Max Keiser interviewed me for his 4th Keiser Report when I was in Paris earlier in December. I come in at about the 13 minute mark after Max’s banter with Stacy:
It was a great interview–Max had about ten questions prepared, but only asked about 3 of them because the conversation flowed so well.
We also recorded a program on what 2010 may bring for markets and economies for BBC Radio 5 Live Breakfast; the program will go to air on New Year’s Eve at 10PM London time.
December 20th, 2009 at 1:51 pm
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December 20th, 2009 at 3:46 pm
Dear Dr. Keen, So, you are saying that asset inflation is caused, completely, by bank lending becomes too loose, for one reason or another. So it is up to the banks and their borrowers, cumulatively, as to whether we get asset inflation in a particular asset class – houses, or commercial real estate, or stocks or even commodities (all that is required is that banks, cumulatively, are willing to over-lend in that asset class, and people, cumulatively, are willing to over-borrow). Which of course is due to over confidence on the part of both parties based on the events of the recent past.
But what about price inflation? Is that the banks over-lending again? For consumption loans, to buy cars, and run up credit card debt, etc, leading to to much manufacturing production etc? I guess a housing or commercial real estate bubble would also spill over into price inflation, too, if the banks were willing to give lots and lots of construction loans to builders.
So that’s it, all inflation of all kinds is caused by bank over-lending and borrowers over-borrowing based on excess optimism?
What about foreign exchange? How does that fit in? If the dollar depreciates a lot vs the Euro, (or, excuse me, the GULFO
) would that cause domestic price inflation because of a big jump in the price of oil?
December 20th, 2009 at 4:49 pm
[...] genuinely puzzled by Steve Keen. He correctly, brilliantly, diagnoses the problem – unsustainable growth of [...]
December 20th, 2009 at 4:54 pm
The physical economy brings in other issues dlr,
Specifically money wages, labour productivity, and the markup firms put on their products. Rising labour productivity is deflationary, and the other two normally balance it in the other direction. But in the abnormal circumstances of a debt-deflation, firms’ attempts to secure some cash flow to service their debts can lead to a general trend to reduce markups, while high unemployment can lead to low wage rises or even wage cuts.
Certainly during the bubble phase, bank lending plays a role in financing both money wages and high markups; but during the deflation it’s powerless to do either.
December 20th, 2009 at 6:24 pm
Hi all (newbie so go easy),
Apparently we have a housing shortage (I’m sure there’s folk on this site that would dispute this).
There are new apartments in my neighbourhood (clearly not Sydney) which are priced at approximately 3.6 x average income (before tax). Does anyone know if the long term average house price of 3 times income is calculated on the before or after tax income?
What then could be the problem with financing the production of a new home at this level of debt? It is inevitable that Australia’s population will grow. My (limited) experience with traveling overseas is that Australia is quite sparsely populated and undeveloped. With our proximity to Asia, clean environment, high living standards, and respected legal system it would seem natural that the population density will increase (perversely to the detriment of those things).
I guess my point is that perhaps the financing of new homes at reasonable prices will lead to people downsizing to smaller more affordable properties. We do have big block sizes compared to most of the world (especially Asia). Are our houses too expensive, or are they just plain too big? Maybe it’s both.
Tross
December 20th, 2009 at 10:01 pm
“Up And Away” – good observation (sorry meant to post here)
I think the Vic Teachers Credit Union is great, which is why I bank with them.
And they have a thing called “real service” as opposed to ‘telstra type’ service.
December 20th, 2009 at 11:45 pm
Karmaisking,
I don’t know why Steve is not an Austrian. I can write why I am not a follower of Austrian School of Economics despite having some sympathy to liberal thinking.
Free market reforms which resulted in the recent rapid growth of GDP in Poland were inspired to some extent by the Austrian economics. Prof Balcerowicz who implemented them is one of these mainstream politicians and economists who are the closest to the Austrian school:
http://blogs.ft.com/capitalismblog/2009/05/14/this-has-not-been-a-pure-failure-of-markets/
The following graph shows that prof Balcerowicz achieved a spectacular success. Despite the recession the economy remains strong even in 2009.
http://www.indexmundi.com/poland/gdp_real_growth_rate.html
However the price paid by some members of the society for the rapid growth of GDP is described in the following article:
http://news.smh.com.au/breaking-news-world/freezing-weather-kills-15-in-poland-20091220-l7kb.html
Frost is not unusual in that part of Europe but homeless people have a little chance to survive when they sleep outdoors at -20C.
December 21st, 2009 at 12:22 am
Obviously the de-industrialisation Steve refers (in the interview) applies to Australia as well. Even key resource projects (eg Gorgan) are being supplied and engineered from elsewhere.
I wonder how much “globalisation” has contributed to the current situation in the western world?
I have never understood how Australia preaches and pursues “free trade” in every commodity except labor. Not sure where to start with the interactions between currency values, living standards, environmental rules, political freedom and union representation, tax rules, education etc vs production location. However, something doesn’t smell right to me.
December 21st, 2009 at 3:47 am
@Steve Keen,
What I think dlr is talking about are two observable trends. This is different depending on which country we are talking about. One is deflation in assets bubbles. Real Estate, Bonds, Debt, Shares. The other is inflation in food and necessaries. For Australian rents are rising. For American rents are decreasing or staying level but those who loose there unemployment insurance become destitute.
@Tross,
In Australia about 8 percent of houses are unoccupied. I would presume that over 20 percent are under occupied. Australia faces a crisis in rental properties due to the investment in the Australian Housing bubble. This forces those on lower incomes into a tighter market of cheap rentals. Look at the waiting list for a Department of Housing houses. 11 years.
@Wagas,
“I wonder how much “globalisation” has contributed to the current situation in the western world?”
Globalization has allowed the price of manufactured goods to rise in price by a much slower rate as First World nations de-industrialized. Example, China.
Globalization has also allowed the rise in price of services to rise in price by a much slower rate due to outsourcing. Example, India.
Globalization is the name they gave it when the power of monopolies became grotesque. Globalization seems more unifying than Multinationalism (sic). The real function of globalization is to allow the transfer of wealth to a smaller pool of the very rich.
December 21st, 2009 at 3:51 am
China has it own real estate bubble.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aqiNuxetDZbg&pos=15
“China’s asset markets are a Ponzi scheme,” said Xie, now a Shanghai-based independent economist. “Property is heading for one huge bust that will take a year and a half to unfold.”
“China risks a “similar asset bubble” to that in 1980s Japan unless lending is reined in, Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas, said Nov. 23.”
December 21st, 2009 at 6:47 am
“I don’t know why Steve is not an Austrian.”
Steve is definitely AustrALian. It’s a common mistake. Australia is a bit south of Austria, is warmer and wins more Olympic medals.
December 21st, 2009 at 7:18 am
Ah! Bonzer mate! At last someone has twigged!
D’ya think I could start a new school of economics called Austrine economics? -:)
December 21st, 2009 at 7:47 am
Hi Alan,
Isn’t what you describe just a simple supply and demand problem. If properties are unoccupied and people can’t afford to rent places to live, then isn’t the solution that landlords will be forced to lower their expectations of rental return in times of desperation?
Tross
December 21st, 2009 at 8:02 am
Dear Dr. Keen, Thanks for your reply. If I could ask, to clarify this in my mind, what do you think caused the ‘inflation’ part of stag-flation of the 1970′s? One side says, “it was due to the sharp increases in the price of oil. The price of oil being such an important component in the price of most goods, it’s price increase then rippled down the supply chain, and caused increases in the prices of most other goods which led to workers striking for higher wages, and that kicked off a wage price spiral.” The other side says, “there is no way the increase in price of a single item -even something as crucial as oil – could cause general wage inflation. An increase in the price of one set of commodities would result in a decrease in purchasing of many other items, leading to a decrease in the price of those items. Some things would become more expensive, other things would become less expensive, but the general price level wouldn’t change. The only way for the general price level to change is an expansion in the total amount of money (and debt of course, as you have pointed out). ”
Which side do you agree with? Or do you think they are both wrong?
Thank you for helping to clarify this.
December 21st, 2009 at 8:33 am
They’re both wrong dlr. To understand it, you have to put it within a context of endogenous money–as Basil Moore did back in 1979. The money supply expands in response to changes in the financial demands of firms–or it does except during a debt-deflation, which is where we’ve got ourselves to now.
The early 1970s were a high point in both employment and economic activity–since then we’ve been on a Ponzi path. At that time, unemployment was extremely low and demands for increases in money wages very high. Ditto the demand for oil and the bargaining power that gave to OPEC. Those demands were both met by an endogenous expansion of credit, and then passed on via an increase in prices. So the causal cycle goes from prime costs of production–both wages and the essential non-produced means of production that oil is–to demands for credit and then prices. That was the inflationary part.
The stagflation was due to the bursting of the first major debt bubble of the post War period–or actually the second if you include the Penn State crisis in 1966. So we had the combination of a debt crisis and high inflation giving us low investment but quickly rising prices that reduced the debt burden. This is most apparent in the Australian data with the debt bubble in 1972-74 that, had it continued, would have given Australia a debt to GDP ratio of over 100, versus the 1.65 ratio we peaked at in 2008. That was the “stag” part: the bursting of a debt-financed partly speculative and partly real production boom.
If you make up a “truth table” with Debt on one axis (High/Low) and inflation (High/Low) on the other, this event fell into the High Debt/High Inflation box; high inflation to some extent counters the impact of high debt (and deleveraging from it it).
We are now in the High Debt/Low Inflation box–a far more dangerous location.
December 21st, 2009 at 9:50 am
Tross,
The main issue with housing bubbles is that people chase the areas which they believe will provide the greatest chance of capital returns.
The situation you have described where you have homes/apartments at 3.5x income is that these areas may not be seen as highly desirable either due to poor location or poor underlying economic opportunities (sorry!!) and because of this the speculative money stays away.
With regards to rentals, some speculative investors would rather sit back and accept the chance of 10%+ growth each year and forgo the pittance received in weeky rental thereby reducing the ongoing costs and risks of having some unknown quantity renting a 2 bedroom apartment they have just paid $500K for.
December 21st, 2009 at 10:17 am
Tross,
Spot on.
I simply can not buy the argument we have excess supply while rents continue to rise in real terms in almost every capital city. While I’m sure there are examples of oversupply in certain locations, in places where there are diversified work opportunities,and access to infrastructure (choice of schools, hospitals, nursing homes, public transport, etc) there is very strong evidence of under supply – check out the link below.
http://www.housing.nsw.gov.au/NR/rdonlyres/E0860E81-0637-425B-9CEA-5B0E32DE8F00/0/Rent_Report89_09q3.xls
DebtJunkies
In the past one could make the argument that speculators deliberately refuse to lease their property but claim tax deductibility on interest and maintenance & just accept the capital gain. However this argument is getting hard to sustain. With new the new tax laws (which came in in 2006 from memory), investors are highly incentivised to place properties on the market to lease.
December 21st, 2009 at 10:40 am
Supply and demand is important but the debt servicing requirements trump market forces so rents will be reflective of the out lay which is not what something is ‘worth’, just what has been extracted (what a great self feeding cycle – lots of ‘positive’ feed back).
Although a little ‘dark’ the below overview by VK at The Automatic Earth had me ticking a lot of boxes about next year.
Moz
http://theautomaticearth.blogspot.com/
December 21st, 2009 at 10:49 am
Tross & bb
This is a good area with excellent schools ie Rossmoyne, All Saints and Willetton SHS. You would have thought that it is a near zero vacancies.. but try this link and you will see how many houses are available..
http://www.realestate.com.au/cgi-bin/rsearch?snf=rbs&searchFormSource=advanced%20search&a=s&chk=0&pme=any&tb=BULL%20CREEK,bateman,brentwood,WILLETTON,ROSSMOYNE,SHELLEY,RIVERTON&u=RIVERTON&cu=fn-rea&pxe=any&t=ren&s=wa&p=10&o=p
That resolves the vacancies augument!!
2) The price near the Canning river is high but it’s the location. You can still find the circa $400ish mark to rent.
In support of DJK’s argument, there is no vacancies problems. If there is, come and invest here. My crummy 35 yo huose has just gone up by $100k(within 9 mths), thanks to the FHVG not the FHOG. Trust me, against my own interest, the whole thing is a ponzy scheme…. especially with the Gorgon project coming up!!
December 21st, 2009 at 10:54 am
Moz,
Can not agree.
Rents will rise to the point where cost of production is justified. This occures when PV (present value) rents = cost of production. In my view, we are at this point now.
This is supported by the fact that builders and developers have been generating very poor returns depsite the so called “bubble”.
Price and rent growth have now encouraged greater supply. See link.
http://www.abs.gov.au/AUSSTATS/abs@.nsf/mediareleasesbyReleaseDate/8F919D91E9992461CA2568A9001362B8?OpenDocument
December 21st, 2009 at 10:54 am
Oh just forgot to mention, that link above exclude what DJK said about empty houses. There are plenty here and the landlord just can’t be arse to rent it out due to the problems relating to renting..
The Ponzies are winning at the mo.. but for how long???
December 21st, 2009 at 11:02 am
Debt2death,
Thanks for the link, but to be honest it does not tell me anything.
I can not talk about this Rossmoyne, but you will find most houses listed for lease are not immediately available. Around +90% of all lease listings are for properties already leased, with expiries due anytime over the next six-ten weeks. Hence a link like this provides no real evidence of vancancy.
If there is such huge over supply, why are rents increasing? Is there a Ponzi Scheme in the rental market too?
December 21st, 2009 at 11:10 am
There you go, put your money where your mouth is.. come and buy here!! Or at least tell your mates to come and buy here if you think that there is a vacancy problem..
I use to produce figures for governments.. lol.., pick a figure in the air that pleases the boss and than work backwards.. So much for my believe, good luck to yours.. Like I said before, free country, believe what you like!!
December 21st, 2009 at 11:16 am
Debt2death,
Like I said, I can not talk about Rossmoyne – I simply do not know the area.
But I do put my money where my mouth is. I am an owner occupier & have a mortgage.
It sound like you own your home too. Can I ask why don’t you sell and rent? If you are right you stand to make a significant gain.
December 21st, 2009 at 11:17 am
debt2death
Don’t you only have to look at the rental vacancy rates to see that there is a housing shortage? Melbourne’s vacancy rate is at historic lows – less than 1% in many suburbs – so how can there not be a shortage? Or am I missing something?
December 21st, 2009 at 11:51 am
Come on guys,
Surely vacancy, under/over supply will jump around for different areas. Renters and landlords are subject to the same herding pressures as owner occupiers.
In the short term, rents and house prices can rise in lockstep. I have also observed times when they have diverged. Simply using the idea that supply and demand determines price, doesn’t explain how the correlations can change.
If the renter herd fears missing out, they will pay more for rent and prices will rise. If this herd feels that the tide is turning their way, they will offer less or hold out for a better deal. The same is true for the landlords. If they feel that the market is hot they will ask more and hold out for more. I strongly believe these divergences and seeming correlations are much better defined by how the market players feel as opposed to the perfect information that they supposedly possess.
All players in the market have different theories, information/lack of, needs, desires and underlying beliefs.
