I haven’t yet had time to post Michael Hudson’s talk at Customs House–hopefully I’ll manage that this weekend–but in the meantime here is the talk I gave a couple of days earlier at Per Capita‘s Policy Exchange 2009 Conference in Canberra on October 21st 2009. The good folk at SlowTV put this together, and this is the link to the video on their site.
I open this talk by referring to the first presentation at the conference (after Julia Gillard’s opening speech) by Professor Joshua Gans, in which he began by describing both Milton Friedman and Hyman Minsky as “Keynesians”. Had one of the students in my History of Economic Thought subject at UWS made such an observation, he/she would have been well on the way to a fail grade. I was hoping that SlowTV might have also posted Joshua’s talk so that you could make your own minds up on this, but that doesn’t seem to have occurred. Those curious about his approach to economics should check this link to his home page and a blog he established called Core Economics.
Dear Prof. Keen,
In a completely off topic comment, if you have not yet seen it, you should give a look at the article The Bloom in the Gloom, by Rana Foroohar in Newsweek (09/11/09). It’s about echo bubbles.
Cheers,
Marco
Great talk Steve
It strikes me that your equations are similar to the equations in Maxwell’s Control Theory.
That is, the way we increase our money supply is essentially unstable because of the positive feedback associated with the way we create money through debt.
As you have demonstrated money creation occurs by the loan first then the money. To get a loan you have to have an asset against which you can borrow money. So you borrow the money and now – if you consider the money created as an asset – which is what deriratives do we can get more loans because we have more assets which in turn leads to more loans etc.
It acts in reverse with deleveraging which is what you have described.
Systems like this can be described with Maxwell’s control equations.
Given that this is the problem a solution can be found by first stopping money creation through loans. That is, stop banks loaning money unless they first have it on deposit.
But if we do that how do we increase the money supply?
Well let the government decide approximately how much we need to increase the money supply and give it to the population – with the proviso that it must be spent on increasing productive assets.
We only have to do this for the increase in the money supply we need each year.
However, the trouble with this is that we need to increase the money supply a lot more than that to accommodate deleveraging. That is why giving zero interest loans for productive purposes and requiring the money to be repaid will enable us to keep the money supply up without creating toxic debt (debt without a true asset backing)
We will not be able to stop the fractional reserve banking system overnight and require banks to only lend money they have on deposit. We can however, leave it in place because zero interest loans for new assets means that it becomes much more attractive to build new assets in the areas of need than it is to buy old assets and so the system will gradually deleverage and it will become less attractive for banks to create credit money because credit money is intrinsically riskier and the risky money is the zero interest money where the government takes the risk on the money not being repaid.
By using zero interest to create productive assets and new money we have the basis of a stable yet growing system. We control the rate of growth through the issuing of new money. Old money can still be lent but it will no longer increase the money supply because it has to exist to be lent.
I apologize for being completely off topic but in the midst of all the euphoria about how China is saving us and will drag us out of the economic poo of the rest of the world, everyone has forgotten about Japan. Japan is heading into meltdown.
Japan was Oz’s great saviour not so long ago when all our kids were supposed to learn Japanese. Now that the Japanese economy appears to be about to go belly up, with God knows what consequences on all other major economies, it’s all gone very quiet. God forbid we are all supposed to learn Putonghua (at leaat it is easer). No comment from Krudd on this.
In 2008-09 Japan was still our largest export market taking some $52.6 billion in 2008-09. That was not all crude minerals. One could be forgiven in all the back slapping about selling iron to China that China is still not our no 1 market (I would add as someone who knows a little about China it is likely that Stern Hu is not the last piece of retribution for RTZ/BHP etc’s grinding down China in 2008. There is more to come. It may take some time. We are unlikely tog et support form China, indeed they may see it as their opportunity. Why but into Aus when the A$ is high when in time we can buy cheaply.
If Japan, as anticipated, really does go belly up we could well join the rest of the world, only a little later. In the distant days when I was a party goer I recall that being too late was not the best strategy. All the beer and all the best looking girls were gone.
If Japan really is about to meltdown what effect will than have on us, exports, tourism?
us non farm payrolls
-190 000
unemployment rate
10.2%
highest since 1983
First post:
Hi Prof Keen and company.
I have been following this fine site for close to a year.
