The Dynamite Prize for Economics–to be awarded to the three economists most responsible for the Global Financial Crisis–is going gangbusters with over 14,000 votes so far.
It may pick up even more thanks to some excellent work by Business Insider/Clusterstock, which has produced a brilliant graphic illustrating the prize.
It’s magnificent, and here it is below for your enjoyment–click on the “Go To The Short List of Nominees for the Dynamite Prize in Economics–>” link and that will take you to the graphic, or click here to go straight to the graphic.
And remember, if you haven’t done so already, VOTE! The more tallies we get for this prize, the more we put the economics profession on notice that this time, it has to abandon its delusional, equilibrium-fixated ways.
February 16th, 2010 at 5:46 pm
From a MacBank note today:
““Rethinking Macroeconomic Policy” is the title of a staff position note issued by the IMF last Friday. Importantly, it was not written by a middle-level bureaucrat. Rather, one of the authors is Olivier Blanchard, chief economist at the IMF and professor of economics at MIT. As an author of numerous textbooks on macroeconomics, he is a key contributor to mainstream economic thinking.
For this reason the note should not be ignored. It is nothing less than a complete repudiation of the economic orthodoxy that has guided central bank and finance ministry thinking since the early 1980s. Given the effect that this orthodoxy has had on asset markets, including equity markets, the potential implications are enormous.”
How many votes does the IMF get?
February 16th, 2010 at 6:05 pm
Hi djc
That people like Blanchard acknowledge that something really stinks in neoclassical economics is important, to be sure. (Let’s see if he changes his textbook). And I suppose one should make allowances for this.
But it’s not new. Joe Stiglitz, who had a high position at the World Bank, has done pretty much the same, a long time ago (and I believe he’s way more credible than most of these “latter day heretics”).
Say, a guy like Paul Krugman who has openly disowned much of the more stringent monetarism, and neoclassical macroeconomics. This is good, of course. But he did not acknowledge any responsibility.
What’s more, until recently he was a big supporter of the American policy of exporting manufacturing jobs to Third World countries. I suppose this has changed, since January this year, but I haven’t read him saying: “Sorry, folks, I messed up”.
February 16th, 2010 at 6:22 pm
Sorry but how can this list not have JOHN MAYNARD KEYNES in it?
His ideas are the most responsible for this mess and noone else ie deficit spending and large debts.
I cannot believe that he is not on the list
February 16th, 2010 at 8:20 pm
You need to read some of his papers yabs: he was bastardised by Samuelson and Hicks. Read Chapter 12 of the General Theory and his papers in 1937. They are not what you would call Keynesian.
February 16th, 2010 at 8:59 pm
Steve
I believe there was plenty of time and education to correct anything that Keynes pitched in his compromise by embracing the “mixed” economy. In his time his thought process was needed. His school of thought continued because, well, that’s the unchallenged education system of the day. Education was simply that unchallengeable.
Steve I dips me lid that you challenge the mere fibre of learning /teaching and propose an alternative.
You have the most outstanding commody in a human being today -that is apart from your genius (as Oscar Wilde would declare)it is the courage of your convictions.
It is admirable in the face of ridicule and such that you continue. You have my support not because it’s emotional it is because I believe you are right -fervor and passion are driving forces associated with reasomn -not emotion that come with committment.
The walk will do the World good it is an exercise that your critics will regret and your supportors (benefactors) will gain immeasurable good health.
I hope your walk will draw enough attention to put the rote learners back into the thinking pot to stew over their bewilderment however I doubt it.
February 16th, 2010 at 10:21 pm
Hi Steve,
Noticed this on Market Watch. Let’s hope the worm is turning with the MSM.
http://www.marketwatch.com/story/australian-economist-warns-of-housing-bubble-2010-02-16
Cheers
February 17th, 2010 at 7:29 am
Yabs – Not to defend JMK, but my oversimplistic impression was always that he essentially argued a government should spend heavily in a downturn AFTER having saved a good chunk of surpluses from the good times. Obviously, that disciplined give-and-take never really happened.