I have heard quite a few people mention lately that they have sold investment properties as they wanted to reduce debt. Yet I have observed many owner occupiers compete over crappy product and pay IMO ripped off prices using huge sums of borrowed money.
This process is call distribution. Swapping from strong to week hands. This process signals a top IMO. But maybe that’s just what I want to see.
December 21st, 2009 at 11:53 am
bb, you ask,
“1) Can I ask why don’t you sell and rent?
2) If you are right you stand to make a significant gain.”
Answer to
1)I have kids in Rossmoyne SHS that is doing very well. If I sell, she’ll be kick out of the school(very long waiting list for out of catchment). That means a load of hastle for a net $60 k (ie after legal, agency and moving cost). I’ve kids at Curtin Uni(stone throw away) which is also doing very well.
1.1)If I sell, I will have to rent, although there are plenty of vacancies, I don’t wished to ask permission to put a nail in the wall.. get what I mean!! I like my own independence.
2) I don’t think that owner-occupiers are ponzies, owning your own home is a human-right ie a roof over you head. Buying extra houses for spectulation purposes is ponzing!! The last person that holds the worthless title is the ‘bag that got scummed’
If you are like me(taking the liberty to assume), than you are not ponzing as such.. you just want your little castle, somewhere you call home, renting or owning. That’s the big difference.
Yo
Like DJK just said, it depends on the areas you want to be in. It differs from areas to areas, plus the rate of change of ponzi investors coming into you area at a certain point in time. Gorgon project seems to attract ‘flies’ to Perth. Their first choice is locations, than good schools. I don’t live in Melbourne, so imho I’m ignorant of the truth surrounding your area.
People wants to see what they want to see and believe in their own self-perpetuated illusions… that’s all I can say. Think dynamics.. and ‘look before you leapt’ is my advice.
December 21st, 2009 at 12:18 pm
Hi bb,
I don’t think we will get far by debating because we seem to be starting from two very different points. In terms of developers being your measure of a bubble or not. I think that this measure did signal the end of the boom. But the end was not where you are looking.
The following information is anecdotal and has been gathered from industry sources and my own observations. So choose to reject it if you desire.
In regional NSW most medium sized developers that started projects after 2003 have lost money and many of those remaining are in trouble. This could possibly signal that the strongest part of the boom ended in 2003. In Sydney many projects that started after 2003 had difficulty. Success was patchy. Some previous bubble areas were very bad and some of the luxury areas continued their winning ways up until spring 2007. Most markets have had a bounce back in 2009, but many of the leveraged developers have gone under or are heading that way as sales have taken too long to materialize. Also the high rates of ’07 through to late ’08 chewed up most of their potential profit. The main reason developers have struggled is because land prices were booming hard into 2003 and they all over paid for sites that they couldn’t realise on.
I am not as familiar with the following markets, but I am informed that Queensland’s boom continued until 2007 and even early 2008. Also Perth’s boom continued well into 2008. I am now informed that there are some very big skeletons in those two markets.
The take away from this is that in NSW most of the developers have been working off their inventory and reducing risk or going broke since 2003. As such it is very unlikely that this sector will cause a property crash. QLD and Perth may be different though.
What has been happening since this time is a ponzi game centred around existing housing. Private debt levels have been rising and people have been willing to compete with each other over the existing houses.
If the buyers and owners get nervous or fear that their debt levels are too high. Prices will fall regardless of their being new stock coming on or not.
1. Ability to pay (being able to raise enough debt) and
2. Desire to buy
Are much stronger determinants of price than supply which takes 3 or 4 years to come on stream.
Prices clearly fell in NSW in late 2007 through to early 2009. This was because of the above two factors I mentioned. The falls had nothing to do with new supply which had been dwindling for 3 or 4 years.
It is not unusual to have the strongest part of the boom over well before the final high is made. This occurs in stock markets all the time. The relative strength of a move in either direction is usually strongest in the middle. The final move that makes the extreme is usually on waning volume or diverging behaviour. When all markets are involved and moving in lockstep, it is usually a sign that the trend is solid.
December 21st, 2009 at 12:41 pm
One suburb example
http://realestateview.com.au/propertydata/vic/kew/index.html
http://realestateview.com.au/real_estate/kew/rentals/
abs private rental properties = 2173
REIV ~ Advertised available for rent = 124
Vacancy = 5.7%
Check SQM research and you will find all this “1% vacancy hysteria” is pure fiction ~ a marketing scam and some individual ‘prosecutions’ by the office of fair trading would be a good idea…
Vacancy rates are @ 3.5 – 4% and rising
http://www.sqmresearch.com.au/
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AInner+East+Melbourne&t=1
December 21st, 2009 at 12:49 pm
Debt2Death,
Thankyou for your post.
I (like you) have a child at the local school, so even if my house was over-valued, I would not sell. At a certain time in life, stability becomes more valuable than returns.
I guess this is why younger people are more likely to question house prices. They are more inclined to move around, go overseas, etc. and therefore look at rents versus buying, and conclude renting is more sensible.
As we get older, the decision becomes more complicated. This is why I do not expect house prices to fall in any material way in well located areas.
December 21st, 2009 at 1:14 pm
Hi BTB,
Thankyou for your post.
For the record, I would never simply reject someones observations (unless I mistrusted the source). I am here to learn. If I disagree, i will say so and point out my reasons. If I am wrong, then I am not dissapointed, since it means I have learned.
I am by no way a housing bull. However, I beleive the housing bears have three very important questions to answer before I am convinced.
1. If there has been a housing bubble over the past ten / twenty years, how can developers be going broke. Surely land returns have been > cost of funds which must be the first rule of a bubble. And why have retuns on capital (ROC) over the long term (10 years) been, at best, average. Note Mirvac ROC has been 10% since 2000. This compares to the average 10 year bond rate of 5.5%
2. If there is a bubble, why no sharp increase in supply like the US in 2005-2007? I do not beleive supply is constrained. It takes 10-15 weeks to build a house on serviced / zoned land and there is plenty of that (I will not bore you with the links).
3. Rents are growing. This is very hard to do when there is excess supply (just ask any commercial landlord – Sydney CBD rents down 20%!)
I’m sure there are lots of anecdotal story’s like yours which can explain these discrepencies, and those story’s will be hard for me to dispute.
However, for me, the Bear case is far from compelling.
December 21st, 2009 at 1:33 pm
Peter_W
Your links to Kew does not tell me much. Dwellings for lease are not necessarily vacant.
I learnt this 10 years ago. I was about to renovate my apartment and needed to move out for 6 months. I looked at domain and realestate.com and saw there were about 100 places to lease in my area. So I waited until the last week to organise a lease.
When I started calling agents I discovered almost all properties were occuplied and were avaiable for lease at some point in the future (some in two weeks, some in three months).
I was caught.
“For Lease” property does not always equal vacant properties.
BTW, I think your last link showed vacancy rates (2.9%) have declined since 2005.
December 21st, 2009 at 1:46 pm
Hi Steve,
Happy Xmas. Nice job on the Max Keiser clip. When’s your next interview on?
December 21st, 2009 at 1:47 pm
bb
If you look at this 2009 report there is a lack of supply in california.
http://www.hcd.ca.gov/HousingNeeds090809.pdf
My question would be why is there so many reports right from 2003 stating california has a serious under supply which ironically also seems to be going through a severe price deflation.
December 21st, 2009 at 1:50 pm
Steve,
Excellent interview!
But my head is still spinning from the psychadellic and hypnotic Keiser backgrounds.
Now where are my anti-nausea drugs …………..
December 21st, 2009 at 1:59 pm
pb
I think the California and Aus markets have possibly had very similar housing affordability issues – tight supply and high prices. The only difference is that California now has a major consumer fear of debt in the face of rising unemployment, and so house prices are dropping. Aus also began to fall at the start of the GFC but were turned around and propped up by the FHB boost and now by a return of consumer confidence.
December 21st, 2009 at 1:59 pm
Citydoc,
Max Keiser broadcasts on the RT network.
http://en.wikipedia.org/wiki/Max_Keiser
http://en.wikipedia.org/wiki/Russia_Today
“RT sets out to present the Russian point of view on events in Russia and its ‘near abroad’ and give the viewers an opportunity to get acquainted with Russian views on world and domestic events.”
You need a quick shot of vodka and everything will be “normalno”.
December 21st, 2009 at 2:13 pm
pb,
Thanks for your thoughts and link. Very interesting.
I tend to agree with the points made by Yo.
I also think the fact there was oversupply in certain markets (ie Sub-prime) created havok in other areas where creating new supply is an ongoing problem. Something we will need to keep an eye on here in Australia.
December 21st, 2009 at 2:16 pm
pb,
I would also add that falling prices may not mean prices are reverting to fair value – they could be moving away from fair value for external reasons (disfunctional credit markets).
But your point is well made.
December 21st, 2009 at 2:35 pm
bb
In reference to an earlier note about only getting 10% gains on investment in poperty, it is facinating that poperty bulls will always talk about poperty being a long term investment and then demand 10% compounding.
What is 10% compounding on anything over 100 years? My powers of Excel could be off but for $500,000 it is $7,579,336,786 . Can someone check this to make sure this is correct and if it is then I am not sure wages are going to keep up
Moz
PS Banks might need to “look” for more funding between now and then.
December 21st, 2009 at 2:50 pm
Moz,
I do not beleive property can deliver 10% per annum.
For the owner occupier, 4% growth per annum is all that is needed to justify buying verus renting. (ie: 4% per annum growth + say 3% saving in rent, less 7% long run cost of funding).
4% growth can be sustained with 2.5% inflation and 1.5% productivity if delivered in the form of higher real wages. If inflation is less, then the cost of funding is lower.
This ignores other aspects like deprecitaion, and owner occupier premium for tax concession etc.
Of course, this makes investing in property close to madness. The very low returns for the owner delivering utility benefit for the renter, so long as the renter can find 7% after tax returns.
December 21st, 2009 at 2:54 pm
ak @37
Um…….errr…..
I was referring to the visual backgrounds in the interview which were spinning.
Perhaps the Russians use the hypnotic spinning effect to help reinforce their point of view on local and international events! :0)
But in all fairness, I admit they have a good national anthem:
http://www.youtube.com/watch?v=Kj-vxHtU4L8&feature=related
P.S I don’t like Vodka (nor any other hard liquor for that matter).
December 21st, 2009 at 2:56 pm
Moz
500k x 10% comp = 6,890,306,169.91
BTW,
1.5% real increase per annum over 100 years = 4.4x improvement in the standard of living by 2109. This compares to the 7.0x improvement in the standard of living during the 20th Century.
December 21st, 2009 at 3:23 pm
bb
Thanks for checking the result:
A Little off but in the end it is a big number.
Property hasn’t always been an avenue for investment (comes and goes through out history), it is at present. Time moves forward and with it might come changes that we all wont like (change can be an uncomfortable thing). The one thing that makes me see property as a bad investment (I don’t even see it as an investment – just one choice of a way to live) is that everybody is onto it. The train has left the station and those that were smart made the money early and got out of town – ahwell.
For the rest of us it is just a matter of everyday life and not getting smacked from silly choices.
Moz
December 21st, 2009 at 3:28 pm
Moz,
I think it is both consumption and investment. A bit like paying upfront for all of your food and clothing for the next 70 years. Very difficult to make such a decision without a view on the future – just like investing.
This is why I like this site so much. Lots of interesting ideas.
December 21st, 2009 at 3:30 pm
Dr. Keen! All your podcasts from last year have disappeared!
December 21st, 2009 at 3:56 pm
While we are on the topic….
Prof Keen gets some airplay in this article
http://www.smh.com.au/business/house-prices-set-to-rise-in-2010-20091221-l9pb.html
December 21st, 2009 at 4:22 pm
Steve,
Why are you still making forecasts?
Now house prices will fall by 5% as interest rates are rising?
You claimed last year that interest rates would be around 2% by the middle of 2010 and house prices woul;d be declining.
Now the interest rates are rising so prices will decline when last year they would fall and house prices would decline?
I do not comment on these matters because i know not much about them so please do not comment on gold and gold related matters as you know nothing about it.Gold is seen jewellery, what a joke my friend.
You can ignore my comments and dismiss them but i will not be going anywhere as i am correct have been proven correct and have the truth on my side and also the greatest financial mind on my side, no one here can match that combination.
Bullturnedbear do not be shy my “silver specialist” friend.Remember my call in September for $1224 gold?You have to admit that was a brilliant call and to the dollar for heavens sake.Not bad hey!!!
Buy Gold.
December 21st, 2009 at 4:23 pm
According to Earthsharing’s report, there is an unoccupied number of properties in the inner-Melbourne suburbs ranging from 4-11%.
I agree with Moz’s attempted calculation. From 1996 to 2009, property prices nation-wide have increased 136% in real terms. I doubt that prices can continue on this path. If this was so, then houses would cost 10-15x wages in a decade or so.
It reminds me of the dot-com bubble, where economists were jubilant about the ‘weightless economy.’ Stock prices of some publicly listed firms rose 8,000-10,000% within a year or two, and because markets are ‘efficient’, by definition there was no bubble.
Right now I am on holiday in Mandurah, which is probably the most expensive region in Australia relative to wages as Homes4Aussies previously mentioned. Mandurah and the surrounding areas are sparsely populated, even though there has been significant population growth. Prices have doubled in under half a decade. Once the bubble bursts, this town will not be a pretty place to visit.
December 21st, 2009 at 4:28 pm
1st Stage USD recovery well underway, as mentioned previously.
Major institutions, funds and private investors are continuing to short the commodities currencies (e.g BRL and AUD) and going long the USD.
Gold was a crowded trade but is now unravelling fast.
Expect major fireworks in the coming days / weeks in favour of the USD.
SELL GOLD
BUY USD
P.S Who the hell is this Elliotwave chap?
December 21st, 2009 at 4:42 pm
Elliotwave,
Welcome back. Now that you are back I am hoping that you can answer the questions that I posed to you over 2 weeks ago.
Since you claim to be an expert in gold and recommend that we all buy gold continuously, I am somewhat baffled by your calls for everyone to be thanking you. Given that you are Australian, as I assume most here are, gold has dropped over 15% in price in the last 9 months (actually considerably greater than a 15% drop since I wrote that). Not a great investment. If it goes up to $1650 US next year as you guarantee, and the $US continues to tank against other currencies as you say it will, then at best, it will only be a breakeven investment for you in that timeframe.
One more question for you. You claim to be only 20. So as a 20 year old Australian, I am curious as to how you have come to be a very CLOSE friend of Jim Sinclair.
Finally, as others have pointed out, you didn’t make the call of $1224, you merely parroted what Jim Sinclair forecast, and have been unable or unwilling to enter any reasoned discussion on these ‘forecasts’.
December 21st, 2009 at 4:42 pm
bb
Just checked the sheet and I had the result for 101 years, $6,890,306,169.91 is for 100 years so thanks for double checking.
Even for a 5% gain on 500K the result is just as out there at $65,750,628.92 (what will a chicken burger be @ $5.95? 100 years later – $782.43 – could be bit stale having sat around for century though!)
