Mort­gage Finance Asso­ci­a­tion of Aus­tralia Talk

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The screen cap­ture video of my talk at this sem­i­nar gives an overview of both my eco­nomic analy­sis and my views on the Aus­tralian hous­ing mar­ket. Sev­eral blog mem­bers have com­mented that it’s the best overview I’ve pro­vided, so I’ve put it on the essen­tial read­ings list.

I spoke at a MFAA Pro­fes­sional Devel­op­ment Day, fol­low­ing a speaker who pointed out that most deci­sions are made by the emo­tional com­po­nents of our brains–hence some of my ref­er­ences to using the CEO seg­ment of your brain instead.

Steve Keen’s Debt­watch Pod­cast 

| Open Player in New Win­dow

Click here for the Pow­er­Point slides.

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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  • Let me be the first to con­grat­u­late you one your new Blog for­mat — extremely util­i­tar­ian and func­tional while at the same time being most pleas­ant on the eyes and mind.

    Sec­ondly, the com­ple­tion of the sec­ond edi­tion of Debunk­ing Eco­nom­ics. I await the Kin­dle ver­sion patiently.The Flag below is more than appro­pri­ate.

    Well done Steve and be it known that the future of Aus­tralia is in the hands of peo­ple and pro­fes­sion­als such as your­self.

  • Derek

    Great talk! Those graphs of debt ver­sus unem­ploy­ment and lend­ing ver­sus house prices are so com­pelling! This is one of the best talks that you have given. It just ties every­thing together.

  • The west­ern Pacific rim coun­tries are sat­u­rated with over­val­ued hous­ing, dis­par­ity between wages and val­u­a­tions, and for­ward demand for use­ful jobs and wages to sup­port a con­tin­u­a­tion of the debt and hous­ing indus­try.

    30 March 2011 will be a pre­dictable albino black swan event for global equi­ties that will quan­ti­ta­tively ver­ify the qual­i­ta­tive rea­son­ing of Dr. Keen.

  • Philip


    Great pre­sen­ta­tion. The debt dynam­ics pre­sented look so sim­ple, yet the main­stream eco­nom­ics pro­fes­sion com­pletely ignore it, to the detri­ment of the pro­duc­tive econ­omy.

    The major fab­ri­ca­tion pro­duced by bub­ble deniers is always the grow­ing population/demand argu­ment. In the US before 2006, they were blam­ing immi­grants, espe­cially the Chi­nese, as the cause for rapidly increas­ing prices. Gov­ern­ment reg­u­la­tions were some­what of a sec­ondary scape­goat.

    Good neo­clas­si­cal econ­o­mists (bad enough) ignore debt dynam­ics, whereas bad neo­clas­si­cal eco­nom­ics (even worse) ignore basic sta­tis­tics that are eas­ily avail­able. Its a won­der that any­one, let alone edu­cated econ­o­mists and bank­ing offi­cials, can trot out the pop­u­la­tion argu­ment when sim­ple sta­tis­ti­cal analy­sis shows the oppo­site.

    Per­haps as a mar­ket­ing tech­nique, you could post a sec­tion or chap­ter of your Debunk­ing Eco­nom­ics 2nd ed., that is rel­e­vant to the cur­rent finan­cial crises. This could inter­est many blog readers/members and per­suade them to pur­chase your book.

    As a rough per­cent­age, how much of the con­tent is new and/or changed from the 1st ed.?

    Keep up the good work (the new Word­Press for­mat is much improved).

  • Indeed, now I have time to absorb your pre­sen­ta­tion, just great.

    I have been say­ing for some years that the demand for mort­gages is what dri­ves house prices (which includes home prices and there is a big dif­fer­ence between a house and a home) up. In the US it was pri­mar­ily the prof­its avail­able from the secu­ri­ti­za­tion process and the chain of activ­i­ties in between — and also what caused the toxic ninja mort­gages.

    If I under­stand cor­rectly, Swan’s gov­ern­ment is now the last and only buyer of Aus­tralian bank’s RMBS as there are no other buy­ers (I have heard that Pimco* — love that name:) are now selec­tively pick­ing up some, by request. Surely this is con­tin­u­ing the bub­ble whereas, in the US, it appears that there is lit­tle or no demand for secu­ri­tized mort­gage instru­ments of any species, any­more?

