Party like it’s New Year’s Eve 1930

I recommend that you finish the year with a look at the News from 1930 blog, which is providing some “year in review” commentary on 1930 now–including these details on the market highs and lows. Obviously some things were much worse in 1930 than today–notably industrial production and the stock market:

Market highs and lows:

Dow industrial average high of 294.07 Apr. 17; low 157.51 Dec. 16. Rail average high of 157.94 Mar. 29; low 91.65 Dec. 16. Utility average high of 108.62 Apr. 12; low 55.14 Dec. 16.

Market value of NYSE-listed stocks high of $76.1B Apr. 1; low $53.3B Nov. 30.

Dow bond average high of 97.70 Oct. 1; low 92.83 Dec. 17.

Production highs and lows:

Daily oil production high of 2.722M barrels Feb. 22; low 2.127M barrels Dec. 27, lowest since July 1926.

Steel production in March was yearly high of 4.300M tons; low 2.234M Nov. 30.

Rail freight loadings high of 989,504 cars Aug. 30; low 702,085 Nov. 29 (vs. 1929 high 1,203,139, low 798,682).

Reflections

One clear factor stands out about 2009: though the vast majority of neoclassical economists (and the politicians they advise) entered the Global Financial Crisis in denial that it could even happen, by late 2008 they were in panic mode about what it could forebode. Ed Lazear, who was head of Bush’s Council of Economic Advisers from 2006-2008, gave a strong sense of just how extreme that panic was when he spoke at the Australian Economists Conference in September of this year–and the Economic Report of the President (which he submitted from 2007 till 2009) provide an interesting history of just how little idea conventional economists had that a crisis was on its way.

At the beginning of 2007, the President’s Council of Economic Advisers were confidently predicting that unemployment would remain constant in 2007, and rise only slightly in subsequent years:

A year later–at the beginning of 2008–they were only slightly less cheerful:

Even as 2009 commenced, they were still unaware of just how bad the crisis would be. The forecast below was made using data up till November 10 2008, and the forecasts are for the end of the nominated year. So the President’s Economic Advisers told Obama–on his arrival at America’s helm in February 2009–that unemployment at the end of 2009 would be … 7.7 percent:

That forecast wrong by 2.3 percent as of October 2009–even after a slight recovery:

By 2009 the biggest government stimulus packages in human history were in full swing. Australia’s Prime Minister Kevin Rudd estimated that these amounted to spending 18 percent of GDP over 3 years from September 2007 till September 2010.

As a result of these packages, the economic outcome for 2009 was far less painful than non-neoclassical economists like myself expected. I had surmised that Australian unemployment would top 9 percent by year’s end 2009–instead it is 5.7%. Unemployment in the USA has apparently started to stabilise at 10%, when I expected it to be above 13% by now.

So the government stimulus packages have, in the short term, worked. I’ll consider what might happen next further down, but I want to emphasise something here: this is as much a contradiction of standard neoclassical economic theory as the GFC was in the first place. Not only does neoclassical theory not allow that events like the GFC can occur, it also argues that government policy cannot have a beneficial impact upon the economy–all it can do is increase the rate of inflation.

The actual reasons for this belief are arcane, but this choice quote from leading neoclassicals Thomas Sargent and Neil Wallace puts the dominant neoclassical case in a nutshell:

In this system, there is no sense in which the authority has the option to conduct countercyclical policy. To exploit the Phillips Curve [a relationship between unemployment and inflation], it must somehow trick the public. But by virtue of the assumption that expectations are rational, there is no feedback rule that the authority can employ and expect to be able systematically to fool the public. This means that the authority cannot expect to exploit the Phillips Curve even for one period. Thus, combining the natural rate hypothesis with the assumption that expectations are rational transforms the former from a curiosity with perhaps remote policy implications into an hypothesis with immediate and drastic implications about the feasibility of pursuing countercyclical policy.’ (“Rational Expectations And The Theory Of Economic Policy”, Journal of Monetary Economics, Vol. 2 (1976) pp. 177-78; emphases added)

Whoops: suddenly in 2008, economists who believed that went straight into “Keynesian” pump-priming mode. They have become “born again Keynesians”–though their knowledge of Keynes is scant to say the least, since prior to 2009, neoclassical economists had driven all consideration of Keynes out of academic curricula.