I suppose what I am trying to get at in my limited way is that there has to be a point where everything gets dumped on its head so that there is a re start (reset). For this to happen there is deflation and destruction (not good) or else you end up with a $6,890,306,169.91 3 bedroom house in the suburbs with potential harbour views (from on-line) that is surprising quiet (on a highway) with rustic charms (stuffed).
Moz
December 21st, 2009 at 4:54 pm
bb #32
The vacancy rate in Melbourne IS NOT 1%…
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AEastern+Melbourne&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AInner+East+Melbourne&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AMelbourne+City&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AMelbourne+North&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3ANorth+West+Melbourne&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3ASouth+East+Melbourne&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3ASouth+West+Melbourne&t=1
http://www.sqmresearch.com.au/graphs/graph_vacancy.php?region=vic%3A%3AWestern+Melbourne&t=1
It looks like the FHVG has taken a large number of rental tennants and moved them into owner occupation…
December 21st, 2009 at 5:13 pm
Elliotwave
“You can ignore my comments and dismiss them but i will not be going anywhere as i am correct have been proven correct and have the truth on my side and also the greatest financial mind on my side, no one here can match that combination.”
Man, what are you smoking? You need therapy.
December 21st, 2009 at 5:15 pm
bji61,
I believe that i answered your question last time.
I told you to look at the charts of all the major currencies priced in gold and you will have your answer.
Please do not ask personal questions about my relationships as they are my own personal relationships, i am not not being rude to you but instead polite, it is hard to tell ones tone when writing these messages.
The price targets are all based on TA, which is very very accurate, to the dollar actually.
If i can show the people here that my forecasts are correct and credible then an intelligent person would assume that my opinion should not only be considered and respected but also lean towards that point of view.
I am not being disrespectful to Mr Keen, but you have to admit that he has been wrong on all his forecasts and i have been correct so that would make someone stand and notice?
I have always said from day one that these are not my forecasts and have credited my genius friend with all the calls, so please do not mention that silly point again please.
Buy Gold.
December 21st, 2009 at 5:24 pm
Hi All,
I thought I’d throw in my 2c worth into the housing debate.
First point is on measuring whether there is shortage or not. BB correctly points out that the shortage (if there is one) is around places where there is diversified employment opportunity. I live close to the city of Sydney and I have been moving around alot so I’ve looked for a lot of rental properties. There is a very obvious threshold I observed. Say you are looking for a 3 bedroom place. In the same area say there is a price which a 3 bedroom place costs to buy, at the lower end of the market and then calculate the cost of servicing a mortgage plus strata, taxes etc, let’s call this the ongoing cost of buying the place. Now when you look for rental in the same area for the same type of property I find that when rent is below the cost of buying a place there is a mass of applications and it is very hard to get a place. But if you look at the nicer properties, still 3 bedroom, but where the rent is above the cost of buying a 3 bedroom at the lower end of the market, hardly anyone turns up and there is no rental competition. The implication of that is that rental prices tend to gravitate around the direct subtitute of buying with a preference for owning a lower quality property over renting a higher quality property, this is because when you own a property you can improve the quality.
It is hard to tell from that whether there is a shortage of housing but there certainly is plenty of people looking to rent.
It would not surprise me if vacancy rates have gone up because there has been a surge in first home buyers.
Having said that if you accept the situation that rents are increasing at the moment and look to the future I think a good indicator would be to see whether we are actually constructing enough dwellings to deal with our population growth. I have looked at this myself and have seen reports that we are not building enough dwellings by a significant margin to cope with the population increase.
Second point is that the real estate market is stratified in all sorts of ways, geography, demographics, quality to name just a few things. I think it’s really complicated to try and figure out all these dynamics but the dynamics involved would be – demand for borrowing, supply of credit(probably totally demand driven), interplay between rents and prices and then population growth, dwelling growth and add to that the stratification and it becomes and impossible problem.
One can only guess here, but my guess is that demand for borrowing drives the prices, prices have some feedback on demand for borrowing, prices drive rents more than rents drive prices. Demographics, government incentive, EMPLOYMENT drives demand for borrowing. I really think the key figures are changes in employment, interest rates and government incentive. The point is there is many interacting factors and it’s a bit of a subjective call which ones are important because the analysis is very complicated. People who have more time than me to think about it and analyse claim that the fact that we are not building enough dwellings is a major factor in supporting prices.
December 21st, 2009 at 6:06 pm
Damn. I really have to straighten that stuff out. Give me till the first week of January when I’ll try to get podcasting nailed.
December 21st, 2009 at 6:16 pm
Hi to All,
Re: Housing under-supply.
You have probably heard the figure 85,0000 shortfall quoted by many pundits. Have a read of this piece linked below. For your convenience I have included a few extracts.
http://www.dailyreckoning.com.au/property-spruikers-claim-australia-suffers-from-a-chronic-housing-shortage/2009/08/24/
“Both of them provided the link to the research that is the basis for the ‘chronic’ housing shortage argument…..
“The (sic Property) Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008… The Council acknowledges the crudeness of this estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census.”
According to the report, the dwelling gap, which is the difference between the demand for housing and the supply is made up of:
Dwellings required to address homelessness – sleeping rough = 9,000
Dwellings required to address homelessness – staying with friends and relatives = 35,000
Dwellings required to house marginal residents of caravan parks = 13,000
Dwellings required to increase rental vacancy rate to 3% = 26,000″
Folks, is this a dubious basis for the 85,000 claimed shortfall?
On another angle David Holmgren of Permaculture fame remarked that we “may have a housing shortage but we don’t have a bedroom shortage”. There are around 1.7 million residential dwellings in greater Sydney with, if memory serves me, an average occupancy of 1.7 persons (BUT it all depends on the raw date and how you interpret it).
FWIW I think this chart below may be a useful comparison. The graph shows that depending on occupant category those with “one or more spare bedrooms range from 50% to 80% across all categories.
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/4130.0.55.001Main%20Features22005-06?opendocument&tabname=Summary&prodno=4130.0.55.001&issue=2005-06&num=&view=
See 5 Housing Utilisation, Tenure and landlord type, 2005-06
I realise that there are a host of other factors that enter into the debate but IMHO the housing shortfall/ready to boom spruikers are dealing in “science that is NOT settled”.
December 21st, 2009 at 6:23 pm
Hey Elliotwave,
Gold is in a bull market. What is the deepest correction we can expect as the bull charges forward? Will it ever go below $1000?….$950?….what is the lowest price point at which Sinclair would change his forecast to bearish? I’m interested in the risk/reward ratio on the trade….Please help me out.
Cheers
Piotrek
December 21st, 2009 at 6:32 pm
Elliotwave you are entertaining, however some good friendly advice for christmas nearly every successful investor has a stop loss and knows when the market is turning against him.
What price would you get out of gold?
$1000,$900,$800,$700 US an oz.
Or will you hang on to the end?
America dollar is going to be a big surprise in 2010!
December 21st, 2009 at 6:42 pm
Dlr,
Neither of the two things you cited, certainly in my view, caused the ‘flation’ part in stagflation. Most studies have found that oil could at best contributed to 2 percent (a few cents) of the consumer basket (oil excluded), and the wage spiral argument seems dubious empirically (i.e. something we entertain in theory, rather than reality). Furthermore, did you know the biggest monthly rise in inflation happened in the month of August, three full months before the oil crisis, where the monthly CPI index rose by 21 percent?
So what caused the inflation of 80 and 74 (particularly 1973-75 inflation)? There is a more likely candidate; Big Government- the inflation coincided with the biggest increase in transfer payments in American history and the fact personal disposable income rose throughout the recession; transfer payment rose by 200 percent meaning that one in six of every dollar spent was a result of a transfer payment, *i.e. independent of output created*; I think in 1970 transfer payments were something like 75 billion dollars, by 1975 they were like 175 billion dollars, half of the entire U.S. budget! Moreover, while Minsky notices this point, he also overlooks that1 100 000 million new jobs were created in the government sector from 1972-74 period and 500 000 healthcare jobs). The inflation started rising quickly drastically with 1971-2, a period which coincided with Vietnam and Korea War vets receiving transfer payments and the biggest housing boom EVER (i.e. demand for lumber outweighed supply). Of course, that would be inflationary (not to mention the impact transfer payments have in rising the price of workers entering the workforce). Also, in the U.S. oil sector, 350 000 new jobs were created.
The ‘stag’ part of stagflation was a collapse of a real estate boom in the U.S., UK, Australia, Spain, Germany and Japan (in fact, 40 percent of the output during stagflation was in housing and the U.K. in 1973-75 experienced its biggest financial crisis EVER, even to this date- “the Secondary Banking Property Crisis”). But it’s curious to note that when oil prices roses in 1973 1) most of the funds gained/absorbed by the middle eastern oil companies were actually REINVESTED back into real estate in the U.S. AND U.K. by late 1974, despite the financial crisis in both countries- a total of 10 billion pounds , buffering the downfall (!) in property prices (commercial and residential property prices plummeted by 30 percent in real terms in the UK and parts of the U.S; put bluntly, oil saved the U.S. from a economy deflation…indeed, most investors attribute the rebound to all this ‘flood of foreign investment’); 2) when the oil crisis happened again in 1979-1982 and interest rose in Japan, GDP did NOT contract this time, but continued at 3-5% (but it *did have a recession in 1972-73 when the land boom came to an end!*); 3) all the countries had vacancy rates of over 15% (rising from 2-3%).
Tross,
Read up on Harry Hyams- rents can continue to rise because it is not public that there is an oversupply or rather “under-supply” (i.e. land held vacant, waiting to be sold at the top of the market). In fact, get this: Earthsharing found that in one suburb of Melbourne there were 1000 vacant properties (A SUBURB WERE ONE HARDLY HAS HOLIDAY HOUSES) while Melbourne itself has a total of 15 000 vacant houses). Capital decays, labour starves, land appreciates i.e. keeping it idle, it can outlive other factors of production; a war of attrition ensues. It is these ‘speculative vacancies’ that are NOT included in the official statistics, either because they are not counted, ignored or called ‘partially owner occupied’ (then the official vacancy would be around 9-10%).
December 21st, 2009 at 6:55 pm
Elliotwave
From 54:
“If i can show the people here that my forecasts are correct and credible then an intelligent person would assume that my opinion should not only be considered and respected but also lean towards that point of view.”
“I have always said from day one that these are not my forecasts and have credited my genius friend with all the calls, so please do not mention that silly point again please.”
.
.
.
OK, it is now firmly established that you parrot the forecasts of other people. We can not respect your thoughts and opinions as being original because they don’t belong to you. If you were in the research world, it would be called plagiarism. And if caught, you would have no respect, reputation or continued funding as a result.
Also, your precious shiny metal is in the process of nosediving. But keep holding onto it as it (and you) metaphorically fall off the cliff, destroying equity /capital in the process. You seem to have major investment blindspots because you are so TA & gold centric.
And as someone else mentioned, what price does gold have to fall to before you will concede that your parroted beliefs are wrong?
And for others, expect the Aussie dollar to trend lower to USD$0.85 towards Christmas and the New Year, unless another sudden global shock occurs. Should such an event occur, expect the Aussie to be sub USD$0.80.
SELL GOLD
BUY USD
Merry Christmas and/or Happy Holidays to all.
December 21st, 2009 at 7:05 pm
You are correct on the US dollar it will be a massive surprise to the downside and it will cause a huge dislocation in the world, one that not to many people have really thought about or even willing to consider.
The US dollar is finished as the worlds reserve currency and has been overtaken by the oldest and most honest money in the world GOLD.
There is no point when i will turn bearish on gold as it is in a trend that is rock solid and it will once again return into the financial system as it is the only solution to the debt problem.
As i said before gold hit my amazing prediction $1224 to the dollar, if it drops 100 dollars buy it, if it goes to $1000 buy it as it will trade at $1650 US in 2010 guaranteed take it to the bank my friends.
Gold will trade at prices much higher than $1650 and i will give you those targets as required with a time frame, but these are not for trading purposes but only as a guide to buy as insurance for your wealth, if you have any as i am assuming you listen to Mr Keen and BTB, in which case you would not have much wealth.
Buy gold it will not go down and keep rising you will see this happen in frony of your eyes and i will be here to remind you.
Buy gold.
December 21st, 2009 at 7:08 pm
TTINT is right I think.
There can be local shortage and local glut at the same time. Any market collapse may start as a localised event – where people lose income or speculators dump houses. This may or may not lead to the same process which unfolded in the US. We may also experience a plateau in real house prices what may eventually lead to a slow decline experienced by house owners in Japan.
Obviously there is a kind of price ratcheting – once people buy a house to live in they hold on to properties at virtually any price. This may not necessarily be true for investors though – I watched how our former landlord freaked out in 2005.
We also need to keep in mind that demand for housing is highly elastic and depends mostly on lifestyle. Some people who were born in Australia really don’t understand what is considered “normal” in other parts of the world. We can easily squeeze twice as many people as currently live in our houses without even getting close to the density in some European countries:
http://www.ecosmagazine.com/?act=view_file&file_id=EC126p16.pdf
(I do not necessarily endorse all the views of Dr Hamilton)
In Poland the average area of the apartment/house occupied by a family is about 70sqm (2008), 60% of families assess their housing conditions as good.
http://translate.googleusercontent.com/translate_c?hl=en&ie=UTF-8&sl=pl&tl=en&u=http://dom.money.pl/wiadomosci/artykul/polacy%3Bsa%3Bzadowoleni%3Bz%3Bwarunkow%3Bmieszkaniowych,69,0,326725.html&prev=_t&rurl=translate.google.com.au&usg=ALkJrhgBmeALgA_1SEXowV_nc5j9XrVPCg
This is pretty close to the UK I believe (76sqm for new homes)
http://www.smh.com.au/national/home-truths-australia-trumps-us-when-it-comes-to-mcmansions-20091129-jyva.html
The following article is about China:
“China’s average housing area per capita for urban residents has increased from 6.7 square meters in 1978 to more than 21 square meters in 2008, and further upto 27 square meters today. While the average housing area per capita for rural residents had even increased up to 39.4 square meters by 2008, over 30 square meters larger than what Chinese poor farmers enjoyed some 30 years ago.”
http://en.chinagate.cn/features/National_Day/2009-09/25/content_18599856.htm
I would say that 30sqm per person looks more “normal” to me than 100sqm.
So the arguments about severe housing shortages in Australia may look quite funny if you look at them from the Polish / British / Chinese perspective.
December 21st, 2009 at 7:10 pm
Chris Joye
http://www.businessspectator.com.au/bs.nsf/Article/Is-Australian-housing-expensive-pd20091207-YH6XQ?OpenDocument
“It’s a $3.9 trillion part of the economy that few people understand yet is the most important financial commitment most families will make: securing the shelter they need to effectively work and live. Unfortunately, the many myths advanced about the cost of Australian housing undermine both the public debate and ensuing policy.”
Wages are roughly 1/2 of GDP i.e. $60K X 10 million = $600 billion
A house price to gross wages ratio of 6.5
3.9 trillion / 8.5 million dwellings = $460,000 average
December 21st, 2009 at 7:12 pm
Just to add more fuel to the debate:
I can only comment on what I see around me, but there are a lot of young professionals in their early to late 20’s earning good money in safe industries that are waiting for the market to drop to buy.
