowl­edges that all our money has been already printed (cre­ated out of thin air) by the gov­ern­ments. Hence the name “fiat money”.

    You have restated your view that buy­ing back the bonds by cre­at­ing money (what the gov­ern­ment can always do) will lead to “our cur­rency even­tu­ally vapourised and becom­ing worth­less”. Because of that the gov­ern­ment is trapped in a sov­er­eign debt trap, has to pay back money bor­rowed with inter­ests or become insol­vent, etc.

    The point Mitchell is try­ing to make is that this neo­clas­si­cal the­ory is incor­rect. The only side effects of buy­ing back bonds from freshly cre­ated fiat money would be inter­est rates approach­ing zero and pos­si­bly cur­rency deval­u­a­tion as for­eign investors will lose their incen­tive to sub­scribe to free lunch at our expense in the form of inter­ests paid on bonds. He also thinks that if this pol­icy is imple­mented grad­u­ally it doesn’t have to be very infla­tion­ary. We will not fol­low the path to destruc­tion like Zim­babwe if the econ­omy still has unused pro­duc­tive capac­i­ties — what is quite clear in the cur­rent defla­tion­ary envi­ron­ment. In Zim­babwe the destruc­tion of pro­duc­tive capac­i­ties pre­ceded the hyper­in­fla­tion­ary melt­down. My expe­ri­ence from the short bout of hyper­in­fa­tion in Poland in the late 1980-ties was exactly the same — you could not buy prod­ucts for the money you were get­ting because of the rel­a­tive lack of prod­ucts.

    The hyper­in­fla­tion was throt­tled by intro­duc­ing the spe­cial extra­or­di­nary tax on wages
    http://en.wikipedia.org/wiki/Popiwek

    There were mul­ti­ple instances in the recent his­tory when all the old money in a coun­try was sim­ply ditched and new money was intro­duced. The strongest West­ern Euro­pean cur­rency of the sec­ond half of the 20-th cen­tury — the Deutsche Mark — was con­ceived and born in exactly that way. 

    The Deutsche Mark was intro­duced on 21 June 1948 by the West­ern Allies (the USA, the United King­dom and France). The old Reichs­mark and Renten­mark were exchanged for the new cur­rency at a rate of 1 DM = 1 RM for the essen­tial cur­rency such as wages, pay­ment of rents etc, and 1 DM = 10 RM for the remain­der in pri­vate non banks credit bal­ance, with half frozen. Large amounts were exchanged for 10RM to 65 pfen­nigs. In addi­tion, each per­son received a per capita allowance of 60 DM in two parts, the first being 40 DM and the sec­ond 20 DM.
    The intro­duc­tion of the new cur­rency was intended to pro­tect west­ern Ger­many from a sec­ond wave of hyper­in­fla­tion and to stop the ram­pant barter and black mar­ket trade (where Amer­i­can cig­a­rettes acted as cur­rency).”

    http://en.wikipedia.org/wiki/German_mark

    So the value of money is noth­ing objec­tive and we don’t have to treat it as a kind of fetish. The West­ern Ger­mans were able to rebuild the coun­try in a few years time — because they knew how to do it and got some lim­ited help.

    BTW Mitchell is prob­a­bly the last per­son to agree with the unsus­tain­able poli­cies increas­ing pri­vate debt like FHOG:

    So when the sec­tor should have been reduc­ing debt it has been increas­ing it. This sug­gests that the low inter­est rates were some­what expan­sion­ary (given some of the changes were prob­a­bly refi­nanc­ing at lower rates). But how much extra pain the extra debt will now cause as rates rise is unknown. That is one of the prob­lems of rely­ing on mon­e­tary pol­icy for any­thing – it is too uncer­tain. There are no accept­able mod­els that can tell us the dis­tri­b­u­tional and tim­ing effects of a rate change.