February 17th, 2010 at 8:36 am
A simple post of an article that shows some man on the street taking, as well as some obvious to all ( except Central Bankers..) truth.
PAUL CRAIG ROBERTS: AMERICA—A COUNTRY OF SERFS RULED BY OLIGARCHS
The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent (“the recession is over”), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean? Or is it all a lie
The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.
More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.
Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains Cannot Drive the consumer economy.
Housing is still under pressure, and commercial real estate is about to become a big problem.
The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.
The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.
Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.
Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.
As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:
“Thank you for your continued truthful commentary on the ‘New Economy.’ My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband’s job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn’t just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can’t find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn’t have made it. So, I could tell you just how that ‘New Economy’ has worked for us, but I’d really rather not use that kind of language.”
Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.
Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.
It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.
To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.
Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.
Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.
The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.
If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.”
When ( and not if..) a Minsky moment will happen on the bond markets…2008 will appear a walk in the countryside compared to the havoc that will bring.
Cassandra was cursed because she was not believed..that was her curse. Not because she was wrong.
This is what those calling us Cassandras forget…
February 17th, 2010 at 8:54 am
“When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.”
And only then the slow healing process of the REAL economy can start. As a side effect the grotesque size mountain of private debt will shrink.
I found another interesting article, salvaged from Bill’s blog comments. Some elderly men take Viagra to stimulate their worn off body. If somebody wants to be more stimulated the obvious solution is to take more Viagra. The Chinese have probably taken 10 pills… They have reached a point of no return. Let’s see how it unwinds there.
“There’s been an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. What happens is that the increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources? Add to this the fact that you’ve got massive fiscal stimulus occurring today in China.
You have the makings of a very messy situation: if China seeks to sustain demand via fiscal policy, then you could get a big inflation problem, which could severely erode the tradeables sector. And you have all of these Chinese students all steeped in Chicago School monetary theory, coming home and taking over. So they might do a Paul Volcker to stop inflation.
But, what if the they don’t? Inflation can take off and thereby begin to ERODE the competitiveness of Chinese exports. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalue, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.
Or you get the hard-line monetarists triumphing by fighting inflation and you get riots as unemployment increases.
It could get very ugly.”
http://www.angrybearblog.com/2010/02/marshall-auerbacks-responds.html
February 17th, 2010 at 11:20 am
Sorry about the slightly off topic post (though it is a media article) but thought you could all do with a laugh, see the 3rd paragraph in todays SMH. Or is the author a follower of this blog?
http://www.smh.com.au/business/economy-headed-for-boomtime-growth-westpac-20100217-oaq5.html
To quote it (as they may correct it)
“The rabid rebound, though, is more stark with the annualised growth rate in the index rising to 6.2 per cent in December from 5.4 per cent in November, putting it 3.5 percentage points above its long-term trend.”
Yeah it’ll most likely be a “rabid” recovery that will almost end up killing itself!
February 17th, 2010 at 12:02 pm
http://www.news.com.au/business/breaking-news/boom-times-ahead-says-westpac-melbourne-institue-survey/story-e6frfkur-1225831314557
well its all over for us doomsayers, the real experts have spoken and its all good from here on in.
February 17th, 2010 at 12:40 pm
gunny57
Thanks for that post. Maybe I am stating the obvious here but I personally believe we have the same problem of our economy having being moved offshore thus forcing policy makers to pump up the only remaining industry (which can’t be offshored) of housing provision. Although this cannot be offshored, it can be opened up to international markets to hide the missing economy even longer (the FIR changes?). The only difference between us and America is that we have a relatively large amount of natural resources to sell still. This could work against us long term as a further “masking effect” of what has happened underneath and may delay us retrieving a base economy; meaning we will come back after the pack and may have to pay more for capital equipment.
