Delever­ag­ing, Decel­er­a­tion and the Dou­ble Dip

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Much opti­mism flowed from last week’s dec­la­ra­tion by the National Bureau of Eco­nomic Research that the US reces­sion offi­cially ended in June 2009. How nice of them to let us know. 

Mar­kets reacted warmly and the 8 per cent rally in US stocks through Sep­tem­ber seemed more impor­tant than the rev­e­la­tion that the US Fed is wor­ried enough about defla­tion to be plan­ning another round of quan­ti­ta­tive eas­ing — dubbed ‘QE 2’. 

I wish I could share the market’s (and the NBER’s) irra­tional exu­ber­ance, but the key indi­ca­tor that explains where the US econ­omy and its already dis­as­trous employ­ment sit­u­a­tion is headed implies that even QE2 won’t set the US on a course to renewed pros­per­ity.

It’s also impor­tant to note that the ‘strong’ Q2 US earn­ings fig­ures seen in July are partly the result of dra­matic cost-cut­ting in US firms – a nice way of say­ing mass lay-offs. Nonethe­less the stronger bot­tom lines keep pro­duc­ing mar­ket exu­ber­ance, even if the fac­tors behind those bot­tom lines will lead to future defla­tion rather than a boom. As Forbes writer Joshua Brown puts it “there is an effer­ves­cence in the air as we head into the Q3 report­ing period (start­ing Octo­ber 7)”. He thinks the mar­ket will once again turn south, and based on that pesky fun­da­men­tal called the real econ­omy, it should.

So should it on the basis of the key indi­ca­tor that explains the ori­gins of the appar­ent sta­bil­i­sa­tion that led the NBER to declare that the reces­sion was over in June 2009.

For a long time I’ve focused on the con­tri­bu­tion that the change in debt makes to aggre­gate demand, in the rela­tion that “aggre­gate demand equals the sum of GDP plus the change in debt”. An obvi­ous exten­sion of that was that “change in aggre­gate demand equals change in GDP plus accel­er­a­tion in the level of debt”—which would imply that change in unem­ploy­ment is dri­ven by changes in the rate of growth of debt.

Though I was aware of this impli­ca­tion of my analy­sis, I held off from test­ing it because I was con­cerned that this was push­ing the data one step too far.

A phys­i­cal sys­tem with a sim­i­lar rela­tion­ship between veloc­ity (the rate of change of one vari­able) and accel­er­a­tion (whether the veloc­ity of another vari­able is increas­ing or decreas­ing) would gen­er­ate a large vol­ume of suf­fi­ciently detailed data that the rela­tion­ship could be empir­i­cally tested.

But the eco­nomic sys­tem, with the large time lags in data col­lec­tion, sur­vey meth­ods rather than direct mea­sure­ment, and the dodgy prac­tices sta­tis­ti­cians are forced into by politi­cians and eco­nomic bureau­crats who often don’t want raw infor­ma­tion to be avail­able? I just thought that the rela­tion­ship, even though it made sense, wouldn’t be dis­cernible from pub­lished sta­tis­tics. So I held off.

It turns out that I shouldn’t have been so cau­tious: the data well and truly sup­ports this, on the sur­face, weird causal rela­tion: the change in employ­ment is strongly affected by the accel­er­a­tion or decel­er­a­tion of debt. This can give the para­dox­i­cal result that the level of employ­ment can rise, even when the econ­omy is delever­ag­ing, if the rate of delever­ag­ing slows. This phe­nom­e­non has dri­ven the appar­ent sta­bil­i­sa­tion of the US unem­ploy­ment rate (though of course the more mean­ing­ful U-6 mea­sure has risen to 17 per­cent, and Shad­ow­stats puts the actual unem­ploy­ment level at 22.5 per­cent–well and truly in Depres­sion ter­ri­tory), and it is highly unlikely that it will last.

