There is no GFC

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One of the unex­pected things I’ve learnt in Boston is that the Global Finan­cial Cri­sis is not called the Global Finan­cial Cri­sis in America–and there­fore the TLA of the GFC has no mean­ing here.

Instead, in Amer­ica this might be The Cri­sis That Has No Name (TCTHNN), because they don’t call it any­thing at all: it’s just how the econ­omy is right now.

Aus­tralians, it seems, are the ones who invented the moniker GFC as a way of describ­ing what they think they don’t have to under­stand. Over here, where it is actu­ally hap­pen­ing, it is just the day to day real­ity that must be con­tended with.

Even more pecu­liar is news from some finance sec­tor insid­ers here who have been in touch with Australia’s RBA and Trea­sury, that they describe it as not the GFC, but the “North Atlantic Finan­cial Cri­sis” (“NAFC”)–arguing once again by a label that this cri­sis is pecu­liar to the US and Europe.

Appar­ently when asked what Aus­tralia has learnt from the cri­sis, the answer was often “Noth­ing, because it didn’t hap­pen here”. The Lucky Coun­try, it seems, is seen as immune to the cri­sis by its eco­nomic man­agers.

I know that I’m more likely to be spo­ken to by Bears in Boston than Bulls, but even the Bulls find this Aus­tralian complacency–even smugness–about the cri­sis bemus­ing. One insider I spoke to–admittedly a Bear–commented that he found it so annoy­ing on his last visit to Aus­tralia that he’s sworn never to return.

Good rid­dance might be the atti­tude of some; who needs the neg­a­tiv­ity? Well, we might, if the causes of the cri­sis are not in fact pecu­liar to the North Atlantic.

For though the GFC might have had very lit­tle bite in Aus­tralia to date (and I admit that the mild­ness of the down­turn to date in Aus­tralia did sur­prise me) we can only kiss it good­bye if it was really just a North­ern Hemi­sphere Black Swan. If instead its causes are more gen­eral, then as the US now starts to fear a DDR (Dou­ble Dip Reces­sion), Aus­tralia might find that it’s not so Lucky after all.

Here there is one indi­ca­tor that I think explains why Aus­tralia has not suf­fered as badly as its North Atlantic coun­ter­parts, but also why there will be no easy recov­ery: the con­tri­bu­tion that ris­ing debt makes to aggre­gate demand. Though I am a critic of the extent to which our economies have become debt-depen­dent, there’s one unmis­take­able fact about our post-1970 recov­er­ies: they have all involved a ris­ing level of pri­vate debt com­pared to GDP.

I’ve recently done a com­par­i­son of how the US today com­pares to the US in the 1930s on this front, and the results–published in an ear­lier post–were intrigu­ing.

The US was actu­ally suf­fer­ing a more severe pri­vate sec­tor delever­ag­ing this time than in the 1930s: in 1928, ris­ing debt was adding about 8% to the level of aggre­gate demand. That is, demand was 8% higher than it would have been had debt been con­stant. By the depths of the Great Depres­sion, falling debt was mak­ing aggre­gate demand about 25% lower than it would have been had debt been con­stant.

The story for today is more extreme: at the end of 2007, ris­ing debt made aggre­gate demand 22% higher than it would have been had debt been constant–so ris­ing debt today was almost three times as impor­tant in our pre-GFC boom as it was in the 1920s. Two and a half years later, falling pri­vate sec­tor debt was reduc­ing demand by almost 15%. This was not as bad as the worst lev­els of the Great Depres­sion, but worse than in 1931, which was the com­pa­ra­ble time from the begin­ning of the down­turn in pri­vate debt.

The pos­i­tive dif­fer­ence between then and now in the USA turned out to be the con­tri­bu­tion to demand made by ris­ing Gov­ern­ment debt. The gov­ern­ment-financed pro­por­tion of demand in the Great Depres­sion was triv­ial two years into the cri­sis, and only became substantial–at about 7.5% of aggre­gate demand–three years in. In con­trast, gov­ern­ment spend­ing is mak­ing aggre­gate demand almost 13 per­cent higher now. But even then, the USA is still delever­ag­ing.

