DebtWatch No 26 September 2008: Losing control of the margin?

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Late last year on SBS News, when Stan Grant asked me which way the RBA would move rates in 2008, I replied “Up, and then down”, Stan quipped “Spo­ken like a true economist–an even hand­ed answer!”–to which I replied “More down than up”.

I expect­ed the intial rate ris­es because of the RBA’s focus on the rate of infla­tion, and a sub­se­quent fall, not because infla­tion would be head­ing down, but because the econ­o­my would be–and the RBA rate would be forced to fol­low it

Debtwatch No. 25: How much worse can “It” get?

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Last month closed with some far from com­fort­ing news about the state of the US hous­ing mar­ket (sales and prices still falling), US finan­cial insti­tu­tions (Fan­nie Mae and Fred­die Mac in need of res­cue), Aus­tralian banks (NAB’s 90% write-down of its US CDO port­fo­lio). Then ABS fig­ures showed that retail sales had fall­en “unex­pect­ed­ly” by one per­cent in June. The recent ral­ly in stock mar­kets came to a sud­den end, and after a brief peri­od of renewed con­fi­dence, the ques­tion “how much worse can “It” get?” is once again doing the rounds.

My answer is: a lot worse. The empir­i­cal grounds for this assess­ment are:

Debt is the Financial system’s Carbon Dioxide

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Steve Keen’s DebtWatch No 23 June 2008

RBA Assis­tant Gov­er­nor Guy Debelle and I spoke at a con­fer­ence on Sub­primes in Ade­laide last month. One aspect of my analy­sis that Guy queried was my empha­sis upon the Debt to GDP ratio. He not­ed that this appeared sus­pect, because it was com­par­ing a stock (the out­stand­ing lev­el of debt) to a flow (annu­al GDP).

It’s a valid point to make. The engi­neer-turned-econ­o­mist Mick­al Kalec­ki once caus­ti­cal­ly observed that “eco­nom­ics is the sci­ence of con­fus­ing stocks with flows”, and I’m a stick­ler myself for not mak­ing that mis­take. So mak­ing a song and dance about a stock to flow com­par­i­son like debt to GDP has to be jus­ti­fied by a sound argu­ment.

Defer the RBA “Enhanced Independence” Act

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Steve Keen’s DebtWatch No 22 May 2008

The Reserve Bank Amend­ment (Enhanced Inde­pen­dence) Bill 2008, which was tabled in Par­lia­ment in March, aims to give the RBA Gov­er­nor and Deputy Gov­er­nor “the same lev­el of statu­to­ry inde­pen­dence as the Com­mis­sion­er of Tax­a­tion and the Aus­tralian Sta­tis­ti­cian” (Wayne Swann, Hansard, Thurs­day, 20 March 2008, p. 2381).

Under the cur­rent Reserve Bank Act, the Gov­er­nor and Deputy are appoint­ed by the Trea­sur­er, and the Trea­sur­er must remove them from their posi­tions if either of them:

Time to read some Minsky

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The cur­rent tur­moil on the Stock Market—and espe­cial­ly the sud­den col­lapse of many once high-flyers—has tak­en a lot of peo­ple by sur­prise.
One per­son who, were he alive today, would­n’t be the least bit sur­prised, is Hyman Min­sky, who pre­dict­ed that events like this would be a reg­u­lar fea­ture of a dereg­u­lat­ed finan­cial sys­tem.
He devel­oped what he called “The Finan­cial Insta­bil­i­ty Hypoth­e­sis”, and any­one who wants to under­stand today’s events needs to know about it.
The fol­low­ing is an extract from an arti­cle by Min­sky in Chal­lenge in 1977—well before even the 1987 Stock Mar­ket Crash—that pro­vides a nut­shell-sized pre­cis of his the­o­ry.

Debtwatch Podcast Now Up and Running

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The Debt­watch Pod­cast is now oper­a­tional. To hear the first inter­view, down­load it, and/or sub­scribe to the month­ly feed via Itunes or sim­i­lar soft­ware, please click on the link below:

Debt­Watch Pod­cast

To sub­scribe direct­ly, sim­ply copy and paste the link below into your pod­cast soft­ware:

 http://www.debtdeflation.com/podcast/debtwatch.xml

Thanks again to Cameron Media Tech­nol­o­gy for pro­vid­ing this ser­vice.

Debtwatch Goes Podcast

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By the kind aus­pices of Stu­art Cameron of Cameron Media Tech­nol­o­gy Pty Ltd, Debt­watch is now going “pod”. Each mon­th’s report will be accom­pa­nied by an inter­view, which will be avail­able for down­load and sub­scrip­tion via Itunes (etc.).

 The first pod­cast, which dis­cuss­es the “Expe­ri­ence can be mis­lead­ing” elec­tion spe­cial report, can be accessed here. Short­ly we’ll also have the XML link to enable sub­scrip­tion to the pod­cast via Itunes and the like.

Thanks again to Stu­art for pro­vid­ing his pro­fes­sion­al skills to make this pod­cast pos­si­ble.

Experience can be misleading

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A major issue in this elec­tion cam­paign has been expe­ri­ence. Both par­ties accept that expe­ri­ence as an eco­nom­ic man­ag­er mat­ters, and Howard and Costel­lo regard it as their one trump card.But expe­ri­ence can be mis­lead­ing if it teach­es a rote set of behav­iours, and then cir­cum­stances sud­den­ly change. The coloni­sa­tion of Aus­tralia almost failed because farm­ers used their expe­ri­ence in Eng­land and Ire­land to guide their farm­ing prac­tices in Syd­ney. The colony only sur­vived because ulti­mate­ly it adapt­ed its farm­ing prac­tices to this new land (and because it received some help from Indone­sia) .

Both Are a Plague on Our Houses

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Today’s blog was pub­lished as a fea­ture “A lose-lose elec­tion for home buy­ers” by The Age Busi­ness. Click here to down­load this post as a PDF file (with charts).

Both Lib­er­al and Labor hous­ing poli­cies will make Aus­trali­a’s debt and hous­ing afford­abil­i­ty crises worse. The only dif­fer­ence between the two is how much dam­age they will do.Both par­ties have promised tax-advan­taged sav­ings sys­tems that will enable First Home Buy­ers to accu­mu­late larg­er deposits. This will undoubt­ed­ly help them com­pete with oth­er buy­ers in the hous­ing mar­ket, but a lack of com­pe­ti­tion amongst buy­ers isn’t the prob­lem.

Deflated changes in Wages and Debt: 7.30 Report Data

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Tables like the ones below take my breath away when I see them for the first time–because the sto­ry they tell is worse than any I would have dared make up. As I not­ed in the inter­view with Ker­ry O’Brien on the 7.30 Report, real wages have increased since 1990, and since Aus­trali­a’s last elec­tion in late 2004. How­ev­er, mort­gage debt has increased by far more.