    But with so much debt still being held by the house­hold sec­tor I fear we are set­ting our­selves up for another dive as fis­cal pol­icy con­tracts under the immense pres­sure that will be brought to bear lead­ing up to the next fed­eral elec­tion some­time in 2010.”

    http://bilbo.economicoutlook.net/blog/?p=5813

  • GSM

    ak,
    A cou­ple of points;

    1) I see that Mitchell and I both agree that ;
    ”.…..buy­ing back bonds from freshly cre­ated fiat money would be inter­est rates approach­ing zero and pos­si­bly cur­rency deval­u­a­tion as for­eign investors will lose their incen­tive to sub­scribe to free lunch at our expense in the form of inter­ests paid on bonds.” IE our cur­rency would be deval­ued, per­haps seri­ously so. Atten­dant with that deval­u­a­tion would be run­away infla­tion in a worst case. Inter­est rates then would move far pos­i­tive from zero, thus a deval­ued cur­rency ser­vic­ing a much higher bond rate. Hardly a good out­come.

    2)“He also thinks that if this pol­icy is imple­mented grad­u­ally it doesn’t have to be very infla­tion­ary.” This misses the point entirely. In a seri­ous debt defla­tion you sure CAN print extra­or­di­nary ammounts money and still NOT achieve price infla­tion OR sus­tain­able eco­nomic growth. But you sure do have the remain­ing moun­tain of sov­er­eign debt to be serviced.This is what has hap­pened in Japan and is hap­pen­ing now in the US . Now, tax­pay­ers are bur­dened with an increas­ingly oner­ous tax bur­den in a still tank­ing debt deflat­ing econ­omy. So, do you a)raise taxes to ser­vice the debt or b)print more money (inflate away the debt) or c) default or d) a combo?

    IT DOESN“T MATTER because all these options are decid­edly neg­a­tive.

    There IS only one fail­safe answer to our prob­lems — DON“T incur the debt. There­fore it’s not a ques­tion of how to man­age the debt with funny account­ing and obscure eco­nomic the­o­ries — it’s a ques­tion of how do we rid our­self of absurd lev­els of oner­ous (pub­lic) debt brought on us all by self serv­ing Govts.

  • ak

    Atten­dant with that deval­u­a­tion would be run­away infla­tion in a worst case. Inter­est rates then would move far pos­i­tive from zero, thus a deval­ued cur­rency ser­vic­ing a much higher bond rate. Hardly a good out­come.”

    What would hap­pen if the reserve bank doesn’t defend exchange rates by rais­ing inter­est rates? 

    We have already agreed that bond rates will be close to zero. The gov­ern­ment can always achieve that by QE.

    So will a hefty deval­u­a­tion of the cur­rency in a defa­tion­ary envi­ron­ment cause a spike of infla­tion?

    Let’s check what hap­pened in the real world:

    http://finance.yahoo.com/q/bc?s=EURPLN=X&t=2y&l=on&z=m&q=l&c=

    (Euro­zone is the main trad­ing part­ner of Poland)

    http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=PLN

    Except for trou­bles for those who have for­eign denom­i­nated loans — noth­ing seri­ous hap­pened. Can we spot the hyper­in­fla­tion?
    http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=PLN

    What if prof Mitchell is right in this case?

    By the way nobody ques­tions the opin­ion that too much pri­vate or pub­lic debt is not good. Mitchell wrote that issu­ing pub­lic debt (as opposed to sim­ply run­ning out­right bud­get deficits — enabling pri­vate sav­ings) serves only one pur­pose — set­ting non-zero inter­est rates. He is cer­tainly against exces­sive pri­vate debt lev­els.

    But if inter­est rates are close to zero the mon­e­tary con­trol instru­ments do not work. Fis­cal pol­icy (espe­cially tax­a­tion) must be used to man­age the infla­tion and direct spend­ing may be used to con­trol the pub­lic com­po­nent of the aggre­gate demand.

    Again — you may not like that. You may hate using tax­a­tion and direct gov­ern­ment spend­ing to achieve these goals. Fine — I agree — you may have a point, this may look like micro-man­ag­ing the econ­omy or even resem­ble to some extent social­ism.

    But this doesn’t mean that prof Mitchell’s the­ory is incor­rect. IMO he is right in say­ing that the gov­ern­ment is not con­strained in its fis­cal pol­icy — if they don’t do silly things and cer­tain side-effects are accepted.

    But gov­ern­ments often do silly things in the inter­est of some social groups. We can all agree on this I think.

  • Stats Watcher

    Hi Paul

    The cynic would say that the neg­a­tive Price Defla­tor was nec­es­sary to ensure that GDP stayed pos­i­tive and Aus­tralia avoided the reces­sion.

