After extensive and much appreciated critical feedback on the draft designs, this blog entry showcases the three T-Shirt designs I’m producing for the Walk to Kosciuszko.
Each has the words “I was hopelessly wrong on house prices. Ask me how” as required by the bet. Each also has a graphical answer to the question:
- Timing;
- Our Debt Bubble; and
- Government manipulation of the market in the form of the First Home Owners Grant.
Some blog members have made strong cases for a plain T-shirt, but I will stick with the graph-augmented designs. I entered public debate to make the points that (a) we were in for a serious debt-induced economic crisis; and (b) that conventional economic theory had helped cause this crisis by ignoring the role of credit. I intend using this Walk to continue communicating those messages.
I’ve taken aboard the observations that the distorted text made it harder to read both the text and the graphs, but I am placing the text strategically in each graph to emphasise the message of each T-shirt.
Some bloggers have also argued that I should replace “Walking against Australia’s property mania” with “Walking against Australia’s property bubble”. I am sticking with mania, because I believe that future generations, looking back on this period, will regard it as at least the equivalent–and probably the Master–of previous ages of delusion like the Tulip Mania, the South Sea Bubble, and John Law and the Mississippi Company. Charles Mackay popularised the word “mania” to describe such periods in his masterful Extraordinary Popular Delusions and the Madness of Crowds, and I think that term fittingly describes the period of delusion we are living through.
If the above choices mean that the T-shirts work less well for visual bites on TV and the like, so be it. I would rather see them as historical artefacts first, and communication devices second.
1: Timing
The first T-shirt shows CPI-adjusted house price indices for Japan, the USA and Australia, starting from the common date of June 1986 (the earliest date in the ABS time series for established home prices).
Japan’s real house price index rose by 54% between 1986 and 1991 during its Bubble Economy phase, peaked at 154.75 in February 1991 in the early days of the Bubble’s bursting. By March 2009 had fallen to 63.961–a fall of 58% over 18 years.
When Japan’s Bubble Economy fell into the heap that became known as The Lost Decade–and which is now closer to The Lost Two Decades–there were numerous commentaries that something as absurd as Japan’s bubble could never occur in America, given its much more efficient and transparent financial system. As a well-educated Minskian economist, I scoffed at the time at such reports, but even I didn’t appreciate how accurate my scepticism would prove to be.
The American real estate bubble–which began in 1997 after a period of relatively depressed prices after the 1990s recession–clearly dwarfed Japan’s. Between 1986 and late 2005, American real house prices rose by almost 88%. They then fell 36.5%, before starting to rise again recently–with the US version of Australia’s First Home Owners Grant playing a large role in the turnaround. Though prices have apparently bottomed, there are plenty of arguments to expect this to be only a temporary respite–from the size of the inventory of unsold houses to the approaching wave of defaults by mortgagees whose Alt-A “Option ARM” mortgages are about to reset).
However, both the Japanese and American house price bubbles are pygmies compared to Australia’s bubble. Australia’s still unburst bubble drove the real price of housing to 140 percent above the level of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986 (the peak in real terms is still the pre-First Home Vendors Grant level of January 2008, though the nominal index is now 8 higher percent than then).
2: Our Debt Bubble
The reason that our house price bubble has kept going while other less hardy companions have already popped is the same old same old: debt. The T-shirt itself emphasises the aggregate level of private debt to GDP over the last 150 years, to make the point that this is the biggest debt bubble in our history. The previous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Today’s record is 158% as of March 2008.
This comparison actually understates the degree to which our current debt predicament is worse than any previous one, since those previous peaks were affected by deflation: the debt to GDP ratio rose between 1930 and 1931 (and 1890 and 1892) despite falling debt levels, because output and prices were falling faster than debt. In the 1930s, this phenomenon increased the debt to GDP level by about 10 percent over its pre-crisis peak.
We have yet to experience deflation, and yet our current debt level already far exceeds those previous peaks.
Household debt has played a pivotal role in this bubble. The next chart (which won’t be used for a T-shirt) makes that point. Mortgage debt rose fivefold (as a percentage of GDP) between 1990 and today. Without this debt binge, Australia’s private debt to GDP ratio today would be only slightly above the 1930s peak, rather than being twice its level.