Sydney property is definitely expensive and in my opinion appears unsustainable on the surface, but having visited some Asian capital cities recently I don’t see why it couldn’t remain so for at least another 5, 10, 20 years – i.e. until the end of the commodities boom. The city is still young, relatively small and a desirable place to live.
As you get further out into regional areas you can still find reasonably priced properties (on massive blocks) close to industries that provide long term employment. These places may be undesirable to live at present, but they won’t always be. Even places like Balmain in Sydney were originally slums.
Debt deflation may be the order of the day, but I think it is going to take years to play out and the severity will hit some areas hard, while others won’t even notice.
Anyway if credit is drying up won’t the builders go broke first? Then there really will be a housing under supply because you can’t argue that Australia’s population is decreasing. Even Krudd has touted 35 million!
Tross
December 21st, 2009 at 7:17 pm
angophera,
I think there is some ambigouity in what people mean by housing shortage. If you google the subject you are more likely to find analysis of how many people are homeless or in need of social housing. This isn’t really going to effect prices.
The other housing shortage story is from an analysis of dwelling commencements, population growth and persons per dwelling, all the data available at ABS. In this analysis it doesn’t matter how many are vacant now, what matters is that clearly rents and prices are going up and it does not look like going forward we are matching population growth with dwelling commencements factoring in people per dwelling for different demographics.
In terms of census data showing vacant property, if I was paranoid and hid under the bed when a very strange person knocked on my door to ask personal questions my dwelling would be considered vacant. Also the census data does not include how long it has been vacant for, part of the logistics of the rental market is that at any one time (example census night) there is some percentage of unoccupied dwellings. So the census data does not really show true vacancies and this would only be a snapshot in time. Think more dynamically
December 21st, 2009 at 7:18 pm
Peter_W
Thanks for the links. I will have a look.
I never suggested vacancy rates in Melbourne are 1% (how would I know – I live in Sydney). I think you have me confused with another post.
All I said was your last link showed a vacancy rate of 2.9%, which had declined since 2005.
December 21st, 2009 at 7:22 pm
sj,
The markets may push USD up in 2010 but I believe the Fed will push it down – otherwise the US is finished as a global power in a few years time. They may only exist as an issuer of foreign reserve currency but this is not enough to dominate the world forever. What is the status of Switzerland?
Unless the Americans impose hefty import duties (what is probably the last thing they want to do) all the industry left there will lose miserably not only competition with China but also with Europe and Japan if USD goes up.
“The Bank of Japan vowed on Friday that it would “not tolerate” deflation, a statement interpreted as a signal from the bank to persuade markets that it would keep interest rates low for an extended period.”
“Economists said any decision by the bank to keep rates low for an extended period would be aimed at weakening the yen and lowering borrowing costs, both measures that would assist Japanese exporters.”
http://www.ft.com/cms/s/0/8debde92-eb94-11de-930c-00144feab49a.html
They have noticed the little niggling problem of unemployment in the US already.
December 21st, 2009 at 7:25 pm
ak,
The article linked below seems to dovetail with the ideas that you have been discussing. I thought Quigley’s phrase “meta-feudalism” has the ring of truth.
MMitchell and others:
“The other force driving this trend is the emergence of learning networks and the diminished effectiveness of mass broadcasting.”
Isn’t this precisely what we are engaged in forming “learning networks”?
http://www.financialsense.com/fsu/editorials/quigley/2009/1218.html
EW,
You are giving us gold bugs a bad (worse?) reputation. How about trying to make a case based on something other than faith and Jim Sinclair (a gent I respect enormously)?
The USD Is Back @ 62
Are you basing your forecast on AUSD weakness or USD strength?
How do you think the USD will perform in the other major pairs in the same timeframe?
Not trying to pick a fight. As I mentioned previously we went into gold to have some money in a vehicle with no counterparty risk. BTW realise there are other risks including geopolitical.
So price only enters into the equation when/if we decide to buy more.
December 21st, 2009 at 7:25 pm
Moz,
Yes, I realised later you used 101 years, not 100.
While some property “experts” talk about 10% per annum growth, IMHO I think it is total rubbish.
However, as per my previous post, Owner Occupiers only need 4% per annum growth to justify buying versus renting (in a pure quantitative analysis).
This is easy to reach if one expects 1.5% per annum real growth in wages. This is equal to 4.4x improvement in the standard of living over the next 100 years and compares to a 7.0x improvement in the standard of living during the 20th century.
Forget the 10% per annum growth number. No-one on this site would expect such madness……(?)
December 21st, 2009 at 7:37 pm
Elliotwave
You remind me of Martin Armstrong and his pi-cycle model. I think you know where his ponzi scheme ended up. Don’t try and start another similar scheme.
The USA is the premier western capitalistic power in the world, with a military to match.
Don’t write off or underestimate the influence of America or the USD, because it will be at your peril.
I can see you collecting gold sea shells as the tide goes out and before the USD tsunami hits.
Go and sell your gold soon, because you’re ain’t prepared for what is going to happen next.
December 21st, 2009 at 7:38 pm
I am not here to fight with people rather i am trying to put my correct point across and because some do not agree with what i am saying it is assumed that i am in the wrong and fighting.
I have no problem with anyone here, so please do not take offence if i point out some facts.
If i am so wrong then please someone pick apart where i have been wrong and correct me, just as i have picked apart Mr Keen and Bullturnedbear for their incorrect calls.
December 21st, 2009 at 7:42 pm
Bullturnedbear,
You are so scared to respond to me that you had to change your name to USD and under the cover of darkness flame away about the toilet paper you call the $USD.
December 21st, 2009 at 7:49 pm
Angophera
From 70:
Q: “Are you basing your forecast on AUSD weakness or USD strength?”
A: Both.
Q: “How do you think the USD will perform in the other major pairs in the same timeframe?”
A: USD will appreciate against all currencies across the board.
Q: “As I mentioned previously we went into gold to have some money in a vehicle with no counterparty risk. BTW realise there are other risks including geopolitical. So price only enters into the equation when/if we decide to buy more.”
A: Dump your gold, buy USD and continue to hang onto the upward ride for the foreseeable future. America ain’t no Zimbabwe or Argentina. Your Aussie got to the low USD$0.60 levels in 2009. Don’t be surprised if you revisit this level or lower in 2010.
December 21st, 2009 at 7:56 pm
Tross,
Good points. Although Sydney housing prices look about right to me.
The bottom line is if house prices collapse, price < cost of production, and supply will stop. With 400k pop growth, prices will not stay depressed for long.
If GDP collapses, then the value of housing will fall with it, but not in a relative sense. That is, the value of housing will still have the same claim to the Country's supply of goods and services as per the boom times. Individuals may get crunched if they have borrowed too heavily.
December 21st, 2009 at 7:57 pm
AK another big surprise will be the FED chairman man of the year in time magazine for 2009, however the FED will be surprise how little power they really have.
Pride before a fall and the FED is ready for a big fall.
America mood is turning negative towards the FED.
December 21st, 2009 at 8:02 pm
“Also the census data does not include how long it has been vacant for, part of the logistics of the rental market is that at any one time (example census night) there is some percentage of unoccupied dwellings. So the census data does not really show true vacancies and this would only be a snapshot in time.”
Hi TITINT,
Thank goodness someone is now actually quoting the ABS census data correctly! Can you now educate the RBA!
December 21st, 2009 at 8:12 pm
In the USA total residential property is @ 125 million X $175,000 average = @ $22 trillion total
USA GDP is @ $14 trillion
Total US residential housing is 1.6 X GDP and you can take out a 30 year fixed rate non-recourse loan at 4.7% to buy it.
In Australia total residential property is $3.9 trillion, GDP is $1.1 trillion so the price is 3.5X GDP and you can take out a 6.75% full-recourse variable rate loan to buy it.
In both counries wages are roughly 1/2 of GDP…
Who has got the residential house price price wrong the 300 million citizens of the USA or the 22 million citizens of Australia?
That’s the several trillion dollar question!
December 21st, 2009 at 8:20 pm
The USD is Back,
Don’t confuse temporary Euro disdain for a new USD uptrend. On a fundamental basis , the US is about to offer Trillions in new debt as well as roll over nearly a third of it’s outstanding debt before end of Q1 2010. With the US trade balance heading towards balance there is a lot less new USD’s finding there way outside the US to be “churned” back into US Treasuries. The US then must face very limited choices in how to fund that debt issuance. Either slash the new debt (ie slash spending, programs, prop up jobs, bailouts etc) OR augment whatever buyers there are overseas with newly minted doallars courtesy of the Fed in order to buy the new debt – MONETIZATION. I think it is safe to say the US has no intention of reducing it’s debt spending leaving the latter option as a main player.
NOBODY knows for sure what direction the USD will take. But I think it is safe to say that the USD is in a terrible predicament here with a Congress spending like drunken sailors and a Fed chief hell bent on creating inflation as an offset to the deflationary forces wrecking their economy.
December 21st, 2009 at 8:21 pm
PETER_W
I was thinking about the assumption you make that total housing/GDP is good for relative comparison. Aside from pretty major data issues let’s believe this assumption because there is an implict underlying assumption here which is interesting to think about.
The underlying assumption here is that the turnover of housing stock is proportional to GDP, remembering that GDP represents a flow of money for a given period of time. Just wanted to point this out as something interesting to think about. I’m 50:50 whether this thinking is right, maybe someone can help.
Reason I think it could be right is say there is no turnover in housing or that there is extreme turnover in housing, in both cases the proportion of GDP spent of housing in any given period is different but the prices could stay the same because turn over is not an indicator of price, right?
December 21st, 2009 at 9:07 pm
#81
Lets assume the total residential housing / GDP data is not quite accurate to the last cent and could be +/- 20% For the purpose of comparison… One nation is still wrong by trillions.
December 21st, 2009 at 9:33 pm
why assume +/-20% and why is it a good comparison in the first place?
It is an interesting comparison to think about why it’s right or why it’s wrong. Why do we want to measure everything against GDP? And if we do so in a relative sense I think it is important to understand all the assumption in making this comparison.
You are also assuming that if one of the countries is wrong about the price then there must exist some right price, right?
Plus multiplying average price by total stock is actually not an assumption but a big mistake. The average price represents the sales in a given period, to get the average price of all the stock you would need actual valuations at the same time for at least a representive sample (I don’t think there is such thing as a representative sample in real estate) of the total stock if you are going to use it to obtain total value of the stock.
December 21st, 2009 at 9:34 pm
can you tell I have an assignment due in 2.5 hours?
December 21st, 2009 at 9:53 pm
The point about the property market is that it only looks good while the ever increasing debt stimulates the economy. When it stops incomes will be reduced and people will have trouble paying rent and mortgages. What I find amazing is that anyone believes that it is possible to have an economy where the flows are increasingly larger in real terms, without eventually the risk that a sudden swing will produce a limit in some part of the system and it will fail. Would our government be able to add another about 8% to the deficit if housing finance stopped increasing competely ? Probably not.
December 21st, 2009 at 9:58 pm
#83
If you check the national accounts of both countries you will find the aggregate residential housing price / GDP data is roughly right.
If you check 149 years of national account history you will find that the present Australian aggregate housing data is a recent (20 year) 100% price aberration.
The nation with the low price / GDP ratio, the USA, is the nation with 10% unemployment, houses that have fallen 30%, has had 150+ bank insolvencies, 50%+ of home lending nationalizsed (FRE & FNM) and has contracting GDP.
Chris Joye… “Australian housing is 3.9 trillion”… FWIW that’s roughly 80% of Australian aggregate household gross assets.
The national comparative total housing price / GDP ratio may not indicate anything but I suspect it tells us more than enough!
December 21st, 2009 at 10:27 pm
Elliotwave,
From #55
I have looked at the gold charts as you suggest. Gold is flat against the AUD in 2009, so is hardly the great investment that you claim it to have been. Gold is also almost 20% down compared to its high for the year. As I mentioned previously, if your ‘forecast’ is that the USD will fall precipitously then USD$1650 in 2010 for gold will remain a very poor investment for anybody investing in AUD.
As others have pointed out, you have not provided any personal insight. You have merely parroted what you have read elsewhere. Whenever anyone asks you to provide some insight into your ‘views’ you merely parrot the ‘buy gold’ mantra.
As to not asking you personal questions, you were the one that boasted about how you had been a very close friend of Jim Sinclair for many years, as if that somehow added weight to your parroting. So I think it is quite fair to ask you how someone who claims to be a 20 year old Australian came to be a close friend of Jim Sinclair from around the time they entered their early teens.
December 21st, 2009 at 10:34 pm
bb
You said: “Forget the 10% per annum growth number. No-one on this site would expect such madness……(?)”.
We bought our house in 1986 for $230K and a recent valuation puts it at $2.5M. That is a compound growth of 10.9% p.a. average over the past 23 years. That’s why I think it is a bubble. You are probably right: 10% p.a. growth is unlikely to be repeated in the next 23 years.
December 21st, 2009 at 10:58 pm
It’s all about the debt! Debt allows people to buy really nice things that make them feel rich and successful. As the debt grows, the levels approach a point where it starts to get very scary. After that time the positive feelings turn to feelings of failure, stupidity and regret.
Australia hasn’t reached the second stage yet. The US and Ireland have. It will be horrible when it comes. I just can’t see how it can be avoided. Time will tell!
December 21st, 2009 at 11:00 pm
Peter_W, want to see a housing bubble check this out
http://www.rodney-bay.com/result.php?action=search&saleType=1&parishID=&propertyTypeIDs=&prID=&bedrooms=&x=72&y=12
http://www.stlucia.gov.lc/docs/NHRPolicy.pdf
so we have average house price = $XCD160,000
number of households = 47,124
total value of houses = $XCD7.5b = $USD2.8b
plus there must be at least 1000 of those $USD600k average mansions owned by foreigners (assumptions are wonderful when trying to prove a point) so that’s a total of $USD3.4b divide by $1b GDP we have 3.4 same as Australia and they are both islands! Could 160,000 St Lucians be wrong?
Sorry Peter_W bit of fun…
December 21st, 2009 at 11:02 pm
In 1860 Melbourne house prices were $208 pounds = $416 dollars, they are now 1000X higher +/- $416,000
That’s 4.745% compound capital gain p.a. over 149 years.
In 1928 the Australian dollar was $2.38 USD, it’s now $0.89 that’s a compound capital loss of 1.2% p.a.
Measured in USD, Australian houses have increased in price roughly 3.55% p.a. over 81 years.
Australian house prices measured in USD will decline ~ 10% p.a. over the next 10 years… Maybe not in absolute nominal AUD price but definately measured in USD.
December 21st, 2009 at 11:04 pm
Lyonwiss,
My point was 10% “prospective” return was madness. Which is why I used the word “expect”.