My unchar­ac­ter­is­tic timid­ity means that I have to doff my cap in the direc­tion of the three econ­o­mists who first pub­lished on this topic: Biggs, Mayer and Pick. They first showed the cor­re­la­tion between what they called “the credit impulse”—the rate of change of the rate of change of debt, divided by GDP—and both GDP and employ­ment (for those who have access to research from Deutsche Secu­ri­ties, they have a sim­pler expla­na­tion of their analy­sis in Global Macro Issues for Decem­ber 17 2009: “The myth of the credit-less recov­ery”).

The chart below shows my con­fir­ma­tion of the rela­tion­ship with the data on the annual change in unem­ploy­ment in the USA and the annual rate of accel­er­a­tion of pri­vate debt since 1955. The cor­re­la­tion is –0.67: a stag­ger­ing cor­re­la­tion of a first and a sec­ond order vari­able over such a period, and across both booms and busts.

The two dot­ted red lines labelled “S” and “E” show when the NBER thinks this reces­sion started and ended, and they neatly coin­cide with turn­ing points in the credit impulse—an indi­ca­tor that the NBER is not even aware of, let alone one that it con­sid­ers when attempt­ing to date reces­sions.

Super­fi­cially, one might think that since the credit impulse does indi­cate when unem­ploy­ment is going to rise or fall, then the cur­rent data implies that the reces­sion is indeed over—even if the NBER doesn’t under­stand the actual causal dynam­ics at play.

But the chart also shows that there has never been a turn­down in credit like this one—the peak rate of decel­er­a­tion of debt was over 25 per­cent, ver­sus a mere minus 6 per­cent in the deep reces­sion of the 1970s. And though the rate of accel­er­a­tion of debt has the most direct impact on employ­ment, ulti­mately all three factors—the level of debt (com­pared to GDP), its rate of change, and whether that rate of change is increas­ing or decreasing—must be taken into account.

It’s com­pli­cated, so an anal­ogy with dri­ving makes it eas­ier to com­pre­hend.

Con­sider a drive from Los Ange­les to some des­ti­na­tion East (if you’re an Aus­tralian reader, con­sider a drive West from Syd­ney), where the drive out rep­re­sents increas­ing debt, and the drive back home rep­re­sents falling debt.

The level of debt com­pared to GDP is like the dis­tance to be trav­elled, and today the US has a lot fur­ther to travel than it did in the 1950s: 5 times as far, in fact. It’s like the dif­fer­ence between a drive to New York and back, ver­sus a return trip to Utah.

The rate of change of debt (with respect to GDP) is like your speed of travel—the faster you drive, the sooner you’ll get there—but there’s a twist. On the way up, increas­ing debt makes the jour­ney more pleasant—the addi­tional spend­ing increases aggre­gate demand—and this expe­ri­ence is what fooled neo­clas­si­cal econ­o­mists (who ignore the role of debt) into believ­ing in “the Great Mod­er­a­tion”. But it increases the dis­tance you have to travel when you want to reduce debt, which is what the USA is now doing. So it’s great when you’re dri­ving from LA East (increas­ing debt), but lousy when you want to head home again (and reduce debt).

With that far to travel back home, you might be tempted to accelerate—which is akin to increas­ing the rate of change of the rate of change of debt (it’s a mea­sure of the g-forces, so to speak, when they can be gen­er­ated by either rapid accel­er­a­tion or rapid decel­er­a­tion). Accel­er­a­tion in the debt level when it was ris­ing again felt great on the way out: booms in the Ponzi Econ­omy the US has become were dri­ven by accel­er­a­tions in the rate of growth of debt. Equally, accel­er­a­tion in the oppo­site direc­tion feels dread­ful: as the rate of decline of debt increases, aggre­gate demand col­lapses and unem­ploy­ment explodes.

What actu­ally feels bet­ter in the reverse direc­tion is deceleration—reducing the rate at which debt is falling—and that’s what’s been hap­pen­ing in the last year.

But here’s the prob­lem: too much decel­er­a­tion and you actu­ally reverse direc­tion: you start head­ing East again, rather than return­ing home. That wouldn’t be a prob­lem if all you’d done was drive to Utah, but instead you’ve hit New York instead: drive any fur­ther, and you’re in the Atlantic.