The chart also highlights one other important point: a large reason why Australia has had such a mild GFC so far is because Australian households were enticed back into debt by the First Home Vendors Boost, and by the impact of the Government stimulus package upon household disposable incomes.
Households were reducing their mortgage exposure prior to the introduction of The Boost: mortgage debt had peaked at 81.3% of GDP in June 2008, and was trending down prior to the Boost. It then hit a bottom of 80.3% in December 2008 before rising to an all-time high of 86.8 in January 2010.
The change has been less extreme when mortgage debt is measured against Household Disposable Income (HDI), since the Australian government’s stimulus package and the interest rate cuts by the RBA boosted household incomes by almost ten percent last year. As a result, mortgage debt fell only slightly as a percentage of HDI, from 133.6% to 130.3%, and it took longer to fall. But ultimately, even though incomes had been boosted so substantially, the increase in mortgage debt last year finally exceeded the increase in incomes: by January 2010, the mortgage debt to HDI ratio had hit a new peak of 134.2%
The overwhelmingly important reason why this happened is the policy that the Government called the First Home Owners Boost, and which I describe by the more accurate name of the First Home Vendors Boost. As the final T-shirt shows, this is the fifth time in Australia’s recent economic history that the Government has manipulated the property market as a means of stimulating the economy.
3: The First Home Owners Grant
The First Home Owners Grant was first introduced in 1983; while it’s hard to locate discussion on why the grant was introduced (here’s a Hansard link for anyone with more time on their hand than I have to research this), the Grant was introduced when Australia was deep in the recession of the early 1980s, and during the first year of the new Hawke Labor Government. It is therefore likely that then, as now, the Grant was intended to boost economic activity by encouraging the housing market.
That was explicitly the purpose to enhancements to the Grant in 1988, in the aftermath to the Stock Market Crash of the previous year. The 2000 reintroduction of the Grant by the Howard Liberal Government was ostensibly a short-lived boost to the housing sector to get it over the impact of the introduction of the Goods and Services Tax (GST), but it was quickly turned to its customary role of boosting economic activity when a recession was feared in 2001 and the Grant was doubled.
The introduction of the GST is long forgotten of course, but the Grant lived on–and it was then boosted again in September 2008 as part of the Rudd Labor Government’s stimulus package to fight the GFC.
Each time it was introduced, the Grant worked as intended–and it worked not merely because it injected additional Government money into the economy, but also because it encouraged Australians to take on more mortgage debt. Each additional A$1,000 was turned into anything up to an additional $10,000 of buying power, so that while the Buyer got an additional $7,000 from the Government, the Seller (after a very satisfactory auction…) got an additional $30,000 or so from the buyer’s bank.
The Seller then used this money in turn to get a still larger loan from their bank, so that the Grant money was levered at least twice.
This double leverage is a major reason why we have a housing bubble today–and why we had one in 1988, and 2001 before that.
I don’t, like some analysts, blame the housing crisis solely on government policy: for me, the ultimate cause of our housing and financial crises will always be the innate willingness of the financial sector to extend debt. But it is certainly obvious that Government meddling in the housing market has seeded a bubble that the financial sector has then been only too willing to exploit.
As long-time readers know, I railed against this latest manipulation of the housing market when it was first introduced, and again when the scale of take-up of the Boost was first reported. My first post was the only one to draw a response from a Government Minister to any of my writings. Though this reads like a form letter that many critics of this policy may have received, the exchange is still worth reproducing here:
—–Original Message—–
From: Steve Keen [mailto:S.Keen@uws.edu.au]
Sent: Tuesday, 14 October 2008 8:59 PM
To: undisclosed-recipients:
Subject: Debtwatch comment on First Home Buyers Policy
I argue in the attached that doubling the First Home Buyers grant is a continuation of the policies that caused the economic crisis in the
first place.
Associate Professor Steve Keen
From: Plibersek, Tanya[mailto:Tanya.Plibersek@fahcsia.gov.au]
Sent: Thu 16/10/2008 5:19 PM
To: Steve Keen
Subject: RE: Debtwatch comment on First Home Buyers Policy [SEC=UNCLASSIFIED]
Dear Steve
Thanks for your email about the First Home Owners Boost announced by the Prime Minister and Treasurer. I understand the concerns you raise in your email, however, as well as helping Australians into a home of their own, this measure will bring much needed stimulus to the housing market to support the Government’s macroeconomic agenda at a time of serious global uncertainty.