    A closer look at that Table shows that the house­hold defla­tor remained pos­i­tive (0.9 and 0.3) and what turned the GDP defla­tor neg­a­tive was the mas­sive moves in the import and export defla­tors.

    The large move in the export defla­tor can be explained by falls in com­mod­ity prices. For the import defla­tor this would most likely be due to changes in the $A and lower Crude Oil prices.

    The CPI is a “mea­sure” of infla­tion on a bas­ket of con­sumer goods and ser­vices — which can be changed and adjusted as nec­es­sary (to take account of changes in buy­ing pat­terns and changes in the qual­ity of goods and ser­vices).

  • bx12

    Re : # 90. Thanks Goldilock­sis­ableach­blond.

  • Goldilock­sis­ableach­blond

    Re : #89/90

    bx12 — You’re wel­come. I hope I gave a cor­rect inter­pre­ta­tion of Steve’s def­i­n­i­tion.

    As a fol­lowup to the stuff by B.M.Friedman I quoted above , here’s a recent piece by Richard Clar­ida at Pimco , who stud­ied under and worked for Mr. Fried­man:

    http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+Perspectives+July+2009+Bark.htm

    Chart 2 depicts the his­tory of pri­vate credit and nom­i­nal GDP since we did our orig­i­nal work in the early 1980s. It is well known that the rela­tion­ship between the mon­e­tary aggre­gates and eco­nomic activ­ity broke down in the past 25 years, but as the chart shows, the same is true for aggre­gate credit extended to the pri­vate sec­tor. Given the sta­bil­ity of this rela­tion­ship for the 30 years end­ing in 1984 – through two wars, the great infla­tion, the break­down of Bret­ton Woods (I) – it is star­tling to see the chasm that emerged between credit out­stand­ing and nom­i­nal GDP since then. Indeed, the chart pro­vides one mea­sure to assess the extent of the “great lever­ag­ing” that U.S. house­holds and firms took on dur­ing the credit boom. For exam­ple, in 1984, $3.5 tril­lion of nom­i­nal GDP sup­ported $3.5 tril­lion of pri­vate credit out­stand­ing. By 2007, $14 tril­lion of nom­i­nal GDP sup­ported $25 tril­lion of pri­vate credit out­stand­ing. Sim­i­lar charts could illus­trate the credit bub­bles in other coun­tries (for exam­ple, the U.K.).

    His ‘Chart 2’ shows nom­i­nal pri­vate debt and nom­i­nal GDP run­ning neck and neck till about 1984 , where they diverged sharply. Since Fed­eral debt/GDP fell post-WWII , becom­ing sta­ble until about 1980 when it started ris­ing , it seems that this data also con­flicts some­what with Steve’s charts , which show total non-finan­cial debt/GDP start­ing to rise ear­lier. State and local debts were only a cou­ple hun­dred $bil­lion or so in 1980 , so I don’t think that would account for it. Any clar­i­fi­ca­tion on this would be appre­ci­ated.

  • It’s in a press release from Tanya Plibersek:

    http://www.tanyaplibersek.fahcsia.gov.au/internet/tanyaplibersek.nsf/content/tp_fhob_153000_25september2009.htm

    There’s a more recent one linked in the blog entry.

  • Lau­rence

    MMitchell@44

    . But I am con­cerned about this gov­ern­ment guar­an­tee of the banks, and of us maybe end­ing up like Ice­land. I would hate to think of my kids being:
    a) Impov­er­ished by huge taxes to cover bank over­lend­ing
    b) Liv­ing in a dic­ta­tor­ship once our cred­i­tors destroy our econ­omy and polit­i­cal sys­tem (Hudson’s pre­dic­tion for Ice­land if they try ans pay their debts); or
    c) In a war to escape the above sit­u­a­tion.
    With ref­er­ence to b), do you see the Stalin or the Khmer Rouge tac­tics being deployed in Aus­tralia so that we would be forced to work under unbear­able con­di­tions to repay our debts? If the cities do not have the pro­duc­tive envi­ron­ment, we could be forcibly decen­tralised to the rural regions to work on the land. 

    That’s a pos­si­ble sce­nario. A dic­ta­to­r­ial Govt would not be needed for that to hap­pen. The way Govts are being run, a con­sul­tant is all that would be required to exe­cute the con­tract. Guess who would be admin­is­trat­ing the con­tract?

