America is a land of contention, and one of the most contentious topics here (I’m in Seattle as I write) is the impact of the Federal Reserve’s policy of “Quantitative Easing” – otherwise known as ‘QE’. The Federal Reserve has committed to spending $85 billion every month buying a wide range of bonds from banks, until such time as the US unemployment rate falls below 6.5 per cent.
One of the many schisms in economics is between economists – new and old – who believe that prices are set by supply and demand, and economists – also new and old – who believe they are set by a mark-up on the cost of production.
The Seattle Economics Council has invited me to speak on the topic of “The Great Financial Crisis and the Great Recession: How we got here and the way out”. The details are:
Venue: Seattle Town Hall
Date: May 23rd
If you’d like to attend, click on this link.
The ABS publishes its house price index data today. My leading indicator for this is the Mortgage Accelerator, and it implies another increase in prices—and the first sign of rising real prices on an annual basis since early 2011. But there’s also a turnaround developing in mortgage acceleration which implies that the rate of increase will top out at a much lower level than the 2008 and 2010 booms.
I interrupt my series on the instability of capitalism for a special report on the serious problem of Australia’s budget deficit. As everyone knows, the world will end tomorrow unless Australia’s government plugs its $12 billion ‘budget black hole’.
As I noted in my previous post, neoclassical economics made it an item of faith that capitalism was inherently stable, and dismissed arguments to the contrary as no more than left-wing propaganda. My favourite statement of this perspective came from the pen of Nobel Prize winner Ed Prescott, who was one of the key players in introducing the concept of “rational expectations” into economics. Not only was capitalism inherently stable, he claimed in 1999, but it was so stable that we can reliably expect the economy to double the standard of living every 40 years. Marx and his ilk were simply wrong:
Sydney Morning Herald commentator Gareth Hutchens commented that the Rogoff and Reinhart affair shows how slow economists are to realise that their data may be dodgy, but to my mind that is insignificant compared to how slow they are to realise that their theories are dodgier still.
The bulls are roaring, house prices are rising, and all’s well with the world.
Or maybe not. Certainly house prices have risen — and contrary to popular opinion, I expected price rises this year, since mortgage debt has been accelerating since the beginning of 2012 (see Figure 1). One of my many economic heresies is the argument that asset prices are driven by rising debt. Rising asset prices — in this case, houses — require accelerating debt (in this case, mortgage debt), and that’s indeed what we’ve had since the beginning of 2012.
Sorry for the late notice here (the total crash of my ISP prevented me from posting when I had hoped to—and thanks to Phil Stevens for his brilliant work in reviving the site from the wreckage), but if anyone in Sydney has free time today (Sunday 14 April) I recommend attending this event between 2:00 pm and 5:00 pm. It is a festschrift to Eric Aarons, a remarkable man whom I am proud to call a friend.
Last week’s column on margin debt and the US stock market confirmed that leverage plays a key role in driving movements in share markets – and vice versa. But it left one technical question unanswered for me: is the causal link between change in debt and change in asset prices, or between acceleration in debt and change in asset prices?