Nowhere to Grow

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The lack of expansion in the Australian private credit markets is certainly having an adverse effect on commerce in the post 2008 financial crisis period. Annual private credit growth has averaged 3.5%, since it dropped down to single digit figures in October 2008.

Australian Private Credit Growth

Personal credit and business credit have been the deadweight’s, averaging an annual growth of -1% and -0.5% respectively. Housing credit has offset this with an average annual growth rate of 6.9% since October 2008. However, this has since slowed to an average annual rate of 5.3% for the first 3 months of this year and is continuing on this slowing trend. With significantly less credit coming into the market, the Government have had no choice but to compensate deficit spending.

Government Securities on Issue 

Though, as pointed out in last week’s blog post Inflation or Noflation, the ALP has recently embarked on a mission of austerity to please the big rating agencies.

Date: Government Securities on Issue (AU$ Millions)

Jan-2012

221646

Feb-2012

229706

Mar-2012

236036

Apr-2012

227126*

*As at the 27th April 2012

This leaves increasingly fewer options to maintain a path of economic growth here in Australia. The deterioration in credit growth has forced the RBA to revise their already revised economic outlooks. The following graphs review the RBA’s predications versus the actual outcomes for both growth and inflation.

RBA GDP Growth Predictions

RBA Inflation Predictions

While the accuracy of these outlooks is debatable, the precision of their recent 2012 prediction for inflation has positioned the Bank well in justifying a 50 basis point reduction of the target cash rate on Tuesday 1 May. However, given the two 25 basis point reductions for November and December last year had no noticeable effect on credit growth, particularly housing credit growth, I would suggest this measure will too provide little effectiveness. And then, of course, there is always the question of how much the big banks will actually pass on with their increasing funding costs. NAB have so far been the first, passing on 32bps.

With mining conditions deteriorating, house prices falling, Government austerity measures, a struggling retail sector and lack of effectiveness through monetary stimulus, unfortunately the Australian economy has nowhere to grow.

About David Lawson

-Worked as a real estate agent in 2009, have since left the industry because I now see that it is all fuelled by euphoric expections and debt -Started to become concerned about the global debt bubble after reading 'The Credit Crunch' by Graham Turner about a year ago and have since followed Steve Keens debtwatch blog -Competed a Bachelor of economics in 2004 specalising in iternational trade and finance -Lived in the USA for 5 years of my life, have witnessed first hand there frivolous spending patterns and watched our country become the same over the course of last 10 years
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133 Responses to Nowhere to Grow

  1. cliffy says:

    Folks,

    Nice post David.

    Firstly let me say that Australian soils are old and our arable land is largely dry, so we don’t get the production per hectare that wetter newer soil countries get.

    And apologies for the long list however I think it is worth considering this in the global context.

    Having said that Australia has had the hedge of the “Paddock” against the “Quarry” throughout it’s entire modern history. This is a Discretionary (Boom) v Non Discretionary (Bust) play at a macro real economy national level.

    Following is the list of Arable Land per Capita for countries up until China in the list here: http://data.worldbank.org/indicator/AG.LND.ARBL.HA.PC