That’s the com­par­i­son the the USA today with itself 80 years ago; what about the com­par­i­son of the USA today with Aus­tralia today? The chart below pro­vides it.

Firstly, Aus­tralia is run­ning a cou­ple of months behind the USA in the cri­sis. But that’s minor com­pared to the dif­fer­ence in scale. Pri­vate debt added slightly less to demand in Aus­tralia dur­ing the boom times–a max­i­mum of 18.75% of aggre­gate demand was financed by pri­vate debt, com­pared to over 22% for the USA. But delever­ag­ing hasn’t even begun here: the pri­vate-debt-financed con­tri­bu­tion to demand flirted with zero in late 2009, but has been pos­i­tive through­out. Ris­ing pri­vate sec­tor debt today is adding about 2% to aggre­gate demand. Ris­ing gov­ern­ment debt is adding about another 2 per­cent on top of that.

So Aus­tralia hasn’t yet delevered–in con­trast to the USA. Does that mean we have a “get out of the GFC Free” card? That depends on whether we’ve avoided what caused the GFC in the first place–a runup of exces­sive pri­vate debt dur­ing a spec­u­la­tive bub­ble.

There the answer is equiv­o­cal. While we have sub­stan­tially less debt than the USA (though some cor­re­spon­dents have argued that the RBA fig­ures I use under­state the level of finance sec­tor debt here), our debt to GDP ratio is 90% higher than it was back in the Great Depres­sion.

So we have less delever­ag­ing poten­tial than the USA, and we haven’t even begun to do it yet–which is why the GFC has appeared to be a North Atlantic phe­nom­e­non. And if we can pre­vent delever­ag­ing, then we won’t see the depths of the down­turn that the North Atlantic has seen either.

But there is a down­side to no delever­ag­ing. We have a house­hold sec­tor that is even more indebted than its US coun­ter­part. The odds are that this sec­tor will be debt-con­strained in its spend­ing, and the recov­ery will be stalled as a result. So the GFC is not entirely a NAFC.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • BrightSpark1

    ak and oth­ers

    My argu­ment is that the eco­nomic sys­tem is a very com­plex one which is very poorly (if at all) under­stood and described by econ­o­mists. Econ­o­mists whose under­stand­ing has not yet reached the level of under­stand­ing of, Elec­tric­ity held by Fara­day, or Mechan­ics held by New­ton more than 100 years ago.

    As to Kirchoff’s volt­age law and anal­ogy of elec­tri­cal poten­tial there must be a force at play in eco­nom­ics that is anal­o­gous to elec­tri­cal poten­tial or mechan­i­cal force. There is cer­tainly a device anal­o­gous to elec­tri­cal capac­i­tance which increases its (eco­nomic) poten­tial as eco­nomic cur­rent (money) accu­mu­lates. Also there is cer­tainly another mech­a­nism that devel­ops eco­nomic poten­tial (pos­i­tive or neg­a­tive) as money flow is increased (bull behav­ior) or as money flow is decreased (bear behav­ior) anal­o­gous to elec­tri­cal induc­tance. May I be so bold as to say it is up to some­one in eco­nom­ics to define these mech­a­nisms, if physi­cists looked no fur­ther than econ­o­mists do today we would still be burn­ing cow dung in mud huts to keep warm.

    The only econ­o­mist of whom I have knowl­edge and who I believe is on the right track is Steve Keen. Oth­ers may be mak­ing good calls by intu­itive recog­ni­tion of flaws only.

  • bb


    Thanks for your com­ments & thoughts.

    There are end­less com­par­isons to the US / UK in terms of house prices etc etc. How­ever, the world con­sists of more coun­tries than even the good peo­ple at Demographia would have us beleive.

    Below is some data I found on price/Income for a lot more coun­ties. Not sure how accu­rate it is, but what if the USA expe­ri­ence is an excep­tion, rather than a rule as this table sug­gests? Such com­par­isons between Aus­tralia and the USA become irrel­e­vant.