Housing is very important to the Australian economy. Investment in housing accounts for about 6 per cent of the overall economy, and housing is the major source of financial security for millions of Australians and their families.
Expanding support for first home buyers in this fashion is right for the uncertain economic conditions that we now face. It will also help to shore up housing activity in a sector that may otherwise slow. I have attached a fact sheet which provides some more information about the announcement.
Best wishes
Tanya
From: Steve Keen [mailto:S.Keen@uws.edu.au]
Sent: Thu 16/10/2008 7:05 PM
To: Plibersek, Tanya
Subject: RE: Debtwatch comment on First Home Buyers Policy [SEC=UNCLASSIFIED]
Dear Tanya,
I appreciate your perspective, but I remain of the opinion that this is a misguided policy.
The housing market was seriously over-stimulated by debt-financed speculation in the last one and a half decades, and most of that stimulus did far more to boost price levels and increase unaffordability, than it did to increase supply.
The financial security promised by housing has become financial insecurity in the USA and the UK, and much of the OECD, and it will inevitably prove so for Australia too, which as you are aware has the most expensive housing relative to incomes in the OECD. True security only exists when house prices keep step with incomes. When they rise faster for sustained periods, on the back of even faster increases in debt, the financial wealth created is both fictitious and fragile, as we are now seeing on the daily news.
Part of the reason for Australia’s speculative bubble [I have made a slight grammatical edit here of the original] is the plethora of schemes in Australia which encourage speculation on house prices–from negative gearing, to capital gains tax at half the rate of income tax, the exemption of capital gains on principal residences, and of course the first home buyers scheme.
I would be far happier to see schemes to support renters and strengthen their rights, than yet another to encourage first home buyers into a grossly overvalued market.
Nonetheless I appreciate your email, and would like to keep in contact about this and the broader issues involved in our economic crisis.
Sincerely,
Steve
Now The Boost is behind us, and the evidence is in on its impact. There is no doubt that it stimulated the economy–possibly as much as the rest of the stimulus package and the RBA rate cuts combined. It also stimulated house prices through the roof–and it’s the main reason why I’ll be walking next month.
But it worked by seducing Australians back into debt, since (as I observed in a previous report), house prices can only continue rising compared to incomes if debt continues to rise faster still. This could continue after The Boost if the fire the Government lit in the market was carried on by “investors”–and that was and is certainly the hope expressed both by the Government and the property lobby.
My expectations, and that of many other critics like Adam Schwab, was that the FHVB would boost buyer numbers while it lasted, but cause a slump (in First Home Buyers at least) when it finished because (a) it would drag in many would-be First Home Buyers who would have purchased in later years into purchasing in 2009, thus inflating 2009 numbers at the expense of subsequent years; and (b) it would inflate prices so much that many other would-be First Home Buyers would decide to continue as renters instead.
That’s just from the borrowers side; the surprise move by Westpac to reduce its maximum LVR from 92% to 87% also made me feel that, just maybe, the days of rising leverage driving house prices were coming to an end. That doesn’t sound like much, but it means that a purchaser who had her eye on a $1 million dream home and had the requisite funding prior to the change would now have to find an additional $50,000 in cash to bid the same amount–that’s a 62.5% increase in the deposit required to come up with the asking price wanted by the vendor (from $80,000 or 8% of the purchase price to $130,000 or 13% of the purchase price).
The question then is whether the “investors” who’ve been enticed into the market by the promise of rising prices could outweigh an inevitable fall in the number of First Home Buyers and the start of banks unwinding their excessive leverage beneath house prices.
Preliminary data doesn’t look that crash hot for the property bulls on both these fronts. Both the number and the value of new mortgages took an unprecedented fall once the FHVB expired, as the next two charts show.
So the odds are high that the ending of the FHVB will be one of several triggers for the long overdue bursting of the Australian property bubble–along with the unwinding of excessive housing leverage and the slowdown in the rate of growth of mortgage debt. The FHVB will then turn out to be what I anticipated: a short term success that sets up the conditions for a long term failure, and at the expense of the quarter of a million Australians who were enticed into mortgage debt by this temporarily successful but ultimately irresponsible policy.
