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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  • Mar­co2

    Steve and all,

    I whole­heart­edly agree that the RBA pol­icy is mis­taken and pos­si­bly dele­te­ri­ous, not only for the rea­sons you out­lined here (which to me seem per­fectly valid), but also because the rise in inter­est rates is indi­rectly hurt­ing the export­ing sec­tor of the Aus­tralian econ­omy and the Aus­tralian work­ers depend­ing on it for a liv­ing.

    Yes­ter­day I wrote a com­ment for the National Times blogs (SMH online), in reply to an arti­cle by Tim Cole­batch, focus­ing on the social effects of the reces­sion. For some rea­son, my reply was not pub­lished.

    But as you men­tion the way the RBA has increased inter­est rates, I hope this might be of some inter­est:

    Con­grats all and Tim, good posts.
    The RBA is increas­ing inter­est rates, although it dis­cour­ages employ­ment, while the ratio­nale for doing so is unclear. From the min­utes of the Meet­ing of the Board (06/10/09), avail­able at the RBA web­site: (…) ‘The fore­cast trough in infla­tion was not as low as pre­vi­ously expected, and by 2011 infla­tion could be ris­ing again’.
    That is, the RBA has been lift­ing inter­est rates, with grow­ing unem­ploy­ment, on the expec­ta­tion that infla­tion might rise in over a year’s time!
    That would seem a remark­able fore­cast­ing feat; unfor­tu­nately, the RBA’s record doesn’t seem excep­tion­ally con­vinc­ing.
    Dig­ging a bit on the news archive: on the 08/08/07 (4 months after the US-Fed bailout of Bear Stearns and Mer­rill Lynch), the RBA increased inter­est rates (merely a month before the Fan­nie Mae/Freddie Mac inter­ven­tion; a month and a week before the Lehman Broth­ers col­lapse).
    While the effects of the hous­ing bub­ble and the credit con­trac­tion spread world­wide, the RBA again lifted inter­est rates (to 6.75%, 07/11/07).
    Fur­ther­more, after signs of slow­ing global eco­nomic con­di­tions, by 17/12 the best the RBA man­aged was to main­tain inter­est rates unchanged, with two increases fol­low­ing in the first half of 2008 (05/02 and 04/03). The inter­est rates remained at 7.25% for five months, until 02/09 (nearly a year after the Lehman Broth­ers col­lapse), when the RBA finally started low­er­ing inter­est rates, for which it must be rightly praised.
    That per­for­mance, in my opin­ion, is not just dubi­ous in itself, the RBA recent deci­sions fuel expec­ta­tions that the stim­u­lus must be cut short, giv­ing ground to the Opposition’s claim that ‘all debt is bad’, while the Gov­ern­ment, to show they are ‘fis­cal con­ser­v­a­tives’, finds it polit­i­cally con­ve­nient to back down.
    All the while, the unemployed/partially-employed are left to fend for them­selves”.

    And this is the data (from the RBA web­site, taken directly from media releases on mon­e­tary pol­icy):

    Date Res­o­lu­tion
    01/09/09 Rates unchanged at 3.0 pc
    04/08/09 Rates unchanged at 3.0 pc
    07/07/09 Rates unchanged at 3.0 pc
    02/06/09 Rates unchanged at 3.0 pc
    05/05/09 Rates unchanged at 3.0 pc
    07/04/09 Rates reduced to 3.00 pc (from 3.25)
    03/03/09 Rates unchanged at 3.25 pc
    03/02/09 Rates reduced to 3.25 pc (from 4.25)
    02/12/08 Rates reduced to 4.25 pc (from 5.25)
    04/11/08 Rates reduced to 5.25 pc (from 6.00)
    07/10/08 Rates reduced to 6.00 pc (from 7.00)
    02/09/08 Rates reduced to 7.00 pc (from 7.25)
    05/08/08 Rates unchanged at 7.25 pc
    01/07/08 Rates unchanged at 7.25 pc
    03/06/08 Rates unchanged at 7.25 pc
    06/05/08 Rates unchanged at 7.25 pc
    01/04/08 Rates unchanged at 7.25 pc
    04/03/08 Rates increased to 7.25 pc (from 7.00)
    05/02/08 Rates increased to 7.00 pc (from 6.75)
    05/12/07 Rates unchanged at 6.75 pc
    07/11/07 Rates increased to 6.75 pc (from 6.50)
    08/08/07 Rates increased to 6.50 pc (from 6.25)

  • bb


    Thankyou for your reply.