I have no problem with historic price inflation. It is partially supported by building cost inflation.
http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/BEF19E4062997FEFCA25759A001A1E49?OpenDocument
It is also supported by other factors since 1986 including
1. GST in 2000 on building materials & services (included in the link above)
2. Sharp rise in HOW (Home owners warrety insurance) since the collapse of HIH in 2001
3. In 1985, the principal place of residence became the last CGT free asset in Australia (encouraging home owner upgrades etc)
4. Increased financial competition (lowering margins)
5. Innovative financial products (ie: owners could accelerate payments, slashing tens of thousands off interest payaments. Not available in the 1970′s)
6. Lower real interest rates
7. Local, state and Federal Goverments increasing taxes and charges on new developed properties (around $150k per new 4 bdrm house) passed onto end buyers
I do not expect the events to be repreated in the future. Hence trend capital gains closer to 3-5% per annum. However, it is not a bubble IMHO.
December 21st, 2009 at 11:11 pm
#90
Where is St Lucia?
What is XCD and what would the world economy buy with $1B XCD p.a.?
You are reminding me of a few other bubble economy islands… New Zealand, Singapore… All have fiat currency and bubble real estate prices.
December 21st, 2009 at 11:13 pm
yeah definately and island thing
December 21st, 2009 at 11:25 pm
TITINT,
Great Post @ 90. Show just how silly some of these averages are….
Re the US – these income ratio stats are very misleading IMHO. They ignore taxation, which can add significanlty to the list price of a home in the US. Consider the following.
1. US real estate taxes are significantly higher compared to Australia
2. These taxes are generally perpetual
3. Hence when once buys a property in the US, once must service the mortgage and the taxes.
4. Taxes are levied at the County, regional and state level. They vary between 0.2% to almost 2.0% per annum, indexed to the value of the house and land.
http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx
5. The average rate (1.25%) in PV terms adds 46% to the listed purchase price assmuning a 4.7% mortgage and 2.0% house price growth.
6. Hence a property priced a a notional 3.0x income is closer to 4.5x income in an Australian context
7. With all statistics it is best to compare like with like. I would compare gateway city to gateway city like Sydney* (8.3x) versus New York (7x)**. Or, after taxes, Sydney (8.7x)*** and New York (10.5x).
* Apologies to all Melbournites….
** Source: Demographia
*** After stamp duty
December 21st, 2009 at 11:28 pm
I should clarify my tax point above.
Aussies pay their taxes up front in the purchase price as part of the cost of production (used in price / income ratios).
Yanks pay ongoing taxes after the puchase price (ignored in price / income ratios).
December 21st, 2009 at 11:34 pm
I think the property debate has again taken a tangent from the original post.
My comment on the Keiser report is that we are probably one of the first few generations who live in a world where you can openly critise the establishment without any consequences. 500 years ago people were impaled people for speaking out like that.
Freedom of speech is a necessary condition for real change.
December 21st, 2009 at 11:44 pm
#90
Several trillon of Australian ‘average sillyness’…
$3.9 trillion Australian housing ~ 80% of household assets on the national balance sheet.
I hope the Australian 2 X USA’s aggregate house price / GDP ratio is totally irrelevent, and that you’re right and the USA household assets national balance sheet is totally wrong!
December 21st, 2009 at 11:56 pm
If you were attempting to get RELATIVELY rich, surely you would want to buy twice the price / income ratio for each dollar spent, AND YET 70% of Australian households obviously believe the maths is untrue?
I guess Australian households prefer to get RELATIVELY poor vs USA Households!
December 22nd, 2009 at 12:29 am
TITINT,
Fair point. I accept some of the blame regarding the tangent.
A few thoughts on the interview
1. I almost switched off after the first 30 seconds when Kaiser linked 160k very brave men/women sent to Afganistan with bonuses at Goldman Sachs. If it was meant to be funny, it wasn’t. If it was meant to be factual / informative, it failed to provide the evidence. I was disappointed Prof Keen was happy to be associated with a program where politics seemed more important than debate. Nevertheless, I stayed tuned to hear Prof. Keen’s thoughts.
2. As I have posted earlier, I think Prof Keen overstates the debt problem by including financial debt in the analysis ($43 Trillion). FI’s grossly distort the data, and there is a massive amount of double counting with interbank loans
3. IMHO, the key is consumer leverage. If the consumer is OK, Banks will receive their interest. Then the interbank market is OK. For anyone interested in an alternative perspective on this issue, please see following link. As always, happy to be corrected on this point.
http://www.businessinsider.com/2009/2/us-debt-levels-are-fine-debt-to-gdp-chart-is-wrong-and-meaningless
4. To let the banks fail would have been madness. I think there is some confusion here between liquidity and solvency. There were plenty of Banks with prudent lending practices who would have collapsed without liquidity measures. This would have made no economic sense. Insolvent Banks have not been saved….ask the shareholders of Citi, Lehman, Bear Stears, Freddy, Fanny etc.
I think Prof Keens insights are brilliant. However I suspect the starting point is wrong. Perhaps we are decades away from “debt deflation”.
December 22nd, 2009 at 12:34 am
Thank you Prof. Keen for the interesting interview. It was very entertaining, even if the matter is pretty ugly. Max Kaiser is brilliant also.
Keep up with good work!
December 22nd, 2009 at 4:07 am
Concerning the price of Gold. The price of Gold rose to US$1,224 as the US dollar depreciated against other currencies. Now the price of Gold has fallen to just above US$1,100 as the US dollar appreciated against other currencies. Gold could easy reach US$3,000 per ounce.
Does this mean that Gold is worth more? No. It means that the US dollar would have depreciated against other currencies by about 60 percent. Remember, Gold is prices in US dollars.
Concerning the GFC stage two.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5joQkpA3l2Y&pos=5
“Dec. 21 (Bloomberg) — Commercial property values in the U.S. declined in October to the lowest level in more than seven years as unemployment reduced demand for apartments, offices and retail space.”
“The Moody’s/REAL Commercial Property Price Indices fell 1.5 percent in October from September to the lowest since August 2002. Prices were down 36 percent from a year ago and are 44 percent below the peak in October 2007, Moody’s Investors Service Inc. said in a statement.”
“Values are dropping as U.S. unemployment climbs and consumers cut spending. Office vacancies may approach 20 percent next year as employers hold off hiring, commercial property brokers Jones Lang LaSalle Inc. and Grubb & Ellis Co. said last month.”"
The US economy is in a process of spiraling out of control. Green shoots don’t help when the general trend is towards higher unemployment and more deflation in Real Estate. The latest appreciation of US dollar can be explained by the mere fact that Gold and Oil is traded in US dollars. The world economy is moving toward growth but this is due to the emerging economies, especially China.
The Western empire is falling under a mountain of unsustainable debt. I would have the agree with Steve Keens. Deflation is the only movement that can happen in the long term. That includes Australian housing.
December 22nd, 2009 at 5:03 am
PETER_W,
‘Measured in USD, Australian houses have increased in price roughly 3.55% p.a. over 81 years.’
That sounds about right, given the property prices indices from Australia, the Netherlands, the UK and US. Over the decades and centuries, on average, the rate of price growth in property tends to track the rate of inflation.
Any substantial departure from this track record e.g. 136% real increase from 2006-2009 in Australia is a likely indication of a bubble and a massive one at that.
TruthIsThereIsNoTruth,
‘My comment on the Keiser report is that we are probably one of the first few generations who live in a world where you can openly critise the establishment without any consequences. 500 years ago people were impaled people for speaking out like that.
Freedom of speech is a necessary condition for real change.’
Yes, and freedom of speech is a right that has been won, not given. It has been won in spite of our institutions, not because of them.
December 22nd, 2009 at 5:38 am
Steve,
I was hoping one of Kaiser’s questions would be about inflation. I have followed your posts here and on iTulip but I can’t find why you think the government cannot induce inflation via printing or a devaluation. Could you or someone please point me to your thoughts on this? Merry Christmas
December 22nd, 2009 at 6:58 am
Elliottwave,
I tolerate most of your rudeness to other people on this site, and since you expect other people to have a thick skin, then you should have one yourself.
Leave out the abuse of other members or you will be blocked from this site. By all means put your views forward, but contain your language. I don’t think you realise just how arrogant your comments are, and how much it requires others to simply take a deep breath and let the insults contained in those comments pass to focus on whatever substantive issue you may have raised.
And for your information, unless Bull Turned Bear is rich enough to afford an intercontinental ballistic missile for transportation purposes, he is not “The USD is back”. One of these individuals resides in Victoria, Australia; the other is a resident of the American central west.
December 22nd, 2009 at 7:23 am
Hi Orion,
We did actually discuss inflation prior to the show, but not on camera–just the limitations of time.
The government could cause inflation via “printing”, but the scale needed to do it is beyond what they would be willing to try. Even ignoring financial sector debt, total nonfinancial sector private debt in the USA is close to $25 trillion. Bernanke’s recent quantitative easing program created $1 trillion. That wouldn’t even cover a year’s interest on the level of outstanding private debt, if it went to the debtors which of course it didn’t.
They are also likely to give it to the wrong recipients. If they put their money into the banks and expect them to lend it out again to a private sector, it won’t happen; if they gave it to the debtors, then it would cause increased activity and potentially some inflation. But they will stick with giving it to the banks.
December 22nd, 2009 at 8:27 am
Chris Joye…
“As both we and the RBA have argued previously, the increase in household debt levels, and other metrics such as price-to-income ratios, during the 1990s would seem to have been once-off ‘level-effects’ associated with the secular reduction in inflation and nominal interest rates brought about by (in part) the change in the monetary policy framework, which formally shifted to an ‘inflation targeting’ approach, the adoption of an explicit CPI target of between 2-3 per cent per annum, and the establishment of an independent central bank during the 1990s.”
Conveniently forgets to mention that residential house prices inflated 10% p.a. to $3.9 trillion whilst wages inflated 3% p.a. to $600 billion during this so called ‘inflation targeting’ period.
Australians would be FAR wealthier if they had put 1/2 the present housing price ($2 trillion) into repaying $700 billion private external debt, eliminating the current account deficit, investing in local resource developments like the north west shelf, building value added.
It’s bizzare that we export raw materials… red dirt, bauxite, coal, LN gas to vertical integrated business in Asia so that they can then import it back elaborately manufactured to us as a perpetual trade deficit and compounding massive private foreign debt. Chris Joye talks a bunch of uninformed popularist economic garbage.
December 22nd, 2009 at 8:32 am
bb,
agree and I’ll add a bit to your comment 4 about letting banks fail. I remember this very well I was pretty close to the action when the financial system was on the cliff edge. While from an idealist perspective letting the system fail for a socialist agenda sounds good, it would cause an economic crisis the world has never seen and does not deserve. Like you said, everyone would have went down, solvent or not insolvent and as you correctly point out this was a liquidity crisis which effected more than banks. Ironically letting the system fail would hurt the poorest people the most.
I do agree that it seems like the money would have been better spent in direct mortgage relief but I can think of a few ways that this could destabilise the system. At the time what it was really about was getting liquidity back in the system, it was a matter of survival. Whatever the politicians said about stimulating the economy or whatever the statements were – capital markets were frozen and they needed to get moving again, financial doom was imminent and was successfully avoided. For now.
December 22nd, 2009 at 8:38 am
oh yeah let’s not forget LB was allowed to fail and so are many other smaller ‘insolvent’ banks. But every step is done with caution as not to capsize the boat.
December 22nd, 2009 at 8:58 am
Hi TITINT,
What if the problem wasn’t liquidity, but rather solvency? It may have appeared as liquidity because so many organisations were found to be insolvent at the same time.
Like the customer that should be put on stop credit. To continue trading with them is just hope that they will be able to trade out of their problems. To move to stop credit means that you lose the customer, but at least you limit your downside.
I think the US and Europe has been continuing to trade with the insolvent banks and businesses. As such the losses will simply be greater down the road.
December 22nd, 2009 at 9:01 am
Yes, and Mr Joye also never quite remembers to mention the sentiments expressed by the RBA (on more than one occasion) in the following quote (by Tony Richards, 29 Sept 2009)
“when the price of housing rises, higher-income households tend to benefit at the expense of lower-income households. As I have noted before, as a nation, we are not really any richer when the price of housing rises, but the more vulnerable tend to be hurt.”
December 22nd, 2009 at 9:18 am
there was and probably still is plenty of insolvency, but undeniably, first hand account for businesses that were solvent this was very much a liquidity crisis. There is an intrinsic link between liquidity and solvency, of course business models assume some level of liquidity to remain solvent so you are probably right in that there would always be institutions on the edge between where incremental changes in liquidity cross the fine line between solvency and insolvency. The point is that it is not just those marginal institutions that would have gone down, the momentum was there to bring down the whole system.
December 22nd, 2009 at 9:37 am
TITINT,
Thanks for your comments.
I guess I am in the minority here when I say, while the current system is not perfect, its is still a pretty good system and is delivering the right outcomes.
The fact is, there has been significant debt relief already – both in the US +$1.0T in write-offs, and Australia (halving the interest burden). Importantly, the debt releif in the US was targeted to the right people – the ones who could not afford the loans in the first place.
http://uk.finance.yahoo.com/news/factbox-u-s-european-bank-writedowns-credit-losses-reuters_molt-40c6bb188aa4.html?x=0
Secondly, not all banks acted the same way – so they should not be treated the same way (ie: all nationalised). The banks with poor credit processes have been found out. No amount of liquidity can disguise insolvency. The equity has been dusted and this lost equity acted as the debt relief for those who needed it.
Whats more, the US taxpayer appears to be getting two long term benefits
1. Borrowing 30 year money at 4.5%
2. So far, they have received a 15% return on TARP. Easily covering the cost of funds, and building a nice buffer for potential losses down the road.
http://www.nytimes.com/2009/08/31/business/economy/31taxpayer.html?_r=1
The current outcome is not too different to what Prof Keen prescribes (ie: debt relief). Its just happening in a different way.
December 22nd, 2009 at 10:23 am
So Dr. Keen, a depreciating currency would be inherently inflationary? from the rise in the prices of imported items?
It seems like a ‘depreciating’ currency penalizes savers in two ways, first because of low rates and second because of inflation, whereas an ‘appreciating’ currency benefits savers because of high rates and stable prices or even deflation.
I am assuming that low rates cause a currency to depreciate, which leads to inflation. Thus a double whammy for savers. And, conversely, of course, high rates lead to currency appreciation, which leads to deflation.
This is probably too simplistic of course. Of course there are other things have an impact on currency flows besides interest rates, but I am assuming that is the major factor in most cases?
Thank you for helping me think about this.
December 22nd, 2009 at 11:50 am
bb@95 you said,
“Show just how silly some of these averages are….”
1) Are you referring the above comments to gov. figures?
2) In good faith, and just to show that I have no agenda with question 1),
I like to you why you are so reliant on gov. figures and on this ocassion dismisses it as ‘silly’. I respect you trend of arguments on the bullishness of the Ozzy housing market.
Although I disagree, I also welcome your views as a collections of my knowledge on pros and cons… but the discrepancies intrigue me?? That is, on some ocassions, you are steadfast(almost religious) on gov figures.. and well, contrary on other.
Educate me so that I may learn on how you pick and choose the ‘correct’ gov. info to believe. In my previous career, any info from any other departments were viewed with suspicions!
