Max Keiser interviewed me in his inestimable style on the Max Keiser Report earlier this week, and the interview is now available (the interview began at roughly midnight my time on a day that had started for me at 5am, so there are some slips in my delivery here–for instance at one point I say “fail to avoid” when I meant “avoid”).
I’ve had some difficulties in getting the embed to work (the latest version of WordPress seems to do something untoward to the embed code) so you may need to hit the “refresh” button before you’ll see the video below.
The show always starts with an interview between Max and his partner Stacy Herbert, reviewing the financial news of the last week. It’s entertaining, informative and provocative–if you haven’t encountered Max before, you’re in for an surprise.
The interview with Max starts at about the halfway point of the video below, and we cover the housing market, why Australia has not suffered greatly from the GFC so far, why deflation is more likely than inflation, and what the outcome is likely to be of governments attempting to deficit stimulate the economy while ignoring the level of private debt.
February 26th, 2010 at 11:48 am
Hello Steve.
The code you have for the video is using the depreciated element <embed>. By visiting my home page (link with my name) you or Steven can copy the source code I used to include Youtube videos. Better still, here it is.
<object height=”349″ width=”425″ data=”http://www.youtube.com/v/XoF8ZIvhZCk&hl=en&fs=1″ type=”application/x-shockwave-flash”>
<param name=”movie” value=”http://www.youtube.com/v/XoF8ZIvhZCk&hl=en&fs=1″ />
<param name=”allowFullScreen” value=”true” />
</object>
I hope this comes out correct.
February 26th, 2010 at 12:47 pm
Yesterday’s media had a story about a big rise in business investment in the Dec quarter. That appeared odd.
Peter Martin uncovers the facts…
http://petermartin.blogspot.com/2010/02/whats-driving-our-investment-boom.html
“So unusual did the Bureau find the increase… that it went back to the firms it had surveyed and looked again at what they said they spent the money on and asked asked why.
It published a special note to say the answer was highly likely be motor vehicles and the reason was likely to be a rush to take advantage of the government’s end of year business investment tax break.
Industry figures show business purchases of passenger cars jumped 36 per cent between September and December. Business purchases of four wheel drives soared 43 per cent.
The 48,000 extra passenger cars and the 25,000 extra four wheel drives bought by businesses show up in the figures as new investment in equipment, plant and machinery, but are different from what is normally thought of business investment.
Underlying the unusual nature of the boom the industry-lite ACT recorded the biggest increase in “business investment”, up 25 per cent followed by the Northern Territory, up 22 per cent and NSW and Victoria, up 16 and 13 per cent. Recorded investment fell in the mining powerhouses of Queensland and Western Australia.”
Really beneficial for the future productive capacity of the economy.
February 26th, 2010 at 1:26 pm
What’s the Australian reaction to Obama’s latest Health Care Summit? Here, it was just six hours of talking points.
Nothing about how lack of universal care is dragging down the economy globally. Nothing about if any govt. employees are denied coverage due to “pre-existing” conditions.
I know that Rudd’s trying to cut down the wait times in many Australian hospitals. But, have you ever met anyone there would says they’d prefer treatment in the States? Some of the neocons were desperate today. So they were pulling out the usual Canadian-care-sucks propaganda (a Canadian Premier wanted to be treated HERE! And not THERE!)
How’s your mix of national and private coverage?
February 26th, 2010 at 2:33 pm
Thanks for the advice Alan–you do know your stuff on HTML! The code was copied directly from Youtube originally, so they are the source of the deprecated element.
February 26th, 2010 at 5:36 pm
The doomsday cycle
Over the last 30 years, the US financial system has grown to proportions threatening the global economic order. This column suggests a ‘doomsday cycle’ has infiltrated the economic system and could lead to disaster after the next financial crisis. It says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.
February 26th, 2010 at 5:49 pm
soho44 @ 3,
Our public health care system is one of the best in the world, though it still needs a lot of improvement. Currently, Australian per capita costs are half that of the U.S., and 100% of people are covered.
Individuals have the choice of buying private insurance for “hospitals and extras”. This means that extended stays in hospital will be covered and a visit to the myotherapist, chiropractor, optometrist, etc. will be mostly covered as well. In fact, it is rather inefficient to the point that the government gives those purchasing private insurance a 30% subsidy!
Canada also has one of the best health care systems in the world, and will always be better than the U.S. private health care system, no matter how much corporate propaganda is spewed forth.
The U.S. private health care system is the leading cause of the budget deficit. Institute a public health care system and it will help people, businesses, and the budget deficit.
February 27th, 2010 at 2:59 am
I have long argued, and am willing to debate anyone, that the
cause of our economic problems (debt is merely the tool as all debt is someone elses asset…think about that) is wealth and income disparity. This is obviously a very touchy subject, as it makes the wealthy among us face an uncomfortable truth, which most will not. A healthy economy has strong demand (expressed in purchasing power or money flow). Ask yourself why that is not the case now….in other words….what is the snapshot of our economy right now that explains the destruction of demand?? Debt hides for a long time the disparities in the economy that have been happening for a very long time. I have tried to have this discussion with Mish, but apparently his libertarian views are not open to discussion or debate, as there is no libertarian solution to a problem of wealth and income disparity, except to continue to lower the bar for the vast majority of those who must work to survive. My point is that government has an important role in society that has been corrupted by the power elite, and hijacked for their own purposes. In other words, Government is not the problem in itself…but how the Government functions and for WHOS BENEFIT.