    I don’t think Neo­clas­si­cal Econ­o­mists (NC’s) argue no gov­ern­ment involve­ment. Even they accept pock­ets of mar­ket fail­ure (ie: unlik­ley the Army or Police could every be sup­plied by tra­di­tional mar­ket forces). Sec­ondly, they rec­om­mend the fed­eral reserve to be inde­pen­dant of Gov­ern­ment — so i don’t think they con­tra­dict them­selves.


    Thankyou for your response. For my sins I know quite a few NC’s. Non of whom sug­gest the eco­nomic sys­tem is lin­ear (although as you sug­gest, this may not have been the case in the past). In fact, I know my broth­ers reponse to this already. He would also sug­gest you can’t just deduct gov­er­ment involve­ment and get the under­ly­ing GDP num­ber. He would argue that the cash for clunk­ers and other direct gov­er­ment inter­ven­tion has prob­a­bly “crowded out” other part of the econ­omy, and GDP would prob­a­bly have been higher than 1.4% with­out gov­ern­ment inter­ven­tion — with a lot less Fed­eral debt.

  • Mar­co2

    Two lines were miss­ing in the data:

    03/11/09 Rates increased to 3.50 pc (from 3.25)
    06/10/09 Rates increased to 3.25 pc (from 3.00)

  • ak

    What kind of “crowd­ing out” can hap­pen if you have almost 10% offi­cial unem­ploy­ment and capac­ity util­i­sa­tion at 70%?

  • mfo

    Has any­one noticed the nar­row­ing gap between inter­est the banks pay on a term deposit and the inter­est bor­row­ers pay on a hous­ing loan. Last time I saw such a nar­row­ing gap was dur­ing the days of Pyra­mid and Estate Mort­gage 10 min­utes before they col­lapsed — which was 5 min­utes after the then Vic­to­rian State Trea­surer Rob Jolly said every­thing was fine. As Jeff Ken­nett famously said,“you can’t stop the stu­pid from being stu­pid”.

  • bb


    Just because capac­ity util­i­sa­tion is below peak, it does fol­low that there can be no crowd­ing out. It comes down to a mis­al­lo­ca­tion of resources.

    There was an excel­lent post on this blog not too long ago about some­one on the sun­shine coast try­ing to get a new Kitchen. Despite ris­ing unem­ploy­ment, and gen­er­ally weak busi­ness sen­ti­ment this per­son could not find any­one — the rel­e­vant builders were all get­ting work from the Gov­ern­ment to upgrade schools etc. 

    Now, in the next set of GDP accounts, it would be wrong to deduct +100% gov­ern­ment expen­di­ture on schools to derive under­ly­ing GDP — since we know there was at least one per­son on the Sun­shine coast who wanted a new kitchen.

    The result is we have had crowd­ing out, depite the econ­omy not run­ning at full capac­ity.

  • TruthIs­ThereIs­NoTruth


    I’m sure this is noth­ing new to most peo­ple but to clar­ify RBA believes around 4% is an expan­sion­ary level and below that is emer­gency level. At the moment they are with­draw­ing from the emer­gency lev­els, if infla­tion was high they would be expected to go well above 4%.


    Although Aussie banks bor­row some money in for­eign cur­rency it is all swapped out into AUD, effec­tively mak­ing most of the for­eign debt an AUD expo­sure for the banks.

  • Mar­co2

    @ak (#59)

    Excel­lent post, mate! Very instruc­tive.

    I myself am strug­gling with Prof. Mitchell’s thoughts: at one hand, given my already known inter­ests, it is very attrac­tive. At the other hand, it con­tra­dicts many of the things I have taken for granted.

    Keep it the good work!



  • ak


    I was refer­ring to the US not to Aus­tralia. You used the term “cash for clunk­ers” so I was assum­ing that we were not talk­ing about Sun­shine Coast. Why do you think this sin­gle exam­ple can be used to draw generic con­clu­sions about another country’s econ­omy?