    Morocco 67.5
    Pak­istan 40.63
    Belarus 40
    Mon­tene­gro 30
    Rus­sia 28.58
    Roma­nia 24.28
    Lithua­nia 20.84
    Ser­bia 18.8
    Latvia 18.33
    Ukraine 17.37
    China 17.13
    Spain 16.67
    Hun­gary 16.48
    South Korea 16.29
    Thai­land 15.96
    Indone­sia 15.84
    Paraguay 15.56
    Alba­nia 15.38
    Bosnia And Herze­gov­ina 15.28
    Slo­va­kia 15.1
    Czech Repub­lic 14.89
    Iran 14.58
    Sin­ga­pore 14.35
    Italy 14.34
    Esto­nia 14.08
    Bul­garia 13.87
    Japan 13.61
    Poland 13.58
    Croa­tia 12.73
    France 12.68
    Greece 12.22
    United King­dom 12.03
    Argentina 11.82
    Por­tu­gal 11.57
    Malaysia 11.27
    India 11.02
    Jor­dan 10.92
    Israel 10.88
    Sri Lanka 9.82
    Colom­bia 9.52
    United Arab Emi­rates 8.61
    Nor­way 8.13
    Den­mark 8
    Ire­land 7.66
    Venezuela 7.64
    Mex­ico 7.43
    Kyr­gyzs­tan 7.19
    Peru 6.72
    Nether­lands 6.5
    Aus­tralia 6.3
    Brazil 6.29
    Fin­land 6.22
    Canada 6.2
    Ecuador 5.8
    Bahrain 5.74
    Turkey 5.56
    Switzer­land 5.41
    Aus­tria 5.23
    Cyprus 5.13
    South Africa 5.1
    Bangladesh 5.03
    Hon­duras 4.76
    Ger­many 4.32
    Bel­gium 4.28
    Swe­den 4.19
    Chile 4.06
    Domini­can Repub­lic 3.54
    United States 2.68

  • bb


    the 4 big Aus­tralian banks have sourced $650 bil­lion net for­eign debt of which ~25% is USD and ~25% GBP to lend to Aus­tralians their delu­sional priv­e­lage of hav­ing a high cost of liv­ing.’

    I don’t think this state­ment is entirely true. See Ric Bat­tellino, Deputy Gov­er­nor speach on June 15 — page 8

    First, the country’s for­eign lia­bil­i­ties are vir­tu­ally all either in Aus­tralian dol­lars or hedged back to Aus­tralian dol­lars. Aus­tralia is able to do this because for­eign
    investors are happy to hold a cer­tain pro­por­tion of their assets denom­i­nated in Aus­tralian dol­lars. This means that Aus­tralian bor­row­ers do not face for­eign exchange risk on the cap­i­tal sourced from over­seas”


    bb #127

    If the USA UK Japan Ire­land Spain Por­tu­gal etc are the hous­ing bub­ble excep­tions then they have done a ton of eco­nomic dam­age to their own economies and the world econ­omy by being this excep­tional.

    Autralias $650 bil­lion net for­eign debt at 6% costs @ $39 bil­lion p.a. of inter­est pay­ments extracted from Aus­tralians and sent over­seas.

    The aggre­gate Net Rent on Aus­tralias 2.6 mil­lion ‘rental prop­er­ties’ is ~$31 bil­lion.

    Also a sim­i­larly sim­plis­tic com­par­i­son like yours but also inter­est­ing!

  • noah cross

    Those num­beo fig­ures look unre­li­able. The uni­ver­sity of Not­ting­ham says of UK hous­ing:

    The house price to income ratio remains stub­bornly high at 4.3 com­pared with 3.6 over the past 15 years as a whole. In Lon­don the aver­age house price was 4.6 times house­hold income at the end of last year and the aver­age house­hold needed a deposit some 1.9 times income. Con­di­tions are espe­cially tough in the cap­i­tal for first-time buy­ers who need a deposit of 1.6 times income.

    My own expe­ri­ence of UK and France bears out that the num­beo fig­ures rep­re­sented are not cor­rect.


    bb #128

    Ric Bat­tellino is cor­rect

    Aus­tralians pay AUD inter­est on $650 bil­lion of for­eign debt.