    There­fore, I con­clude that it is clearly prob­a­ble that it is the gov­ern­ment that is delib­er­ately attempt­ing to inflate house prices in order to pro­tect the banks and the bank’s book assets (Is there a tun­nel here too?). Is there not enough profit in the frac­tional reserve bank­ing processes of priv­i­leged cen­tral­iza­tion lend­ing with­out gov­ern­ment pimp­ing for the indus­try or is it, as evi­denced by the almost zero gov­ern­ment debt, they just have no other shots to fire, except blanks?

    * Pimco — It appears that the US T-Bond mar­ket will soon col­lapse and Pimco has recently dumped all its hold­ings thereof — which may explain it buy­ing into the Oz RMBS con­tango.


    Ship of Fools

  • Thanks Peter,

    I changed to that pre­vi­ous for­mat sim­ply because my orig­i­nal one stuffed up ital­i­cised text–every italic was put on a sep­a­rate para­graph in small font! But I soon realised that the new one was a pain as well, espe­cially with com­ments being threaded when it appears every­one here prefers to be part of one large con­ver­sa­tion. So I’ve altered that too.

    Mind you, this is not the final for­mat; I have not had time to touch the blog while writ­ing the book, so I took advan­tage of hav­ing fin­ished it to improve things a bit myself with a new theme. But there is a pro­fes­sional inter­face being designed for me, which will turn up some time this year.

  • Thanks all–and thank you for tol­er­at­ing the interim one while I was pre­oc­cu­pied with the book.

    On which note, the sec­ond edi­tion is 90,000 words longer than the orig­i­nal, with the vast major­ity of that rep­re­sent­ing new work on macro­eco­nom­ics. This includes cri­tiques of the ““Dynamic Sto­chas­tic Gen­eral Equi­lib­rium” crap that now dom­i­nates neo­clas­si­cal macro, pulling apart Bernanke’s spu­ri­ous expla­na­tion of the Great Depres­sion, and cas­ti­gat­ing Krugman’s inane attempt to model debt defla­tion.

    Oh, and I’ve tried to be much more polite than I was in the first edition–NOT!

    I also include two chap­ters on my Min­sky model, and my mon­e­tary “Rov­ing Cav­a­liers” model.

    Finally, I’ve sub­stan­tially altered the argu­ment on the the­o­ries of demand and sup­ply in the first two sub­stan­tive chapters–I think my expla­na­tion of the Son­nen­schein-Man­tel-Debreu con­di­tions is much improved, and I now include an entirely ver­bal proof of why equat­ing mar­ginal rev­enue and mar­ginal cost does not max­imise prof­its.

    So though I ini­tially intended to just add about 30,000 words to “put my oar in” before fin­ish­ing Finance and Eco­nomic Break­down, I ended up rewrit­ing over 50% of the book.

  • Philip

    90,000 words longer! This is an addi­tional book in itself. It will be at the top of my list when it comes out.

    Too bad that the issues of income dis­tri­b­u­tion and Pareto optima will not be cov­ered more in depth. I sus­pect that your book will still be much eas­ier to read than Joseph McCauley’s Dynam­ics of Mar­kets. The first few chap­ters of his book were read­able, then the insane amount of com­plex math made it too dif­fi­cult to under­stand what is going on.

    I asked McCauley if any dynamic analy­sis of the income dis­tri­b­u­tion had been per­formed, but he didn’t know of any, apart from your chap­ter on this issue. The skewed dis­tri­b­u­tion of income is one of the great crimes of state cap­i­tal­ism since its incep­tion.

    Good to know that you haven’t become soft on neo­clas­si­cals…

  • ak


    What I would really like to see in the 2nd edi­tion of your book (obvi­ously my idea may be silly and it may be too late) is an appen­dix to your book where “proper” maths is used to illus­trate the point you’re mak­ing. I know that this is indi­gestible for some read­ers and prob­a­bly should be excluded from the main text but it some­times adds a lot of clar­ity.