    Sun­shine Coast Area Pro­file
    * Unem­ploy­ment Rate : 4.4 %
    * Job Seek­ers : 11 661
    * Aver­age Job Seeker Age : 37
    * Aver­age Job Seeker Unem­ploy­ment Dura­tion : 16 months
    * Work­ing Age Pop­u­la­tion (15–64) : 188 467|ESA|QSNC|ESA|anon|Job%20Network

    Also — what is the “mis­al­lo­ca­tion of resources”? I thought that the spec­u­la­tive bub­ble in real estate is the biggest exam­ple of such a mis­al­lo­ca­tion. (Oh sorry for a neo­clas­si­cal econ­o­mist there is no hous­ing bub­ble and prices are always right unless the gov­ern­ment spoils the party). You need to pro­vide sta­tis­ti­cal data show­ing that said “crowd­ing out” indeed hap­pened in the US — for exam­ple by point­ing to a direct spike in prices of cer­tain ser­vices in the areas affected caused by the stim­uli.

  • clive

    Australia’s Retail Sales Unex­pect­edly Decline 0.2%

    It appears, there’s still a few around that aren’t that con­fi­dent about the future

  • ak

    sorry the link is bro­ken just type “sun­shine coast unem­ploy­ment” in Google and the link will be shown in the search results

  • GSM


    I did com­ment above;
    “If we respond with sim­ply more print­ing then we will see our cur­rency even­tu­ally vapourise and become worth­less.”

    Char­tal­ism or any the­ory that espouses the mas­sive and unlim­ited print­ing of new debt (so Govts can take the place of pri­vate demand that is not there), will even­tu­ally result in that debt being essen­tially unser­vice­able and is a road to a worth­less cur­rency. I believe you have agreed to that.

    I would not panic about our pub­lic debt. ”

    That debt that we don’t need to panic about must be ser­viced. Even Ken Henry acknowl­edges that, hence his com­men­tary recently on the prospect for higher taxes. Whether you believe it or not,Ken Henry has indi­cated higher taxes are in your future. That will fur­ther crimp aggre­gate pri­vate final demand (I dont see wages increas­ing as an off­set to higher taxes- do you?). Taken to extremes, mas­sive and run­away debts= MUCH higher taxes to ser­vice it. Try to print the money to ser­vice that run­away debt and our cur­rency loses value, per­haps dra­mat­i­cally so. This is what is hap­pen­ing now in the US. Has it worked? Sure, it has tem­porar­ily pumped up the stock indexes and boosted Bankster bonuses. But essen­tially QE has failed to boost pri­vate demand. Con­sumer credit has col­lapsed in the US indi­cat­ing clearly that con­sumers still are not will­ing to give up delev­er­ing. Company’s are still retrench­ing with no employ­ment growth for this decade.

    IMHO there is only one sus­tain­able way out off our imme­di­ate predica­ment. To SAVE. Both pri­vate and Pub­lic. Slash Govt spend­ing back to essen­tials. This is the only way to bring back a last­ing con­fi­dence. Yes it will have neg­a­tive impli­ca­tions ini­tially but when the delever­ag­ing has run it’s nat­ural course house­hold and Govt bal­ance sheets will be in the kind of shape that will offer a sus­tain­able eco­nomic recov­ery WITHOUT the over­head bur­den of mas­sive debt ser­vic­ing costs.

  • TruthIs­ThereIs­NoTruth

    the RBA was still rais­ing rates in mid-2008 to fight infla­tion. They didn’t see the GFC com­ing” — Steve, sorry for play­ing devil’s advo­cate but I believe they did see it com­ing but at the time thought that Aus­tralia was in a rea­son­ably strong posi­tion to face the cri­sis. Not only were they right but they were proved to be too bear­ish in their fore­casts.

    Don’t you think rais­ing rates now is a rea­son­able thing to do to pre­vent fur­ther bal­loon­ing of the real estate bub­ble?

    It just seems like any­thing they do can be cri­tised, they lower rates — they feed the bub­ble. They raise rates — they’re going to prick the bub­ble and cause a dis­as­ter.

    From what I under­stand the RBA takes in many more fac­tors into con­sid­er­a­tion and I find that dif­fer­ent pock­ets of peo­ple with dif­fer­ent inter­ests pick up on a few things on which they base their critisms.

    The real uncer­tainty here is how thick is the debt bal­loon skin, we are in untested ter­ri­tory and I don’t think any­one can say with any degree of con­fi­dence the exact tim­ing of a poten­tial burst. If the RBA tried to make their deci­sions on such long term and uncer­tain pre­dic­tions that would be a recipe for dis­as­ter. I believe a “roll with the punches” approach is best.