For that reason, the T-Shirt I’ll be wearing on day one of The Walk is number 3 above.
Dear BIB,
I think it’s time that I asked you to read the Roving Cavaliers post. It does explain how interest on debt can be repaid. The flaw in your logic–and it’s a flaw that is very widespread–is to confuse a stock of debt-created money with the flows that money can finance over time.
Thanks Steve. I have read it, actually. And also the proof paper that ak helpfully cited. I’m truly sorry, because I want to accept the argument and be in happy agreement with you and all.
I’m pretty sure I grasp the concept of stocks-of-debt vs flows-of-debt.
But honestly, I just don’t see how an answer that (to me) boils down to, “MOVEMENT of tokens in a big system through time allows principal + interest to be repaid”, at all satisfactorily addresses my basic example.
In a nutshell, to date I simply cannot get my head past the (apparent) fact, that the only way the “interest” component can ever exist in order to be repaid, is if it too is at some point-in-time actually created as a new loan to someone else.
And IF so, then I feel it logically follows that usury-credit systems are a giant Ponzi scheme, designed to profit banks via their siphoning off a small % of those enormous Total credit-flows. Flows that themselves only exist because people/entities were signed up to become debt slaves, and then moved (flowed) a stock (total principal) through the economy.
Strikes me as being akin to a fairground trickster’s shell game.
I’ll drop the topic, though, and spend some more time reviewing.
“Where there is an issue is in a market sense I believe a that oversupply of the bonds issued by the nation puts a limit on the borrowing ie If Burkina Faso issued 3 trillion in bonds denominated in Burkina Faso currency the amount of debt that the market would be willing to buy and soak up compared to 3 trillion USD”
hi jaxspax,
crowding out isnt an issue since the government is the source of the funds for the bond purchases, since its in deficit.
but you do raise an interesting issue, in that there is a limit to debt monetisation through deficit spending in a interest rate targeting environment. unless the government is prepaired to dismantle interest rate targeting, it needs to issue bonds to control its destiny in terms of a rba mandated interest rate position, otherwise interest rates would head towards zero bid.
Hi BiR,
Look at it this way: a bank loan of $100 can finance (say) $400 of turnover over a year, $300 of which in wages and $100 in profit. If the bank charges 5% interest then the firm can pay $5 of its profits to the bank and keep the other $95. It’s that simple.
I’ll illustrate this with a new software program in a post in May.
“that is in national income accounting terms, the creation of a financial asset by a bank loan perhaps results in a equal fianacial liability to the recipient of the loan. at a national level all these transactions in terms of balance sheet accounting all nett to zero”.
Mahaish
What happens as an example where the Gov creates 100k via the issue of 10yr bond and the market rate for that debt is 5%.
There is a creation of an asset with the bond valued at 100k and a liabilty being the debt of 100k.
12 months later the market rate for a 10 yr bond is now 6%.
5k in interest has been paid to the owner. If the bond was traded it would have a value of approx 90k because the market can get new bonds at 6% and would only pay that value for a 9 yr bond at 5%.
The result is an actual liabilty. I suppose it works the other way as well but the point is that these securities can only be valued if there are buyers.
I am probably not expressing right, but I think MMT is sound in theory but in a floating currency, floating market environment it comes unstuck.
i probably should send this to bill mitchell for his explanation.
Hi Steve,
Thanks so much, good example. I have no trouble at all seeing how the bank gets its $5. But my mental block is not there. Begging your indulgence, since this probably seems a really dumb question:
How can turnover (movement, flows) result in an original discrete unit of $100, becoming a discrete $105?
Or, to put it another way: The ‘turnover’ is simply the sum of all movements over time of sub-parts of that original, discrete $100… yes?
So, while the sum of the movements over time can indeed equal $400 (or just about any amount), if, at any given snapshot in time, all entities within the system were called upon to settle all present liabilities to one another, everyone cannot get their dues. For the entire populace to square with each other, the bank cannot get back $105. Because the actual, final settled sum of all liabilities and credits, will still only equal $100. Yes? No?
BarnabyIsRight,
Please distinguish between stocks and flows.
The principal $100 is not repaid in the trivial model which is in equilibrium. It is equal to the amount of money in circulation.