With the level of debt the USA has accu­mu­lated, the prospect that any sec­tor of it (apart from the gov­ern­ment) can be enticed to go back into accu­mu­lat­ing debt once again is remote. So the decel­er­a­tion in the rate of reduc­tion of debt that is occur­ring right now will ulti­mately give way to at best a con­stant rate of decline of debt, and at worst another acceleration—and the dreaded “dou­ble dip”.

These next two quar­terly charts empha­sise the dilemma: the sta­bi­liza­tion in employ­ment has occurred because the rate of delever­ag­ing has slowed, which reg­is­ters as a pos­i­tive in the “rate of change of the rate of change”:

But the rate of change of debt is still neg­a­tive: it’s just risen from a low of –6% to –2%. For the decel­er­a­tion effect to con­tinue, the US debt car would need to stop its return drive from New York to LA, and head back towards New York once more: the level of debt rel­a­tive to GDP would need to rise.

This is highly unlikely when all sec­tors of the Amer­i­can econ­omy bar one (non-finan­cial busi­ness) are already car­ry­ing more debt than they were in the depths of the Great Depres­sion, when the debt ratio had been dri­ven higher by defla­tion.

So the decel­er­a­tion in delever­ag­ing should give way again at some point, and then the NBER may be forced to begin dat­ing the next recession—which is still a con­tin­u­a­tion of the cur­rent Depres­sion.

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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  • Mind Bog­gling great blog.

  • Bull­turned­Bearturned­Bull

    Dear Adam, you do not seem to have noticed that I call myself Bull­Turned­BearTURNED­BULL. I believe that the US econ­omy will grow above 4% annu­ally in the first half of next year. Chimerica will sur­vive and pros­per. More­over, if you took notice of what Steve was say­ing about the credit impulse, you might realise that X-mas is only two months away and if those of you who can afford it go and spend a lit­tle extra, you may find you get some­thing back in the form of hope.

    Jesus was a great man. Cel­e­brate your love of Christ and be patient.

  • ak


    I bet the US econ­omy is dead (please see the graphs show­ing their pro­duc­tive capac­i­ties). It may only bounce in the way dead cats do it.

    China is a dif­fer­ent story. We may not like their polit­i­cal sys­tem but it sim­ply works. I just have looked at the num­bers… If we read all the com­ments full of venom the West is slowly real­is­ing this sim­ple fact but the most of com­men­ta­tors will not under­stand why it works. (In fact it is obfus­cated pretty well).

    One of the rea­sons the Chi­nese sys­tem deliv­ers sta­ble growth is that they did not out­source their macro­eco­nomic pol­icy to “free mar­kets” (a.k.a boys from Gold­man). Also — the deci­sion mak­ers know that if they don’t deliver “mod­er­ate pros­per­ity” and “main­tain sta­ble and rel­a­tively rapid eco­nomic devel­op­ment” they will lose the man­date to be in power.

    Unlike the cor­po­rate banksters Mafia rul­ing in the US. These will never sur­ren­der power.

    The Amer­i­cans still live in a very rich and pow­er­ful coun­try but unless they fol­low War­ren Mosler their last win­dow of oppor­tu­nity is rapidly clos­ing up. The neolib­eral sys­tem has no chance to sur­vive the ris­ing com­mod­ity prices (here I fully agree with aan­gel).

    Who under­stands these issues? Who has already started prepa­ra­tions for the next phase by divert­ing resources to build foun­da­tions for the energy-effi­cient econ­omy?

    The build­ing of a resource-sav­ing and envi­ron­ment-friendly soci­ety should be a focal point in the trans­for­ma­tion of the eco­nomic devel­op­ment mode. It is imper­a­tive to take reform and open­ing-up as a pow­er­ful dri­ving force for speed­ing up the trans­for­ma­tion, and score more com­pre­hen­sive, coor­di­nated and sus­tain­able growth to seek sound and fast eco­nomic and social devel­op­ment.”–10/18/c_13563388_3.htm

    I don’t know how faith or reli­gion may affect these processes.