    If we don’t want to march too far away from home, then we should plan ahead of the game. Per­haps we should urge our coun­cils to start the “reduce con­sump­tion, pro­duce locally” cam­paigns asap. At least we should cre­ate more agri­cul­tural lands and rural spaces within the urban areas; oth­er­wise we will face forced decen­tral­i­sa­tion against our wishes sooner or later.

  • msms

    @29 Stats Watcher

    the com­plete con­tri­bu­tion from elliot­wave in that post you referred to was

    Steve,

    Gold will trade at US$1224 on or before Novem­ber 5 2009.

    Remem­ber this and when it hap­pens alot of peo­ple on this blog will be owing me and apol­ogy.

    You can use this infor­ma­tion for trad­ing pur­poses i do not mind if peo­ple profit from my calls, even if they agree or dis­like me.

    Elliottwave.”

    Now that’s a cocky state­ment and quite a demand (for an apol­ogy). He is refer­ring to the US time zone so in one day gold will have to jump from about $1090 to $1224. The ques­tion is, will apolo­gies be forth­com­ing in the other direc­tion? Sure, gold has risen since his state­ment but it’s one thing to pre­dict rises and another to be cocky and make demands with a set time­frame and you (may) prove to be incor­rect, instead. We wait another 24 hours for either gold to hit $1224 or for some fur­ther com­ment (and/or the word “apol­ogy” from some­one).

  • Philip

    Lau­rence @ #110

    I like Michael Hudson’s free mar­ket idea of let­ting the banks and finan­cial insti­tu­tions go bank­rupt. This means that they would be repur­chased at pen­nies to the dol­lar, and that their assets (our debts) would either be erased or writ­ten down to very accept­able lim­its. Then they could be restru­c­uted and put back into busi­ness.

    Of course, the rich own­ers and man­agers of these insti­tu­tions acknowl­edge that indi­vid­u­al­is­tic respon­si­bil­ity are for those less for­tu­nate than them­selves. They will hud­dle under the pro­tec­tion of the nanny state, as they have always done. Dean Baker has a good intro­duc­tion to the exten­sive wel­fare pro­grams for the rich (it’s freely avail­able online):

    Baker (2006) The Con­ser­v­a­tive Nanny State — How the Wealthy Use the Gov­ern­ment to Stay Rich and Get Richer, CEPR, Wash­ing­ton D.C.

    I see (a) occur­ring to a degree but it can’t be exces­sive because it will fur­ther stran­gle any recov­ery but it remains a pos­si­bil­ity.

    As for (b) the state and cap­i­tal­ists are likely to have such an upris­ing on their hands due to unem­ploy­ment, fore­clo­sures, bank­rupt­cies, etc. that I think they would be forced to make huge con­ces­sions to the middle/working class as was seen in Paris 1968 in order to neuter any strong reformist/revolutionary ten­den­cies.

    If such things do actu­ally occur (25%+ unem­ploy­ment, bank­ruptcy cas­cades, debt-defla­tion, etc.) it would be a great time to orga­nize labor to do some­thing bet­ter than to sim­ply ask for more wages and ben­e­fits e.g. democ­ra­tize the work­place and get rid of man­agers and politi­cians. They need labor but labor sure doesn’t need them. If this were to ever occur then the cap­i­tal­ists and state would drop any pre­tense as been the won­der­ful bene­fac­tors of soci­ety and attempt to smash labor and social move­ments.

    For ©, we are already in two wars. Which other coun­try can we declare war on?

  • bx12

    Re : #108

    Wow! Both the sta­bil­ity of the PH Credit / GDP ratio before 1984 AND it’s decou­pling there­after are impres­sive. These two lines aren’t event scaled to over­lap each other, they’re actual val­ues.

    Steve has alluded to France behav­ing dif­fer­ently than oth­ers among OECD coun­tries on that mea­sure. In his ppt (below) though, on p14, France is not shown. Besides these are yearly changes, not lev­els. Has any­one seen such graphs, per­haps updated (these were 2007)? 

    Also, it would be inter­est­ing to see the level of total debt (Pri­vate + Pub­lic) to GDP as France is known as a gov­ern­ment friendly coun­try : does the pub­lic debt make up for the pri­vate one? For exam­ple, 2009’s “OECD in fig­ures” page 80 (the pdf is free) pub­lic debt in France dou­bled since 1989 whereas Ireland’s has declined. 