It’s certainly challenging to follow as I have no financial training. I just glean what I can.
I viewed your lecture Steve and seek your permission to post it on my youtube channel halfasheep or I could create another channel. I would perhaps break the lecture into smaller parts.
I noticed Glenn Stevens on the ABC this morning acting mystified in regards to current house prices. I recall him saying something like “here in Australia we have so much land, yet our population is small compared with other countries. Why do our house prices remain so high?”.
It’s statements like this that earn Stevens the big dollars.
Thanks again all, keep up the good work and observations.
Prof. Keen,
I really liked the OECD forecasts slide:
“a soft landing in the US.
a strong and sustained recovery in Europe
a solid trajectory in Japan
and buoyant activity in China and India
In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment”.
OECD. June 2007
They managed to be wrong in each and everyone of them! This has got to be a record. By June 07 Bear Stearns and Merrill Lynch were already history, we were hearing about the sub-prime everywere, but, hey, this was no emergency!
A few days ago, I had serious doubts about the RBA-Federal Government’s policies.
Well, I had doubts then. Now I have no more doubts… I am full of confidence in the RBA and Treasury.
I hope Gillard heard your presentation. Not that it would have made much difference, but if she was there, I don’t think she would have failed to understand the “governments losing elections as a consequence of an economic debacle” bit. These people are heading the same way.
The Newsweek article mentions that we appear to have entered a stage where, like earthquakes that are followed by secondary earthquakes, a bubble collapse may be followed by other bubbles forming and collapsing quickly. And they believe one such bubble could be forming in China, our saviour.
Well, I’m signing off.
Marco
Thanks life after debt,
I actually felt sorry for Glen when I heard that comment. He sounded genuinely mystified, and his comment included a statement similar to that “he couldn’t understand why the price of “the marginal house was so high”–which means that he was trying to fit it into the neoclassical mold of “marginal cost equals marginal revenue”.
No wonder he’s confused.
PS “Lad”, feel free to post the video!
I always thought the saying was “the marginal return isn’t worth the marginal effort”. This applied (in my younger days) to working longer hours, working out at the gym, etc, etc. Five recent home sales in the estate I live in (north west Sydney) have not only been so swift (48 hours on the market in one case) and the prices so much higher than even the vendors expected I am in no doubt the Kevin Rudd and his economic advisers are financial geniuses of the highest order, Bernie Madhoff move over, these guys have succeeded in Ponzi-ing a whole nation!
Elliot Wave International currently has a free week until 11 Nov for all their financial reports.
I highly recommend their detailed, comprehensive and insightful work. It is also still strongly deflationist.
Goto http://www.elliottwave.com/freeweek/ffs-nov-2009/default.aspx?code=36891 and sign up as a Club EWI member then access the reports – BY 11 NOV.
It hasn’t been posted here but another excellent program on the GFC, This one is called the The Warning:
http://www.pbs.org/wgbh/pages/frontline/warning/?utm_campaign=homepage&utm_medium=bigimage&utm_source=bigimage
At the end, Greenspan’s mea culpa and dismay at how 40 years of his intellectual view of the economic world turned to dust is riveting. He will surely have some more confused peers before this is all played out.
I really know that I should not write this… but I can’t resist.
What if the initial housing bubble developing in the late 1990-ties has been artificially propped up as a part of the migration policy of the government – to force fresh migrants into debt servitude / renting houses forever and avoid (or delay) the country being taken over by the skilled migrants?
This is the profile of my area – Post Code 2763 (I’m not sure whether the link will survive posting):
http://www.censusdata.abs.gov.au/ABSNavigation/prenav/LocationSearch?locationLastSearchTerm=2763&locationSearchTerm=2763&newarea=POA2763&submitbutton=View+QuickStats+%3E&mapdisplay=on&collection=Census&period=2006&areacode=POA2763&geography=&method=Place+of+Usual+Residence&productlabel=&producttype=QuickStats&topic=&navmapdisplayed=true&javascript=true&breadcrumb=PL&topholder=0&leftholder=0¤taction=104&action=401&textversion=false&subaction=1
Probably more than a half of the people living there can be described as of Anglo-Saxon or other Western European ancestry.
However 90% of the children in the opportunity class of the Quakers Hill Public School are from migrant families.