Over one year period firms sell $400 worth of products (this is our flow – you can say that it is $33.3 per month) paying workers $300. Workers purchase $300 of products. $100 in profits is shared between capitalists ($95) and bankers (in the form of interests on the loan what is $5). Then capitalists spend $95 on products and bankers spend $5 on products manufactured by the firms. All the products have been purchased and Say’s law is not violated. Some of the products might have been accumulated so real wealth might have increased but the trivial model is in equilibrium because there is no acumulation of financial assets and no debt repayment leading to the destruction of credit money. Please be aware that in this trivial model the sum of net financial assets equals to zero.
Charging interests (usury) leads in our case to income redistribution between the productive sector (workers and capitalists) and financial sector (bankers) rather than growth in debt.
ak,
Thanks so much.
“The principal $100 is not repaid in the trivial model which is in equilibrium. It is equal to the amount of money in circulation.”
Yes, I understand that.
“Charging interests (usury) leads in our case to income redistribution between the productive sector (workers and capitalists) and financial sector (bankers) rather than growth in debt.”
Eureka! That is precisely the core point I’ve been trying to make.
Further to your statement, an increase in the volume/flow results in an increase in just how much income redistribution to bankers is possible at any given time… correct? Which explains why banks are always seeking new and more sophisticated ways to increase ‘activity’.
Charging interest means that the labour of the masses is legally channeled into real-world, real-asset ‘buying power’ flowing from sweating workers to lazy, greedy, morally bankrupt bankers. They create the money from nothing. Sign us up to have the right to use it. Then sit back on their well-cosseted backsides.
The workers (sheep) must labour to repay the bank something it first created out of thin air. The bank then uses a portion of the resultant massive overall flows to buy up real assets, whilst the slaves are limited in their buying power by firstly/coincidentally having to repay their debt burden. Their combined actions over a lifetime are what create those flows. So, when the masses stop or merely slow their total ‘activity’ (buying, selling, borrowing), everything grinds to a halt. And bankers crap themselves.
Whereas, if banks simply created money out of thin air for themselves, in full public view, and directly went out and bought up real assets – (ie) without the big shell-game (the leeches’ anaesthetic) to delude us that it is all proper and right – the population would instantly rise up and hang them from lamp poles.
Just as I recall reading they did on Wall Street in 1907.
Jack Spax,
If the central bank can purchase bonds directly from the treasury (or if it can bypass the outright ban) then the whole yield curve can be controlled and the treasury can spend as much as is required to achieve reasonable social goals. This is what MMT scholars advocate.
The bond vigilante doesn’t want to purchase our bonds at 0.5%? The bond vigilante can go away! The bond vigilante can no longer dictate the costs of borrowing or macro economical policy of a sovereign state as the monetary system is not based on pre-existing commodity (gold). Yes the adjustment from the current system to the new system may lead to a temporary instability when bond holders try to offload their assets. This is what MMT scholars haven’t explicitly mentioned and what needs further study… But so what? Otherwise the iron logic of the current system will sooner or later lead to the meltdown:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7514987/Portugal-downgrade-knocks-euro-as-Merkel-imposes-IMF-solution-for-Greece.html
MMT scholars don’t see any reason why interest rates need to be high – they can be close to zero. The main control tool of the economy in the form of adjusting interest rates to target inflation can be replaced by the fiscal policy.
Want a loan? Pay a tax. But first negative gearing in Australia, contributing to resource misallocation and leading to our future misery, should go to hell.
If the central bank can purchase bonds directly from the treasury (or if it can bypass the outright ban) then the whole yield curve can be controlled and the treasury can spend as much as is required to achieve reasonable social goals. This is what MMT scholars advocate.
As soon as a security is created it becomes tradeable and has a valuation attached based on it’s cash flow. I agree with the theory behind MMT, its just that we would have to ban the trading of governement securities in my view for it to operate. I still think it could only work in a closed economy.
Does MMT advocate the banning of bond markets.
This also plays out the exchange rate and capital inflows/outflows into the currency.
I also then suspect we would have a disruption as large if not larger than what occured in 2007/2008 re the repricing of debt instruments and the repricing of risk if a major economy was to try this.
Anyway all good thinking material.
PS
The bond vigilante doesn’t want to purchase our bonds at 0.5%? The bond vigilante can go away!