Forecasts

Now that government action has saved the economy in the short term, the same economists who used to argue that it could do nothing of the sort are expecting the resumption of “business as usual” growth. Ed Lazear himself, in September 2009, was expressing (without much conviction) the view that it was feasible for the US economy to grow at 5% in 2010–on the basis that the data showed that “the bigger the fall, the higher the rebound”. A statistical argument to that effect formed part of his 2009 Report:

So far, the recovery is not going according to plan. What was initially seen as a strong sign that the V-shaped recovery was underway–the 3.5% growth rate in the September quarter–has since been revised down to a mere 2.2% growth. The initially estimated rate was just more than enough to make a dent in unemployment; the revision is still below the 3% level that is seen as being needed to keep unemployment from rising.

I base my forecasts, not on regressions, but what I regard as the underlying causal mechanisms in the economy, which are well captured in Minsky’s Financial Instability Hypothesis. The key factor here is the ratio of private debt to GDP, built up on the basis of an inherently cyclical economy, and overlaid by a financial system that has a strong tendency to fund “Ponzi” speculative behaviour rather than real investment.

On that basis, the real game of the GFC–deleveraging by the private sector–has only just begun in the USA (and has been delayed in Australia by government policy, as I discussed in my previous post). We are just at the peak of the biggest debt bubble in human history. It dwarfs the level of debt reached in the 1930s largely because conventional economists like Greenspan and Bernanke allowed a “natural” debt bubble that should have burst in 1987 to keep going for two more decades:

“Business as usual” growth since the end of WWII has been underwritten by a rising level of debt (right from 1945 in the USA’s case, and from the mid-1960s in Australia’s):

This was always going to lead to a crisis when the debt-financing load became too great, and the asset bubbles financed by this Ponzi Lending finally burst. The government rescues of 2009 have clearly re-ignited this bubble in the stock market, giving us the longest running and biggest bear market rally in history:

Whether that rally can continue–and “business as usual” growth resume in the real economy–is the moot point for 2010. The rally, though impressive, has still only taken the market back to 25 percent below its peak in early October 2007.

My expectation is that, some time during 2010, the disconnect between the financial markets’ euphoric expectations and the hard reality of a deleveraging private sector will bring the optimism of both “born again Keynesian” neoclassical economists and the markets to an end. Growth will not resume once the stimulus packages are removed, since deleveraging will then assert itself in the absence of government stimulus. Falling debt will subtract from growth, as it once added to it, and unemployment will start to rise again.

I expect that governments will react to this as they did in 2009–by turning on the stimulus packages once more, while continuing to ignore the private debt levels that caused the crisis in the first place. They will “turn Japanese”, to coin a phrase–since this is the same thing the Japanese government has been doing for two decades since its Bubble Economy burst at the end of 1989.

This process may repeat itself two or three times before serious attention is finally turned to the Ponzi-dominated financial sector’s parasitic impact on the real economy. But for now, the parasites are clearly still in control of the host.

That’s it for the serious stuff! Sydney is a great city in which to welcome in the New Year, and I’ll happily be doing that at a swish restaurant in Darling Harbour tonight. But before I go, here’s a quick personal retrospective on 2009.

Should old acquaintance be forgot…

Many thanks to the many bloggers who’ve joined the site (there are now over 3,000 members), and to the smaller number (about 50 I think) who regularly post comments. I’ve learnt a lot from following the debate, though the sheer volume and my “real job” work commitments get in the way of replying to all requests for feedback.

There are also a remarkable number of readers around the world: the site now has about 50,000 unique readers each month, with a substantial additional number following via RSS feeds. On New Year’s Day I’ll publish the final count for the number of readers, but the current tally (as of 9.39am on New Year’s Eve) is shown in the table below. It seems likely that December will set a new record of over 53,000 unique readers.

Toil and Trouble

It’s been a productive year for me in terms of research. Against all expectations, I managed to develop the monetary multisectoral model of production that has been an ambition for over a decade–under the pressure of a research grant from the CSIRO that had a very tight deadline. Early in the New Year I’ll post a pair of videos outlining both my model and the CSIRO’s biophysical model–I simply haven’t had time to do so as yet.