    In regards to house prices the chick­ens may finally come home to roost… there has been no FHOG despite the elec­tion cam­paign in NSW what may sug­gest that not much muni­tion in the neo­clas­si­cal box is left (I do not expect ALP to adopt the Char­tal­ist posi­tions soon). What about the sec­ond edi­tion of the walk to Kosciuszko?

  • This arti­cle will be easy for you Steve but I have found it rather dif­fi­cult; per­haps I am either get­ting too old or I have been read­ing too much today; but it rings a bell.


  • Lyon­wiss


    Great post! You have a bet­ter dis­cus­sion on the sub­ject than any­thing else I’ve seen or heard. Joyce, Robert­son, RBA, Stevens, lately Blox­ham spew rhetor­i­cal non­sense. You pointed out a com­mon flaw of con­fus­ing need with demand and result­ing price pres­sure: these peo­ple pro­vide “rea­sons” which are irrel­e­vant and unsub­stan­ti­ated empir­i­cally. Every day and every night, you hear such non­sense in news and com­men­taries by mar­ket “gurus”.

    Fore­cast­ing the details of the endgame is gen­er­ally dif­fi­cult, because of gov­ern­ment inter­fer­ence. Cred­i­ble fore­casts of doom rarely even­tu­ate, sim­ply because of gov­ern­ment inter­fer­ence. Like­li­hood of a sec­ond great depres­sion brought on the money print­ing frenzy in the US: sav­ing the day for a while. Like­li­hood of hous­ing price slumps in Oz brought on gov­ern­ment hous­ing stim­u­lus with home grants etc. Every can is sim­ply kicked down the road, until one day we reach a dead-end with a pile of cans. That day will come when the gov­ern­ment find itself in a posi­tion of “zugzwang”, a term in chess for the sit­u­a­tion where every pos­si­ble move leads to loss. The US gov­ern­ment is get­ting close to that sit­u­a­tion with zero inter­est rate, record gov­ern­ment deficits, grow­ing national debt and ris­ing infla­tion. Accu­rate fore­cast­ing is much more fea­si­ble in the sit­u­a­tion of “zugzwang”.

  • juk

    Hi Steve,

    As oth­ers have said, great pre­sen­ta­tion; it really was the com­plete story.

    Can you explain how debt isn’t rep­re­sented in GDP? On slide 4 you have:

    GDP $1,000 bn
    Debt $1,250 bn, Change in debt = $250 bn
    Total spend­ing $1,250 bn

  • juk

    Half my com­ment was cut­off???? This is the sec­ond half, read the lower one first.

    But it seems odd that debt is the only thing that isn’t rep­re­sented in GDP? It seems to me that in the exam­ple above, real GDP is $750, debt is $250 and appar­ent GDP is $1000.


  • Robert K

    I con­cur with the appro­ba­tion of the other com­menters on your talk, and would
    only add that, hav­ing lis­tened to sev­eral oth­ers you pre­sented on the web, the
    cohe­sion of the ver­bal por­tion (you) with the on screen sen­tences and graphs is
    far supe­rior in terms of clar­ity and ease of viewer com­pre­hen­sion to any­thing I
    have seen you do before. Kudos. By the way, Peter­jbolton, I think the Betan­court
    piece is very impor­tant, but in severe need of an edi­tor expert in dejar­goniz­ing,
    along with sup­ply­ing a few well cho­sen exam­ples to illus­trate points. Great think­ing but TOUGH read­ing.

  • 2 rea­sons:

    1. There are 3 mea­sures of GDP: income, expen­di­ture and pro­duc­tion. My per­spec­tive uses the first.

    2. We spend on both com­modi­ties and exist­ing assets. GDP via the other 2 mea­sures tells us how many com­modi­ties we bought or pro­duced.

    The sum of GDP plus change in debt will equal expen­di­ture on goods and ser­vices and exist­ing assets.

    Schum­peter also mod­eled it in a way that might make sense: con­sump­tion is financed entirely by income; invest­ment is financed (in his model) entirely by the change in debt. I have sim­ply for­malised and gen­er­alised that in line with Min­sky.

  • Hi AK,

    I’m set­ting up a blog for the sec­ond edi­tion, so it’s quite fea­si­ble that I could pro­vide the maths online. That will be an ongo­ing project how­ever!