  • Bull­turned­Bearturned­Bull

    ak, as a sci­en­tist, I do not fol­low any reli­gion. I do, how­ever, believe that it is unlikely that humans are the most advanced species in the uni­verse and I there­fore accept the pos­si­bil­ity that our des­tiny may not be enteirely our own to decide.

    I believe that all reli­gions, when used prop­erly, are an impor­tant force for the pos­i­tive advance­ment of human-kind.

    You are right to be proud of your coun­tries aston­ish­ing eco­nomic suc­cess but you should always remem­ber who aided it. I believe it was Bill Clin­ton who pushed for your entry into the WTO

    The world must act as one and use our col­lec­tive brain-power if we are to suc­ceed in tack­ling the global chal­lenges that we all face.

  • sj

    BTB with respect for your own per­sonal faith.
    Jesus show vio­lence only once in his life when he turned over the tables of the money chang­ers in the church.
    Would Jesus today speak out against the bank bail outs and cor­rupt account­ing?
    Would Jesus be deflationist/Inflation per­son?
    I’m not pro­mot­ing any extreme chris­t­ian cru­sade here!
    Per­son can have morals with­out chris­t­ian val­ues.
    Rea­son why cor­rupt banks have sur­vive is because inter­est rates are below the rate of real infla­tion.
    FED keep­ing inter­ests rates very low means the banks can lend out to the masses at a very high inter­est rate mar­gin as War­ren Buf­fett said “Banks can trade their way out”
    So the savers and the pro­duc­tive peo­ple are being destroyed to keep the rot­ten banks alive.
    AK China story is about large cen­tral plan­ning the Russ­ian way, 20 chi­nese elite in a room can­not make good deci­sions the free mar­ket is the only way.

  • Bull­turned­Bearturned­Bull

    I agree with every­thing you say, SJ. The point is that if every­one lived by the codes of their respec­tive reli­gions we wouldn’t be in such a mess. Whether its the ten com­mand­ments or what­ever peace-inspir­ing things they say in the koran or even the teach­ings of the Dalai Lama, it seems that nobody is lis­ten­ing.

  • bb

    aangl / steve

    Thanks for your ref­er­ences and replies. I clearly have more read­ing to do on this topic.

  • bb


    One of the rea­sons the Chi­nese sys­tem deliv­ers sta­ble growth is that they did not out­source their macro­eco­nomic pol­icy to “free mar­kets””

    ak, im sorry but i have to dis­agree on this point. Remem­ber China GDP per cap­i­tal is very low, so their so called “great eco­nomic per­for­mance” is a growth num­ber com­ing off a very low base.

    In short, the Chi­nese econ­omy is sim­ply snap­ping back like an elas­tic band which has been held behind for too long. The growth looks great, but the absolute wealth per GDP is a dis­grace and reflcts their poor poli­cies of the past.

    The real­ity is inno­va­tion and pro­duc­tiv­ity improve­ments con­tribute to real growth in out­put. After decades of being held back by maoist dogma and “cul­teral rev­o­lu­tion”, China is sim­ply copy­ing all of the pro­duc­tiv­ity and inno­va­tion improvemtns from The West. With­out the West lead­ing the way on these improve­ments in the 70’s 80’s and 90’s, China would have noth­ing to copy.

    So in fact today the Chi­nese econ­omy is an INDIRECT BENEFICIARY of the free mar­kets. The rest is just pol­i­tics.

  • BH

    Thanks bb (145)

    So “loans cre­ates deposits” only relates to the abilty of the banks to cre­ate new credit, con­strained by cap­i­tal con­straints and by fund­ing con­straints.

    As you say trans­ac­tions between cus­tomers of the one bank doesn’t require rais­ing funds only needs book entries. So the fund­ing ques­tion only comes in when it comes time to for the banks to hon­our com­mit­ments to these newly cre­ated deposits when pay­ments between banks are being made.

    And for this, the fund­ing relates to rais­ing base money from the overnight mar­ket or the RBA short term, and amal­ga­ma­tion of this for the long term.