The other area we rely on has been agriculture, but as I have mentioned, at a huge cost to the environment in terms of river damage and soil depletion. Again, the longer we leave this, the harder it will be to recover from these mistakes.
February 17th, 2010 at 1:32 pm
spooky2009,
That article is another brickbat to add to the collection. This article is interesting: ‘Mortgages growing faster than income’.
http://www.news.com.au/money/property/mortgages-growing-faster-than-income/story-e6frfmd0-1225830306654
February 17th, 2010 at 4:55 pm
MMitchell
We have natural resources for the time being…
http://www.dpi.nsw.gov.au/minerals/resources/coal/coal-industry
The New South Wales (NSW) coal mining industry produced around 170.3 million tonnes (Mt) of raw coal, yielding 131.3 Mt of saleable coal in 2006-07…
Recoverable coal reserves in NSW are over 12 billion tonnes.
So simple math gives Coal reserves to be depleted in 70 years.
Of coarse if the rate of extraction is continuously increased, it will be much sooner. Current production rates have been increasing circa 5% PA, Interestingly, compounding 5% growth in extraction rate gives the last year of production as…. 2040. I wonder if the intergeneration report ponders this fact.
Sounds like we had better start building nuclear power stations pretty soon.
Global Peak oil information and analysis of impact on the UK economy:
http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf
February 17th, 2010 at 5:35 pm
Steve,
“04:22 Rising lumber prices threaten the housing market says the WSJ
On the futures market, lumber prices have risen by 32% this year. The homebuilders could face increased construction costs and may have to deal with the added expense and margin hit.
The price rise is due to a shortage of supply. Mills cut production when the slump hit and output dropped by about 45%.”
IMHO this adds to the evidence that Supply Destruction is starting to kick in.
FWIW I have also been reading an article on a detailed analysis of a hyperinflationary episode in Eastern Europe that disclosed that most of the “hyper” occured in food and other staples of life. Non-essential assets were clobbered. Unless an observer was taking a multi-sector approach it could have been portrayed as deflation.
I can post a link if anyone wants to read the piece.
Steve, something else on my mind. Are US Food Stamps “money”?
February 17th, 2010 at 6:20 pm
angophera,
Could you provide the link?
February 17th, 2010 at 6:39 pm
so what are the substantive differences between what Keynes wrote and what the neoclassicists and others adopt as “his” ideology?
The Austrians seem to bash Keynes quite a lot, but from reading Prof Keen’s lecture notes, it seems that what Keynes said and what economists do are two different things…
February 17th, 2010 at 7:08 pm
Sign of things to come?
Greek FinMin unveils tax reform, wage policy
TAXATION
“From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards”
“There’s tax relief for incomes up to 40,000 (euros)”
“Taxable income based on the new scales will include capital gains from the short-term trading of stocks”
“Every autonomous taxation … for special professions, like engineers, architects, taxis, gas station owners and kiosks is abolished”
BANK DEPOSITS
“Deposits in banks outside Greece are exempted from audits of their origin if they are repatriated within six months of the passing of the tax bill and are taxed with a 5 percent rate”
PUBLIC PENSIONS
“Public sector pensions will increase by 1.5 percent, except those above 2,000 euros a month”
PUBLIC SECTOR WAGE CUTS
“We need to contain the public wage bill and fairly share out the burden”.
“The wage cuts will begin from 18 euros a month, reaching 345 euros a month for court officials. In percentages, it will be between 1 and 5.5 percent”
February 17th, 2010 at 7:20 pm
angophera
I noticed on a previous thread you mentioned Chris Martenson’s Crash Course, I found he focuses on the supply destruction side as well as the economic side. (not as good as this site regarding the economic side).
Interesting however his comments regarding Peak Oil with the traditional growth of the economy and credit going hand in hand with Oil. No oil to lubricate the economy, no economy and vice versa.