Unfortunatley the bond vigilantes are our super funds trying to ride the yield curve.
http://www.zerohedge.com/article/fed-runs-out-low-rate-options-ust-must-be-considering-wholesale-shift-out-risky-assets-bills
“Does MMT advocate the banning of bond markets?”
No they don’t care what happens to the investors especially to foreign investors. Any attemps to elicit any binding statements from MMT scholars “proper” in regards to the process you described above have so far been unsuccessful. There was an interesting discussion on the Bill’s blog a few weeks ago but it is difficult to provide a link.
I believe that some baby boomers are screwed up anyway.
Do you think that bond investors are not aware of an MMT-like option?
“If markets believe fiscal policy is unsuitable then they will discount the risk of the deficit being monetized and UK gilt yields will rise significantly and sterling will remain under pressure.”
“deficit being monetized” and “inflation to correct the deficit”. This is what MMT scholars advocate but they use different terms to describe the process and reject the idea of inflation caused by money printing.
“Question: Over a 5-10 year horizon, do you think the Government’s main strategy to deal with the deficit will be: inflation/devaluation, deficit reduction or default?
Answer: The long-term risk is that the government chooses an inflationary path to correct the deficit. Alternatively, the government could chose to reform pensions and harmonise men and women’s retirement at 70. This supply-side reform would lead to a big improvement in public finances and does not involve damaging aggregate demand via slashing public expenditure when the recovery may still be fragile. This action would be well received by financial markets. Furthermore, once recovery is established they could undertake further public expenditure cuts. The big question is whether or not the government chooses to inflate its way out of the problem. ”
http://www.telegraph.co.uk/finance/financetopics/budget/7479042/UK-government-bond-investors-give-their-view-Barings-Asset-Management.html
So baby boomers in the UK have a choice of their savings being reduced in value due to money printing resulting in dumping the bonds by the investors or simply having to work until they reach 70. Or die trying as at the same time other age groups will compete to get employment. This is what is advocated by Barings Asset Management which can also be renamed Baby Boomers Poverty Management.
I will stick to MMT in this case.
I suspect that it will be both options, ie having to work to 70 and having their savings eaten by inflation and paying more for credit. QE will eventually lead to inflation particularly when you think in the UK, what do they actually produce.
“Barnaby Joyce dumped as Opposition Finance Minister”
The guy has said a few things which always lead to a sudden political death in this country…
http://www.news.com.au/breaking-news/barnaby-joyce-dumped-as-opposition-finance-minister/story-e6frfku0-1225845403809
Can anyone explain the apparent contradiction here?
Two days ago -
http://news.smh.com.au/breaking-news-business/westpac-looks-to-big-rate-rises-report-20100323-qroo.html
“Westpac is under financial pressure to raise its interest rates but fears a political backlash, chief executive Gail Kelly has reportedly told a private shareholder briefing”
versus Today -
http://www.theaustralian.com.au/business/industry-sectors/rba-upbeat-on-australias-financial-system-despite-fragile-global-system/story-e6frg96f-1225845181670
“In its latest six monthly review of the financial system, the RBA also said funding conditions for Australian banks have improved since its last review in September and life is returning to the market for residential mortgage backed securities.”
Looks like I need new blog and User names.
Steve,
A good story here viz. your position. Note that Chancellor specifically mentions “manias”, and, lists Minsky’s theory as #9 out of his 10 reasons why China is a financial bubble ready to burst –
http://seekingalpha.com/article/195224-ten-ways-to-spot-a-bubble-in-china
Same story with less detail also here –
http://www.financialpost.com/story.html?id=2723055
“As soon as a security is created it becomes tradeable and has a valuation attached based on it’s cash flow. I agree with the theory behind MMT, its just that we would have to ban the trading of governement securities in my view for it to operate. I still think it could only work in a closed economy”
i think the idea is jack spax, there theoretically isnt any need for bond issuance in a deficit environment if the risk free rate of interest was zero, rather than a arbitrary rate set by the rba with all its perverse distributional impacts
Ukraine, Off Topic but I couldn’t resist:
http://www.financialsense.com/editorials/engdahl/2010/0322.html
“The man Washington decided to back in its orchestrated regime change in Ukraine was Viktor Yushchenko, a fifty-year old former Governor of Ukraine’s Central Bank who had been the point man in Ukraine for the savage IMF “shock therapy” deindustrialization of the country during the 1990′s. Yushchenko’s IMF program had devastating consequences for his countrymen. Under his 1994 IMF program, Ukraine was forced to abandon exchange controls and let the currency fall. He oversaw the currency demands as head of the central bank, which within days saw the price of bread increase by 300%, electricity prices by 600%, public transportation by 900%. By 1998 Ukrainian real wages had fallen by 75% compared with 1991 when the country declared independence.”