    I take it then, if a bank was grow­ing their mort­gage book faster than other banks, they’d have greater fund­ing require­ments. But if all banks were grow­ing their books in dol­lar terms fairly equally then the long term fund­ing require­ments would be min­imised, being sup­ported mostly by overnight and short term fund­ing (most trans­ac­tions being net­ted off)?

    Fol­low­ing from the above, a con­se­quence of the takeover of St George by West­pac would have been to increase the “within the bank” trans­ac­tions and reduce the need for fund­ing “between the banks” trans­ac­tions.

    So the banks can sup­port a large vol­ume of trans­ac­tions on a lower vol­ume of fund­ing but rely on that fund­ing to be read­ily avail­able, which is where the state of the mar­ket and the cen­tral bank comes in.

    In times of stress, when fund­ing becomes dif­fi­cult then that may slow new lend­ing until banks can be con­fi­dent of rais­ing the con­se­quent fund­ing at prof­itable rates and suf­fi­cient amount.

    I’m still hazy on the aspects of where Aussie banks are fund­ing mort­gages from over­seas — what are the inter­est rate and cur­rency effects?. Does the RBA step in and pur­chase FX to sup­port this? I know the banks mostly hedge their risks but not sure if it is for exchange risks or inter­est rate risks or both.

  • Bull­turned­Bearturned­Bull

    Andre, thank you for the excel­lent analy­sis. I would point out, how­ever, that a bar­rel of oil has an eco­nomic util­ity greater than its energy value and there­fore a rise in the price will indeed be suf­fi­cient to ensure the rise of alter­na­tive sources of liq­uid-fuelled trans­port.

    Like­wise, “stronger than steel” build­ing prod­ucts will soon become avail­able, we will just have to pay full price.

  • BB, you’re wel­come.

    How­ever, if I might add, you are at the very begin­ning of this jour­ney. If you keep research­ing you will dis­cover that there is no alter­na­tive liq­uid fuel source or com­bi­na­tion of liq­uid fuel sources that can be ramped up in time as con­ven­tional liq­uid oil declines. Ethonal is a net-energy fail­ure; the cel­lu­lose required by cel­lu­losic ethanol (if the process is ever per­fected) is too dif­fuse and would require too many plants to be built to be worth it (so that the cel­lu­lose doesn’t have to travel far to get to the plant, oth­er­wise the process won’t be net energy pos­i­tive); coal-to-liq­uids can help if we don’t mind send­ing even more CO2 into the atmos­phere and are will­ing to spend $6.5 bil­lion for just 80,000 bar­rels per day plants; gas to liq­uids is another pos­si­bil­ity but it too is atro­ciously expen­sive when cap­i­tal is get­ting scarce and so on.

    We are headed for global con­trac­tion as oil declines and there is noth­ing that can stop that now. If we had started mit­i­ga­tion 30 years ago per­haps we would have had a chance. But it is folly to think we can build out the infra­struc­ture for the next energy source while the cur­rent one (oil) is declin­ing. Our econ­omy will be in sham­bles very soon from both the debt defla­tion that Prof. Keen has fore­seen so well as well as declin­ing energy avail­abil­ity.

    I rec­om­mend read­ing the U.S. Depart­ment of Energy Report PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, & RISK MANAGEMENT and the leaked Ger­man mil­i­tary report to get as sense of just how late in the game we are.

  • Jason Mur­phy


    Bofore the exchange rate was floated the Reserve would give a bank $AUD for its nett $USD posi­tion [for exam­ple] at the offi­cial rate. The issue was that this injected and with­drew liq­uid­ity into the Aus­tralian sys­tem.

    Today a bank would just take the $USD it bor­rowed and sell it in the mar­ket for $AUD.

    Of course there are plenty of peo­ple will­ing to organ­ise all this — for a fee.

    The daily turnover in FOREX is in the tril­lions. The daily turnover in Equi­ties is in the bil­lions. Some­thing of that very broad com­par­i­tive scale.

