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
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:
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.
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:
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.
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:
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Thanks again to Cameron Media Technology for providing this service.
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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.).
Â 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.
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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) .
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.
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.