  • Goldilock­sis­ableach­blond

    re: #72

    Aggre­gate Demand = GDP + DeltaDebt

    It’s prob­a­bly a mat­ter of seman­tics, but I would have thought that DeltaDebt would be a com­po­nent of GDP, and why treat it dif­fer­ently than Aggre­gate Demand?”


    I believe that Steve would argue that , in his for­mula , ‘Aggre­gate Demand’ equals that demand sup­ported by the under­ly­ing econ­omy , in the absence of inputs from added debt that causes the debt/GDP level to increase.

    So : “Legitimate(my term)GDP = Aggre­gate Demand — DeltaDebt

    I con­tend that if you were to look at the U.S. econ­omy pre-1975 or so ( when debt/GDP was sta­ble and low) , you would find that any incre­ment in deltadebt that raised the debt/GDP ratio , added , arti­fi­cially , to GDP in a dol­lar for dol­lar fash­ion , or very nearly so. So , one could recal­cu­late yearly GDP , cor­rect­ing for the effects of added , excess debt over the last 50 years , say. Econ­o­mists in the U.S. don’t dare attempt some­thing like this , how­ever , since it would reveal that The Emperor not only has no clothes , but no skin or any other tis­sues , only bones , because GDP growth since the 70’s or there­abouts would be shown to be illu­sory to an embar­rass­ing degree.

    Cur­rently added debt prob­a­bly con­tributes on sig­nif­i­cantly less than a dol­lar for dol­lar basis , because part of that con­tri­bu­tion shows up as Chi­nese GDP , and because of the effects of forced delever­ag­ing by the U.S. con­sumer.

  • Goldilock­sis­ableach­blond


    Sorry, I messed up my def­i­n­i­tion above. I believe that Steve would say that “Aggre­gate Demand” equals the under­ly­ing demand plus the debt-added demand , but I think you prob­a­bly already guessed as much.

  • GSM

    A good sum­mary on how to blow up your econ­omy. Clearly, QE is a tool used by cor­rupted Govts and CB’s to defend their bank­ing pals from fac­ing neg­a­tive mar­ket and legal responses . QE is an eco­nomic death sen­tence.

    Select Quotes
    • Democ­racy has been diluted by the actions we have taken to get out of this cri­sis.
    • The gov­ern­ment is will­ing to willy nilly print money to pre­vent any bank from going into receiver­ship which I think is a galac­ticly bad idea.
    • Credit deriv­a­tives added to the prob­lems by pro­vid­ing lever­age and opac­ity. They increased people’s abil­ity to bor­row in hid­den ways.
    • There is a lot of debt in the sys­tem that is invis­i­ble. And banks them­selves were often run­ning invis­i­ble hedge funds. The legacy invest­ment banks were run­ning invis­i­ble hedge funds, but so were our major banks, and that includes JPMor­gan, and Cit­i­group Bank of Amer­ica.
    • Col­lat­er­al­ized Debt Oblig­a­tions (CDOs) were over­rated and over­priced the minute they came to mar­ket. If that wasn’t enough, invest­ment banks were cre­at­ing these things in their finan­cial meth labs , know­ingly sell­ing things they knew or should have known were over­rated and over­priced.
    • In 2007 when it was clear that this activ­ity should be shut down, because we had mort­gage lenders fail­ing through­out the coun­try, instead of shut­ting down the finan­cial meth labs, the invest­ment banks sped up, they accel­er­ated the bad deals they were bring­ing to mar­ket. Many of them were just phony secu­ri­ti­za­tions with no other pur­pose than to hide losses.
    • I was hope­ful that when some­one like Obama came in, there would be mean­ing­ful change. If any­thing, the sit­u­a­tion has got­ten worse. But this is bipar­ti­san. You’ll notice that Pres­i­dent Bush when he was in office, he ele­vated Roland Arnold who was the head of Ameriquest, that had been involved in alleged mort­gage fraud, mas­sive, sued by almost every state in the union, and he was ele­vated to the posi­tion of Ambas­sador to the Nether­lands. The Nether­lands did not even like it.
    • This was not a model issue. This was a man­age­ment issue. We had peo­ple who knew or should have known they were sell­ing things that were value destroy­ing secu­ri­ti­za­tions, and their sale pro­vided money to lenders were orig­i­nat­ing fraud­u­lent loans, over­rated by com­plicit rat­ing agen­cies.”