I’m only repeating CM but, most natural resources are fast approaching their exponential limits in a finite world. As he says, all part of the three “E’s”, Economy, Energy and the Environment.
Very interesting in the big picture with the blinkers off.
All the best
February 17th, 2010 at 9:41 pm
I found he focuses on the supply destruction side as well as the economic side. I have also been reading an article on a detailed analysis of a hyperinflationary episode in Eastern Europe that disclosed that most of the “hyper” occured in food and other staples of life. I am stating the obvious here but I personally believe we have the same problem of our economy having being moved offshore thus forcing policy makers. Very nice blog…..
jacksmith
thanks
……………………..
Cheap Mortgages
February 17th, 2010 at 11:06 pm
How long do you have nick? -:) Probably the best answer to that is to refer you to my lectures on the history of economic thought on this site (Under the lectures tab), and also the papers on the financial instability hypothesis which explain how Minsky derived his perspective from a mix of Marx, Schumpeter, Keynes and Fisher.
Key to understanding Keynes is reading his 1937 papers rather than the General Theory; to see where the Keynes of the textbook came from, read John Hicks’s so-called review in 1936.
Sorry to be rather cryptic here but I’m pressed for time!
February 17th, 2010 at 11:51 pm
More bad news from the USA
Poof: Another 800,000 jobs disappear
Job losses during the recession may have been underestimated by close to a million jobs. So instead of employers cutting just over 7 million jobs from their payrolls since the economic downturn began in December 2007, it’s expected that the Labor Department’s new estimate will be a loss of 8 million jobs.
The problem is that BLS models appear to have grossly overestimated the number of new businesses that opened during the recession.
February 18th, 2010 at 8:18 am
And even more bad news
http://www.telegraph.co.uk/finance/economics/7259323/US-bank-lending-falls-at-fastest-rate-in-history.html
Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.
David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.
Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature,” he said.
The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed’s “Monetary Multplier” has dropped to a record low of 0.81, evidence that the banking system is still broken.
Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.
“It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money,” he said.
Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit “continues to contract” in their latest statement.
However, regional Fed “hawks” appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of “monetizing” its deficit in a stealth default on Treasury bonds.
The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks.
Fed chair Ben Bernanke first made his name as an expert on the “credit channel” causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time.
“The reason the Great Depression became ‘great’ was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this,” said Mr Ashworth.
February 18th, 2010 at 9:42 am
Re: Burrah #18
A maximum of 1,500 euros for cash transactions? Does anyone else but me think that this will lead to an underground economy whereby exchanges are made using goods, gold or other types of unofficial tender?
February 18th, 2010 at 10:01 am
Baldbadger
How do you monetise debt and how do you do it with QE. Is it because more debt release to public will lead to inflation thereby reducing the value of T-bills?
“China has also been calling for a halt to QE, accusing Washington of “monetizing” its deficit in a stealth default on Treasury bonds.”
February 18th, 2010 at 11:18 am
Gentlemen, is easier to repair the system giving money to Joe Bloke to pay off his debt.
Forget the BS about the Bank’s multiplier through fractional reserve…is plain BS, as Steve’s work shows.
Debt doesn’t go away, it is either repaid or defaulted, no other way. Instead of brainiac schemes like giving 17 grands to new home buyers perpetuating house inaffordability, give 50 grands to each mortgage holder to pay off his mortgage or reduce it to serviceable levels…this will be more effective than giving money to the banks if you have to inflate public sector debt…then of course, charge extra taxes proportionally to get the money back of the same amount you will be able to cut bloated Govt.pork barrell.
There is NOTHING that will let us off the hook of austerity needed to shrug off the mountain of debt, the only thing you can do is make it lees painful on the smaller boy and cuts perks and bonuses of the oligarchs making them pay their fair share.
Sounds ominously “communist” to you???
February 18th, 2010 at 11:25 am
Oh yes, i forgot…make everyone’s rate fixed for 15 years.
By law!