There is an excellent article for those who want to really understand what is going on, for your consideration. Unfortunately, Mish is not open to this line of truth.
http://www.globalresearch.ca/index.php?context=va&aid=17815
February 27th, 2010 at 3:19 am
soho44,
Your cost on health care are one half ours because in the US ours is rampant with fraud. There are huge monopolistic insurance companies who conspire with each other, legally as they got the government to exclude them from the anti trust laws. So our health care system is run more like a mobsters. Territory is divided up and there is little or no competition. To maintain this system, they pay huge legal bribes to the law makers in the form of campaign contributions and who knows what else. It is a mess and as seen by the year long fighting in our Congress, won’t be easy to fix.
Our system is broken. The Supreme Court gave away the country to corporate rule in the 1950′s when they gave corporations the rights of citizenship. It recently drove the final nail in by allowing corporations unfettered spending during campaigns.
The US is on a road to a major melt down because for the majority, there is no way to continue to function. All prices are already to high for our incomes and the government’s answer was for us to go way over our heads in debt. To a point which was not sustainable. Now Obama’s fix for health care appears to force citizens to support the already out of control insurance industry.
The US government is trying to make all US citizens economic slaves of the financial system. We will all be forced to work until we drop of old age with all the profits going to the Oligarchs who actually run this country. What has happened to the US is insane. Our founding fathers should be rolling over in their graves and screaming. Except for Jefferson who predicted this.
February 27th, 2010 at 4:40 am
Dr. Keen,
According to the theory that money is created endogenously by the private sector, what role would you say central banks play? It seems to me that in this context, they are enablers but not the root cause of the problem.
Also, why does deficit spending have to result in zombie capitalism? If the private sector could deleverage while the government simultaneously provides fiscal support, couldn’t the economy theoretically recover without massive unemployment and falls in production?
February 27th, 2010 at 4:59 am
#7
Don’t worry, you are not alone:
http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/02/greece_spearing_the_octopus.html#P92503999
Since the 1970s Capitalism struggled to grow in the true wealth creation sense. What has been happening for the last 40 years or so is a stagnation of REAL wealth, and a ballooning of debt “claims” on wealth. This has actually led to covert class wealth transfer (consolidation in the hands of the few) not wealth creation.
P.S. Your link in #7 didn’t seem to work.
February 27th, 2010 at 8:23 am
Re #9 Armchair_Pundit,
Yes the CB role is basically that of an “enabler” rather than a “causer” from the endogenous money perspective (the best article on this being Basil Moore’s 1983 paper on this:
Moore, B. J. (1983). “Unpacking the Post Keynesian Black Box: Bank Lending and the Money Supply.” Journal of Post Keynesian Economics 5(4): 537-556.
The reasons I expect zombie capitalism out of a stimulus approach to solving the crisis are that:
(1) the scale of deficit spending needed to completely counter private sector deleveraging will be politically impossible to achieve;
(2) were the policy to completely succeed, then unless it was also combined with policies to deliberately reduce the size of the F &RE sections of the FIRE economy in particular, it would allow the perpetuation of the irresponsible Ponzi finance behaviour that caused the crisis in the first place.
(3) Given the relative motivation and cunning of the finance sector vis a vis the government bureaucracy, I would expect Ponzi to undermine government stimulus behaviour over time.
February 27th, 2010 at 8:44 am
The Age’s Tim Colebatch echoes some of Steve’s analysis.
In the red, mortgage burden soars to $1 trillion
http://www.theage.com.au/business/in-the-red-mortgage-burden-soars-to-1-trillion-20100226-p9bs.html
Households’ willingness to take on greater debt powered much of Australia’s economic growth from 1990-2010 but with our households now as indebted as any in the Western world, economists say that will not be repeated.
February 27th, 2010 at 8:49 am
Deflationist, Hawkeye_Pierce,
The link to the article is here:
http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=17502
I am not going to dispute the points you made because I agree with you.
The real result of this crisis will be another long-term shift in social mood. If “rational expectations” of the young people will be that they are screwed up anyway and no more instant credit gratification is available – they will not attempt to repay the debt imposed upon them by the system.
People will try to leave Greece in droves (what happened in Poland and Romania several years ago). This is the relief valve. But where will they go from the UK or the US?
People who are unemployed for a few years but are given enough food to survive may simply ignore the need to work for the capitalists and bankers to chase the dream of wealth – which runs away from them further and further away anyway. Is this irrational?
If the real estate spruikers read this “spray” – they should notice that they are the very people who are destroying capitalism. You have made homes unaffordable. Soon nobody will bother to subscribe to 30 years debt peonage for a pile of bricks, concrete, asbestos and veneer called The Greatest Australian Dream – the Family Home. As long as the value is rising the Ponzi schema is running. But it can’t go like this forever…
The capitalist dream will be over as the system of values upon which the system is built (the pursuit of wealth and instant gratification – overconsumption)- erodes. The Austrian scholars fail to understand this. It really doesn’t matter what they think – they may rant about free markets and limited government as much as they want but people will not listen. Middle class hoarding wealth is not the whole society.