  • bb


    Thankyou for your reply.

    I apol­o­gise for any con­fu­sion — I was talk­ing about the US, but I used the Sun­shine Coast as an exam­ple as to how it is pos­si­ble to have “crowd­ing out” in an econ­omy not run­ning at full capac­ity.

    Your excel­lent link to the eco­nomic per­for­mance of this region con­firms this. Regional economies can per­form quite dif­fer­ently to the nation — hence the blunt instru­ment of fis­cal pol­icy can cause unin­tended excess demand in some indus­tries and regions, while other indus­tries lan­guish. So I guess we are in agree­ment.

    I will just avoid debat­ing NC eco­nom­ics with my brother for a few weeks and wait for some bad eco­nomic news.….nice to see some weak retail sales data though.…:)

  • debtjunkies


    I agree.

    After read­ing var­i­ous sto­ries about restric­tions in the HK prop­erty mar­ket, I am now of the firm opin­ion that the best way to con­trol the hous­ing mar­ket and bub­ble is through reg­u­la­tion of bank lend­ing stan­dards and prac­tices.

    1. Min­i­mum deposit require­ments, say 20%.
    2. Max­i­mum income ser­vice­abil­ity bound­aries, 35% gross income.
    3. All loan assess­ments are based P&I and on the aver­age mort­gage inter­est rate over the past 25 years, approx 9%.
    4. All lend­ing both occu­pier and invest­ment is sub­ject to the same lend­ing stan­dards and require­ments.

    This would ensure that hous­ing spec­u­la­tion remains firmly within the mar­kets and the bor­row­ers capac­ity to ser­vice.

    The RBA would then be free to com­pletely dis­re­gard hous­ing when look­ing at its deci­sion mak­ing processes. They may then give more con­cern to the real prob­lems fac­ing the econ­omy like reduc­ing busi­ness invest­ment etc.

    I think at the moment peo­ple and the RBA are wor­ried about con­flict­ing read­ings in the econ­omy and the RBA is strug­gling to deal with these com­plex­i­ties — whilst remov­ing the hous­ing issue may not make their deci­sion mak­ing process any more robust it would remove one of con­cerns that they have been more vocal about in the past 6 months.

  • GSM

    US Trea­sury meets with var­i­ous Finan­cial Blog­gers;

  • DrBob127

    MORE than 75 per cent of home­own­ers took advan­tage of low inter­est rates to add to their mort­gage loan or take on other forms of debt, a new sur­vey has found.”,27753,26304289–31037,00.html

  • Mar­co2

    @TruthIsThereIsNoTruth (#82)


    I’m sure this is noth­ing new to most peo­ple but to clar­ify RBA believes around 4% is an expan­sion­ary level and below that is emer­gency level. RBA believes around 4% is an expan­sion­ary level and below that is emer­gency level.”

    Accord­ing to this, from August 2007 and up to August 2008 (period dur­ing which inter­est rates were either increased or kept at 7.25%) was not an emer­gency period?

    The emer­gency began in August 2008, when the RBA pre­cip­i­tously started reduc­ing inter­est rates. I would sug­gest the RBA to revise its emer­gency def­i­n­i­tion.

    At the moment they are with­draw­ing from the emer­gency lev­els, if infla­tion was high they would be expected to go well above 4%”.

    I see. So we are now at 3.50% and, at least among the pun­dits, a con­sen­sus is appar­ent that we aren’t stay­ing put for too long. I sup­pose, then, this means we are enter­ing an infla­tion­ary period in the very short run, not in 2011, as stated explic­itly in the min­utes of last month’s Meet­ing.

    Still, con­sid­er­ing that among “the most sig­nif­i­cant price rises this quar­ter [Sep-09] were for elec­tric­ity (+11.4%) (…) water and sew­er­age (+14.1%)” [1], and elec­tric­ity and water and sew­er­age tend to increase only spo­rad­i­cally, I fail to see the imme­di­ate urgency.

    Then, again, I already failed to see how a 2011 fore­cast could have been made.

