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

    Peter_W

    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.

    COUNTRY PRICE/INCOME
    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

    http://www.numbeo.com/property-investment/rankings_by_country.jsp

  • bb

    Peter_W

    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”

  • PETER_W

    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.

    http://www.ntu.ac.uk/adbe/news_events/residential_property_advice/affordability.html

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

  • PETER_W

    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

    noah,

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

    http://www.communities.gov.uk/documents/housing/xls/141395.xls

    Stg185k

    And the median income

    http://www.statistics.gov.uk/cci/nugget.asp?id=285

    St25.4k

    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

    Peter_W

    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:
    http://www.statistics.gov.uk/elmr/08_09/downloads/ELMR_Aug09_Chamberlin.pdf

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

  • bb

    kys,

    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 

    http://www.imf.org/external/pubs/ft/fandd/2010/03/pdf/loungani.pdf

    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…http://www.nzherald.co.nz/residential-property/news/article.cfm?c_id=76&objectid=10655715&pnum=0

    …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.

  • PETER_W

    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.

  • PETER_W

    TITINT #139

    Cor­rect.

    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

    Hi
    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

    Robbo.

    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.

  • PETER_W

    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!

  • PETER_W

    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).

  • PETER_W

    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

    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.”

    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. ”

    http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/07/Net_foreign_debt_public_private_Mar_2009.jpg

    The orig­i­nal post:
    http://bilbo.economicoutlook.net/blog/?p=3346

  • 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.