The only way to restore the order is to make the people hungry and then terrorise them. I can hardly see Mr Rumpy Pumpy growing moustache like Adolf.
All we will get is the underground economy. Very little credit money, no taxes paid and even some barter trade emerging.
The paradox of Greece and Eastern Europe in general is that the underground economy which led to the current situation of public finances will save the impoverished society during the crisis.
Yes they are lazy and they cheat. What if this is the most Rational Expectation you may have about the human life – that you’ll die anyway so why should you bother?
If the official system is only geared towards extracting wealth and repaying back the debt to the greedy Germans and Goldman Sachs – people will simply ignore it. The EU can only send unarmed clerks there – they will not send Wehrmacht.
In the end I believe the whole house of cards called the EU will collapse or the Germans will have to keep bailing out the others. This is the Lehman Bros 2.0 They want to apply pressure to Greece by allowing them to go bankrupt. Good luck…
February 27th, 2010 at 1:53 pm
Steve,
Note the last line of Michael Pettis’ reply to a comment on his latest blog post:
“Michael Pettis | 24/02/10
Houhui, thanks, and yes, we don’t spend nearly enough time thinking about balance sheets. When I studied economics monetary and balance sheet issues were often treated as a veil that had no real bearing on underlying economics, even though Irving Fischer, Hyman Minsky, Charles Kindleberger, and above all Keynes should have taught us otherwise. Minsky’s books and papers, including “Stabilizing an Unstable Economy”, are very good and usually very readable. Whalen on Minsky is worth reading. The Levy institute at Bard is hard-core in the Minsky camp and you should get in the habit of trolling through their papers, and Minskyite Australian economist and blogger Steve Keen has great insights.”
Take a bow.
PS. Prof Pettis is very generous with his time in responding to questions. Obviously a committed teacher and educator.
February 27th, 2010 at 2:15 pm
I reckon the last 24 hours has seen the high and low of commentary surrounding our housing markets.
I’ll start with the positive. The article in this weekend’s AFR by Andrew Cornell is probably the most balanced article on our housing market that I have read in the last 5 years or more. The only thing that I would have added is that I would have named Garnaut as someone else who has called it a bubble. Steve’s views are treated with greater respect. (Actually this seems to be the case with Fairfax journalists since the article widely discussed in the earlier thread, so perhaps some good came from it.)
Interestingly it updates the graph from the RBA which we used in the Bubblepedia brochure – showing that we retained our no. 1 position (house price to disposable income amongst Anglophone countries) and that by this measure we are back up to the levels of 2003.
Cornell is carefull not to call it a bubble or suggest that a crash is on its way. But he does a good job of covering the issues.
Now to the not so positive. The press release for the monthly hedonic indices (will not give publicity for the company) contained some quotes from Steve’s most recent debating opponent. In it he continues with the jibes:
“In my debate with Steve Keen this week I argued that anyone wanting to stimulate media hysteria by spruiking a house price bubble needs to at least back up their claims with objective analysis, which I have yet to see,” Mr Joye said
The comedic value of suggestions of “spruiking a bubble” from this source is priceless!
Another of his quotes was interesting, especially in light of the earlier quote and graph compile by Steve which I have attached below:
“In the long-run, one would anticipate that house prices should track disposable incomes.”
So I gather the view is that after such a large run up in prices – what I would call a bubble – that prices are now meant to act accordingly to fundaments and track disposable incomes – from where they are right now.
Well he is entitled to his opinion. But for my hard earned and the financial security it provides my family, I am inclined to think that there will be a signficant period of reversion to trend rather than adhering to trend from this point forward.
February 27th, 2010 at 2:37 pm
I notice the graph mentioned in #15 did not load – hope this works.
February 27th, 2010 at 3:01 pm
@ ak (#13)
My friend, you have no idea how much I agree with your words.
Those who read the SMH article linked by MechanicalEngineer 4 days ago:
The DeathBed of Keynesian Economics
http://www.smh.com.au/business/the-deathbed-of-keynesian-economics-20100223-p00z.html
Are already aware that there is an academic reaction against the very policies that, well or badly, have kept the system afloat, sort of. In the UK, this reaction takes form of the letter from the 20 or so asking to cut government spending and supporting the Tories.
But this reaction is not limited to academic or mainly academic circles. In the US, is the (mainly) Republicans (but also a fair bit of Democrats) and the Tea Partiers.
And now, we have the same thing, guess where? In Australia! The country where Keynesianism, however badly applied, has worked best.
Last Sunday (14/02/2010) the Business Council of Australia (BCA) released a Budget Submission containing recommendations such as:
(1) cut down unfinished works funded with the stimulus package.
(2) tighten eligibility criteria for unemployment and retirement benefits.
(3) further increases in the retirement age (not specified, but left open up to 75 years).
(4) cut health spending.
(5) further reforms in workplace relations.
The idea is not to keep the federal budget constrained by a 2% increase in real terms (as vaguely stated by the PM), but to take the budget into SURPLUS as soon as possible.
For that, apart from cutting federal spending, the BCA suggests as well:
(6) increases in consumption taxes (a.k.a. GST)
(7) no increases in income, corporate or capital taxes
(8) no new corporate taxes at all (this seems aimed at the rumored economic rent tax on mining, allegedly recommended by the Henry tax review).
