A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis
In his recent paper entitled A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis , Professor Mark Stein develops a theoretical framework around the notion of a manic culture, comprised of four aspects: denial; omnipotence; triumphalism; and over-activity.
“A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies,” he said. “These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies.”
All four of these of these manic qualities were apparent in the Australian treasurer last week “The doomsayers have been proved to be completely and absolutely wrong,” Mr Swan said . Just as Australia faces a significant slowing of the Australian property bubble, together with significant signs of trouble within all our trading partners and a continuing European debt crisis , the treasurer stands resplendent in triumphant denial .
the rba cash rate is 3.5%.
and every 1% adjustment downwards adds , what 20 billion in additional spending power.
so there is a bit more ammo left
so what the government takes away the rba provides for the time being.
plus we still have cumilative deficits from 2009 onwards of between 4 to 6 % of gdp to work their way throught the system, regardless of the surplus thats been forecast.
i think we have done a pretty good job of staying out of trouble, as a consequence of those cumilative deficits.
the negative wealth effects of stagnant or declining property and share markets are making people grumpy, but they all have a job and rising incomes, care of the cumilative deficits and our unique industrial relations system.
and thats the crux, the government can have as much unemployment as its prepared to put up with, and every banker knows that the unemployment rate is the most significant predictor of the default rate.
i think wayne swan should rightly be happy about the power of vertical money to circumvent a disaster in the horizontal money part of the economy.
now if only the yanks and the europeans understood this , instead of them being blinded by their idealogical obsessions
Earlier in the year (Feb) Steve commented “give it six months to a year and we’ll know whether ChIndia is going to permanently insulate us from the rest of the world’s crisis”
When can we expect and update on this statement, Steve? Should we give it till the end of the year?
I’m very interested as to whether Australia has been “permanently insulated” ?
I think this view pegs the reality. Look at popular movies. In the U.S., we have superheroes. The popular imagination loves heroes, from James Bond through Jason Bourne, who are simply superior to all comers. A downturn (economic) brings out our worst qualities into the light, as nationalists suddenly answer the call.
Mahaish, it’s widely thought over here that Austrailia is profoundly dependent on the booming manufacturing of china via demand for materials, which has depended on the unsustainable peg to the U.S. dollar….. Only a matter of time, in other words.
As every piece of information you pick up from the media, I think that the dependance on China is overstated. Although there is no doubt that growth spurts are underpinned by iron and coal exports (to China), the impact of a slowdown in China may not be as direct as the bearish view assumes (and has assumed for the last several years…).
There are several reasons. AUD being thought of as a commodity currency provides a buffer for falling commodity prices. The nature of the products has a sticky long term contract driven demand, particularly energy products (i.e. once you build a power station you have to keep feeding it fuel). On top of that the nature of the current growth through capex, increases future capacity. Even with a bearish commodity price outlook, the extra capacity and future planned capex almost guarantees GDP growth for a few years to come. On top of that Australian households have increased their savings ratio, the government is moving into surplus and Australia has a good pass through mechanism of interest cuts directly to the household, with the ability of Australian banks still able to pass on most of the cuts.
If you want to make economic commentary on the current commodity I would suggest studying past commodity booms to understand for how long and in what way the investment in extra capacity filters through the economy and economic growth.
It is inevitable that the economy will slow down sooner or later and the bears will have their day again, conveniently forgetting all the years that the bear view has produced some outragously innacurate predictions. At the moment the bear view with regards to Australia has a strong “we’ll see who will have the last laugh” flavour, and with the natural cycle of the economy I’m sure one day the sun will shine for the bear, but I wouldn’t bet on it happening any time soon.
Australia managed a 2.8% growth in GDP to Q1 2012 from same period in 2011.
In money terms the growth was AUD37.4bn. In the same period the current account went backwards AUD37.2bn.
So Australia has modest growth but it is entirely dependent on increasing external debt. That would be tolerable if the debt was denominated in AUD but mostly it is not. 16% of the private bank liabilities, equivalent to 30% of GDP, is denominated in foreign currency.
Australia is in a delicate position being highly dependent on black and red commodity demand and prices holding up near their record levels.
It is apparent that the RBA is content to see steady deleveraging with private banks growing deposits rather than being totally reliant on increasing offshore funding. It seems there are more economists taking private debt into account but none of the current bunch of politicians in opposition have raised the issue of the deteriorating current account; growth coming entirely through debt increasing.
“think wayne swan should rightly be happy about the power of vertical money to circumvent a disaster in the horizontal money part of the economy.”