    In real­ity we don’t actu­ally pay AUD out of Aus­tralia (pretty use­less cur­rency unless you wanted to buy AUD assets) the for­eign debt just com­pounds up in AUD in the accounts of var­i­ous for­eign enti­ties and Aus­tralians put our col­lec­tive hands out for a bit more via the trade deficit each year.

    This debt rolls over at some­thing like $150 bil­lion p.a. and when it rolls the cost, the dura­tion, and the hedg­ing terms, get rene­go­ti­ated or the debt does not get renewed.

    The entire $650 Bil­lion for­eign debt has a term struc­ture (from mem­ory) with aver­age dura­tion @ 3.5 years and tails out to about 7 years.

    Happy for a few experts to chime in on the accu­racy of this descrip­tion.

  • bb

    noah cross @ 130

    You could be right. hav­ing said that, I note the Aus­tralian price / income is too high as well. I beleive the real num­ber is closer to 4.4x all dwellings, local income to local house price (ie: median syd­ney income to median syd­ney all res­i­den­tial pric­ing).

    The num­beo data prob­a­bly looks at median national income / median national house price.

    It all comes down to the method­ol­ogy.

    I sus­pect the data is not accu­rate in iso­la­tion, but the rel­a­tiv­i­ties between coun­tries is accu­rate (since it prob­a­bly employs the same method­ol­ogy).

  • bb


    just to add more con­fu­sion, below is the median house price


    And the median income


    The result?

    7.3x income

    FWIW, median HOUSE prices in the UK are Stg325k. So this would give 12.78x income which is con­is­tent with num­beo (12.03x).

    As I said, it depends on the method­ol­ogy. The good thing about num­beo is that it prob­a­bly has a con­sis­tent method­ol­ogy — so the coun­try rank­ings could well be accu­rate.

  • bb


    Play­ing dev­ils advocate…$39bn in annual inter­est pay­ments does not seem that high to me (4% of GDP). This num­ber is gross inter­est is it not? Do you know what Aus­tralians receive in inter­est an div­i­dends from off­shore invest­ments?

  • kys

    bb #132,133

    uk gov shows noah is right. see fig­ure 3, page 3:

    Stg25.4k is annu­alised median full time pay, not house­hold income. u mis­used data again. old habits di.….??

  • bb


    I think you mis-read my ear­lier posts — or at least maybe I was not clear enough.

    I think I actu­ally said Noah was prob­a­bly right (see 132).

    I think I also said it comes down to method­ol­ogy (see 132 and 133)

    My post @ 133 was for illus­tra­tive pur­poses — show­ing how one could get dif­fer­ent ratio’s usi­ing dif­fer­ent method­olo­gies. In this instance I used indi­vid­ual income rather than house­hold income.

    You may (or may not) be aware Chris Joye has been heav­ily criti­sised on his blog for using house­hold income when cal­cu­lat­ing price / income for Aussie prop­erty.

    I stand by what I said — num­beo prob­a­bly does not have the ratio right, but MAY have the rank­ings right.

    Please read my posts fully before cast­ing asper­sions.…

  • noah cross

    bb… these are from the IMF

    The num­beo fig­ures would be com­piled from var­i­ous source which use dif­fer­ent meth­ods and then would be put into tables by a junior per­son on the basis of plau­si­bil­ity.

    What is intrigu­ing in this space is the num­ber of for­eign observers whether from OECD, IMF, or from hedge funds finan­cial traders, and just last week NZ’s finance min­is­ter…

    …who point to Australia’s hous­ing bub­ble. Are they using the wrong sta­tis­tics and con­se­quently all hope­lessly bad at under­stand­ing the real posi­tion, in which case we can see sev­eral large busi­ness col­lapse for being wrong, and a pub­lic loss of con­fi­dence in the capa­bil­i­ties of OECD and oth­ers to analyse a sit­u­a­tion. Such pan­dem­i­cally bad analy­sis should be a cause for con­cern.


    bb (Cap­tain) #134

    $650 Bil­lion ‘Net’ for­eign debt and 4% GDP ‘Net’ inter­est

    Not gross, ‘Net’

  • TruthIs­ThereIs­NoTruth

    I agree that we are in the ridicu­lous sit­u­a­tion where we have bor­rowed money from over­seas which has flowed to inflate the hous­ing mar­ket so as a con­se­quence we are pay­ing inter­est to over­seas investors to live in our own houses. The ridicu­lous­ness of the sit­u­a­tion is made clear with the fol­low­ing anal­ogy.