You may notice that some of those recommendations seem misplaced in a Budget Submission (which deals with short term fiscal matters, by definition): (3), (5).
Some of its recommendations seem redundant, in view of the automatic stabilizers: (2).
Some seem self-interested: (7) and (8).
I suppose most readers may notice these measures are aimed at reducing aggregate demand: the Budget Submission, as expressed by its authors, is based on a supply side economics view.
I may, of course, be reading too much in the recent announcements by the Federal opposition that they intend to privatize Medibank Private, restore individual work contracts, lay off federal public servants and cut down plans to reduce the number of homeless, but the timing does seem curious.
At the same time, the lack of pronouncement by the Federal Government on most of these matters, together with the lack of coverage by the media, doesn’t sound reassuring to me.
It was enough to believe the crisis is over to start again on the same path.
If these views prevail, considering that the recovery is already stumbling both overseas and domestically, may god help us all.
PS: This is the press release
http://www.bca.com.au/Content/101652.aspx
There is a link at the bottom of the page for the Submission itself.
February 27th, 2010 at 3:51 pm
Homes4Aussies,
I have been largely in agreement with most on this site, especially those who feel the pain of obscene house prices. The question that has not been clearly answered however is, are there any reliable strategies to do anything about it? If there is opportunity in adversity, and recognising that current prices cannot be sustained, there must be an appropriate strategy to protect oneself from the situation. Given the inflation/deflation debate and the possibility for nominal prices to head both higher (govt inflates) or lower (credit collapse, perhaps more likely), the only situation that I can see as a sure thing is that the price of houses, as priced in gold, is guaranteed to go down. This process is already underway and can be relied on in the future, no matter what the economy or government does. To capture this, one could:
1. (If existing homeowner) Sell houses and buy gold.
2. (If renting and saving) Save in gold and if possible, borrow to buy gold.
3. (both) Short the house price index and go long gold.
My personal wager against myself is a refinement of Steve’s ’40%’ prediction – the price of houses in gold will go down by 40% over the next fifteen years, even though there is a possibility that nominal prices may continue to rise. A stealth bear market in gold, if you will. And I suspect that prices may go way beyond this wager.
February 27th, 2010 at 4:41 pm
Gleambright
I think your comment is more about gold than house prices – and it is a perfectly valid view – but I do not have a strong view on gold, whilst others here in the past have shown an interest, so I will leave it for them to comment.
I will just say that I built up a reasonable (but not overly significant) exposure to gold in 2004/05. My current plan is to maintain it at current levels.
And I think it unlikely that nominal house prices will be above current levels in 5 years.
February 27th, 2010 at 5:52 pm
Gleambright and homes4aussies,
The wild card in all of this is the changes to the FIRB rules on residential RE from March 31, 2009. I have been working on a piece presenting a series of scenarios on the impact of these changes (between other commitments). I hope to finish it soon.
FWIW I am into gold although I don’t bring it up here except in passing. Gold could be a good parking spot for a deposit but exchange rate movements can negate the benefits to some degree. Gold is up around 180% in Aus$ terms over the decade but it is up closer to 400% in US$ terms. A prospective US homeowner who put a 20% cash deposit into gold a few years ago could be a 100% cash homebuyer in the not so distant future. An Aus hopeful isn’t looking nearly as well placed at the moment. Though IMHO their situation could improve quite dramatically before the GFC is over.
I think that the forces at work in the GFC will do what is required. Demographics and Steve’s maths on the debt tell the story. The outcome is inevitable. It is, I believe, only a matter of degree.
As far as action is concerned IMO the main thing is to hound the Govt to stop interfering in the market and to stop piling up debt and contingent liabilities such as bank guarrantees.
My overarching concern is that housing affordability starts improving but the Govt negates the benefit by reducing people’s disposable income through taxes and charges. Offsetting the benefits in the process.
February 27th, 2010 at 6:13 pm
Angophera and home4aussies, am i reading correctly you are acknowledging gold, what the hell is going on here?You are talking about the forbidden fruit here.
We begin the next upside move in April 2010 in gold and from this move we will see $1650 US by years end at latest, this will happen and please use this information as you will.
I only come on this site when gold is close to moving seriously higher.I did it last year and was totally correct with the 1224 call and will be correct again this time.
To be clear March will be your last chance to get involved in gold because in APRIL 2010 we begin the real ride that will make you wish you had listened to me in June last year when gold was in the 900′s.
Buy Gold
PS where is my “silver specialist” buddy Bullturnedbear?
February 27th, 2010 at 7:56 pm
Funny this thread starts out with a debate on US medicine. For one, no one in the US goes without health care. They might get a bill they can’t pay, but they just don’t pay it. As far as getting in the hospital, the only wait is the government run hospitals. And they don’t run cheap. Truth is Americans overuse their health care systems and too many of a limited number of doctors get into non medical care businesses like cosmetic surgury and such. The pharmaceutical distribution system in the US abuses those without insurance while basically giving insureds medicine at cost plus a small fee plus the co-pay. I have read enough to know a cash payer is hit with $80 for them putting 24 pills in a bottle at the pharmacy over what the drugs cost quite often. Entire stores are built around the pharmacy. The insured on the other hand gets the pills for a $10 or $20 copay and from what I can deduce the insurance company pays wholesale plus a processing fee of about $7. I would stuff a couple of dozen pills in a small bottle for $10 each or $20 each or even $7 each. The uninsured is ripped off by a system of extortion. But, at the same time, until the government got heavily involved in the health care system here, it was relatively affordable. It will be rationed when the government gets the rest. The American public has been screwed every time they dealt with their government.