This is in no way disrespectful to your thoughts but just a wee bit curious.. Thanks in advance for any clarifications
December 22nd, 2009 at 11:52 am
bb #95
You noted in your post:
“7. With all statistics it is best to compare like with like. I would compare gateway city to gateway city like Sydney* (8.3x) versus New York (7x)**. Or, after taxes, Sydney (8.7x)*** and New York (10.5x).”
In the US interest on mortgages is tax deductible – have you factored that into your comparison calculations as this will have a profound effect on the capacity to service the debt and in turn will have an effect on the up front price paid.
You will also find that ongoing property taxes paid are tax deductible – and we thought our tax system was full of churn.
http://taxes.about.com/od/deductionscredits/a/MortgageDeduct.htm
Like for like comparisons….
December 22nd, 2009 at 11:54 am
What is the easiest way to buy US dollars? Do any of the four banks do term deposits in USD? Doing it online would be preferable.
December 22nd, 2009 at 12:00 pm
Yes depreciation would add to inflation, to the extent that essential commodities (in the sense of commodities that are needed to produce most other commodities) are imported. But I wouldn’t draw a direct connection between low rates and depreciation. Currency flows are highly speculative as well, so a low rate in one place can lead to asset price inflation elsewhere–we’re seeing that in Australia right now courtesy of the carry trade–and this in turn can cause some commodity price inflation if it sets off a bubble.
December 22nd, 2009 at 12:21 pm
Debt2death,
No worries. All of your questions are fair, and probably do require further explaination.
“1) Are you referring the above comments to gov. figures?”
Answer: No. I assume Goverment figures are generally correct, however there are always statistical errors in measurement.
The comment regarding “silly averages” was WRT the use of goverment data to derive (IMO) meaningless statistics. For example, Price / Income ratios in Australia versus the US. I’m sure the price data is accurate. Im sure the Income data is accurate. I’m just not convinced the comparison is relevant for the points I highlighted.
So I do not pick & choose which core data to beleive. If I left that impression, I apologise.
“2) In good faith, and just to show that I have no agenda with question 1), I like to you why you are so reliant on gov. figures and on this ocassion dismisses it as ’silly’. I respect you trend of arguments on the bullishness of the Ozzy housing market”
Answer: I guess this is partially answered above. The data is probably Ok, but is can be manipulated to tell any story one wished. I think I read your earlier post that you have experience in this area. If you do I would like to hear your thought on this.
December 22nd, 2009 at 12:32 pm
DebtJunkies @ 116
Another good question which deserves further explaination.
Yes interest and governement charges are tax deductable in the US. Capital gain is taxable. So the numbers are like with like relative to an Aussie investor (save for the imputed rent).
However I firmly beleive the marginal price is set by an owner occupier in Australia (my only proof of this is the view that prospective returns from Aussie housing are so low).
But I still think the comparison is fair assuming that
the savings on interest and tax duductability are offset by the losses on the capital gains tax. This will require US house prices to increase by 4.75% per annum from 2009.
I suspect the Henry Review will tell a similar story.
Although this assumption worth of debate in its own right, all I’m simply trying to point out how one can collect the same data and tell a very different story.
December 22nd, 2009 at 12:39 pm
I can add to bb’s reply since it was on the back of my post. I claimed that using average house price times total housing stock divided by GDP as a relative indicator is pretty meaningless for many reasons some of which I already tried to explain.
To re-iterate a point I thought was interesting in terms of thinking about dynamics, when we use GDP to total value of housing stock what are we really comparing and why? Especially if you use average price times total stock as a proxy for total value, since the average price is the average sale price over a particular period, which surely is not always going to be a representative sample especially in a shocked market. So if you use this kind of measure, first need to be clear on the assumptions, second for a multitude of reasons it may be misleading in a statistical way and in an economic sense.
December 22nd, 2009 at 12:53 pm
bb@120
” I think I read your earlier post that you have experience in this area. If you do I would like to hear your thought on this.”
I will write in more details(of my neo-bonobos past) later. I do apologise due to the tightness of my work schedule at the mo… and perhaps my sublime intention to forget my career past.
Many thanks but bear..lol.. “bear” with me
December 22nd, 2009 at 12:55 pm
Hi GSM
From 80:
“Don’t confuse temporary Euro disdain for a new USD uptrend.”
Look at it this way.
Would you rather bet on America or the 16 countries of the Eurozone, some of which are complete basketcases?
Also the EU has severe coordination problems and have difficulty agreeing on anything.
But anyway when push comes to shove in the world, I’d go with America anyday.
December 22nd, 2009 at 1:13 pm
Re: the Australian housing bubble. One picture is worth a 1000 words. The graph showing the Japanese, American, English and Australian housing bubbles is about half way down the post by Mike Shedlock. Completely mind-boggling.
http://globaleconomicanalysis.blogspot.com/2009/12/all-bubbles-pop-no-matter-what-color.html
Anybody know how to short the English or Australian housing market?
December 22nd, 2009 at 2:08 pm
dlr,
Very interesting chart. Great post.
No sure of the relevance of Japan and Germany given their terrible demographic profile. It is easier to build houses to match demand, rather than destroy them.
December 22nd, 2009 at 2:09 pm
“Anybody know how to short the English or Australian housing market?”
Rent.
December 22nd, 2009 at 2:21 pm
Hi The USD is back (TUSDIB?)
I like your thought process. More importantly, I hope you’re right.
December 22nd, 2009 at 3:11 pm
For anyone who has an interest listening to (or reading) Warren Buffett.
The link below is a transcript from an interview on the Burlington Intranet. Interesting comments on which areas of America will do well over the next 100 years.
http://www.sec.gov/Archives/edgar/data/934612/000095015709001025/form425.htm
December 22nd, 2009 at 3:19 pm
Hi The USD is Back,
“Also the EU has severe coordination problems and have difficulty agreeing on anything.”
I see that as a very big plus for Europe when considering the coordinated rape, pillaging and fraud of US Taxpayers at the hands of the 3 evil sisters – the Fed, US Treasury and Wall St.
You need to be able to reconcile how the US can fund it’s massive debt issuance without resorting to turbo printing the money itself to argue for a significant strengthening of the USD. China doesnt see itself as a big UST customer at the moment;
http://www.shanghaidaily.com/article/print.asp?id=423054
December 22nd, 2009 at 4:05 pm
Hi TITINT,
Insolvency. Probably defined two ways.
1. Liabilities total more than assets (technical insolvency)
2. Inability to pay one’s debts (traditional insolvency)
Based on the second definition, I can see how many would believe that the greater majority were not insolvent in 2008, but rather had temporary cashflow problems that when corrected meant they could repay their debts.
The way I see it though, is that the western world has been seduced by debt and the belief that they must take on higher and higher levels of debt to buy assets. “That’s just what you do”! Such that the value of their assets and the resulting levels of debt flow from a ponzi scheme.
So the question becomes. Are asset values normal or are they ponzi inflated? If you believe that the present levels of debt and asset values are normal you will conclude that in 2008 we had a liquidity crisis. If on the other hand you conclude that asset values are greatly inflated because of the abnormal ponzi. Then in fact the majority are technically insolvent and the soon to return liquidity crisis (inability to convert assets to cash) will find out who is swimming naked. Unfortunately it will be most, as most are indebted.
Ponzi equals technically insolvent.
Normal state equaled temporary liquidity problem.
The world has concluded the latter. Time will tell if it’s the former.
December 22nd, 2009 at 4:08 pm
Hi GSM
From 129:
” I see that as a very big plus for Europe when considering the coordinated rape, pillaging and fraud of US Taxpayers at the hands of the 3 evil sisters – the Fed, US Treasury and Wall St. ”
And you don’t think that EU taxpayers are going to be similarly screwed to prop up the dysfuctional countries and economies of the EU?
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” You need to be able to reconcile how the US can fund it’s massive debt issuance without resorting to turbo printing the money itself to argue for a significant strengthening of the USD.”
Like I said before, when push comes to shove America will be ruthless in protecting its own security and national interests.
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” China doesnt see itself as a big UST customer at the moment”
China will continue to be a big UST customer in the foreseeable future. If it doesn’t, it can kiss its own economy goodbye and deal with the resulting consequences which include internal instability and domestic unrest.
December 22nd, 2009 at 4:39 pm
bb & TITINT
‘While from an idealist perspective letting the system fail for a socialist agenda sounds good, it would cause an economic crisis the world has never seen and does not deserve’
A socialist agenda would be to jump in and do what has been done (and worse – AK might shed better light on this), a hard capitalist agenda would be to go through bankruptcy and let what happens happen, you might be surprised that although painful it might have been(and still be) the better option for the longer term.
‘Ironically letting the system fail would hurt the poorest people the most.’
Maaannn, way too late; the wheels were set in motion long ago for this event, as it now stands the poor and middle class are getting stuck with it big time in the US and everybody is standing around slapping backs at mission accomplished, job well done.
I would strongly argue that very little has and is being worked out of the system in the way of losses, mark to market got scrapped and now it is all green and groovy baby.
As many people smarter than I have pointed out, if people aren’t working then they are not paying their mortgages and if that isn’t happening then the rest is just window dressing, so the losses will continue to grind on regardless of the tick of health the FED has given the financial sector(the same FED that missed it coming – hummm?) and in the mean time all main street indicators (employment, consumption, debt, etc) point to a long hard grind with little end in sight.
In the end though the US will survive this disaster but it (and the rest of us) have got a long way to go before we are anywhere near
‘saved’.
Moz
December 22nd, 2009 at 4:40 pm
bb
From 128,
The Warren Buffett interview at sec.gov was interesting. Buffett’s attitude towards current US debt is certainly different and probably worth considering. At odds with all the in the moment Sturm und Drang. Is he right? In the long run – very possibly. Still, we know what Keynes said about the long run.
I’m reading Alice Schroeder’s SNOWBALL. In the book Buffett references Honore de Balzac’s “Behind every great fortune, a great crime” to which Buffett replies “Not at Berkshire Hathaway”.
No great crime perhaps, but death by a thousand cuts?
December 22nd, 2009 at 4:49 pm
“Like I said before, when push comes to shove America will be ruthless in protecting its own security and national interests.”
Are you referring to defending the interests of the state and the society or to defending the interests of certain groups of people (e.g. bankers or investors)?
“Imports do not cause a net loss of jobs in a nation’s economy. Imports may displace some workers in less competitive industries, but the overall level of employment is determined by monetary policy, labor market flexibility and other non-trade factors. Thus, trade benefits an economy in the same way as technology, causing resources to shift to more productive sectors, raising overall living standards. For the overwhelming majority of American workers, imports raise real compensation by keeping prices down and stimulating domestic competition. Research shows that a rising level of imports to the United States usually signals the creation of more jobs, not the loss of jobs. Imports benefit American producers as well, providing capital equipment to make workers more productive and lower-cost inputs, such as steel, electronic components, and raw materials, that make their products more price-competitive in world markets.”
http://www.cato.org/trade-immigration/faqs
“An estimated one in eight Americans depends on the benefit to buy food. With the nation’s unemployment in double digits, more people are expected to enroll. By some government estimates, up to 16 million people who are not receiving food stamps today could qualify.”
http://www.reuters.com/article/idUSTRE5BH2C220091218
I am not saying that the US cannot bounce back but to me days of unchallenged global domination are over. You guys only have a few more years left to stop the deindustrialisation process. I cannot imagine how this can be achieved without restoring tariffs and / or keeping dollar weak to stimulate export.
December 22nd, 2009 at 5:05 pm
Mr Keen,
If i come across as arrogant in my postings then i am sorry, as i have said before it is hard to tell the tone of how someone is expressing themself in writing and that is not what i am doing and i am not being rude or abusive to anyone.If disagreeing with you or pointing out your errors is abusive then i am sorry.
But i have to add that whenever i see the video of you giving your seminars it is obvious that you are oozing with arrogance towards the crowds that ask you questions, it is as if you could almost not even be bothered explaining yourself to the inferior audience who should already know what you are talking about.
So i believe it is a case of the pot calling the kettle black.
You can believe whatever you want about me Mr Keen but i do respect your knowledge of your own material and you are a very intelligent academic/economist, even though what you believe will not come about as gold will be the solution to the debt problem.
December 22nd, 2009 at 5:08 pm
All,
I have to go on holidays for a week without access to a computer. I’m a little disappointed as the dialog is now getting really interesting.
Moz – appreciate your thoughts, but simply can’t agree. Capitalism is not a binary choice. Hopefully we will catch up next week to discuss further.
Patfla – one could do worse than listed to Warren Buffett. Thankyou for your thoughts.
TUSDIB – couldn’t agree more. The US is only at the beginning of its dominance – not at the end. Read “The next 100 years” by George Friedman (if you have not already done so).
To Steve & everyone else, Happy Xmas / holidays to all & thankyou for your feedback.
December 22nd, 2009 at 5:11 pm
bb
Have a safe and happy holiday break and speak to you in the new year
Moz
December 22nd, 2009 at 5:28 pm
Moz,
I appreciate your point of view and I enjoy the paradoxes in your reply. I genuinenly like a good paradox and I think paradoxically paradoxes are a good sign your on your way to the truth that does not exist, your reply points out some paradoxes in my thinking as well.
The first paradox is that the hard line capitalism action would be to let the system fail, which would in my opinion would cause the destruction of captalism.
The second is between your two replies, one you acknowledge that letting things fail would cause a lot of pain, then you seem to say that the pain is already there. Maybe that’s not quite a paradox but it fits with the theme.
Definately agree, US is in deep trouble but they have bought themselves some time. The cause of the trouble is quite fundamental, I like to think about in an abstract sort of way, from a global point of view at some point the US has started to extract more from the system then putting back in, they have created a financial system which accomodates this. The nice thing is, is that at least somehow this system works in a way where this situation is not sustainable and the pressure will always be there for it to unwind itself.
December 22nd, 2009 at 5:46 pm
Hi The USD is Back,
“China will continue to be a big UST customer in the foreseeable future. If it doesn’t, it can kiss its own economy goodbye and deal with the resulting consequences which include internal instability and domestic unrest.”
I think you assign a lot of credit where little is in fact due.The Hurricane Katrina experience showed bare what awaits the US in a breakdown of services. I’m not saying the US will collapse, but you are dreaming if you believe the average US person is not suffering and will moreso suffer a dramatic drop in living standards. While Europe has had to deal with calamity of this type twice last century (WW1&2), the US has no experience really to speak of so I’m very sceptical indeed that current MTV etc generations will adapt so easily to hardship.
You haven’t yet responded to the core question afflicting the US: ” From where will the money come to fund the absurd Public debt and debt servicing costs?”. Find an answer that doesn’t involve turbo dollar printing and you have solved Bernanke’s great dilemna.
“”The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”-Zhu Min, deputy governor of the People’s Bank of China.
Patriotism is a fine thing The USD is Back. But it simply doesn’t pay the bills- especially the foreign obligations.
December 22nd, 2009 at 6:00 pm
“… let’s not forget LB was allowed to fail and so are many other smaller ‘insolvent’ banks.”