    A major issue in assess­ing debt sus­tain­abil­ity are the actual assets fac­ing debt : Invest­ment? Wel­fare? but also a country’s demo­graph­ics. Rus­sia, for exam­ple, has a decreas­ing pop­u­la­tion, so it’s debt per capita should be inflated rel­a­tive to the stan­dard Debt / n ratio where n is the # of inhab­i­tants. Any exist­ing visual tools for this?

    http://www.oecd.org/document/47/0,3343,en_2825_293564_43896303_1_1_1_1,00.html

    http://www.dealersgroup.com.au/kb/cf24-steve-keen.pdf

  • Goldilock­sis­ableach­blond

    bx12,

    You might find some­thing in the links at this post on Seek­ing Alpha :

    http://seekingalpha.com/article/125900-global-debt-a-closer-look

    I can’t vouch for valid­ity of the data. Some is from the “CIA World Fact­book” , a title that’s always struck me as oxy­moronic.

    Another vari­a­tion of the data I posted by Fried­man is shown in this post by Men­zie Chinn ( see Fig. 1 ):

    http://www.econbrowser.com/archives/2009/10/the_naitonal_sa.html

    There you can see the dis­con­nect , again start­ing around 1983–84 , from the bal­anced off­set­ting between pub­lic and pri­vate deficits/surplus that held pre­vi­ously (graph only cov­ers back to 1967).

  • Goldilock­sis­ableach­blond

    It just occurred to me , after look­ing at Chinn’s graph , why Steve’s charts show an ear­lier ram­pup in U.S. debt/GDP lev­els , rel­a­tive to the pic­ture you get from Fried­man et al.

    The U.S. used to be the largest cred­i­tor nation , then steadily tran­si­tioned to where we are now , the largest debtor. Steve’s data prob­a­bly incor­po­rates the decline in the cur­rent account , which I’m guess­ing started in earnest in the 1970’s , and that dif­fer­ence might explain why he shows dete­ri­o­ra­tion of the pre­vi­ously sta­ble debt/GDP ratios start­ing about then.

  • MMitchell

    Lau­rence #110,

    TruthIsThereIsNoTruth’s reply to my post #44 in which he stated bank debts were swapped to $AU made me feel a lit­tle bet­ter about our bank debt, but not much bet­ter about the con­tin­ued flood of money push­ing up house prices (it seems the Gov FHVG can be largely blamed for that though). The argu­ments by oth­ers that attempt­ing to inflate peo­ple out of this debt would be dis­as­ter­ous did not bring much peace of mind either.

    As for forced move­ments to the coun­try, I am not sure how far we are ever removed from author­i­tar­ian gov. It seems we inch closer every­day. In any case, in the Great Depres­sion peo­ple were moved to the coun­try to work. That was how they dealt with unem­ploy­ment, I have no doubts they would do the same today if nec­es­sary.

    I have con­ducted a small (but expen­sive) sus­tain­abil­ity exper­i­ment in my own area, and I am now con­vinced that rais­ing suf­fi­cient local aware­ness and involve­ment for any ideas like yours at the local level is unlikely in most sub­urbs (with excep­tions such as Brunswick maybe) — at least until a sub­stan­tial num­ber of peo­ple are really affected (I believe many are now, but these peo­ple are the most mar­gin­alised and voice­less in our soci­ety). It prob­a­bly still worth try­ing though — even­tu­ally the time may be right.

    Philip #112

    What sort of con­ces­sion could be made? Assume we do end up in an Ice­landic sit­u­a­tion; what con­ces­sions have they /could they be given by cap­i­tal­ists and the state?

  • bx12

    #114
    Goldilock­sis­ableach­blond,

    Thanks for these links. Great resources. Had no time to look in detail but some coun­tries look bet­ter than oth­ers on some mea­sures of debt and con­versely.

  • Lau­rence

    Philip@112

    Where do we get our pays and pen­sion cheques if “the banks and finan­cial insti­tu­tions go bank­rupt”? The job of pay­ing every­one includ­ing the pol­lies has been out­sourced to them long time ago.

  • Lau­rence

    MMitchell@116

    I agree. Rais­ing aware­ness is a long process but it has got to be done.

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