The bloody Banks have to take their share of the pain, cut their entitlements and soldier on…no discussions.
February 18th, 2010 at 11:58 am
Gunny57,
As long as there is additional flexibility in the fixed rates schemes. Currently there are penalties for fixed rates if you try and pay off your loan faster than the scheduled repayments.
February 18th, 2010 at 12:30 pm
Im sorry to have another rant on this subject but it is a BIG annoyance to me.
This morning i heard on the radio 4 adverts for property seminar and spruikers within 30 minutes, not to mention the 2 paper adverts i saw flipping through the paper.
There is fundamentaly something wrong here, that a whole industry selling property “investments” (i use that word loosely) can develop like this.
They are like financial muck rakers using exploitive emotional advertisng to entice people into the whole home ponzi market and its worse when they are aided and abetted by lack of govt regulation combined with a tax system that encourages exploitation of this manner.
This has all the hallmarks of the financial brokers scandal that caused all those losses in WA years ago.
I suspect if you looked hard enough you could find the same worms moving from one financial scandal to another.
I cant see how this activity contributes anything good to this economy other than making money for the spruikers, and pushing up house prices, allowing the spruikers to make even more money.
February 18th, 2010 at 12:57 pm
Steve, I see on the business spectator site today that you will be debating the only amigo you have not yet debated (face to face, in any case). It has sparked the typical BS (sorry for the French, but hard to find a more appropriate description.) Could not resist saying a few words and I’ve pasted them below:
The wonderful thing about technology is that history can be recorded (in it’s original form) and accessed more easily.
So we are less at the whim of people who care to put their own spin on events.
But it remains up to individuals to consider that historical record with an open mind.
Those who want to find out exactly what went on with this bet, the talks were recorded and are available for downloand (you can fast forward to around the 36 minute mark, though the talks are worth listening to in entirity)
http://www.aph.gov.au/library/pubs/Vis/VIS_EconomicFutures.mp3
and the ppt slides are available at
http://www.aph.gov.au/library/pubs/Vis/vis08-09.htm
Now my perception – from listening to this – of how the bet came to be is somewhat different to that of the 3 amigos.
Firstly, it’s important to note that the amigo proposing the bet sprang it on Steve Keen in a public forum. He had clearly been dreaming it up – perhaps in bed at night, or over a drink with the other 2 amigos – because he had already thought of all of the parameters. To Steve’s credit he did not shrink away – but he did clearly state that his view was that the 40% decline might take 10-15 years.
Also note that there was no mention of any price rise above the earlier peak leading to a win to the amigo. As I understand it this was worked out later.
But also note that for Steve to win, house prices have to fall 40%. Not 30%, or 35% or even 39.9%, but all the way to 40%.
For the amigo to win, prices just had to fall less than 20% over 15 years (or, as subsequently agreed, rise by a certain amount in the short term.)
Now in my view these odds are fairly seriously skewed towards the amigo’s favour.
I can not escape the view that prices falling 39% would see all 3 Amigos with egg splattered all over their faces – but apparently that is a “no result” – and even falls of 19% would see at least a quail egg on their faces, but apparently that would be a win to them.
(But, then again, from participating on Steve’s blog I know for a fact that he is not interested in the “told you so” factor – he is genuinely concerned for the country – so he’ll be far more circumspect when he is proven right.)
February 18th, 2010 at 2:10 pm
Steve – thanks!
By the way it was me who sent you an email with regards to neoclassical teachings etc (i.e. I intend to go back to school to finish my economics/finance degree)
I’ve read most of your online lectures, and recently purchased your book and am wading through it – but I need more time to digest all the info and read all the papers, textbooks and research again, which I intend to do once I restart my degree later this year.
Cheers,
Chris B. (nickmakwell is my online avatar)
Up and Away – to monetise debt via QE is done thusly (AFAIK) – 1. Treasury announces it wants to sell government debt. 2. Federal Reserve purchases it using new money (i.e printed) and its balance sheet expands. 3. Treasure receives the new money to then spend it across its departments (e.g Defense, Social Security etc).