Lehman Bros and Bear Sterns were allowed to fail. It is a pure coincidence that they were the two largest competitors to Goldman Sachs. GS has had a strong connection with the Federal Reserve and with Congress for many years.
See: http://www.zerohedge.com/article/study-finds-all-factors-determining-bailoutability-crappy-banks-ties-federal-reserve-are-mos
December 22nd, 2009 at 6:12 pm
Thank you Elliottwave,
I don’t deny that I have some arrogance too, but I try to restrain that in personal communication. I think the problem you occasionally have on this list is possibly a lack of experience with how words come across in print when they cannot be accompanied by facial expressions, etc. I’ve had plenty of that on internet discussion lists, and I’ve seen them descend into exchanges of abuse, which is why I’m so vigilant against similar things happening here.
Disagreement is not abuse of course–I’m glad that you contribute an alternative perspective to this alternative list. But try to do what sometimes others have had to do when receiving a particularly strongly stated assertion from you: take a few breaths before you reply and try to reply to the issue rather than to the person. What I objected to in your previous comment was the (false, as it happens) accusation that BTB had changed is moniker to TheUSDisBack to fight you.
As you note yourself, and I agree, disagreement isn’t abuse: it’s the way one states disagreement that can lead to hurt feelings. I want to keep that to a minimum here, and I do appreciate your reply.
December 22nd, 2009 at 6:25 pm
Hi AK
From 134:
” Are you referring to defending the interests of the state and the society or to defending the interests of certain groups of people (e.g. bankers or investors)? ”
The answer is both. That’s the way all society has operated for time and memorial. Nothing unique to the US.
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” I am not saying that the US cannot bounce back but to me days of unchallenged global domination are over. You guys only have a few more years left to stop the deindustrialisation process. I cannot imagine how this can be achieved without restoring tariffs and / or keeping dollar weak to stimulate export.”
Our global domination has been challenged previously (e.g during the Cold War). Also the primary issue for America is to maintain and expand our sphere of influence across the globe. America is and still remains a global leader today and will continue to do so in the future. Sure, we’ve had our problems in the past, but we have always survived and thrived.
Now its time for some shut eye.
December 22nd, 2009 at 6:39 pm
New year’s resolutions (draft):
1. Less blogging! Such a time waster, yet strangely compelling. All the best for 2010 to this community. I think I’ll fail at this one.
2. Swim more. I have become a lazy sloth in the last 6 months.
3. Get more small.
4. Re-double my efforts to improve my human capital.
In the next phase, IMO one’s human capital will be the difference between moving sideways and going backwards. I hope to do more sideways than backwards. But the learning curve will be steep.
December 22nd, 2009 at 6:39 pm
Hi GSM
From 139:
” I think you assign a lot of credit where little is in fact due.The Hurricane Katrina experience showed bare what awaits the US in a breakdown of services. I’m not saying the US will collapse, but you are dreaming if you believe the average US person is not suffering and will moreso suffer a dramatic drop in living standards. ”
A breakdown in services is nothing unique to the US. Happens everywhere. For example, what about the earthquakes in China.
And yes, we are suffering. We have suffered in the past, are suffering now and will suffer again in the future. That’s just life. But like I said to ak, as a country we will survive and thrive again.
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” You haven’t yet responded to the core question afflicting the US: ” From where will the money come to fund the absurd Public debt and debt servicing costs?”. Find an answer that doesn’t involve turbo dollar printing and you have solved Bernanke’s great dilemna. ”
” The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”-Zhu Min, deputy governor of the People’s Bank of China.”
Don’t worry. Other countries have and will continue to lend to us because it is in their vested interest to do so. In other words, if other countries attempt to screw America, they will be screwing themselves in the process.
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” Patriotism is a fine thing The USD is Back. But it simply doesn’t pay the bills- especially the foreign obligations.”
Patriotism is what has made America great. You’d be surprised what it can do.
See you guys tomorrow.
December 22nd, 2009 at 6:53 pm
TITINT
138
I suppose in my limited way I was trying to point out the inverse nature of some of our statements, ‘we must save the system to help the poor’ but in reality the poor are and have already been slammed from on high(really we are just trying to save our own financial necks and why not!).
On the point of:
‘The first paradox is that the hard line capitalism action would be to let the system fail, which would in my opinion would cause the destruction of capitalism.’
is a strong argument but it doesn’t allow for the fact although capitalism would more than likely take a beating ‘it’ would survive in some form or another having tipped through bifurcation.
Moz
Clean & mess free, no, potential to go forward, great.
December 22nd, 2009 at 7:06 pm
Poor China… Built their mercantilist economy supplying US consumer demand > $7 trillion wages + $1 trillion debt = $8 trillion demand p.a. now China is trying to compensate for a masssive down turn in US demand > $7 trillion wages – $1 trillion debt = $6 trillion demand ~ 25% change in end demand.
Any wonder they are trying to bridge the absent 25% demand gap with 33% bank loan growth and government stimulus to ‘build GDP’
December 22nd, 2009 at 8:39 pm
Prof Keen,
Long time reader, first time poster. I was just hoping to ask a quick question: why are you predicting a drop of “only” 5% in house prices in 2010, when you have been far more bearish than this in the past? Why the change of heart?
Thanks.
December 22nd, 2009 at 9:30 pm
Moz,
I know what you mean and a ‘cleansing’ is an attractive idea but I think if we are to step into the unknown it should be through positive change and with control. It is an unpredictable world and I would be very worried losing economic control because some idealists think that’s the best thing to do in a tough love kind of way. The risks of being wrong are huge.
GFC was a big wake up call and people are paying attention. Saving the system bought time and therefore the chance, however small that may be to fix things in some way. If disaster is inevitable anyway I would prefer it to happen in a slower and more controlled way, would you really want to see people suffer because of an idea that this is the best thing. I think there is a very cynical way to perceive this.
The whole system is a kind of illusion anyway, it really comes to down to very basic things related more to power than wealth. The western world especially is living a very unreal and largely ignorant existence, this sort of artificial support is just another manifestation of this illusion.
December 22nd, 2009 at 10:37 pm
http://www.moneymorning.com.au/20091222/property-bears-becoming-an-endangered-species.html
Steve , I think Money Morning might be mis-quoting your views.
(Also having problems submitting comments – tried a few times on the above comment, it was submitted but didn’t appear.) Hopefully this time lucky.
December 22nd, 2009 at 10:59 pm
The USD is Back,
@ 123
“Would you rather bet on America or the 16 countries of the Eurozone, some of which are complete basketcases?”
The first keyword is “bet”. Not invest. Not build. Not save. Bet.
The second keyword is “basketcases”. Says who? Can these basketcases feed themselves in the EU? Do the majority of the citizens of Europe have the debt levels of the average US citizen?
December 22nd, 2009 at 11:16 pm
TITINT
I should really clarify my general idea of change(for want of a better word) as without this then it all does look and sound very drastic.
I do agree that a gradual change is what is ideal as a sudden shock only harms the community leaving great wreckage. Unfortunately slow change does also allow old habits to be carried and modified along into the new landscape (natural really) with the desire to continue making disproportionate gains(what we have learned to do – will continue to do)
I really want people to feel free and alive to their roles on this globe and definitely don’t want suffering, the cynic in me sometimes does want calamity as some of the best personal lessons can be the most painful but I know that this is not right nor reality. I would much prefer to see change through decent education in a manner of areas that gets people just asking a few more hard to answer questions, this is also not likely but I am hopeful.
You are spot on to point at power, this above all else keeps things in place in a particular manner that does allow this construction to be maintained. I just get a bit saddened by what I see as a lack of justice when lots of very good people are not considered beyond what they are ‘worth’ and you get a sick feeling that it is always going to be that way.
Moz
December 22nd, 2009 at 11:31 pm
Steve Keen,
@ 141
“I don’t deny that I have some arrogance too …”
Stay arrogant. (Postscript – get more arrogant.)
SK, 2+2=4….. Summers, but I want it to equal 5.
SK, sorry 2+2=4…. Krugman, but I want it to equal 6.
SK, sorry 2+2=4.
Mathematics is an arrogant SOB. I have a book called “The Book Of Heroic Failures”. Would you believe that two US States have a law on their books to round out Pi to an even number?
I love that earlier witty observation about you being the founder of Austria-lian Economics. Fine with me but you need a credo. How about this:
The Australian School of Economics asserts that any number presented by an Economist, of any school, should be derived from mathematics NOT pulled out of their arse.
December 23rd, 2009 at 1:50 am
@Steve Keen,
I must remember to spell your name correctly.
@The USD Is Back 142,
“Our global domination has been challenged previously (e.g during the Cold War). Also the primary issue for America is to maintain and expand our sphere of influence across the globe.”
This is why foreigners call Americans naive. The horror that America has unleash on this world is already intolerable. We can now give due reward to America for bringing us the greatest economic crisis ever.
“America is and still remains a global leader today and will continue to do so in the future. Sure, we’ve had our problems in the past, but we have always survived and thrived.”
History would suggest that imperialistic powers have grown and waned through time. To truly lead, one must demonstrate a good example. Maybe unknown to Americans, the rest of the world has been exposed to ‘American Decadance’. This is a common term to hear among older Australians.
http://en.wikipedia.org/wiki/Decadence
“A luxurious self-indulgence”
“In a social context, the word ‘decadent’ is often used to describes corrosive decline due to a perceived erosion of moral traditions”
@The USD Is Back 144,
“And yes, we are suffering. We have suffered in the past, are suffering now and will suffer again in the future. That’s just life. But like I said to ak, as a country we will survive and thrive again.”
The United States has recovered before but this was when a trillion dollars was fantasy. Anyway during the great depression, 70 percent of families (not sourced) grew there own food. Now I read about cereal for dinner.
http://globaleconomicanalysis.blogspot.com/2009/12/cereal-its-whats-for-dinner.html
“The US current account deficit is falling as residents’ savings increase.”
The savings are fictional if you are referring to bank savings. A demand on these savings (cash) would force a bank holiday. If Mish is correct in saying that American banks have no capital, this is a very dire situation. The reason that the US current account deficit is falling is because American are cutting back on spending.
“Don’t worry. Other countries have and will continue to lend to us because it is in their vested interest to do so. In other words, if other countries attempt to screw America, they will be screwing themselves in the process.”
Has the world got another US$15 trillion dollar plus to lend to America over the next 10 years when many countries could become insolvent? Please consider the dilemma in China which has it own bubble in real estate and other investments.
“Patriotism is what has made America great. You’d be surprised what it can do.”
Are the Banksters patriots?
Patriotism: devoted love, support, and defense of one’s country; national loyalty.
You have great faith in outright fraud being sustainable.
December 23rd, 2009 at 4:07 am
Happy Xmas to one and all.
But also, this. Does anyone forsee any changes in Obama’s economic advisers in 2010? Bernanke and Geithner are staying. And I don’t see any significant changes in current overall policy.
December 23rd, 2009 at 6:39 am
Hi mfo,
Sometimes the spam filter will put stuff there because of hyperlinks–all your 4 attempts to post ended up there.
Everyone, if a post doesn’t appear straight away, don’t repost straight away–give me time to wake up and check the spam filter.
And I wasn’t misquoted–will explain in my next reply to Just!
December 23rd, 2009 at 6:43 am
Welcome into the discussion Just.
That was simply setting myself an easy target for a change. I think it would take a miracle–or another all-out dose of changed government policy–for prices not to fall by that much. And I’ve had enough of being ambushed on property prices.
My main focus is macroeconomics, and property is part of that because it’s been the Australian asset class that has allowed the Ponzi scheme our financial system is biased towards to run for so long. I’d rather get the focus back on macroeconomics, and there I am as bearish as ever–though tempered by the realisation of the scale of government response (a la Japanese) that will be undertaken to try to solve the problem without addressing its cause. You’ll see that in The Age’s bi-annual survey of economists, which is being published on January 2nd.
December 23rd, 2009 at 6:59 am
Very good point Peter_W: this is absolutely the role of deleveraging in a debt deflation: the change from debt adding to demand to debt substracting from it can occur in an instant and make a huge change to aggregate demand.
December 23rd, 2009 at 11:07 am
TITINT
I see the problem this way. We had the South American problem which nearly brought the system down,,and we left the same powers and bankers in place. Then we had the Enron collapse, and its associated cascade, which nearly brought the system down and we left the same powers in place. Now we have the GFC, which as we can all see, has nearly collapsed the entire world, and we are leaving the same powers in place. In fact each event has been used to enhance the powers of the people who caused the problems.
Sure, a gradualist approach would be great. However every time we kick the can down the road the gradualist approach becomes less and less likely and less and less possible.
If we are to take a gradualist approach, we should START….somewhere!!!! It’s the only way I have ever found of getting a difficult job done. Instead we are busy partying again, pretending the job is not there to be done and that it is not getting worse by the minute. Debts are growing by teh minute, Share prices are going up, house prices are headed for the stratosphere, we’ve all got more money and can buy more TV’s or pizza makers, or computer games, ipods etc etc etc. Imports are rising (forget the CAD it doesn’t matter!) Paper over all the losses, punish the prudent and reward the profligate a bit more, use the money and future welfare of good working people to keep the banks solvent, eliminate any pretence of truth in both the corporate sector AND Government, and in the process endanger our democracies and the freedoms we value so highly.
The evidence that we have learned nothing is, in my opinion and contrary to Steve’s, best illustrated by interest rates. Here we are, drowning in debt as a result of real negative after-tax interest rates for 50 years, and what is our TOTAL solution to the problem????? Even LOWER (higher degree of negative) interest rates for as far out into the future as we can see!!!
As I keep quoting Glen Stevens, paraphrased, because I don’t have the EXACT words. ‘Australia will recover because I think households have a capacity to take on more debt’
Just peachy!
Sorry I do get out on the end of my chain a bit on this stuff. I’ve fought this damned process in all sorts of public and private forums fo 50 years…and every damned year the problem has just got worse!!
We are ‘gradually’ heading to the cliff edge!
December 23rd, 2009 at 12:08 pm
Angophera @ 150,
Whether you like it or not, investment is a form of betting.
Also the EU has several dysfuctional economies within its 16 member group. You know who they are. Think of the EU as a corporation with several poorly performing divisions.
And for me, I still rather bet on the future of America than bet on the future of 16 nations which start to squabble when things turn bad. Remember American output is roughly similar to the 16 EU countries combined. And if you own some Euro, I reckon you should sell it now.
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Alan Gresley @ 153,
Yes, the source of the problem is America for which I profusely apologise.
And if you really don’t like your so-called American decadence, perhaps you would prefer the Russian, Chinese or Iranian form should America not have been the global power that it is today.
America will survive and prosper in the future.
P.S Banksters are worldwide and have been around for time and memorial. Definately not unique to the US. Look at the Aussie property market!
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And for others, Aussie dollar spot price $0.8764. Coming down nicely due the USD rally.
December 23rd, 2009 at 1:10 pm
But this is how the system works Outback Oracle, it’s a credit system isn’t it. Credit has to keep growing in this setting. It’s not that we edge closer to the cliff edge it is that the cliff edge gets higher and we walk along it and often have to keep from falling over the edge.