I assume you mean Govt deficit spending
There really is no such thing as vertical money. Rather there are just levels of horizontal money
But anyway Govt deficit spending DOES NOT result in more level 1 money (central bank reserves which is called vertical money) or level two money (bank credit). Because bonds are issued to drain both
And here’s an example of someone (Warren Mosler) tying himself in knots trying to explain what vertical money is
http://community.tradeking.com/forum/categories/general/topics/5030-the-concepts-of-horizontal-vrs-vertical-money-creation-the-solvency-of-the-us-govt/forum_posts
In my view its an inappropriate term to use to describe our money and banking system. That will confuse rather than help people understand how it all fits together
“But anyway Govt deficit spending DOES NOT result in more level 1 money (central bank reserves which is called vertical money) or level two money (bank credit). Because bonds are issued to drain both”
Correction
Except when bonds are purchased by banks. In which case reserves are drained but not bank credit.
“16% of the private bank liabilities, equivalent to 30% of GDP, is denominated in foreign currency.”
So that the banks can get lower interest rates? It is a risk though but is 16% too big a risk for a bank to take. Esp if the 16% is held in a mix of currencies.
And this must also mean that foreigners hold Aust $s. As the say US$s can only be obtained if a US holder wants Aussie dollars
But anyway Govt deficit spending DOES NOT result in more level 1 money (central bank reserves which is called vertical money) or level two money (bank credit). Because bonds are issued to drain both”
if the government deficit ends up in non bank balance sheets, it changes the net worth position of the non bank sector of the economy rj,
the increase in net worth can be held as a deposit , or a securitised asset.
the consolidated treasury/central bank creates net assetts in the horizontal sector of the economy.
great article by mosler. dont know what the problem is rj,
need to get away from talking about money, instead of financial assetts.
“When the government “spends,” the Treasury disburses the funds by crediting bank accounts.”
The first sentence is confusing for a start
The commercial banks credit banks accounts not the treasury.
“The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system.”
And what does this mean? The deposit is the banks liability
“Reserve accounting uses the standard accounting identities, but the meaning of “liability” is not “debt.””
This article really is rubbish by Warren. He should leave an explanation like this to someone else.
@RickW
I, like you, am not nearly so sanguine as Swan. But one must remember that it is the job of folks like Swan to be cheerleaders for the economy, and realistic portrayals are not in their vocabulary.
I see Australia to be in a similar situation as the United States. It has an 8-cylinder economy that is firing on one cylinder. In Australia, that one cylinder is mining industry. In the US it is the war industry.
Australia, like the United States, has inordinate net foreign debt. But this begs a couple of questions:
1) Is the debt denominated in the sovereign currency? (You’ve already answered that question.)
2) Was the debt incurred to invest in productive assets, or was the debt incurred to invest in non-productive assets?
In the case of Australia, it is argued that the net foreign debt was incurred “because of government stimulus spending and private borrowing to fund the mining and infrastructure boom.”
http://www.news.com.au/business/federal-budget/national-debt-to-reach-1-trillion/story-fn5dkrsb-1225861074909#ixzz1xIbY3bCB
In the the case of the United States, it is argued that the net foreign debt was incurred to finance America’s “guns AND butter” foreign policy:
*quote*The U.S. has been perfectly happy to accede to the current state of affairs in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly importnat consideration as it has gradually miitarized its energy policy.*end quote*
http://media.pimco-global.com/pdfs/pdf/WP007-090607%20Renegade%20Economics%20FINAL.pdf
The mining investment appears to have rendered higher dividends than the military investment. Australia has gotten an increase of about 40 cents in GDP per dollar of increased debt (and this is all debt, not just foreign debt), whereas the United States has only gotten an increase of GDP of about 17 cents. (As all empires since the Renaissance have discovered, empire always reaches a point where it is no longer profitable.)
http://www.businessinsider.com/david-stockman-youd-be-a-fool-to-hold-anything-but-cash-now-2012-3
http://www.macrobusiness.com.au/2012/05/the-rise-of-unproductive-debt/
Historically, a dollar of increased debt has yielded about 65 cents in increased GDP. This had been the “golden constant” for a hundred years prior to the 1990s in both the United States and in Australia.
So even though Australia’s mining investment has been far more productive than the United States’ military investment, is it productive enough?
And what will happen to Australia’s mining investment should world commodity prices crater?
Another thing: when the debt crisis finally descended upon the United States, we did not see the capital flight and rapid outflows of hot money typical of Third World style debt-trap dynamics. Just the opposite occurred, and there was a massive flight to U.S. dollars. Why were U.S. dollars perceived to be a safe haven despite the fact that the U.S. economy is such a basket case?