February 18th, 2010 at 2:18 pm
spooky2009 – as a former financial planner, let me tell you that the property industry is the most unregulated, cowboy part of the FIRE sector going! It sometimes makes Goldman Sachs look like choirboys…
We had to go through massive hoops due to ASIC, FSR etc (still these were relatively easy to sidestep) – but property spruikers, real estate agents and the like have almost no regulatory control.
If I advertised like they did (but said shares or margin loan instead of investment property and low-doc finance) I would have received a very quick summons from ASIC, lose my professional indemnity insurance and be out of a job.
February 18th, 2010 at 4:41 pm
Nickmakwell
So treasury will have to pay back the debt anyway to the federal reserve. What is wrong with this and why does this upset China?
February 18th, 2010 at 5:00 pm
Hi ak,
Re: # 16
http://www.zerohedge.com/article/guest-post-stretch-farthest-point-known-thoughts-hyperinflation-event
For the time deprived a few extracts:
“To record knowledge of their (Poland’s) fate—and to preserve the jobs of as many bureaucrats as possible—the government statistical service preserved the minutest details on a monthly basis.
The data source is various issues of the Biuletyn Statystyczny, the Polish household budgetary survey that consisted of a rotating 8,000 households in Poland.
The Polish hyperinflation was a short-lived event but in the space of a year inflation rocketed up 300%. After the huge acceleration shock, price increases only decelerate, but they don’t decline.
This is where the “minute detail” comes in. That household survey captured consumer prices by category during hyperinflation. They show that hyperinflation is the ultimate in living for the now.
As prices for basic necessities go through the roof, the prices of non-essentials collapse. Not only is capital stored in currency destroyed, the cost for food outstrips other consumer categories.”
February 18th, 2010 at 5:16 pm
MMitchell,
Re: #24 and Burrah #18
“A maximum of 1,500 euros for cash transactions? Does anyone else but me think that this will lead to an underground economy whereby exchanges are made using goods, gold or other types of unofficial tender?”
I understand tax avoidance and keeping transactions hidden from the Govt are national sports in Greece.
Reputedly, tax avoidance levels in Greece are right up there with the French. In other words the undergound economy already exists.
FWIW I think pensioners and welfare recipients are most at risk because of their visibility to the Greek Govt.
February 18th, 2010 at 5:43 pm
angophera,
Let me quote:
“As prices for basic necessities go through the roof, the prices of non-essentials collapse. Not only is capital stored in currency destroyed, the cost for food outstrips other consumer categories. For the record, non-foodstuffs means clothing and shoes and electrical/mechanical goods for the home; entertainment means newspaper expenditures, books (including school-books), movies and related items like concerts; fuel (heating oil and gasoline) is not included. Subsidies and usage differences make such comparisons inadequate anyway because few had a car when Polish communism collapsed.
There are some clear and profitable conclusions to this section. Food (and fuel) is how one will profit in the initial stages of a hyperinflation, even as rents, non-food consumer goods collapse. This is due to the fixed nature of rental arrangements and the immiserizing effect of inflation takes luxury goods out of reach. Items for immediate consumption are the one that really jack up. After the initial inflation shock, returns on other goods surpass foodstuffs. ”
This article draws a completly incorrect conclusion and is in fact a very good example of how one can mislead himself by applying pseudoscientific analysis without knowing the context.
Before 1988 some prices were regulated and food rationing was in place. But some types of goods had a kind of market price as they were either imported or manufactured in small enterprices already allowed by the communists. Then the cap was removed and the market opened to foreign import. At the same time wage increases were throttled by a special tax.
All of these led to rebalancing prices in the context of a dramatic system change.
February 18th, 2010 at 5:53 pm
@ homes4aussies (# 30)
Thanks for the link, h4a. I’ve downloaded both the MP3 and the presentations.