  • vk

    The sum of GDP plus change in debt will equal expen­di­ture on goods and ser­vices and exist­ing assets.

    This might deserve a bit closer scrutiny. The seller of the exist­ing asset ends up with a pile of cash which he can use to
    a) retire exist­ing debt — but when over­all debt lev­els are ris­ing we can ignore this out­come and focus on the other options
    b) buy goods and ser­vices — in which case this amount will be included in GDP as spend­ing.
    c) buy a new asset — in which case the amount will be included in GDP as invest­ment
    d) buy an exist­ing asset — no macro-effect as the seller of that asset will be in the same posi­tion.
    e) save the amount in the bank (did we see a ris­ing sav­ings ratio?)
    f) stuff the cash under the mat­tress.
    g) some­thing else?

    It could be argued that a sig­nif­i­cant pro­por­tion of the debt-financed spend­ing on exist­ing assets ends up accounted for in the GDP num­ber.

  • You have to con­sider the endoge­nous gen­er­a­tion of spend­ing power in excess of that financed by the sale of exist­ing goods and ser­vices vk. That’s the point that is missed by con­ven­tional think­ing on this issue. Your point (d) assumes a straight trans­fer for exam­ple. This is very dif­fer­ent if the trans­fer was funded by a bank whose loan cre­ates money than if it were a “ven­dor finance” oper­a­tion. Mis­tak­ing debt growth for ven­dor finance is a major weak­ness in neo­clas­si­cal think­ing on this topic.

  • vk


    I think I did not express my thoughts clear enough, so I will try with an exam­ple:

    1) Alice bor­rows to invest
    (this is the endoge­nous money cre­ation bit).
    2) Alice buys an exist­ing asset from Bob
    3) Bob ends up with a pile of cash and faces one of the a) to g) options
    3.1) if he chooses options b) or c) then the endoge­nous money cre­ated in step 1 would be included in GDP
    3.2) if he chooses option d) and buys another exist­ing asset from Char­lie (which is a straight trans­fer of the endoge­nous money cre­ated in 1) then Char­lie ends up in the same posi­tion as Bob was in step 3).

    Sure Char­lie could buy from Dan, then Dan from Eddie, etc, but even­tu­ally a non-triv­ial part of the endoge­nous money cre­ated in 1) will end up either spent or invested and there­fore accounted for in GDP.

  • Hi vk,

    I agree that a non-triv­ial amount of the increase in debt will end up being mea­sured in GDP–especially when you use the pro­duc­tion or expen­di­ture approaches to mea­sure it. It’s the equally non-triv­ial part that doesn’t end up being mea­sured in GDP that is my inter­est.

    I am under­tak­ing a fund­men­tally causal analy­sis here: where does the spend­ing come from?–past/current income, or increased debt? The lat­ter unar­guably exists, and amounts to 5–10% of total spend­ing even with­out a Ponzi Scheme. If that bit disappears–especially when it reaches 28% of spending–then I think we would see a pretty sharp fall in GDP (and expen­di­ture on exist­ing assets) shortly after­wards. This is pre­cisely what occurred.

  • PS vk, another way of rec­on­cil­ing this is to ask “What hap­pens to recorded GDP if your step 1 doesn’t hap­pen”? There is a causal link between the endoge­nous cre­ation of credit and the expan­sion of GDP. That is what I attempt to cap­ture with my short­hand state­ment about aggre­gate demand and change in debt.

  • Pingback: Steve Keen discusses debt, housing, and the economy | Financial Insights()

  • vk


    I fully agree that a debt-fuelled demand boost GDP.

    What I don’t agree with is the “GDP + change in debt” bit since a non-triv­ial part of the change in debt is already accounted for in the GDP num­ber.

    If I was an econ­o­mist I would have focused on the change-of-debt-financed-por­tion-of-GDP rather than adding GDP to the change in debt. But I am just an engi­neer so I am prob­a­bly wrong.

  • Think in con­tin­u­ous time terms then vk: AD(t) = GDP(t-tau) + dD(t)/dt.

  • vk

    AD(t) = GDP(t-tau) + dD(t)/dt

    Yes, that makes sense. Thanks for putting up with me.