!Another thing: when the debt crisis finally descended upon the United States, we did not see the capital flight and rapid outflows of hot money typical of Third World style debt-trap dynamics. Just the opposite occurred, and there was a massive flight to U.S. dollars. Why were U.S. dollars perceived to be a safe haven despite the fact that the U.S. economy is such a basket case?
Because the US is not a basket case. Far from it
And there is no real (just make pretend) GOVT debt crisis. US Govt debt is miles too low (this is the main US problem). Its only because the clueless equate US Govt debt to household debt that some are concerned about US Govt debt levels.
The big investors understand this. US Govt debt is almost risk free. The US Govt will never default for economic reasons. The only risk of default is for political reasons
US GOVT DEBT IS A LIABILITY created by the US treasury without limit as required. And it is always supported by a NON GOVT INTEREST BEARING ASSET held by another party.
? TruthIsThereIsNoTruth said:
Maybe so, but still: “Australia Has Highest Household Debt to Disposable Income Ratio in World.” http://www.dailyreckoning.com.au/australia-has-highest-household-debt-to-disposable-income-ratio-in-world/2010/02/03/ In a speech just last week, RBA governorn Glenn Stephens stated this ratio still stands around 150%.
The Household Debt to Disposable Personal Income Ratio in the US of 128% is a tad lower than the 150% the Gov cites for Australia.
http://www.aiminvestments.com/pdf/ConRec.pdf
In the United States it has fallen from a peak of 133%, mostly due to bankruptcies and forecolosures.
? TruthIsThereIsNoTruth said:
That’s a good idea, and I would suggest as a starting point studying the performance of the economies of places like Texas, New Mexico, and Lousiana, which all had economies heavily dependent on oil production, during the oil boom which began in 1973 and in the wake of the precipitous declines in oil prices which began in 1982.
It wasn’t a pretty sight, and I think you will find precious little in actual experience to support your theories.
RJ said:
Well I suppose that if enough people actually believed that, that could have something to do with it.
But I would think that currency manipulation by governments in emerging Asia, the Middle East, Japan and the Nordics has a lot more explanatory power.
When Dialynas and Auerback wrote the report I cited above, for instance, China had accumulated (as of June 30, 2007) $1.33 trillion in foreign currency reserves. Four years later, in July 2011, China’s forex reserves stood at $3.2 trillion. http://the-diplomat.com/2011/07/31/china%E2%80%99s-2-trillion-hole/
In my way of thinking, both China and the United States are basket cases.
“In my way of thinking, both China and the United States are basket cases.”
Indeed. We’re not just paying ourselves this debt. Its another nation. And likely the vast majority of the rest of that debt is owed to the TBTF Banks and the TBTF CEO’s and their corporate stockholders.
Debt is problematic as above, and RE-distributive taxation in order to pay it is elitist advantaged and the burden on already inherently scarce purchasing power for the individual is oppressive. Why give away your power? DISTRIBUTE IT TO EVERYONE INSTEAD!……and then let the ambitious/unambitious work for any (hopefully) just reward.
Wisdom and fatherly advice similarly come from the heart which is a deeper place than the tables of the money changers.
“Neither a borrower nor a lender be.
For a loan often loses both the loan and the friend,
And borrowing dulls the edge of the economy.
This above all, to your own self be true,
And it must follow, as the night the day,
You cannot then be false to any man.
Goodbye. My blessing instill these things in you!” (Hamlet)
@Glenn — “Why were U.S. dollars perceived to be a safe haven despite the fact that the U.S. economy is such a basket case?”
Evidently, a lot of money thinks the U.S. is pretty much the opposite of a “basket case”.
This could be, for instance, due to the fact the U.S., unlike china, Germany, Aus, is *not* especially dependent on exports, but instead has the world’s greatest amount of demand, the one thing in shortest supply…. Of course, U.S. businesses have this huge advantage right in their own yard….
need to understand the difference between transfer payments from the treasury and a bank loan RJ.
dont see what the problem is with what mosler is saying.
“Why were U.S. dollars …”
When people sell US stocks they are buying USD.
Later the monetary base was doubled, but the fed is paying interest so the real money supply did not change.
(I think.. I am no expert).
In a complementary study nueroscientist/former trader reckons ponzi trading is driven by excess testosterone
http://www.newscientist.com/blogs/culturelab/2012/06/hormone-hangovers-spell-financial-doom.html?DCMP=OTC-rss&nsref=online-news