  • bb


    I’m still hazy on the aspects of where Aussie banks are fund­ing mort­gages from over­seas – what are the inter­est rate and cur­rency effects?”

    It comes from my point (3). Because Aus­tralia has a cur­rent account (trade) deficit, we automti­cally have a cap­i­tal account sur­plus.

    The cap­i­tal account is sim­ply the other side of a trade deficit. When an Aussie decides to Buy a Honda from Japan, they sell A$ and buy Yen. The other side of the FX trade has some­one sell­ing Yen and Buy­ing A$. So $A (cre­ated by the banks) never leave the sys­tem — they just end up in for­eign hands.

    There­fore the A$ even­tu­ally goes back into one of the Aus­tralian Banks. This is gen­er­ally viewed as off­shore fund­ing. As to whether it directly funds the banks mort­gage book is a moot point. The fact is, when some­one owns an A$, they have to put it in the Aussie finan­cial sys­tem (there are very few bank notes left to put under the pil­low).

    So the off­shore fund­ing issue is really a FX issue. If the Aussie banks start to fail, the result will be lack of demand for the $A — sup­ply of $A is unch­naged because the same num­ber of peo­ple want their Honda. The result is an $A col­lapse.

    There is an auto­matic sta­biliser here…If the CBA needs A$10bn to fund itself, then it needs to find almost US$10bn. If the cur­rency falls to 0.25, then the CBA only needs to find US$2.5bn. So a drop in the cur­rency can releive the fund­ing pres­sure on a bank.

    This is what hap­pened dur­ing the Asian cur­rency cri­sis — it was actu­ally a bank fud­ing cri­sis which mor­phed into a cur­rency col­lapse.


    bb #163

    In part I agree…

    The ‘credit cre­ates deposits’ mech­a­nism, as an inter­nal debt/asset/deposit sys­tem is prob­a­bly close to unlim­ited in how high it can go (ratch­et­ing down inter­est rates to keep debtors cur­rent).

    When the expo­nen­tial deposits leak ‘off-shore’ to pur­chase goods & ser­vices in an unbal­anced trade amount… i.e. a ‘trade deficit’ then we increase ‘for­eign cur­rency debt’

    The higher the inter­est rate to restrain the ‘credit cre­ates deposits’ expo­nen­tial credit/asset/inflation spi­ral, the more attrac­tive the cur­rency is as a carry trade.

    This has a limit for for­eign fund­ing at the bank­ing sec­tor, which will be the pledgable net for­eign income of the national export sec­tor…

    Aus­tralian net for­eign debt is @ $670 bil­lion

    Aus­tralian ASX Resource Com­pa­nies Mar­ket Cap­i­tal­i­sa­tion at p/e 18 (which is a 5.5% after tax yield) is $570 bil­lion.

    A flinch from China and the AUD is trash.

    We spent the mir­a­cle of ‘credit cre­ates deposits’ to the tune of the entire mar­ket cap of the entire ASX min­ing sec­tor.

    To top it off @ $48 bil­lion net credit was cre­ated dur­ing the past year. Plus $82 Bil­lion for hous­ing and minus $48 bil­lion for busi­ness, the gov­ern­ment helped out with plus $48 bil­lion. The entire net credit cre­ated, was all for­eign debt.

  • Jason Mur­phy

    This is the way I think of it:

    All sorts of folks from all sorts of places hold all sorts of num­bers in bank acc­counts in all sorts of cur­rency deonom­i­na­tions.

    The com­mon link is that those num­bers have to be able to pass through the Reserve Banks clear­ing sys­tems to actu­ally buy stuff in Aus­tralia.

    When the denom­i­na­tion is not $AUD it has to pass through a step to con­vert it to $AUD that the Reserve Banks clear­ing sys­tems will also accept.

    A bank can­not just type num­bers into peo­ples accounts willy nilly. 

    It has to get into an account via a loan, or as a result of a pre­vi­ous loan. [Or from the Reserve putting it there — I mean it runs the sys­tem (e’g the $900 hand­outs that started appear­ing in banl accounts in the GFC)].