Keiser mentioned Charlie Munger of Berkshire saying we needed a new constitution. The problem was the government isn’t following the old one. The endowment of titles of nobility to bankers and the Fed and the entire destroying the real standard of living through debt has undermined the country. The founding fathers, in a large part, feared the establishment of the system we have today. FDR set up the current system under emergency rule and went around the constitution using war and emergency statutes set up during World War I. Without the Fed and without deposit guarantees, the US could have never created this kind of bubble. It has allowed the rich to put the country on the verge of feudalism.
To Steves interview. I think it was work of art. I don’t know how the government can continue to take on debt and have any validity over time though. I just read something where the debt of the Japanese government is nearing the entire asset base of the Japanese households. This means the Japanese people are in debt to themselves or their bankers for their entire net worth. This is worse than the US position. Some saving system.
I have changed my tune from predicting this stuff over the past 9 years to how do we get out of it. It seems all the economics, even Minsky, surrounds themselves with the idea of how to keep such an overburden debt system intact. The system of government in a free society was to serve the people, not to own them and should we be willing to place our security in such an institution, freedom will cease to be the norm for free men. It is time that everyone take a haircut. The US has created China through a system of excess credit flows. Don’t fool yourself that China would have grown otherwise. The effect of trying to keep the bubble intact seems to be the same as what transpired in France during the Mississippi Bubble, which was the last time credit totally imploded. Seems France lost its industrial base as people began to live high on the hog and speculate on paper. The mistake of the Monarchy then, from what I understand was to bail out their cronies and put the debts on the common man. The King was all in with the speculators who were to produce a profit large enough to pay off the Kings debt. It worked for awhile before it crumbled. Sounds like Robert Rubins scheme to me. Nothing new under the sun.
Steve, I have been reading Minsky’s “Stabilizing an Unstable Economy”. It appears to me that we are at least to some extent getting Minsky’s solution here. I find a couple of things interesting in the early parts of that book. One is that Minsky traced instability to the reduction in the amount of treasuries on the balance sheet of banks back in the 1970′s. No liquid paper. At that time he said that the big banks acted as lender of last resort for the non-bank lenders, aka GE and others of current times. Clearly this is what so many of these SIV’s were about and it is clear that the reason the banks didn’t use the discount window of the Fed is they didn’t have securities fit for discount, but instead a bunch of non-marketable crap. Also, contrary to popular belief, the real reserves the Fed indicated were out there are in the matresses of Mexicans and Russians and not in the banks. The QE the Fed has done in buying mortgages is because they were all that could be discounted and the banks needed to be able to write checks for each other. I had seen Citi’s financials in mid 2007 and I knew from the start that Citi was in trouble because their Fed funds needs were $400 billion. The entire Fed reserve base was about $800 billion, so the capacity of Citi to raise liquidity was limited to its readily marketable securities once it was apparent how broke they were.
The problem I see is that Minsky’s solution works when there is a much lesser level of debt, but not now. The best we can get is the zombie system you mentioned. I think you covered the bases very well as I understand it. I also believe that the government should impose an across the board haircut and maybe tax half the debt in return for a guarantee the other half stand up. I doubt they would get many takers now, but if they would quit bailing this out, there would be a change of tune quickly. I have just engaged in a mild debate on Mish’s page. The government is trying to keep people in their homes, but the response has been that many have just quit paying and it isn’t quite Kosher that they get bailed out. At the same time, there needs to be a solution at some point or the entire system melts down. I sense that paying customers should be able to apply for some kind of assistance, even if it is that they shorten the term and get to pay at the current 5 year treasury rate of 2.25%, which might give them some capacity to pay down to a more reasonable level with the same payment.
Few seem to understand this entire mess. I think it is plain once you look at it in terms of debt to income on a house. The standards are using payment ratios for qualification, but this doesn’t solve the debt problem. From what I understand, my sister is carrying a $800,000 mortgage. When I heard that, I related to my brother that $800,000 is 10% of $400,000 a year for 20 years. I don’t know if that sunk in or not to him, but figure it out. People don’t understand the debt is rarely ever paid, but moved onto the next guy and stays in the system. Maybe my sister sells out in 10 years and takes out $200,000 or even $400,000 if we get appreciation, but she left behind $600,000 plus what the next guy borrows. If it is all paid down, the money supply goes with it. It becomes an unservicable trap that has to continue to expand or collapse.
Japan’s zombie economy didn’t stop real estate prices from collapsing. The effort in the USA is to restore the housing bubble so that banks and the GSE’s get back on their feet and the appreciation can restore consumer demand. It isn’t going to happen. Resale rates are now starting to collapse and the most recent application rate for mortgages was reported as the slowest since May 1997. New home sales were at a record low and this is with the home stimulus being extended and expanded. The problem is that if you rent in the US, you are evicted after maybe a month at best and we view people that are using the system as deadbeats, especially if they haven’t paid in a long time, which is quite the case. A house in foreclosure here from my lending experience in the 1980′s is worth maybe 70% of market to the lender, so there is your breakeven. The lender cannot afford to give everyone that break. But, it appears someone is going to take the loss. It may be time for damage control.