    Australia | 2.15
    Kazakhstan | 1.45
    Canada | 1.34
    Niger | 1
    Russian Federation | 0.86
    Argentina | 0.77
    Ukraine | 0.71
    Lithuania | 0.61
    Paraguay | 0.6
    Belarus | 0.58
    Guyana | 0.56
    Uruguay | 0.56
    United States | 0.53
    Latvia | 0.52
    Moldova | 0.51
    Sudan | 0.47
    Hungary | 0.46
    Central African Republic | 0.45
    Serbia | 0.45
    Denmark | 0.44
    Estonia | 0.44
    Mali | 0.43
    Finland | 0.42
    Bulgaria | 0.41
    Romania | 0.41
    Chad | 0.39
    Bolivia | 0.38
    Burkina Faso | 0.37
    Togo | 0.37
    Turkmenistan | 0.37
    Namibia | 0.36
    Mongolia | 0.35
    Zimbabwe | 0.34
    Nicaragua | 0.33
    Poland | 0.33
    Brazil | 0.32
    Cuba | 0.32
    Senegal | 0.32
    Cameroon | 0.31
    Czech Republic | 0.3
    Turkey | 0.3
    Guinea | 0.29
    South Africa | 0.29
    Benin | 0.28
    Cambodia | 0.28
    France | 0.28
    Libya | 0.28
    Sweden | 0.28
    Montenegro | 0.27
    Spain | 0.27
    Bosnia and Herzegovina | 0.26
    Slovak Republic | 0.26
    Tunisia | 0.26
    Zambia | 0.26
    Malawi | 0.25
    Morocco | 0.25
    Gambia, The | 0.24
    Iran, Islamic Rep. | 0.24
    Ireland | 0.24
    Kyrgyz Republic | 0.24
    Afghanistan | 0.23
    Greece | 0.23
    Myanmar | 0.23
    Syrian Arab Republic | 0.23
    Tanzania | 0.23
    Angola | 0.22
    Gabon | 0.22
    Lao PDR | 0.22
    Mexico | 0.22
    Mozambique | 0.22
    Nigeria | 0.22
    Thailand | 0.22
    Algeria | 0.21
    Azerbaijan | 0.21
    Belize | 0.21
    Croatia | 0.2
    Guinea-Bissau | 0.2
    Macedonia, FYR | 0.2
    Uganda | 0.2
    Albania | 0.19
    Equatorial Guinea | 0.19
    Fiji | 0.19
    Sierra Leone | 0.19
    Ghana | 0.18
    Ethiopia | 0.17
    Norway | 0.17
    Swaziland | 0.17
    Austria | 0.16
    Lesotho | 0.16
    Panama | 0.16
    Armenia | 0.15
    Germany | 0.15
    Madagascar | 0.15
    Timor-Leste | 0.15
    Tonga | 0.15
    Uzbekistan | 0.15
    Cote d’Ivoire | 0.14
    Eritrea | 0.14
    Honduras | 0.14
    Iraq | 0.14
    Kenya | 0.14
    Samoa | 0.14
    Botswana | 0.13
    Congo, Rep. | 0.13
    India | 0.13
    Peru | 0.13
    Rwanda | 0.13
    Cape Verde | 0.12
    Luxembourg | 0.12
    Mauritania | 0.12
    Pakistan | 0.12
    Saudi Arabia | 0.12
    Bhutan | 0.11
    Burundi | 0.11
    Comoros | 0.11
    El Salvador | 0.11
    Guatemala | 0.11
    Haiti | 0.11
    Italy | 0.11
    Korea, Dem. Rep. | 0.11
    New Zealand | 0.11
    Portugal | 0.11
    Somalia | 0.11
    Suriname | 0.11
    Tajikistan | 0.11
    Congo, Dem. Rep. | 0.1
    Georgia | 0.1
    Indonesia | 0.1
    Liberia | 0.1
    United Kingdom | 0.1
    Venezuela, RB | 0.1
    Antigua and Barbuda | 0.09
    Dominica | 0.09
    Slovenia | 0.09
    Vanuatu | 0.09
    Belgium | 0.08
    China | 0.08

  2. Dannyb2b says:

    Lyonwiss

    Yes debt is less useful as money because it is only a claim on it. It has more risks attached like default and it is less wideley accepted as a medium. You could see it as a derivative of money I suppose.

  3. RickW says:

    Dave Lawson
    Are you in a position to update the blog on progress being made with Minsky? Is it possible to set out a timetable for the development of the various elements planned to extend the model.

    How is funding going?

    Also what would need to to done to test possible policy adjustments such as public QE?

    It is clear Australia is heading down the same path as UK and US with cuts in interest rates trying to keep the assets bubbles inflated until we reach ZIRP then the money will be injected into the banks to keep them afloat rather than reducing the private debt burden directly.

  4. mikeh1980 says:

    Lyonwiss:”Money/cash is a reliable store of value, if the government backing it is responsible. Otherwise, one has to fall back on gold and silver, which also measure trust in governments. The US government has been suppressing the USD gold price to mute the market’s signal of distrust.”

    Why should anyone expect gold or silver or any other metal for that matter to be a store of value? Was gold a store of value in the 90s?

    How exactly is the US government suppressing the gold price?

  5. Steve Hummel says:

    Just a few observations.

    Capitalism versus socialism is a false duality. Some actual dualities are RE-distribution versus Distribution, the Oligarchy versus the Polis and the will to power versus the will to freedom. And then there’s the real duality so far as the basic psychology of both individuals and systems are concerned, vice versus virtue.

    Read many of Randall Wray’s articles over on credit write downs. He’s a really bright and thorough researcher and its pleasant just to read what he says. The one thing however that IMO trips him (and nearly everyone else) up is his solutions are derivative, they just don’t penetrate deeply enough or don’t recognize what the true opposing ideas, forces, intentions or psychologies actually are.

    One last actual duality comes to mind and its correlatives:

    Status quo versus change, the latter of which breaks down into deep versus shallow and actual versus apparent.