I haven’t finished it all yet, but I can already say that the sound quality is fairly reasonable.
Often sound is a problem with this kind of events.
February 18th, 2010 at 7:50 pm
Steve- Did you read this? what a support for what you are saying and from -can you believe it? a BANK
A real “call” at last.
The NAB’s head of business banking Joseph Healy said yesterday (Financial Review Page 7 Feb 18 entitled “Home loan bias bad for economy”) ‘Australia’s banks threaten to constrain the Country’s economic growth and are helping fuel a household debt binge, because they would rather lend money yo but houses than invest in businesses”
The article is supported by Morgan Stanley economist Gerard Minack who adds “Mr Healy views were “unusally sensitive for a banker” “We’ve got a banking sector that’s restricting capital” unfinished for the article is well worth reading in its entirety.
February 18th, 2010 at 9:13 pm
Didn’t see it gaday–thanks for the heads up. Gerard is always excellent, but it’s remarkable to see a NAB banker saying something sensible like this.
February 18th, 2010 at 11:21 pm
I left a comment on Michael Yardney’s article,
http://www.smartcompany.com.au/property-investor/20100210-will-housing-affordability-stall-our-property-boom.html
however, it either failed moderation or they have not had enough time to allow it through moderation. The site did however have enough time to spam me each day since then
Isn’t it strange how only evidence based sites allow all comments? Here is my response.
Thank you Michael for a warm, fuzzy feel-good story about how we (well mostly investors) are becoming wealthier due to our increasingly expensive real estate. You make the same points that most property bulls do without actually providing any meaningful links. The four links that appear in your article are to a previous article and three companies that make money from property
I’m glad you posted this article though as I’ve found the comments quite informative and for that I’m quite grateful to you. It would be fantastic if you could write another article but this time provide solid evidence which supports your claims rather than the same old increasing population and not building enough.
Australia has six of the top ten most expensive cities in the world!
http://www.demographia.com/dhi.pdf
And this is from one of the most sparsely populated countries in the world! Sure we all like to live in the big cities, but when it is cheaper to buy property in London, New York, San Francisco and many other larger cities, than in Australia, you have to ask the question, why?
People can only afford to buy houses while they can get credit and every extra dollar spent paying off a mortgage is one that is not spent on the economy. So, at some stage credit will dry up, as can already be seen by Westpac lowering its LVR to 87%.
Maybe you could get some food for thought by commenting on the graphs on this page?
http://www.whocrashedtheeconomy.com/
http://www.whocrashedtheeconomy.com/?p=148
Or maybe you could comment on the Case-Shiller index?
http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case-shiller-updated.png
But, maybe Australia is different to every other Western country because, “we have kangaroos”
February 18th, 2010 at 11:48 pm
Steve,
I have an off topic question about your credit circuit if you have time:
What is the nature of bank capital in a pure credit economy? Bank capital has historically been thought of as a vault of gold, which is then lent out many times/put at risk. More recently bank capital is a vault of fiat money.
But in a pure credit circuit there is not even fiat money. So what then is bank capital representative of? Can it simply be a stock of debt obligations of various sectors of the economy? If so then what does that say about credit derived from said capital – it becomes a derivative of a derivative if you like. Very recursive. Or is the value really in the assets that the financial assets comprising bank capital are secured on?
Thanks in advance!
February 19th, 2010 at 5:11 am
In an off-topic comment, I guess there are good things about being a proletarian: sometimes one gets to read the news before anybody else!
An article by Jessica Irvine dealing with Prof. Keen’s and Rory Robertson’s wager and the housing bubble and general economic outlook:
“Walking on a wire stretched between stimulus and debt”.
http://www.smh.com.au/opinion/society-and-culture/walking-on-a-wire-stretched-between-stimulus-and-debt-20100218-oiqh.html
The article sounds balanced and it’s definetely not one of those grotesque anti-Keen tirades we’ve seen lately. If one makes allowances for her neoclassical “perspective”, she seems kinda alright, and she does have a sense of humour…
It looks like the Great Walk of Canberra is having some positive effects, after all.