I am going to attempt to enter something in the contest on that new page you posted the other day. I am a pretty good bean counter and degreed in finance. We don’t have a lot of time to come to some kind of solution to this problem, else the free world as we know it could cease to exist. I don’t think many know how far down this mess can collapse in this kind of debt structure and those that think they are going to come out with 100% are going to be lucky to come out with anything. Bankruptcy of corporations generally result in maybe 25% salvage. It appears the debt instruments in general will pay out about that much when all is said and done. Then it isn’t beyond the possibility that the rest could be wiped out by a hyperinflation if the current recipe is continued.
February 27th, 2010 at 10:46 pm
Hello everyone,
Has anyone thought about the implications of the dynamite prize? I consider the verdict of the prize to be the collective judgement of a representative sample of the thinking economists of this world. The rest are sheeples, switching off their brains to advance their own careers by following the path of least resistance in kowtowing to mainstream economics. May be we shouldn’t blame them for putting their pay and their family responsibilities ahead of the truth and the common good. But they have misled the world in a big way.
What the dynamite prize tells you is that we have been going up the wrong garden path for the last few decades! The damage that has been done is not going to be fixed by a bit of government stimulus and a bit of money printing. Major upheaval is virtually inevitable in the next few years.
Governments (e.g. Thatcher, Reagan and Bush) have assumed that private-sector self-interest will keep the markets running efficiently for the benefit of all. Greenspan (our dynamite laureate) had admitted publicly that he had made this wrong assumption. The “trickling-down” effect has not worked, only to see CEOs getting multi-million dollar pay packages and the disparity of wealth between rich and poor on any measure has been widening to record levels.
Australia is a lap-dog of the US, following the leader with six to twelve months lag on many economic indicators. In terms of intellectual ideas, there are very few differences. Sub-prime lending in Australia was about half of the US, only because we were twelve months behind in following the leader. But the Australian housing bubble has been made worst by this happenstance.
Governments around the world have shown a great reluctance in not admitting to their mistakes about private sector debt (being reasonable and efficient). Most government departments are either incompetent or corrupt. Governments have transferred obscene private sector debts onto public sector balance sheets, through bailouts, making ordinary taxpayers pay for all the incompetence and mistakes of the past decades.
People are waking up this debacle created by both governments and markets. They are starting to protect in the streets. Under democracy, some governments have to take notice and the problems may not be allowed to be swept under the carpet indefinitely, like Ponzi schemes which have use-by dates. Unsustainable government deficits and foreign debt are likely to trigger the day of reckoning. I suspect that 2010-2012 will see the second lag of the global financial crisis, with bond market crashes and currency gyrations.
February 27th, 2010 at 11:18 pm
“Also, why does deficit spending have to result in zombie capitalism? If the private sector could deleverage while the government simultaneously provides fiscal support, couldn’t the economy theoretically recover without massive unemployment and falls in production”
high armchair pundit,
yes , and this is the game thats being played out here. the government adding net financial assetts to the private sector, propping up employment , incomes, and the elphant in the room, house prices
theoretically this scenario can go on forever, since its up to the government to determine how much unemployment they are prepaired to put up with. but steve is right to think that the nonsensical gold standard thinking thats currently engulfing the EU and in particular greece may be a portent to our future.
it beggars belief that the greek government would rather stick it to their own people with some self imposed fiscal restrictions as oppossed to telling the EU to shove their austerity measures where the sun dont shine, somewhere in deepest darkest equitorial brussels.
like many a greek tragedy revenge will be swift and the king will lose his head if the greeks sense betayal in the air.
it has always been my contention , that for a similar tragedy to occurre here, we are going to need a change of government, and a return to gold standard thinking, given that the current government is quite happy to prop up the system with large deficits, allthough mr tanner shows signs of being a card carrying member of the gold standard thinking, gbc(government budgetary constraints) club.
despite mr abbotts valiant efforts he has allready lost this election. they wrote that little suicide note the day they voted mr abbott as leader, since he will not get the support he needs in key female demographics.
if john howard was a throw back to 1950 , well tony abbott decent fellow he may be, is a throw back to the 15th century, and the women of this country wont have him.
their current finance spokesman is a reminder of what awaits us sometime in the second half of this decade, spouting off eronous propositions about the perils of government debt and deficits, and government solvency.
we are going to end up shooting ourselves in the foot because of faulty thinking
our greek tragedy still awaits us, and steve will have his day, we just might have to wait upto another 10 years for our actions to fructify into the ugly consequences that lurk beneath them.
February 27th, 2010 at 11:41 pm
mannfm11,
Re: #23
“Keiser mentioned Charlie Munger of Berkshire saying we needed a new constitution. The problem was the government isn’t following the old one.”
The Govt WAS not following the Constitution, is NOT and will NOT. But, but, but it remains the law of the land.
elliottwave,
Re: #22
My first exchange of comments with you included the statement that I owned gold in order to avoid/reduce counterparty risk. This is not a recent development.
Since you are into pricing gold; in 1997 was the gold price around US$380 per ounce or US$6,000 per ounce for tonnage?
February 27th, 2010 at 11:58 pm
Angophera was i not clear in my comments?
