Mar20
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
Click here for the PowerPoint slides.
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.
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.
Steve,
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.
Thanks,
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.
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…
Steve,
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.
http://www.michaelbetancourt.com/pdf/ctheory_immaterial-value.pdf
cheers
Steve
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”.
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
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.
Thanks
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!
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.
Steve,
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.
Steve,
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.
Yes, that makes sense. Thanks for putting up with me.
Steve,
I fully agree with the initial position presented by VK.
I did not want to wade into the discussion about the non-existence of the “bank vault” and wrong causation in the model described in one of the previous posts as I didn’t think the time was right but this issue is too important to be left as it is.
The models discussed now are miscalibrated and this explains why moderate fiscal stimulation was successful in the US in 2009 (prevented sliding the global economy into another Great Depression). The additional debt increase contribution to GDP is not 0% of d(debt)/dt as the neoclassicals would like us to believe but it is also not 100% of d(aggregate_debt_of_the_private_sector)/dt
(Note. I am not talking about the net position but about the sum of all the loans)
The coefficient could be maybe 20-40% ( I did a rough estimation a long time ago so this number may be wrong). This corresponds exactly to the amount of money spent on the scenarios discussed by VK compared with the total amount of money created by the banking system.
If we initially the ignore secondary effects like spending multiplier we should look at the amount of money injected to the economy in a period of time which is spent on buying new products and services. This flow (accounted for as a component of “investment”) passes through the circuit and is eventually withdrawn in the form of savings. The rest of the money used to buy properties on the secondary market is simply saved as deposits, used to purchase other existing assets or to repay loans. Only some of the money is used to finance consumption. There is also some stimulatory effect due to spending some of the borrowed money on Real Estate services, additional costs like removals, etc. Some money is withdrawn as taxes or may flow overseas if there is a trade deficit.
However during the debt deleveraging phase different effects take place and the impact of d(Debt)/dt on GDP may me much higher. People repay loans and all the credit money is simply destroyed.
Looking at the NIPA accounts system we may easily be confused as:
1. “saving” includes an increase in bank deposits, bonds but also purchasing company equity – this flow of money is recycled and deposits do not change when one buys shares
2. buying a house even for myself is considered to be investment rather than consumption what is counter-intuitive for non-economists
3. not all the investment is financed by taking new loans – some is financed by saving (see 1)
4. there is an imputed income paid to oneself by a home owner
http://www.clearonmoney.com/dw/doku.php?id=public:nipa_imputed_rent
All of these issues are discussed in detail in “Monetary Economics” W. Godley and M. Lavoie
http://www.amazon.com/Monetary-Economics-Integrated-Approach-Production/dp/0230500552
especially in Chapter 2.
Everything is explained there in detail and I do not want to repeat the analysis.
AD(t) = GDP(t) by definition and this is not the formula one can play with.
What we need to analyse is what constitutes the outflows of money at the nodes of the model and what constitutes the inflows of money. One of the components of the inflows to the household sector is d(Debt)/dt
There is even a section latter in the book (which I haven’t thoroughly analysed yet) where a scenario with “an increase in the gross new loans to personal income ratio” was simulated by W.G. and M.L. what led to very familiar looking curves. Yes there was a spike in GDP when new lending was increased but then there was a hangover.
(section 11.8.2 Figure 11.8B – see below)