    There have been some inter­est­ing recent sales in the block where I live. I have a ref­er­ence price for 1 year ago and 2 sales within weeks of eachother about 1 month ago. 

    The first most recent sale was a stag­ger­ing 40% over the price from 1 year ago. The last 30% of the price was bid up by just 2 bid­ders. The next day the los­ing bid­der put a note into every mail box ask­ing if any­one is inter­ested in sell­ing at a sim­i­lar price. One of own­ers said yes please and sold for an addi­tional 2–3% over the auc­tioned price and is now rent­ing.

    So we have a sit­u­a­tion where the 2 com­pet­ing bid­ders are now liv­ing next to eachother. At this point I’m start­ing to think game the­ory, if they only talked to each other in the first place. Any­way let’s start talk­ing some hypo­thet­i­cals now, let’s say they financed their pur­chases with 80% lvr, so roughly 50% of the price is financed locally and 30% off­shore. Since the com­pe­ti­tion between them drove the price up by 30% we can see that what they are infact doing is inflat­ing the price using money bor­rowed over­seas. So they are both pay­ing inter­est which ends up over­seas so they could live where they live — and the avail­able over­seas credit went directly into inflat­ing the price. This is exactly what we are doing on a very large scale.


    TITINT #139


    Also cor­rect on an aggrea­gate macro scale.

    Pretty dumb IMHO

  • TruthIs­ThereIs­NoTruth

    sorry Peter_W “Pretty dumb IMHO” I find to be an oxy­moron, I think that’s why I pick on you some­times.

    I agree that it is in a way pretty dumb, but that’s not a very hum­ble opin­ion…

    Even if it is dumb — we are a pretty wealthy coun­try and as such we can afford to be a bit eco­nom­i­cally daft. But why is this hap­pen­ing?

    I think it all goes back turn­ing hous­ing into an ivest­ment vehi­cle. The moment you do that there is incen­tive and even demo­c­ra­tic will to act in a way to increase prices. We have had var­i­ous poli­cies designed to do just that, some in an obvi­ous way such as the FHOG and neg­a­tive gear­ing and some in not so obvi­ous like a lack of invest­ment in infra­struc­ture and poten­tially even lack of invest­ment in pub­lic hous­ing. But what we are really doing is sell­ing the labour of future gen­er­a­tions to fund the retire­ment of pre­vi­ous gen­er­a­tions. One might think that this is fair because it is the same for every­one, but it is not, I have to pay a much larger pro­por­tion of my income for a home than any pre­vi­ous gen­er­a­tion and the same oppor­tu­nity to build up a retire­ment port­fo­lio of prop­er­ties is not there in the same way.

    There is a lot of peo­ple who started this game 30 even 40 years, if you say to those peo­ple that invest­ing in prop­erty is dumb they have every right to politely chuckle in your face. These peo­ple are not sen­si­tive to prices or inter­est rates, they play the game with a great advan­tage. When you are under no pres­sure, hot mar­kets are oppor­tu­ni­ties to sell some of your port­fo­lio and any drops in prices are buy­ing oppor­tu­ni­ties. First home buy­ers either pay a high price to buy the home and have to bor­row money sourced partly from abroad to do this, or pay high rents and it all goes back to the investors either to fund a lifestyle of fund fur­ther port­fo­lio expan­sions.