February 28th, 2010 at 12:55 am
“Keiser mentioned Charlie Munger of Berkshire saying we needed a new constitution”
it not just the constitution that needs change but the power arrangements surrounding it.
i do not think it is a satisfactory proposotion that we have un elected wall street bankers coming in and out of the revolving door of the american cabinet.
i do not think its satisfactory that the president gets to choose his men subject to congressional approval, not the citizenry.
and because the citizenry dont have to turn up and vote, money talks and prejudice abounds
in this country even prime ministers can lose their seat.
i have said this before,
when they write the history of the next 30 years it will be the american presidential system of governance that will be held to account for the collapse of the current global political and trading system, and our economic prosperity, such as it is, with it.
trade and economic prosperity cannot flourish without political security, and it will be the barely elected presidency with its unelected cabinet, that will bring into jeopardy the current geo political framwork through miss guided foreign policy.
in my view the world would be much better served if the americans had a bench of 3 or 5 presidents all serving on a rotational staggered basis, compulsory voting, and total public funding and the banning of private funding.
show me a political, economic or military disaster, and i’ll show you a regime that cant govern itself or is being out governed by its mortal opponents.
February 28th, 2010 at 7:52 am
Re #23 mannfm11,
Yes, I think you’re correct that Minsky’s solution only works with a much lower level of debt.
In the models I did in my 1995 paper, there was a bifurcation point for government debt: below one level of the rate of growth of private debt, government debt could stabilise it at a fluctuating but long term constant ratio of government debt to GDP. Above that level, it took accelerating levels of government debt to stabilise private debt. That I think is the situation we are in now, and once I realised this I started to regard Minsky as an optimist.
That’s one reason my solutions involve abolishing a large slab of the debt–in line with Michael Hudson’s thinking–and not merely government spending as a counterbalance (which was Minsky’s idea and is also given form in my 1995 JPKE paper).
February 28th, 2010 at 7:55 am
Lyonwiss, I love the expression of “Dynamite Laureate Greenspan” (and of course also Friedman). I’ll use these in future with a link to the relevant blog entries whenever I use their names.
February 28th, 2010 at 8:37 am
@ Lyonwiss (#24)
I believe you are right in your interpretation of what the Dynamite Prize means: “we have been going up the wrong path for the last few decades”. And undoubtedly a fraction of the economics profession understands it this way. But this is not the whole of the profession and, least of all, the whole of the universe of decision-makers.
I also agree that a “bit of government stimulus and a bit of money printing” will not fix this. To see that you are right and that at one stage even pollies and their advisers understood that, we only need to remember last April meeting of the G20. They made recommendations from putting a cap on high executives’ pay packages, to introducing new financial regulations, to crack down tax havens.
To see what good those recommendations were: financial regulation legislation in the US has stalled; in Davos last year, the bankers already opposed most changes, although in a low profile move; in Australia, there are proposals to transform Sydney into a tax haven (apparently supported by former members of the Howard cabinet), with no substantive change in the way executives are compensated.
In Steve’s expositions on Minsky, he explains that periods of financial stability, because of that very stability, induce increasing risk-taking behavior from bankers and investors. And this erodes the very same stability, making the market more prone to crashes.
As the application of this process, in what concerns most people in this blog, is to housing and mortgages, people seem to accept that this occurs only in those markets.
But I can’t see why investors in financial assets or real estate, large or small, have to be the only ones affected by it.
In fact, I see the current reaction against the limited neokeynesianism a la Krugman precisely in the same light: neokeynesianism’s ability to make the situation “look like the crisis is over” moves capitalists to become greedier.
This may be just herd behaviour: financial markets appear to be booming, wohoo! Let’s all make money! A kind of feeding frenzy.
But I can think of a simple factor, well grounded in economic theory that can explain it: opportunity costs of investment.
Suppose you have enough money to either (1) open a small factory or to (2) buy several houses for rental market and speculation. You may end up deciding to open the factory based on many things (from, say, your deep patriotic sense of duty, to your wish to honor your late Dad’s memory, as he was a blue collar worker), but whatever the things influencing your decision, at least some consideration for opportunity costs will affect your decision.
Let’s simplify this and consider that only opportunity costs play a role. So, the higher returns offered by the financial markets, the higher the returns required by you from the “real” economy. If those returns are not offered in Australia, but in the Philippines, so be it.
And the thing probably works the other way around: the higher the returns offered by the “real” economy, the higher the returns demanded from the financial sector.
To achieve these higher returns, foreign investors need to be allowed to invest in physical assets in markets outside their country of residence and be allowed to move their financial capitals without any obstacles. In other words: globalization.
As higher returns are sensitive to governmental decisions (say, foreign investment regulation, workplace laws, taxes, tariffs, environmental, OH&S regulations, and financial regulation), capitalists will fight with claw and teeth to gain leverage over governments. This is what I believe happened in the US, UK, here and elsewhere starting during the 1980s (under Thatcher, Reagan et al).
Then we had this all too brief interlude where “now we all were Keynesians”, while the GFC seemed to threaten the very roots of capitalism. If you like, it was a collective loss of self-confidence. Now that the threat seems to be over, the self-confidence is back and we have the low of the tide.