The cliff edge gets higher and higher, and our entropy seems to be to the bottom of the cliff while regulation is a fence which keeps us from suicide and we are constantly fixing holes and making regulation better. Enron and GFC are both direct consequences of lax regulation, I appreciate what most people in forum believe to be the indirect causes. Left to our own devices there may never have been a cliff in the first place but maybe we would not have achieved so much because if this system does one thing well is move private capital on a grand and global scale which has some good aspects.
I am starting to think about the real big picture, forget about this fictional concept of paper money, what are we really doing? What is humanity achieving? If you were an alien observing the earth what would you see? Money from this perspective is probably insignificant.
December 23rd, 2009 at 1:16 pm
Dear American Friend,
“And if you really don’t like your so-called American decadence, perhaps you would prefer the Russian, Chinese or Iranian form should America not have been the global power that it is today.”
OK so please tell me what is America going to do about the following issue?
“Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: China wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful “deal” so western leaders would walk away carrying the blame.”
http://www.guardian.co.uk/environment/2009/dec/22/copenhagen-climate-change-mark-lynas
There was an attempt to negotiate the new world order. I don’t want to get sucked into the discussion on the merit of the climate change threat. There is at least an issue with limited oil resources. The Chinese simply said: “We don’t care about your new world order and your artificial and unjust limits on energy extraction. You have to keep buying our cheap stuff manufactured using ancient and inefficient technologies because this enriches your retail sector and fuels the consumption binge. You have no choice left.”
My point is that the US has no balls to stand up and do anything about it because the country has lost its sovereignty to bankers and various lobby groups. The US has no balls to stand up to China because of the mountain of debt created by the banking system to redistribute the income from the workers to the rich investors. Now not much is left to redistribute from these people who were supposed to work for the others. The jobs are gone – precisely to China.
In my opinion mishandling of globalisation resulted in the debt bubble and converting productive economy into a great Ponzi scheme. Debt can be inflated or forgiven but the deindustrialisation may be irreversable. You guys have not much time left to react.
In one case I agree with you – here in Australia we can only watch this great game and either follow the US in rebuilding the real economy or just keep supplying raw materials to Asia.
December 23rd, 2009 at 1:19 pm
this is what an alien would see (I don’t believe in aliens by the way but who knows)
http://www.realfuture.org/wordpress/wp-content/uploads/2009/05/earth_at_night.jpg
http://www.everybodygoto.com/2007/10/12/what-people-eat-around-the-world/
http://gizmodo.com/5055160/24-hour-air-traffic-around-the-world-blows-minds-eyeballs
December 23rd, 2009 at 1:53 pm
ak,
don’t know if you have noticed but supplying raw materials to Asia and greeting tourists is the real economy in Australia. Horses for courses…
December 23rd, 2009 at 1:54 pm
Hi AK
I’m not a fan of climate change and I was quite frankly happy to see the Copenhagen talks implode. The current climate change policies are a scam designed to suck extra money out of the pockets of hard working ordinary people across the globe. And like you, I’m not interested in discussing this climateissue any further with anyone.
Also, ALL countries across the world have lost their sovereignty to bankers and the lobby groups. Nobody likes this, but this is the world we all live in.
And with regard to China, like I said before, when push come to shove, America WILL look after its security and national interests. We have the might and the resolve to do so. And China will keep buying our bonds into the future because it has no choice but to do so.
And you know something, if I could re-run my life again, I’d still want to be an American, despite the problems that exist in our country and the world today.
December 23rd, 2009 at 3:00 pm
m my maths is getting as bad as the Australian treasury economists!!! 40 years of ranting and raving will do.
Hi TITINT
Your cliff edge analogy is not bad. However I think the cliff has always been there if we want to go near it. Maybe the debt is making the cliff higherm however, I can’t help but feel that what we have is a continuous build-up of pressure on the fence that is keeping us from going over, as more of us go into more and more debt.
The ‘credit’ system does not ‘grow’ anything worthwhile. It steals from the prudent! That is all, Credit does not create a single damned thing. It results in bubbles, mis-pricing of resources and over-use and over consumption.
I am looking at a 50 year time frame. I find it quite fascinating that all Economists think the world can get something for nothing just because some bankster somewhere, ‘prints’ up a whole oot of coloured paper and says we are all richer.
I have been accused off not understanding the modern credit system before. In fact I understand it very well and can find no fault with Steve’s ‘Cavaliers’. In fact that just reinforces my own take on the credit system.
I always relate it to the First Law of Thermodynamics. One form or another it is the basis of much of physics. Yet somehow Economists think we are the exception. We can ‘create’ wealth. Well sorry, in the long term, real wealth is not created by credit. Credit, if priced incorrectly by being in excess of savings, just inefficiently reallocates and over-uses.
So yes I agree with you, there are bigger issues than money but this endless creation of infinite credit is at the heart of our misuse of our world.
Re AK’s post (note AK I am in agreement)
“Research shows that a rising level of imports to the United States usually signals the creation of more jobs, not the loss of jobs. Imports benefit American producers as well, providing capital equipment to make workers more productive and lower-cost inputs, such as steel, electronic components, and raw materials, that make their products more price-competitive in world markets.”
“Research shows” over what time period I wonder. For the last 30 years (50 in Aus case) debt financed by foreigners has been regarded as costless. There is no negative side to it. There is no COST. You can import the goods and reborrow the money at virtually zero interest. So as long as you don’t place any negative value on increased debt levels, or on the fact that you are selling the assets of your country, you basically get imports for nothing. Therefore, say your research covers 20 years, of course it will show that imports benefit the importing country and ‘free’ workers for other industries. Give your research a 50 or 70 year time frame, where the real costs of increasing debt become apparent and of course one would get a different answer.
I’m not arguing against ALL trade, just the distorted economics of the last 50 years.
December 23rd, 2009 at 5:42 pm
@ak 61
“There was an attempt to negotiate the new world order. I don’t want to get sucked into the discussion on the merit of the climate change threat. There is at least an issue with limited oil resources. The Chinese simply said: “We don’t care about your new world order and your artificial and unjust limits on energy extraction. You have to keep buying our cheap stuff manufactured using ancient and inefficient technologies because this enriches your retail sector and fuels the consumption binge. You have no choice left.””
It would be good if that is the truth of the matter. To see a rather strange spin on this, please listen to Christopher Monckton talk at the International Climate Conference (over 4 videos).
http://www.youtube.com/watch?v=32KOg4yB22Q
Now if there is now an “institutional framework,” well that is another challenge.
@The USD Is Back 159,
“Yes, the source of the problem is America for which I profusely apologise.”
Not all Americans. It the Government, the mainstream media and those hidden elite groups. Anyway, this is the Anglo-American and EU establishment using American military for full spectrum dominance.
http://www.youtube.com/watch?v=frw87_Fbc8g
Note Zbigniew Brzezinski.
http://en.wikipedia.org/wiki/Zbigniew_Brzezinski
“And if you really don’t like your so-called American decadence, perhaps you would prefer the Russian, Chinese or Iranian form should America not have been the global power that it is today.”
My father taught me this common phrase in Australia from the 1940s, “Oversexed, Overpaid And Over Here”. Many Australians share the same sentiment.
It not that I don’t like it. It’s something we have come to accept in this world. You yourself don’t have to defend America. Some aspect of what has emerged from America is good (The American Constitution and Bill of Rights, Computers and the Internet). What is the old adage, “you accept the good with the bad.” Really some world citizens would like to help the common American and in turn it would help us all.
“America will survive and prosper in the future.”
I agree if Americans can help themselves.
“And for others, Aussie dollar spot price $0.8764. Coming down nicely due the USD rally.”
And how would the Australian dollar perform if Oil and Gold was traded in Australian dollars and the Australian dollars was the reserve currency of the world? Could the world handle ‘Australian decadence’ even if was shaped like our national character?
Now can we please return to the thread in hand. Debt deflation, unsustainable capitalism and the GFC stage two.
December 23rd, 2009 at 5:52 pm
This did have a link.
My father taught me this common phrase in Australia from the 1940s, “Oversexed, Overpaid And Over Here”. Many Australians share the same sentiment.
http://www.ww2australia.gov.au/allin/yanksdownunder.html
December 23rd, 2009 at 6:04 pm
The REIV and their associated real estate agents are a spin doctoring marketing machine THEY ARE NOT a balanced source of the truth..
I know of several real estate agents with 1% vacancy rate hanging in the window… NOT TRUE… See #53
Also NOT TRUE… The REIV’s reported house prices… on the net… and paid for by the REIV in the mainstream newspapers each week…
http://www.heraldsun.com.au/news/victoria/victorian-home-prices-overstated/story-e6frf7kx-1225811878623
December 23rd, 2009 at 7:33 pm
An interesting ‘distraction’ and it’s only a distraction, is the barrage of AUD ‘purchase power parity’ rationalisation by Australian bank economists… The ‘ipod index’ is one of them and the ‘Big Mac index’ is the other.
http://images.comsec.com.au/newsresearch/articles/global%20comparisons.pdf
It’s interesting that the AUD ‘intrinsic value’ should be compared by ‘Australian Bankers’ with trivial consumer items that at best would account for a few bilion of trade total.
I have never seen relative currency ‘value’ articles from ‘Australian Bankers’ comparing the $22 Trillion US housing vs $3.9 Trillion housing markets.
December 23rd, 2009 at 8:08 pm
The ratio of aggregate gross housing stock to 100% population ipod ownership is….
(using $150 per ipod)
$45 billion / $22 trillion in the USA = 0.2%
$3.3 billion / $3.9 trillion in Australia = 0.08%
The comsec ‘ipod index’ seems to be telling me something about the ‘asset’ value ‘Comm-bank’ is using as security to lend consumers debt to purchase the ipod.
December 23rd, 2009 at 9:38 pm
The ‘elephant in the room’ that Craig James conveniently omits to include in his ‘ipod – exchange rate analysis’ is the ~ $2 billion per week of external debt that Comm-Bank has to roll-over on the foreign exchange market each week.
Don’t let ANY of these facts obsure the direction of the AUD exchange rate that Craigs Comm-Bank needs ‘minions to believe’
December 23rd, 2009 at 11:42 pm
Gold is trading under $1100 US an OZ
What now?
Max Keiser spoke to Steve Keen off air regarding deflation, At the moment hyperinflation,money printing and buy gold is what the media want to hear, no surprise to hear Steve Keen not mention deflation on air, sure signal that another meltdown on it’s way.
Max Kaiser is screaming again that England is going to have a social revolution.
Max England And USA was built on solid foundation “Freedom of the individual and the rule of law”
This has taken thousands of years to happen goes back to the Roman times,
Think that western society going to breakdown immediately with hyperinflation like Nazi Germany goes against the grain majority of decent people.
The gold bugs have underestimate the rule of law is still very strong “USD is back” understands this.
I have found most gold bugs are arrogant, very aggressive and waiting for society breakdown.
Well have bad news it will take a long time to destroy the rule of law in Western countries.
Gold bear market for 20 years from 1980 to 2000 money supply increase triple (3 times!) gold fell over 60% so gold bugs your money printing theory goes out the window.
So my gold bugs it’s all perception and you may be looking at another 20 year bear market if “We the people” decide that it’s time for strong fiat currency.
December 24th, 2009 at 2:28 pm
Steve, I am linked this interview and Mish’s expose you posted (I had read it on Mish’s site and found it here, which I think I am getting to where I read too much because I read stuff again too often after it is posted in another place)to a debate on the subject raised by Mish in his article. I got here when there were 2 or 3 comments on this post and fell asleep listing to it.
Most of the people I debate on the net are inflationists, who seem to think that all that is green is free money out of the fractional reserve system. I titled a post Money, Capital and Inflation. It seems that those that believe in Feda Claus tend to think that a bank can lend what it is already liable for again and it can’t. This is why Mish called it fictional reserves. The reserves are the portion of the asset base of a bank that exceed the assets minus the deposits. If a bank has 10% reserves and only 5% capital, they already owe half the reserves to the depositors and thus they aren’t reserves at all, but assets for payments of debt. Thus if a banks is down to 5% capital, then it is short reserves and any action of the Fed has no influence on that bank. Should that owe another bank that is full of capital, thus one depositor say write a $10 million check that is put in another bank, then the $10 million would come out of cash and deposit liabilities and the new bank might be able to multiply the cash. But, if the new bank is also loaned up, the $10 million is nothing but a counter entry to their deposit liability. They could take the $10 million and buy a t-bill, but they couldn’t create another liability in their own bank where it exceeded the loanable capital they had. This goes right by them.
What else goes by them is they believe in infinite fiat and don’t understand that savings and debt equal each other. There is more than the change in price levels that come with credit money. There is the investing of finished goods into the account at the bank. Thus if I borrow $10 million and buy your goods, your $10 million in goods is now in the bank. I also owe the $10 million plus interest, which means that I owe more than was created. At a low level, where there is plenty of hard money and goods, this is a highly inflationary situation, but in the loaned up times of today, the fact of the matter is the follow through lending that would complete the inflationary effect of this transaction isn’t there.
http://wallstreetbear.com/board/view.php?topic=64567&post=217388
December 24th, 2009 at 9:06 pm
interesting new years reso’s btb,
less blogging? your seriously suggesting we let the inner meglomenaic within us die.
i think steves blog is vital for global security, it stops some of us from wanting to take over a small or for that matter large country.
i personally like sticking to resolutions i find easy to keep,
you know,
be more judgemental,
be superior and condescending,
eat more lasagna and ice cream
interrupt people mid sentence,
shoot off my mouth before actually thinking things through,
all easy ones to keep
December 28th, 2009 at 2:57 pm
[...] (in contrast to the financial spivs who dominate business today in the USA) in my interview on The Keiser Report, and wanted me to elaborate for his audience. The interviews have been posted to YouTube (see [...]
December 31st, 2009 at 5:35 pm
Steve and all,
I think you will find your interview on BBC5 is actually 8PM London time. Which puts it at 7am Sydney time tomorrow morning with a repeat at 3pm (4am London time).
The program synopsis is here:
http://www.bbc.co.uk/iplayer/console/fivelive/
A direct link to the broadcast is here;
http://www.bbc.co.uk/programmes/b00pgpkc
I will post this also on the 2009 Retrospect topic. Apologies to all if this has already been corrected.
December 31st, 2009 at 6:17 pm
Ref 176
Sorry — the links are ass about.
January 1st, 2010 at 1:51 am
[...] (source: Max Keiser Interviews) [...]
January 1st, 2010 at 9:50 am
Isn’t the simple point being made here that money available to borrow is just like money in your pocket except that the “How_hard_to_get_out_of_pocket” attribute is at a different level [one you just reach in, the other you have to convince bank].
That is, it doesn’t matter how much money is around you have to be able to “get it out of your pocket”.
The inverse of the blog with regards money migt be with regards production.
That is, if you are in the desert all the money with the lowest “How_hard_to_get_out_of_pocket” attribute value wont get spent because there is nothing to spend it on.
Maybe?
March 24th, 2010 at 6:27 am
[...] (in contrast to the financial spivs who dominate business today in the USA) in my interview on The Keiser Report, and wanted me to elaborate for his audience. The interviews have been posted to YouTube (see [...]