  • sj

    Hi All
    Just curi­ous to know if any­body has done the scut­tle­butt (Philip Fisher term) method on gross rental yeilds in the area they live.
    Spend­ing a day check­ing rental list­ing, Real Estates Agents, talk­ing to neigh­bours and friends about rental prop­er­ties?
    This data will be more accu­rate than any other on the mar­ket?
    Steve Keen beable to give excel­lent data on the Surry Hills area?
    Give a bet­ter idea of where 40% fall in prop­erty may hap­pen?
    Low­est and high­est rental yeilds by post­codes be very inter­est­ing to know from other blog­gers who have done the scut­tle­butt method.
    Camp­bell­town Units and Vil­las just under 6% gross rental yeild with very strong rental demand.
    8% to 10% gross rental yeild is near the bot­tom of a major bear mar­ket in prop­erty.
    Going from my own hum­ble obser­va­tions and expe­ri­ence, so 20% fall is pos­si­ble in my area that I think is the bot­tom.

  • Robbo

    Just test­ing a rumour, but won­der­ing if any­one else heard the same.
    Mate of mine in the prop­erty indus­try heard a cer­tain promi­nent real estate agent in Syd­ney knocked back a pro­posal from West­pac to dis­cretely offload a large num­ber of homes in the East­ern Sub­urbs.

  • mfo


    In my area, a large num­ber of prop­er­ties have come up for sale recently. Also a large num­ber of fac­to­ries, com­mer­cial build­ings, units and town houses have ‘For Lease’ signs in front of them. This has all hap­pened in the last few weeks.
    Only the other day I saw a per­son nail­ing onto elec­tric­ity poles a sign that said “House to Rent”.

    My guess is that many peo­ple are going under and the banks are being sad­dled with prop­er­ties that they have to sell with­out spook­ing the mar­ket.

    If the banks are los­ing money, they are hardly going to pay the exhor­bi­tant fees Real Estate Agents charge to get rid of them. My guess is that West­pac asked the Real Estate Agency to flog these houses off at some minis­cule fee and the Agency told West­pac to get stuffed.

    Give it time and the banks will form their own in-house agen­cies to flog off ‘under­wa­ter prop­er­ties’ en-masse.

  • slaphappy

    If the gov­ern­ment was seri­ous about adress­ing the hous­ing afford­abil­ity issue then the FHOG on a new dwelling should be replaced with a rebate on the GST incurred in the con­struc­tion of that dwelling paid directly to the financier.

    Its not that im against the new tax sys­tem but the way it has played out smacks of inter-gen­er­a­tional inequal­ity.

    The cost of new sup­ply has run at 2.5 times the rate of infla­tion since 2000.

    Pre-2000 exist­ing home own­ers hav­ing in most cases already enjoyed tax­payer sub­si­dies (infra­struc­ture) recieved mas­sive income tax cuts and CGT con­ces­sions whilst in 2010 new home buy­ers strug­gle for 7 years just to pay of the tax com­po­nent of there new home.

    A dis­count win­dow on new sup­ply for first time buy­ers would rip­ple back across the mar­ket and tem­per price growth.

    The post 2008 growth in house prices is just mad­ness.


    TITINT #141

    I agree I come across as being disin­genuious, but I belive it is ‘pretty dumb’ in the aggre­gate for all Aus­tralians as a nation to pur­sue this delu­sion.

    In ‘the aggre­gate’ Aus­tralians long term, NET loose wealth to off­shore inter­ests by bor­row­ing off­shore to bid up the onshore AUD price of hous­ing.

    At the micro/individual level some peo­ple become fab­u­lously rich in local cur­rency AUD due to being acci­den­tally well posi­tioned going into an asset bub­ble (good luck to them) whilst some peo­ple are left hold­ing ‘the can’ and strug­gle to make ends meet (my com­mis­er­a­tions) but the NET trans­fer of wealth ‘in the aggre­gate’ from Aus­tr­ralians ‘in the aggre­gate’ is to offshore/foreign inter­ests.