I’ve also published more than ten papers–a ridiculous tally for one year:

  1. (2009) “The “Credit Tsunami”: Explaining the inexplicable with debt and deleveraging”, in Friedman, G., Moseley, F. & Sturr, C., The Economic Crisis Reader, Dollars and Sense, New York, pp. 44-51.
  2. (2009), “The Global Financial Crisis, Credit Crunches and Deleveraging“, Journal Of Australian Political Economy, No 64, pp. 18-32.
  3. (2009), “The Confidence Trick”, The Australasian Accounting Business & Finance Journal, May, 2009.
  4. (2009), “Household Debt—the final stage in an artificially extended Ponzi Bubble”, Australian Economic Review, Vol. 42 No. 3, pp. 347-57.
  5. (2009). “Bailing out the Titanic with a Thimble”, Economic Analysis & Policy, Vol. 39 No. 1, pp. 3-24.
  6. (2010). “The coming depression and the end of economic delusion”, in Steven Kates (ed.),Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis, Edward Elgar, Cheltenham, UK, pp. 127-142.
  7. (2009) “The dynamics of the monetary circuit”, in Jean-François Ponsot and Sergio Rossi (eds.), The Political Economy of Monetary Circuits: Tradition and Change, Palgrave, London, pp. 161-187.
  8. (2009), “Warum die Standard-Theorie des Unternehmens nicht mehr unterrichtet werden Darf”, in Luderer, B. (ed.), Die Kunst des Modellierens (The Art of Modelling), Vieweg+Teubner Verlag, Wiesbaden, pp. 179-194. (English draft here)
  9. (2009), “A pluralist approach to microeconomics”, in Reardan, J. (ed.), The Handbook of Pluralist Economics Education, Routledge, London, pp. 120-149.
  10. (2009), “Mathematics for pluralist economists”, in Reardan, J. (ed.), The Handbook of Pluralist Economics Education, Routledge, London, pp. 149-167.
  11. (2009), “Keynes’s ‘revolving fund of finance’ and transactions in the circuit”, in Wray, R. and Forstater, M., (eds.), Keynes and Macroeconomics after 70 Years, Edward Elgar, Cheltenham, pp. 259-278.

The 11th paper is awaiting referees’ reports (“Solving the Paradox of Monetary Profits“), but will be available as an online discussion paper on Monday January 4th in the new and very innovative journal Economics.

The number of conferences I’ve spoken at is even more ridiculous:  44 in all, about 33 of which were public seminars with the remainder being academic conferences.

I also wrote 10 new lectures for a new subject Behavioural Finance. I’ll add three more next year when I take the subject again in August 2010:

Behavioural Finance

  1. Reconsidering Consumer Behaviour (PDF)
  2. Reconsidering Producer Behaviour (PDF)
  3. Reconsidering Behaviour in Finance (PDF)
  4. How the Data Killed CAPM (PDF)
  5. The Fractal Markets Hypothesis (PDF)
  6. The Inefficient Markets Hypothesis (PDF)
  7. Experiments in Economic & Financial Behaviour (to be posted in 2010)
  8. The statistics on money and implications for finance and economics (PDF)
  9. The endogenous money perspective (PDF)
  10. Modelling Endogenous Money I (PDF)
  11. Modelling Endogenous Money II (PDF)
  12. The Global Financial Crisis (to be posted in 2010)
  13. Alternative nonlinear methods to model financial behaviour (to be posted in 2010)

New Year’s Resolutions

Some of these are necessities:

  • Establish a blog for the walk from Parliament House to Kosciousko

Others are vital:

  • Begin a discussion forum linked to Debtwatch
  • Start solid work on my book Finance and Economic Breakdown for Edward Elgar Publishers

And some are easy to achieve, but hard to do:

  • Spend less time on the blog so that I have more time for the book

The last task is hard to do because, of course, I enjoy this blog. But I spend too much time on it already, let alone with the added task of writing a book. But ultimately I have to provide a book-length treatment of Minsky’s theories (and the data of the GFC) if I’m going to help cause a permanent shift in economic theory and policy. So I have to force myself to spend less time on this blog.

Happy New Year everyone. 2010 looks like being just as exciting as was 2009.