Have a look at this cartoon. This is the idea:
Regarding the Ongoing Irrelevance of Keynesian Economics
http://www.leftycartoons.com/regarding-the-ongoing-irrelevance-of-keynesian-economics/
In any case, this ceaseless flow and reflow of investment back and forth causes the global economy to become increasingly interconnected and complex. And banks profit and grow and become more powerful and risk seeking. The fact that they also become “too big to fail” is not conducive to risk averse behaviour!
If one link of the web fails (say a volcano eruption in Mindanao island), both the “real” economy and the financial markets somewhere else will be affected. Say, you lose your factory in the Philippines and your investment and you can’t repay the bank, which goes broke because of that.
February 28th, 2010 at 12:12 pm
“That’s one reason my solutions involve abolishing a large slab of the debt–in line with Michael Hudson’s thinking–and not merely government spending as a counterbalance (which was Minsky’s idea and is also given form in my 1995 JPKE paper”
point taken and im in favour,
but, government spending money without a liability attached to it, is also another way we can address these problems, and allow the private secor to fix its balance sheet.
it would mean dismantling interest rate targeting, but so be it.
the question remains, do we do this and keep housing asset prices where they are, and aid abbett the current systems tendency to use part of this government largess to undertake ponzi like behavior
February 28th, 2010 at 10:47 pm
Dr. Keen,
Thanks for the link to the Moore paper. If I read it correctly, then the Federal Reserve is essentially powerless in controlling bank lending, even if it sets the federal funds rate relatively high. This is a pretty counter-intuitive idea, given how much emphasis politicians place on reserve banks.
I had also come across for the first time the idea that the base rate of inflation can be interpreted as the excess growth rate of money wages minus the growth rate of average labor productivity. If this is accurate, then I imagine it all sorts of implications that economists are ignoring. Is this still argued by Post-Keynes economists?
March 1st, 2010 at 1:16 am
Lyonwiss & Marco2,
I think these two quotes helps to explain why economic theory and economists themselves tend to be rather conformist and even corrupt:
“The dominant economic discourse has, since the early 1980s, reinforced its hold in academic and research institutions throughout the world: critical analysis is strongly discouraged, social and economic reality is to be seen through a single set of fictitious economic relations which serve the purpose of concealing the workings of the global economic system. Mainstream economic scholarship produces theory without facts (“pure theory”) and facts without theory (“applied economics”). The dominant economic dogma admits neither dissent from nor discussion of its main theoretical paradigm: the universities’ main function is to product a generation of loyal and dependable economists who are incapable of unveiling the social foundations of the global market economy. Similarly, Third World intellectuals are increasingly enlisted in support of the neoliberal paradigm; the internationalisation of economic “science” unreservedly supports the process of global economic restructuring.” (p. 42)
“The “official” neoliberal dogma also creates its own “counter-paradigm” embodying a highly moral and ethical discourse. The latter focuses on “sustainable development” and “poverty alleviation” while distorting and “stylising” the policy issues pertaining to poverty, the protection of the environment and the social rights of women. This “counter-ideology” rarely challenges neoliberal policy prescriptions. It develops alongside and in harmony rather than in opposition to the official neoliberal dogma. Within this counter-ideology (which is generously funded by the research establishment) development scholars find a comfortable niche. Their role is to generate (within this counter-discourse) a semblance of critical debate without addressing the social foundations of the global market system. The World Bank plays in this regard a key role by promoting research on poverty and the so-called “social dimensions of adjustment”. This ethical focus and the underlying categories (e.g. poverty alleviation, gender issues, equity, etc.) provide a “human face” for the Bretton Woods institutions and a semblance of commitment to social change. However, inasmuch as this analysis is functionally divorced from an understanding of the main macro-economic reforms, it rarely constitutes a threat to the neoliberal economic agenda.” (pp. 42-43)
Chossudovsky, Michel. 1998. The Globalisation of Poverty: Impacts of IMF and World Bank Reforms (Sydney, Australia: Pluto Press).
March 1st, 2010 at 3:13 am
Steve,
Thanks for the Moore paper. I’ll recommend “Shaking The Invisible Hand” by Moore for readers here. The quote in the paper by Max Planck A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it is both nice and depressive – it seems to suggest that we have to wait for another generation to get rid of neoclassicals!
There is another quote – by Freeman Dyson in “The Scientist as a Rebel”- which you may like – because it is what you have tried to say on various occasions. The great advances in science usually result from new tools rather than from new doctrines.. Mainstream is full of doctrines and nothing else.
March 1st, 2010 at 8:23 am
Re #32 ArmchairPundit “I had also come across for the first time the idea that the base rate of inflation can be interpreted as the excess growth rate of money wages minus the growth rate of average labor productivity.”
Yes this is still the basic Post Keynesian position on inflation, and in fact it can be derived from a dynamic model of production and price setting, as I show in this paper:
http://www.economics-ejournal.org/economics/discussionpapers/2010-2
March 1st, 2010 at 2:45 pm
@ Philip (#33)
The second quote is terrific: it puts my argument into perspective.
When a guy like Paul Krugman is seen as a socialist (as he is seen, in the “land of the free”), we need to worry.
March 4th, 2010 at 6:54 am
[...] The Keiser Report. The guy is a crank, but that does not mean he is wrong. Highly entertaining. (Incidentally, if Bond Girl and I ever do a video, it will probably look at lot like this.) [...]