This should hardly surprise anyone if we consider that the whole Skilled Migrant Scheme is an IQ test in disguise – and apparently IQ is strongly inherited (I am well aware of the limitations of this approach but this post is not a scientific article so please do not accuse me of oversimplifications)
http://www.newscientist.com/article/dn1520-iq-is-inherited-suggests-twin-study.html
(True – there are good private / Christian primary schools in the area as well – some smart Anglo-Saxon kids often go there).
I can say the same about the IT industry – the managers are (mostly) Aussies or Poms but a lot of senior technical staff are ethnic Chinese, Indians or came from Russia. If you look at who goes to the university – not only foreign students are Chinese / Indian. A lot of Aussie students are of Asian ancestry.
The brutal truth about our migration policy (apart from the reluctance to accept illegal migrants even if they are true refugees) is that the population of Australia has to grow even if this means damaging the environment – or else we will be settled without our consent when the environmental or political crisis in the region kicks in. You cannot get enough high quality migrants from Europe or Latin America.
The alternative to skilled migration is opening doors to anyone – what would result in similar problems the UK, France and Germany have to cope with.
But there is a clear conflict of interests between the descendants of Anglo-Saxon / Western European population and the migrants. Just look at our politicians who they are – either Anglo-Saxon or descendants of Italians in NSW. How many of the federal or state level politicians are of Asian ancestry? One minister in the Government? True, the language is the barrier – much higher for the Eastern Asians than for the Europeans. But the most of Indians speak reasonably good English when they arrive because they studied in English rather than ethnic languages back in India.
Some of highly successful entrepreneurs are in fact either first or second generation migrants. However profits in Australia are often made not by actual production of anything – but by rent-seeking.
The only effective way of preserving the status quo for the next 20-30 years is to run a massive income redistribution scheme. You just can’t tax me more because I was born in Gdansk not in Penrith. However forcing families either to spend $2000 per month on renting or $1500 (soon may be more) on paying the interests to an average loan will do for a while. Capital gains have also been mostly realised by the initial group of investors who turned out to be mainly Anglo-Saxon. True, there are also rich migrants coming from Hong Kong or Western European countries but the most of people came without $500k required to buy a house in Sydney.
The welfare and income redistribution scheme is very popular in the electorate especially among baby boomers. Young Anglo-Saxon people born in Australia are just a “collateral damage” as they have even smaller chance to break through the glass wall than highly skilled and more intelligent children of migrants. We have to keep in mind the different attitude among the second generation migrants – they usually work harder than more laid-back Anglo-Saxon students.
Anyway – the process of Singapore-isation of Australia is inevitable. When the housing bubble finally bursts and the baby boomers fade away – forget about the beloved White Australia. I will not cry for it at all.
Robert,
Thanks for the EWI Freeweek link. Just a minor correction though – the financial reports available are restricted to the US reports in this instance.
Steve – Excellent talk. I really enjoyed it. I’d like to know when it gets posted to YouTube.
One question: Isn’t the Minkskyan depression especially likely in a world with fiat money? Debt levels are much easier kept in check with the state is restricted from increasing base money, which explains why they never got this far out of whack before 1971.
Steve, back on the topic of Kosciosco trek, it certainly would be interesting if it was done later in 2010 when there is time to prepare and the weather is better starting at Canberra during an election campaign.
Steve
We walked from Canberra to Kosciosco a few year ago along the Alpine Trail. It took about 2 weeks and was most enjoyable. Leave your mobile at home get a few food drops where the trail crosses a road and you will have a very enjoyable time. It was a good bet to lose.
GLENN STEVENS: How is it that in a country this big in area and this small in numbers of people we can’t manage to make the marginal price of a dwelling lower than it is? It seems to me quite high.
November 5, 2009 (AP)
Fannie Mae to allow troubled borrowers to hand over deeds to homes, let former owners rent
Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.
The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.
Can you see the advertisements. Australian Government Guaranteed Houses. If you cannot afford the mortgage payments the government will take them over and you pay only the LOW, subsidized, public housing rent. No foreclosure, No troubled asset sale to upset the inflated housing prices and away we go again.
Hi Steve, you’re looking well!
Just wondering if you have a link to the updated report on the “economists who saw it coming” where the list grew from 12 to a couple of dozen I think you said.
I can give a free 30 minutes presentation to Mr Glenn Stevens how to use Google to find information which is in the public domain if he still wants to ask silly questions.
