2009 Ret­ro­spec­tive

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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).


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.


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.

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  • scep­ti­cus

    mahaish I am refer­ring to the feds plan to pay inter­est on bank reserves in order to raise rates when an excess of reserves is present (nor­mally in this sce­nario the overnight rates pushed to 0).

    There is no real dif­fer­ence between inter­est pay­ing reserves and short term gov­ern­ment bonds. 

    My point was that if inter­est rates can be tar­get­ted in this way regard­less of the quan­tity of excess reserves, then those excess reserves have no real mean­ing as money (as opposed to credit, broad money), which is the role peo­ple nor­mally is filled by base money.