“Yushchenko’s wife Kateryna, an American citizen born in Chicago, had been an official in both the Reagan and George H.W. Bush administrations, and in the US State Department.”
PS Odd, is it not, how often bankers and lawyers seem to be found in close proximity to these great tragedies for the citizens. Pardon my laxity, I should have also mentioned their facilitators and most valued clients – Politicians.
PPS. Georgia – Mikhail Sakashvili – US Uni educated Lawyer.
No BiR, but it will take some mathematical modelling to make it clear to you. ak’s later explanation is correct. There is a “penny drop” factor when one finally grasps this point, and it is so easy to confuse stocks and flows, as you do here: there is no need for the $100 stock of debt to become a $105 stock of debt for the banks to earn $5 per year from that stock. If there is a fixed amount of money in the system and no debt repayment, then $100 of debt generates $5 of income per year for the bank–and in my example $95 net for the firm, and $300 for the workers.
The point here is not that banks don’t tend toward usurious and Ponzi behaviour–obviously they do. But it is a “sufficient” condition, not a “necessary” one.
We’ll discuss–and demonstrate–this on the walk together anyway.
BTW, bye all, I’m off for 2 weeks vacation in Hawaii, out of Internet range. I may post one more blog entry before departing tomorrow.
Cheers, Steve
just what we need,
more hawaiin shirts entering the country
or will it be a grass skirt.
im expecting to see footage of steve keen taming the banzai pipeline
Dear Prof. Keen,
I am confused by some of your figures. Your first figure seems to show a more than doubling in real home prices in AU since 1986 while your third to last figure at http://www.keenwalk.com.au/wp-content/uploads/images/T-Shirt/KeenT-Shirt03RealHousePricesAndFHOG.jpg seems to show less than doubling in real home prices in AU since 1986?
I must be misinterpreting things somehow. Could you (or another reader) help me understand why the implied real home price rises in the figures are different?
Thanks.
Welcome aboard inquisitive!
The first is house prices divided by the CPI–that’s the real house price index. The other one is the house price divided by household disposable income: that’s the “affordability” index if you like. Since incomes have increased in real terms since 1980, the second is lower than the first.
Some more stuff re foreign ownership
http://money.ninemsn.com.au/article.aspx?id=1031382
http://money.ninemsn.com.au/article.aspx?id=1032272
Re MMt – there are examples of economies using MMT , such as Nth Korea. Not sure that it is a good example though.
” but they are not also creating the actual interest component too (ie, a real unit over and above the actual principal extended to the borrower), then how can it be that all the transactions at non-govt level “net to zero”? Where does the additional ‘interest’ component come from that constitutes the banks’ profit”
hi barnabyisright,
bank assetts(loans) earn interest income, bank deposits incurre interest expences. income and expences ultimately effect equity, but it doesnt alter the fact that in balance sheet terms the creation of a bank loan creates an assett and a liability in equal measure.
nett interest margin has an effect on profit and loss, but whats been discussed here is the balance sheet effect.
Hi Steve re #271,
Thanks, hope you enjoy your holiday, and really look forward to more enlightenment on fundamentals during the walk
– ‘The point here is not that banks don’t tend toward usurious and Ponzi behaviour–obviously they do. But it is a “sufficient” condition, not a “necessary” one.’ –
That remains the evil root I’ve been trying to get at. If mankind allows even a ‘sufficient’ condition for banks / money lenders to engage in such tendencies, millennia of history demonstrates that they will always take it. To society-as-a-whole’s detriment. We must remove the condition (whether necessary or sufficient is irrelevant), or, face the same problems – only in slightly differing forms – over and over again, ad infinitum.
Case in point, from latest Bloomberg news –
JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.
A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.
http://www.bloomberg.com/apps/news?pid=20601010&sid=anl9vTKXKYyk