  6. Lyonwiss says:

    @ Mikeh 1980 May 7, 2012 at 4:34 pm

    Gold, silver, platinum, rare earths, land etc. all have intrinsic value, due to their utility. That their relative values fluctuate over time does not alter the fact of their real values, which are inherently more stable because of constraints to production.

    The excuse for central banks to manipulate the gold price is to manage inflation expectation, which has been going on at least since the 90s. The following minutes of the Fed meeting in 1993 is just one of many examples:

    http://www.federalreserve.gov/monetarypolicy/files/FOMC19930518meeting.pdf

    Note the comment by Angell on p.32-33 on the importance of the gold price for the Fed. Note the comment by Greenspan on p.40:

    “I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market. There’s an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology.”

    Later on p.50, Greenspan said: “For psychology, I think we ought to get Governor Phillips to dump her bracelet on the gold market at some point!”

    A more recent (2005) conversation between Ron Paul and Greenspan on gold price manipulation here:

    http://goldprice.org/news/2005/06/alan-greenspan-on-gold-price.html

    There is a lot of evidence of gold price manipulation over time. These days, investment banks such as JP Morgan and Goldman Sachs are probably heavily involved, particularly through derivatives, which are unregulated and hide a lot of the transactions. Zero Hedge provides a recent example from trading data:

    http://www.zerohedge.com/news/paul-mylchreest-presents-various-visual-case-studies-gold-price-manipulation

  7. mikeh1980 says:

    Lyonwiss

    I asked you about US government suppressing the gold price. I couldn’t give a rats about Goldman or JPMorgan. I am only interested in what evidence exists of US government suppressing the gold price.

    As for gold being a store of value — to me gold, like any commodity, has uncertain value. If I buy some today it may well have lost value — as it has in the past — when I want to use it to purchase goods and services in the future. To put it another way why would anyone want to “fall back” on gold or silver?

  8. alainton says:

    The argument has usefully moved on to how banks evaluate their portfolio and adjust the liquidity of that portfolio.

    We are on to very tobinesque terrain – the ideas that so influenced Godley and current post-kenysian ideas about endogenous money (and if you arnt interested in that you wouldn’t be on this website).

    There is a very interesting discussion on this and the extent to which individual banks (as opposed to banks in aggregate) can expand money relating to Tobins ideas on the blogosphere at the moment between Daniel Neilson Inet Money View http://ineteconomics.org/blog/money-view and the very Hawtrian David Glasner at Uneasy money http://uneasymoney.com/2012/05/06/james-tobin-got-it-right/

    I had previously thought that Tobins ideas on endogenous money were something of a bridge between ‘old’ exogenous ideas about money and modern circuitist theories – as they had a residue of loanable funds theories. I was very influenced in this view by Rochon’s magisterial survey Credit, Money, and Production http://books.google.co.uk/books?vid=ISBN1858988950&redir_esc=y

    This blog exchange however has me thinking that Tobin was on to something, Glasner:-

    while banks are making new loans, the public is also repaying old loans, and whether the total quantity of deposits is increasing or decreasing depends on whether banks create new deposits as they make new loans faster than the public is paying back its loans to the banks. [this is a very Hawtryian point from his verbal model of today what Steve calls the credit accelerator] And how fast the banks are creating new deposits depends on the economic incentives for creating deposits reflected in the structure of yields on alternative assets and liabilities, and on the costs banks expect to incur in financing their creation of deposits. If banks expect that the public will hold additional deposits, it will be more profitable to create additional deposits than if the banks have to borrow reserves in order to meet an increased deficit in interbank clearings. The quantity of loans being made and the quantity of deposits being created are the result of the interaction of economic decisions being made by banks and the public reflected in the entire spectrum of yields on the full range of assets and liabilities purchased and sold by banks.

    Money (bank deposits) may have special features, but the decision-making process that determines the amount of money in existence at any moment of time is not essentially different from the process by which the amount of other financial instruments created by other financial other intermediaries is determined.

    The key point here being that endogenous credit creation by banks isnt a wilful individual decision about whether to create money ‘out of thin air’ but an act of investment in an asset (a loan) which has to compete against other potentially profit making activities in the economy. If the market in total is leaning towards leveraging or deleveraging and this sends rate of profit signals so the flow of capital will shape the investment decisions of banks, even though this may be harming the potential profitability of other sectors. If deleveraging increases the profitability of banks then equity will be attracted to the banking sector from other parts of the economy and the enhanced equity should eventually lead to an increase in borrowing as it expands the borrowing power of banks. Of course like for every firm this analysis only holds true as far as the firm (here bank) staves off bankruptcy.