    And that loan has to jump the inter­est rate hur­dle.

    And the Reserve con­trols rates.

    This one has some inter­est­ing data:

    Australia’s for­eign debt—data and trends–09/09rp30.pdf

  • Bull­turned­Bearturned­Bull

    Dear aan­gel, there is light at the end of every tun­nel. Whilst peak oil is being played out, other advances will be made and progress will out-strip regres­sion.

  • Bull­turned­Bearturned­Bull

    SJ, I think Jesus was mur­dered because Coffin­Man1 could not under­stand his mes­sage. If you can get a copy of the Bible and read it you will find that all the mes­sages are schiz­o­phrenic until you hear what Jesus had to say. Many Chris­tians have still not fully con­tem­plated the mes­sage of Christ.

    Although I do not believe in mir­a­cles, I con­sider myself to be a dis­ci­ple of not only Christ, but of Ghandi and the Dalai Lama as well.

    This did not come nat­u­rally to me. My soul was saved 9 years ago by a species or a god that I do not know but that thought I was worth sav­ing and told me that I must make the effort to do like­wise for all other humans.

    It is a frus­trat­ing exer­cise but I try. I think Jesus would be telling every­body to take a chill pill so as not to make mat­ters worse.

  • bur­rah

    I’m still hazy on the aspects of where Aussie banks are fund­ing mort­gages from over­seas – what are the inter­est rate and cur­rency effects?.”
    Up till 2007 Aus­tralia was 2nd only to the US in RMBS {Res­i­den­tial Mort­gage Backed Secu­ri­ties) thank­fully very lit­tle of that was sub-prime.
    How­ever the GFC had a major effect in Aus­tralia, as it had on the rest of the world, and secu­ri­ti­sa­tion has dropped con­sid­er­ably since then.
    An inter­est­ing address by Dr Guy Debelle, Assis­tant Gov­er­nor (Finan­cial Mar­kets) RBA on secu­ri­ti­sa­tion here.

  • ned


    lol “I think Jesus would be telling every­body to take a chill pill” I think you might have had a few too many of those pills man!!

  • cyrusp

    Bull­turned­Bearturned­Bull @ 166:

    There is light at the end of every tun­nel. Whilst peak oil is being played out, other advances will be made and progress will out-strip regres­sion.”

    That is purely a state­ment of faith. As aan­gel has shown it
    is highly unlikely that we will replace rapidly declin­ing oil pro­duc­tion with any form of renew­able energy.

    Look at the attached graph. Peo­ple don’t appre­ci­ate what a tiny per­cent wind and solar energy rep­re­sent.

    There is absolutely no rea­son why Oldu­vai The­ory won’t come to pass:

  • Jason Mur­phy

    Warn­ers v Elders Finance is off course an old prece­dent in Aus­tralian law deal­ing with the legail­ity of the “mere book entry” includ­ing in the light of the notion of capi­tol ade­quacy:

  • BH

    bb, jason, peter_w, bur­rah,

    Thanks for the responses and the links. It seems that I’ve been hazy with the word “fund­ing” think­ing ini­tially that fund­ing a mort­gage would be to obtain the funds to finance it for the term of the mort­gage whereas per­haps it is more that the funds are only required in order to make good any with­drawals of deposit (cre­ated by the mort­gage) which is obvi­ously a short term thing. Seems rea­son­able?

    Under­stand­ing the dynam­ics of this stuff is not sim­ple.

    Regard­ing the over­seas “fund­ing” that banks seem to have such need of. Per­haps it refers more not to avail­abil­ity of funds but of price of funds. That is, it is a prof­itabil­ity ques­tion — the banks are in “need” of main­tain­ing mar­gins. Per­haps, the banks are sourc­ing cheap fund from OS because get­ting a good mar­gin locally has issues..

    Anec­do­tally I’ve heard retirees OS are look­ing to Oz to get some return on their money — some­thing to live off. Aus­tralia hav­ing appeared to weather the GFC storm is look­ing rel­a­tively safe with decent yields to these investors. Add the ris­ing cur­rency — we might yet have an Aussie Bub­ble.