Here is a document explaining why the marginal price of land has to be high in Sydney:
http://www.nsroc.org/documents/LGA%20-%20Medial%20Release%2025%20June%202006.pdf
The answer is: the land price has to be high because we have such policy. This has nothing to do with any land shortage or extremely high costs of providing infrastructure. Why does the cost of the infrastructure have to be higher here than in for example Montreal? What urban infrastructure are we talking about? The non-existing North-West rail line?
I fully agree with the endogenous nature of the global bubble. But nothing explains why our house prices must be 30% higher in Sydney than in Toronto. Nothing – except for the fact that this is our official policy. No, not a conspiracy. This is the official policy of the government of NSW. This policy will never be changed because there are vested interests – and there is a Green-Labor-Liberal consensus.
In our country our property bubble is sacred and any government will do anything they can to save it at any cost.
On Toronto house prices and Canadian housing — http://www.americacanada.blogspot.com/
Canada’s home prices have skyrocketed in this recession. When the dollar was at 97 cents US a couple weeks ago, average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt has over doubled since 2002. We will surpass the US in per capita residential debt within the next year. In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis)
The average price of a detached Toronto home has approached $600,000. I have attached a home listed at $559,000. The home is about a 15 minute drive from downtown in an average location. It is clearly overvalued.
The listing-to-sales ratio in Toronto, the fifth largest city in North America, has surpassed the late 1980’s bubble. Moments after that point Toronto’s housing market crashed losing 25% of its value and the country went into a deep recession. Toronto’s housing market took 12 years to recover, and needless to say its recovery was brought on by a massively inflationary credit environment.
In the greater Vancouver area, our third largest metropolis after Montreal, the average price of a detached home in March 2008 was $921,000. In fall of 2008 the market tanked, but only to find itself growing again in 2009. By September 2009 the average price was back up to $904,000. Average household incomes in Vancouver are lower than average incomes in Toronto. They hover somewhere around the $70,000 mark.
All of these prices are one hundred percent attributable to ultra low interest rates and a government insured credit market. CMHC, the equivalent of Fannie and Freddie, has expanded securitization of mortgage debt to nearly 100% of the credit market in Canada. The government of Canada insures the securities. The healthy banks in Canada, something that gets bragged about internationally, have fewer loans on their books then they did in 2007. This is despite the credit market growing by 30% since then.
The Bank of Canada has already admitted to a real estate bubble in Canada. Mark Carney, head of the BOC, has threatened to manipulate the mortgage market if borrowers don’t come to their senses.
Shadow — have a more thorough read of the analysis and commentary here; the spin of the establishment may not appear quite so forcefully convincing afterwards.
ak,
“Anyway – the process of Singapore-isation of Australia is inevitable. When the housing bubble finally bursts and the baby boomers fade away – forget about the beloved White Australia. I will not cry for it at all.”
Spoken like a true late comer. For someone who continues to write so much vitriole about our way of life and the “terrible” inequities of our Aussie society, I am at a loss to understand why you emmigrated here in the first place.
fyi:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/a-monetarist-theory-of-neochartalism.html
PETER_W@17
Let
MC=marginal Cost
TC= Total Cost
FC=Fixed Cost
VC=Variable Cost
Q=Quantity
MC=dTC/dQ=d(FC+VC)/dQ=dVC/dQ
Most of the references I read relate to the case of VC=f(Q)being a quadratic equation.
If VC=f(Q) is a quadratic equation where VC decreases with increasing Q at the beginning until it reaches a minimum value at a certain Q value beyond which VC starts to increase.
I can’t see why VC=f(Q) cannot be a polynomial equation of higher orders.
The way Glenn Stevens put it, he was assuming VC=f(Q) is always a linear equation.
Does it mean he’s quite naïve? Is that what you people are getting at?
If VC=f(Q) is most likely a quadratic equation where VC decreases with increasing Q at the beginning until it reaches a minimum value at a certain Q value beyond which VC starts to increase, then the VC for the cities of Melbourne, Syndey and possibly others could have reached the minimum values at certain total number of dwellings and VC is now increasing with higher Q.
Now MC being the rate of change of the VC wrt Q, means MC was negative then zero and now is positive.
Was Glenn Stevens talking about low marginal price in terms of dollars or a rate of change of $/unit?