    For­eign hold­ings of AUD are not all that use­ful unless you can buy AUD assets and where you can also export the value of your AUD sav­ings intact ‘in value’ into an off­shore juris­tic­tion…

    I notice the grad­ual takeover of our min­ing resource com­pa­nies by off­shore inter­ests!


    bb #121 (Cap­tain)

    You said in response to my rough DCF

    With regard to your sen­si­tiv­ity analy­sis, I would argue if growth (infla­tion + real wages) falls from 4% to 3% in per­pe­tu­ity, then it is lik­ley that inter­est rates (or oppor­tu­nity cost) falls by a sim­i­lar amount. we saw this dur­ing the GFC.

    Under these scenario’s, your value assess­ment is less volatile and there­fore your mar­gin for safety is less sen­si­tive.”

    Now this IS where we prob­a­bly con­virge on agree­ment.

    An appro­pri­ate ‘mar­gin of safety’ at present house prices prob­a­bly implies, as you say, ‘inter­est rates falling’.

    What I wit­nessed was not a col­lapse in house prices but a col­lapse in the AUD.

    My rough esti­mate is that mort­gage rates would need to be @ 1 — 2% lower than the DCF/NPV going into a global depres­sion to pre­vent a large cor­rec­tion in local house prices.

    To engi­neer 4.5 — 5.5% mort­gage rate in Aus­tralia the RBA would need a 0 — 1% cash rate.

    That would prob­a­bly cause the AUD to fall alot and import infla­tion to rise… 2 — 3% of GDP is spent on oil imports.

    At what price the AUD would sta­bilise over the fol­low­ing 5 — 10 years in this scene­rio is dif­fi­cult to know but my best guess is USD 35 — 45.

    We would get the 5% wage infla­tion you are expect­ing because we are presently close to fully employed.

    Aus­tralian houses would have fallen (priced in USD) by about 50 — 75%

    Job done.

    We could all remain AUD 0.5 mil­lion­aires invested in houses.

    That’s not quite the same spend­ing power over time though if the AUD falls enough to bail out the bub­ble cap­i­tal price of houses.

    3.2 X GDP vs 1.3 X GDP is a big dif­fer­ence unless GDP gets inflated sig­nif­i­cantly via a falling AUD.

    An inflat­ing denom­i­na­tor (GDP) bails out the numer­a­tor (Price).


    bb #147 (Cap­tain)

    A falling AUD scene­rio is (unfor­tu­nately) some­thing that Steve Keen did not take into account when he bet RR.

    Unlike the USA, UK, Japan, the EURO zone, Aus­tralia uses a triv­ial (2% world GDP) fiat cur­rency (AUD) and there­fore we have the flex­i­bil­ity to use a range of poli­cies that could devalue the AUD vs the main cur­ren­cies of the G20.

    $2.40 USD 1928
    $0.83 USD 2010

    AUD/USD house price GDP ratio dif­fer­en­tial 3.2 vs 1.3

  • ak


    I agree that we are in the ridicu­lous sit­u­a­tion where we have bor­rowed money from over­seas which has flowed to inflate the hous­ing mar­ket so as a con­se­quence we are pay­ing inter­est to over­seas investors to live in our own houses.”

    This is quite con­sis­tent with MMT I would say. 

    The fol­low­ing sequence of graphs shows the evo­lu­tion of for­eign debt since 1988. The first graph depicts net for­eign debt as a per­cent­age of GDP (to scale it) for the pub­lic and pri­vate sec­tors over­all. The pri­vate sec­tor blast off began as the Coali­tion took office (denoted approx­i­mately by the blue line). The mir­ror image is no coin­ci­dence. The fis­cal squeeze cre­ated the con­di­tions whereby house­holds and firms had only one way left to con­tinue to enjoy spend­ing growth – debt. Enter the finan­cial engi­neers and the rest is in the red line. The obses­sion with run­ning bud­get sur­pluses (blue line) drove these dynam­ics. ”

    The orig­i­nal post:

  • slaphappy

    Aus­tralian hous­ing mar­ket at 3.2 X GDP ?. 

    To bor­row this method­ol­ogy and apply it to our known min­eral reserves X cur­rent spot prices would make aus­tralia on a per capita basis the wealth­i­est coun­try on earth.

    Halve the $Au — dou­ble the wealth.