  9. Dannyb2b says:

    Alainton

    “The key point here being that endogenous credit creation by banks isnt a wilful individual decision about whether to create money ‘out of thin air’ but an act of investment in an asset (a loan) which has to compete against other potentially profit making activities in the economy.”

    The act of investment in an asset (new loan) is a wilful decision to create money theres no separation because banks create money when they lend.

    It doesnt matter what the market signals are really as they are up for interpretation(ask a bunch of bankers how they see the economy some will say we are on the verge of a bull market others on the verge of deflation). Banks drive business cycles by expanding the supply of commercial bank money when they create new loans. If banks feel positive they will expand lending and create a new upswing and vice versa. The economic system is dependant on the subjective expectations or intentions of profit oriented banks which adjust the money supply through their lending decisions. The banking system drives the economy.

  10. NeilW says:

    “The key point here being that endogenous credit creation by banks isnt a wilful individual decision about whether to create money ‘out of thin air’ but an act of investment in an asset (a loan) which has to compete against other potentially profit making activities in the economy”

    I do wonder whether the ‘thin air’ thing is pejorative and hinders correct analysis.

    Banks expand their balance sheets. Other businesses expand their balance sheets as well.

    Is there really that much difference between the analysis of a bank asset and its return and the analysis of any other intellectual property asset and its return?

    The creation process seems pretty similar to me – call something an asset and convince others it has value.

  11. alainton says:

    @Dannyb2b

    Way too subjectivist for my liking.

    Do a % of bankers all subjectively get up one morning and say hey were going to expand credit today and that explains the credit/business cycle?

    Questions – why are bankers expectation on profits net positive or negative?

    Why does capital net flow towards or away from financial intermediaries as opposed to the productive sector of the economy?

    If a bank has greater or lesser expectations on profits than other banks and this increases or decreases it profitability what market signals does that send to other banks?

    This is not to say that individual loan decisions arnt important, but such agency is set within the structure of the capitalist economy where capital is always seeking the best out-turn.

  12. Dannyb2b says:

    Alainton

    “why are bankers expectation on profits net positive or negative?”

    Banks historically have been beset by herd mentality. They see a market appreciate (dotcom, housing, etc..) and they begin to expand lending into that sector more and more creating bubbles and driving new unstable upswings.

    “If a bank has greater or lesser expectations on profits than other banks and this increases or decreases its profitability what market signals does that send to other banks?”

    Doesnt matter what the signal is much of the time. What matters is how it is interpreted. If the herd start seeing the future in a positive light for whatever reason they will expand new lending and start a new upswing.

    “Why does capital net flow towards or away from financial intermediaries as opposed to the productive sector of the economy?”

    Capital flows to financial intrnediaries due to interest, loan repayments to a large extent.

  13. NeilW says:

    “but such agency is set within the structure of the capitalist economy where capital is always seeking the best out-turn.”

    And what is the evidence for ‘best’? Why not ‘good enough’?

  14. Lyonwiss says:

    @ Mikeh1980 May 7, 2012 at 7:41 pm

    You said: “I asked you about US government suppressing the gold price. I couldn’t give a rats about Goldman or JPMorgan. I am only interested in what evidence exists of US government suppressing the gold price.”

    Governments’ transactions directly in gold are well-known and transparent. But the US government (and others) may also deal indirectly through brokers, such as JP Morgan and Goldman Sachs, because price manipulation (unlawful) to manage inflation expectations has to be done covertly. You obviously are not aware of the “revolving door” in the people connecting the government and the financial sector, helping operational confidentialty, in the name of maintaining market confidence (among other things). Some of the evidence are suggested in the links I provided.

    You have a very emotional reaction to gold. In some countries or in some stressed situations, gold may be the only currency accepted to settle transactions. A day may yet come when the USD may not be widely accepted, outside the US, to settle transactions. I have 5 to 10 percent of my wealth in gold for “insurance” against government corruption and incompetence. Clearly, there is no need for this otherwise, as I’m not a “gold bug” speculator.

  15. alainton says:

    @NeilW

    ‘And what is the evidence for ‘best’? Why not ‘good enough’?’

    Because CEOs that aim at that target get fired, as do soccer managers, and investors get wiped out in the long run as there investments no longer act as a store of value in real terms.

    Hilferding – who put it more simply than Marx
    ‘the individual capitalist can only survive if he strives continually not simply to keep pace with his competitors, but to outstrip them; and he can do this only if he succeeds in raising his profit above the average, thus achieving an extra profit…This result is assured by the competition of capitals for spheres of investment, by the constant influx of capital into those spheres with above average rates of profit, and by its withdrawal from those spheres where the rate of profit is below average. ‘

    @Danny2B

    ‘Banks historically have been beset by herd mentality’

    Of course but that is a systemic phenomenon not one explainable by strong methodological individualism/reductionism

    ‘Capital flows to financial intermediaries due to interest, loan repayments to a large extent.’