Cheers.
February 19th, 2010 at 9:18 am
Yes Marco, but that throwaway line “If only his predictions were so reliable”; maybe I was a bit grumpy this morning, but that really annoyed me (as you can see by the new post)–especially since I spoke on Meet the Press with Jessica ages back, and she’s been a regular recipient of my Debtwatch report since (I think) well before the GFC actually hit.
February 19th, 2010 at 9:24 am
Hi Scepticus re #40. The nature of credit in a pure credit economy is well put by Graziani:
“In order for money to exist, three basic conditions must be met:
a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);
b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);
c) money must not grant privileges of seignorage to any agent making a payment.
The only way to satisfy those three conditions is to have payments made by means of promises of a third agent, the typical third agent being nowadays a bank. When an agent makes a payment by means of a cheque, he satisfies his partner by the promise of the bank to pay the amount due. Once the payment is made, no debt and credit relationships are left between the two agents. But one of them is now a creditor of the bank, while the second is a debtor of the same bank. This insures that, in spite of making final payments by means of paper money, agents are not granted any kind of privilege.”
So the basic idea is that money in a pure credit system is the promise of a third party to pay that is accepted by two parties in an exchange of goods. That’s all: once the promise is widely accepted, you have money. Anything else to which this promise might be linked, or by which it is potentially backed, is ancillary to that widespread trust.
February 19th, 2010 at 10:17 am
Steve, I honestly hoped this piece would have lifted your spirits. I am sorry for upsetting you: it was entirely unintended.
As I see it, Irvine might have been trying to sound light-hearted only, as that is the way she likes to write her pieces. And her statement of the facts is more or less accurate: we are not yet out of the woods, as the holy cows want us to believe.
In hindsight, though, you have been catching a lot of flack lately (very little of it addressed to your theory and a lot directed against you personally) and I should have expected your tolerance to jokes to be a bit low.
I know it is easier said than done, but try to take things easy. In the end, those words are sweet: “I told you so, holy cows”.
February 19th, 2010 at 12:10 pm
ak,
Re: #36
Thanks for your insights. Sometimes this stuff is like peeling an onion. Layer upon layer of assumptions with the facts hidden at the core.
Cheers
February 19th, 2010 at 1:03 pm
Yes, good point Marco2. I was a bit buggered this morning after a lousy night’s sleep and maybe a bit uncharacteristically thin-skinned as a result.
February 19th, 2010 at 8:59 pm
Steve #44
“In order for money to exist, three basic conditions must be met:
a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);”
A clever argument, but surely a bit too clever. It seems to depend too much on strictly theoretical definitions of things like “money” and “pure credit”. If a bottle of spirits is currently valued at about $20 (because people pay that amount) and a packet of cigarettes at about $10, the fact that for some people these have intrinsic value does not remove their general usefulness as an alternative to $20 and $10 notes. Surely the opposite. The fact that they have intrinsic value to some people means that you can have more confidence in a bottle of spirits retaining value than the corresponding note. And a bottle of spirits is harder to forge.
And it seems to me that exchange of a bottle of spirits could amount to a quite satisfactory settlement of an account without any need to trust a third party.
February 19th, 2010 at 9:40 pm
djc,
Indeed, half-a-litre bottle of vodka (“pol litra”) was a kind of informal currency in Poland in the 1980-ties (a perfect gift or a bribe). I believe this was also common in the former Soviet Union.
http://news.bbc.co.uk/2/hi/uk_news/education/177421.stm
February 20th, 2010 at 3:39 am
ak@49
Also two hundred years ago in New South Wales rum became a currency controlled by the military, the NSW corps AKA the “rum corps”. When the governor, William Bligh objected, he was ousted in this country’s only military coup.
cheers