Updated Credit Accelerators

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As I’ve noted in ear­lier posts, the con­cept of the Credit Accel­er­a­tor is still a work in progress. A major objec­tive is to be able to use monthly data and remove the noise that gen­er­ates, but for now I’m work­ing with the change in the change in debt over a year, divided by GDP at the mid­point of that year. In order to be able to still use the lat­est monthly debt data from Aus­tralia (and quar­terly from the USA), I’ve revised the for­mula to “freeze” the last avail­able value of GDP six months in advance of the last data for debt. This gives an accu­rate mea­sure of the change in the change in debt, but divides it by a GDP fig­ure that will later need revision.

The result for Aus­tralia is shown in Fig­ure 1 below, using debt data released by the RBA on Fri­day: the Mort­gage Accel­er­a­tor is now neg­a­tive (though not as neg­a­tive as it has pre­vi­ously been). The cor­re­la­tion coef­fi­cient is also higher than I reported in the pre­vi­ous post—0.53 rather than 0.42 (the pre­vi­ous fig­ure was derived from data includ­ing a dis­con­ti­nu­ity in the mort­gage data caused by a reclas­si­fi­ca­tion of house­hold debt data by the RBA in the early 90s)

Fig­ure 1: The Mort­gage Debt Accel­er­a­tor and change in real house prices

On the other hand, the US Mort­gage Accel­er­a­tor is now pos­i­tive, though only barely—see Fig­ure 2. It will be inter­est­ing to see whether this is main­tained in the next release of the Flow of Funds, due out on Sep­tem­ber 16th, and if so whether there is any slow­down in the rate of decline of US house prices (though the recent extreme volatil­ity on share mar­kets may be enough in itself to renew the trend to falling debt, thus turn­ing the Accel­er­a­tor neg­a­tive once more).

Fig­ure 2: Debt accel­er­a­tion deter­mines change in US house prices

Finally, one thing I omit­ted from yesterday’s blog was evi­dence of the role of the First Home Ven­dors’ Boost in caus­ing and reignit­ing the hous­ing bub­ble. I can pro­vide sta­tis­ti­cal evi­dence as well, but the visual evi­dence in Fig­ure 3 is stark enough.

Fig­ure 3: First Home Ven­dors Scheme starts, reignites & res­cues the hous­ing bub­ble

About Steve Keen

I am a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
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58 Responses to Updated Credit Accelerators

  1. Lyonwiss says:

    Alain­ton August 31, 2011 at 8:32 am

    Hawtrey pro­vides some nice descrip­tions of some of the under­ly­ing eco­nomic processes. If finan­cial and eco­nomic insta­bil­i­ties orginate from mon­e­tary processes, then the gov­ern­ment can­not pos­si­bly help in the short-term and can only pos­si­bly help in the long-term through struc­tural changes. Macro­eco­nom­ics is quite mis­lead­ing and use­less, because it does not help in under­stand­ing under­ly­ing eco­nomic processes.

    For exam­ple, if large quan­ti­ties of money are injected into the finan­cial sys­tem and they have not pro­duced the desired effects, then they could well be doing unde­sir­able dan­mage, like tak­ing the wrong med­i­cine. Unfor­tu­nately, nei­ther Hawtrey nor Min­sky, could pro­vide direct answers bacause cri­sis repeats but always with a twist (in dif­fer­ent under­ly­ing proesses). No one has so far acknowl­edged the ele­phant in the room, which needs to be shown to be irrel­e­vant, rather than ignored.

  2. alainton says:

    Lyon­wiss

    Get your point how­ever Hawtry lived long enough (till 95) on this point and in his life­time, being a clever chap, his views were never rigid.

    Cer­tainly in the 1920s he held that famous ‘Trea­sury View’ as the no 2 eco­nomic advi­sor, but of course his friend­ship with Keynes and exchange of ideas with him led to grad­u­ally see that this view has flaws, indeed some eco­nomic his­to­ri­ans put some of the key ideas in devel­op­ing from the ‘trea­tise’ to the ‘gen­eral the­ory’ down to Hawtry’s insights.

    I would agree though that much ‘Key­ne­sian’ work post-war has for­got­ten the ori­gins of the creed in ideas about money, credit, entre­pre­neur­ship and investment.

    Both Hawtry and Keynes — being supreme pra­grama­tists, im sure would have seen today and dis­patched the ele­phant, rather than attempt­ing pure con­ven­tional mon­e­tary or fis­cal solutions.

  3. koonyeow says:

    Title: Thank You, Alainton

    Thanks for the link to Hawtrey’s book.

    Sigh.… So much to read and so lit­tle time.

  4. allis2 says:

    Alain­ton,
    Thanks for the ref­er­ence to Hawtrey. I just read the first few pages. Makes me think of Steve Keen’s good advice to for­get the text­books and read eco­nom­ics in the orig­i­nal authors. Did you ever read Daugh­ter of Time? After much work prov­ing to his own sat­is­fac­tion a com­monly denied his­tor­i­cal truth, a researcher real­ized that many oth­ers had also fig­ured it out.

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