    Accord­ing to the Reserve Bank Act 1959 (a syn­the­sis of which is con­tained in the RBA web­site), there is no indi­ca­tion that any of its three main legal duties is inher­ently more impor­tant than the other two:

    It is the duty of the Reserve Bank Board, within the lim­its of its pow­ers, to ensure that the mon­e­tary and bank­ing pol­icy of the Bank is directed to the great­est advan­tage of the peo­ple of Aus­tralia and that the pow­ers of the Bank … are exer­cised in such a man­ner as, in the opin­ion of the Reserve Bank Board, will best con­tribute to: 

    (a) the sta­bil­ity of the cur­rency of Aus­tralia;
    (b) the main­te­nance of full employ­ment in Aus­tralia; and
    © the eco­nomic pros­per­ity and wel­fare of the peo­ple of Aus­tralia” [2]

    Still, after read­ing the min­utes and the media releases, one has a sen­sa­tion that (b) is some­what less impor­tant than (a).

    The need to con­trol this immi­nent infla­tion (that is, item a) cer­tainly over­rides the trade­ables sec­tor per­for­mance: “The Board noted that the rise in the exchange rate is likely to con­strain out­put in the trade­ables sec­tor (…)” [3].

    As a side note, I guess then the RBA might argue that this rise in the exchange rate (accord­ing to some pun­dits 27% since the end of 2008) has lit­tle rela­tion, if any, with the ris­ing inter­est rates [4].

    And this deci­sion to rise inter­est rates clearly over­rides any fur­ther con­sid­er­a­tion to unem­ploy­ment (that is, item b): “There have been some early signs of an improve­ment in labour mar­ket con­di­tions. The rate of unem­ploy­ment is now likely to peak at a con­sid­er­ably lower level than ear­lier expected” [5].

    I don’t know if it is clear to any­one else, but I still stand by my orig­i­nal post: the ratio­nale for the RBA actions is unclear and I can see no immi­nent infla­tion threat. But even if there was a threat of infla­tion, I still can’t see why it must over­ride the search for full employ­ment.


    Marco <- with­out the 2, please 🙂

    [1] ABS. CPI Sep­tem­ber Quar­ter 2009 Up 1.0%
    Octo­ber 28, 2009.

    [2] RBA: Overview of Func­tions and Oper­a­tions.

    [3] RBA. MEDIA RELEASE No: 2009–25
    3 Novem­ber 2009.–25.html

    [4] David­son, Ken­neth. For­eign spec­u­la­tion on our cur­rency is a bub­ble set to burst.
    SMH, Octo­ber 26, 2009.

    [5] RBA. Cited.

  • Barry


    Do you have a source for those fig­ures in rela­tion to the FHOB?

    Im look­ing at data from the WA Depart­ment of Trea­sury and Finance which does not cor­re­late with the data you have posted. See here:

    If you have a source for your data that would be great.


  • Shadow

    Silly silly gov­ern­ment. How fool­ish of them to imple­ment a pol­icy that dri­ves the econ­omy upwards, and achieves a mul­ti­plier effect of 50 to 1. If they had any sense at all they would have instead dri­ven the econ­omy into the ground and cre­ated a nice long reces­sion. A depres­sion even. What were they think­ing? Damn fools! I want my depres­sion you fools!

  • GSM

    Silly silly gov­ern­ment. How fool­ish of them to imple­ment a pol­icy that dri­ves the econ­omy upwards, and achieves a mul­ti­plier effect of 50 to 1.”

    Spo­ken like some­one who dines out at tax­payer expense. For these par­a­sites, the Govt’s pol­icy is man­nah from heaven.

  • Bull­turned­bear

    Hi Shadow,

    You got me think­ing. On the sur­face you raise a good point. The gov­ern­ment should try and prop every­thing up as long as it can, right? But how far do you take that?

    Why prop up the price of houses? Aren’t cheaper houses bet­ter for every­one? I assumed your 50 to 1 was a ref­er­ence to the FHOG. How much extra pri­vate debt has this pol­icy fur­ther encour­aged our peo­ple to take on with­out think­ing?
    Japan has been prop­ping up for over 20 years. They still have ris­ing unem­ploy­ment and a loom­ing cat­a­stro­phe.

    What if pri­vate debt lev­els are too high? What if prop­ping up just kicks the can down the road? What if we can have less pain now? Isn’t that bet­ter than leav­ing it for our chil­dren to suf­fer? Like Japan has done! I would rather take the hit than have my kids suf­fer more than they need to.

    Of course if I’m wrong. It’s bet­ter to never have the pain of debt. Just take all the con­sump­tion and never pay the piper. Some­how that just seems like a fan­tasy world to me.