    The interest has to be competitive with the rate of profit in the productive economy, if it is much lower then it would be irrational for anyone to invest in finance capital. If the rate of profit in the productive economy is lower over any considerable period profits will fall due to lack of investment and then profits in finance capital will fall.

  16. Dannyb2b says:

    “Of course but that is a systemic phenomenon not one explainable by strong methodological individualism/reductionism”

    So you agree with me now? The systemic phenomenon is manifesting itself because of an imbalance. This imbalance is that some private profit oriented entities create money and some don’t. Too few entities (the ones creating the money) making decisions for an entire economy means poor allocation of resources because of a limited capacity to analyze and manage the environment effectively.

    A balanced system is one where all entities operate on a level field and a greater number of entities are involved in the lending and investment process. More minds at work equals better decisions.

  17. NeilW says:

    “Because CEOs that aim at that target get fired, as do soccer managers, and investors get wiped out in the long run as there investments no longer act as a store of value in real terms.”

    No they don’t.

    The vast majority of businesses are run on a good enough basis doing just enough to avoid boats being rocked.

  18. LCTesla says:

    Australian cities are well represented among the “world’s most expensive cities” according to this analysis:

    http://www.ritholtz.com/blog/wp-content/uploads/2012/05/most-expensive-cities.png

    http://www.ritholtz.com/blog/2012/05/global-real-estate-bubble/

  19. alainton says:

    @NeilW

    The vast majority of businesses are SMEs or other privately held firms without shareholders and only they can afford to survive at below average profit rates for any considerable length of time, and not if they are debtors as they will then need to pay a competitive interest rate (again Hilferding was good on how different rules on profit rates apply to different segments of the economy).

    Why should anyone rationally invest in a firm that makes significantly below average profit rates, unless the rate of profit is higher than the rate of inflation, as the value of the investment will erode over time, it would be better investing on bonds or keeping it in the bank.

  20. mikeh1980 says:

    @Lyonwiss

    This began when I found your claim that the US government was suppressing the gold price astounding and sought evidence from you. You’ve made some wild assertions but nothing close to being evidence. You’ve referenced a tin foil hat blog, claimed I am unaware about a revolving door between government and the financial sector, claimed I am emotional about gold and so on. None of this constitutes evidence that the US is suppressing the gold price. It reads as random hand waving intended to obscure a lack of any information to support your emotional beliefs.

    Take your information to all the institutions that are long gold so they can initiate a class action against the conspirators suppressing the gold price.

  21. Lyonwiss says:

    @ Mikeh1980 May 8, 2012 at 9:39 am

    Central banks are long gold. They are unlikely to initiate class action against themselves.

  22. Lyonwiss says:

    @ Mikeh1980 May 8, 2012 at 9:39 am

    Also, I find it amazing that you cannot take a hint and find things out for yourself. Who are you that I need to convince you or educate you? What have you brought to the conversation? Nothing, not even a “a tin foil hat blog”. I will stop here.

  23. mikeh1980 says:

    @Lyonwiss

    “Central banks are long gold. They are unlikely to initiate class action against themselves.”

    And what of others long gold? Gold ETFs and so on. Don’t you think that if any credible evidence existed of the gold price being suppressed that they would have an interest in that?

    “Also, I find it amazing that you cannot take a hint and find things out for yourself. Who are you that I need to convince you or educate you? What have you brought to the conversation? Nothing, not even a “a tin foil hat blog”. I will stop here.”

    I came across your astounding claim — it stood out in this conversation amidst a measured debate by others about banks and money — and asked you for evidence. All you do is respond with condescending remarks (but nothing that can support your claim). Now instead of providing evidence to support your assertion you ask me to find things out for myself. Do you expect anyone to take you seriously when you post stuff like this?

  24. Lyonwiss says:

    @ Mikeh1980 May 8, 2012 at 11:39 am

    You have added nothing factual to this conversation. Please terminate.

  25. mikeh1980 says:

    @Lyonwiss

    Your last comment (May 8, 2012 at 12:31 pm) is quite ironic. It was your absence of facts that led me to comment in the first place. i.e. I asked you what evidence, a.k.a. facts, you had to support your assertions about the US government suppressing the gold price.

    If this US government action was real rather than in your imagination I’m sure some evidence would have been forthcoming by now — and no doubt gold longs would be up in arms. I agree we should terminate — before the US government get wind of your exposé and send in the black helicopters.

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