    I’ve come to the con­clu­sion, that the prob­lem of how bank bor­row­ing from OS affects the local sys­tem ends up in the RBA’s lap. It’ll play around with forex swaps, etc to main­tain its main tar­get — rates.

    Bur­rah, was inter­est­ing look­ing at the effect of the GFC’s effect on secu­ri­ti­sa­tion and the RBA’s bal­ance sheet. To my untrained eyes, for the year to June 2008 it looked like “Other Secu­ri­ties” was dri­ving the RBA’s bal­ance sheet growth until it wasn’t. In June 2008 “Other Secu­ri­ties” com­prised 52.8% of the RBA bal­ance sheet, by Sep­tem­ber 2010 that has become 31.6%.

  • BB, as cyrusp points out, that we will be able to main­tain this sort of civ­i­liza­tion as we con­tend with the var­i­ous con­verg­ing nat­ural resource crises hit­ting us is a state­ment of faith. Although it has good evi­dence for it (the last sev­eral hun­dred years it has been true), the evi­dence was cre­ated dur­ing the ascent of the fos­sil fuel bub­ble we cur­rently are in. A world of declin­ing fos­sil fuels will be very dif­fer­ent indeed.

    I encour­age you to set aside your faith for a moment and actu­ally prove for your­self that civ­i­liza­tional con­trac­tion will not occur as oil declines. I believe you will find that it is impos­si­ble to do. Read the leaked Ger­main mil­i­tary report, as well. You will quickly see that your faith is mis­placed.

    The only open ques­tion is how much we con­tract before we reach a “sta­ble” level of pop­u­la­tion and eco­nomic activ­ity. With renew­able energy sources cur­rently mak­ing up less than 1% of the world’s pri­mary energy sup­ply, my guess is that we will con­tract very far indeed.

    I was one of the open­ing speak­ers at the con­fer­ence and I invite you to watch the short syn­op­sis I gave on the first day. It pro­vides the whole pic­ture in just 14 min­utes. This appears to be the first time you are exam­in­ing this ques­tion so I expect that your imme­di­ate reac­tion will be to think I’m daft. I assure you that the decline of oil pro­duc­tion has far-reach­ing impacts that almost no one is aware of. Com­bined with the defla­tion we are enter­ing, our world will seem to change almost over night.

    Steve, if you’re still read­ing these com­ments, I would love it if you were to watch the video as well and pro­vide any com­ments you see fit. 


  • Bull­turned­Bearturned­Bull

    Algae to oil.

  • Hi Andre,

    I’ve watched the video, and the one addi­tion I’d sug­gest is putting the inverse sig­moid model and Hubbert’s Peak as its deriv­a­tive into the pre­sen­ta­tion near the begin­ning. The rea­son for this is that most peo­ple accept that the oil on the planet is finite (on a human time scale), so that the argu­ment that ini­tially it was easy to get the oil, and that over time it gets harder, drops right out of the basic propo­si­tion.

    Once peo­ple accept that, they’ve accepted the basic shape of the Hub­bert Peak, which you can illus­trate sim­ply by show­ing that the deriv­a­tive of the inverse sig­moid gives you the cur­rent rate of extrac­tion. Then the issue becomes how much can we change this shape–both in a pos­i­tive sense (extend­ing it) or a neg­a­tive one (the propo­si­tions about oil pro­duc­ers hang­ing on to their oil and the exportable sur­plus run­ning out in say 2040).

    With­out this fun­da­men­tal start­ing point, I think it would be pos­si­ble for peo­ple to “tune out” in the “technology/the mar­ket” will solve it way.

    I think it would also be use­ful to illus­trate how unique oil is as an energy den­sity product–to counter the belief that we can find a sub­sti­tute; and illus­trate the scale of indus­tri­al­i­sa­tion needed to shift from fos­sil fuel trans­porta­tion now to renewable–to counter the belief that we can do all this tomor­row.