The latest Flow of Funds release by the US Federal Reserve shows that the private sector is continuing to delever. However there are nuances in this process that to some extent explain why a recovery appeared feasible for a while.
The aggregate data is unambiguous: the US economy is delevering in a way that it hasn’t done since the Great Depression, from debt levels that are the highest in its history. The aggregate private debt to GDP ratio is now 267%, versus the peak level of 298% achieved back in February 2009–an absolute fall of 31 points and a percentage fall of 10.3% from the peak.
I took part in this debate hosted by Intelligence Squared Australia (an initiative of the St James Ethics Centre) last month. I was on the opposition side, along with Paul Gilding and Kate Jennings; the government position was put by Lucy Turnbull, Ross Gittins and Geoffrey Cousins. Details on all the speakers are available here, as is a video of the entire debate from beginning to end. In this post I’m reproducing this video in bite-sized chunks–9 minutes for each of the speakers (plus a 2 minute summing-up period), plus the audience discussion that included a couple of Debtwatch stalwarts.
My last post on the Commonwealth Bank’s “there’s no housing bubble in Australia” document focused simply on the use of two different data sources for the House Price to Income ratio; I left the arguments the bank made untouched.
Not so David Llewellyn-Smith, who ran a logician’s eye over the bank’s document and found “logic” of Monty Python “if she weighs more than a duck, she’s a witch” calible. David published this post in the Henry Thornton blog, and he has kindly consented to me reproducing it here.
On Thursday September 9th 2010, the Commonwealth Bank released a document on the Australian housing market, to support a tour that its senior executives are making to meet overseas investors. The press release for the document was as follows:
Australian Residential Housing
Sydney, 9 September 2010: Senior executives from the Commonwealth Bank of Australia (“the Group”) will soon be travelling overseas to meet with some of the Group’s offshore shareholders and other investors interested in Australia and the Australian banking sector.
My recent post “What Bernanke doesn’t understand about deflation” has hit a chord, with a number of sites around the world reproducing it—including John Mauldin’s Outside the Box column. But it has raised a couple of queries in people’s minds too:
- Does my definition that “aggregate demand equals GDP plus the change in debt” involve double-counting?
- My figures for the USA are difficult to reconcile with the published US Flow of Funds data.
Things are looking grim indeed for the US economy. Unemployment is out of control—especially if you consider the U-6 (16.7%, up 0.2% in the last month) and Shadowstats (22%, up 0.3%) measures, which are far more realistic than the effectively public relations U-3 number that passes for the “official” unemployment rate (9.6%, up 0.1%).
The US is in a Depression, and the sooner it acknowledges that—rather than continuing to pretend otherwise—the better. Government action has attenuated the rate of decline, but not reversed it: a huge fiscal and monetary stimulus has put the economy in limbo rather than restarting growth, and the Fed’s conventional monetary policy arsenal is all but depleted.
The webinar organised by Phil Dobbie for BTNet went over very well this morning, with about 80 attendees and a lively discussion mediated by Phil. Unfortunately a power outage meant that GoToMeeting’s recording of the presentation only commenced half way through, so to make amends Phil and I re-recorded it this afternoon. We lost some of the interactivity, but the information comes through very well in this format.
To see this re-recording, please click on either of the following links:
Phil Dobbie’s BTNet page “Aussie Rules”; or
A direct link to GoToMeeting.
Bernanke’s recent Jackson Hole speech didn’t contain one reference to the key force driving the American economy right now: private sector deleveraging (here’s the previous year’s speech for comparison’s sake). The reason the US economy is not recovering from this crisis is because all sectors of American society took on too much debt during the false boom of the last two decades, and they are now busily getting themselves out of debt any way they can.
Broadcaster and podcaster Phil Dobbie, who amongst other roles conducts the podcasts for BNET.com, is launching a Webinar seminar series with a talk by me on the Australian economy.
A webinar is an online version of a seminar at which the speaker can give a lecture (complete with slides, simulations, etc.) that up to 1,000 people can attend, and attendees can ask questions during the talk.
This first webinar is entitled “The Aussie Economy – Good Times or Stormy Waters? “, and it will take place at 11am (Australian Eastern Standard Time) on Friday September 3rd 2010.
Peter Martin reports in The Age today that Professor Ron Bird of UTS has weighed into the debate over the Rudd stimulus package. Professor Bird claimed that the stimulus was far less important than our strong economy prior to the crisis, and the secondary effect on our exports of stimulus packages undertaken elsewhere.
”The position we find ourselves in today is more due to our strong economic position going into the crisis and the massive stimulus packages undertaken by our trading partners,” Professor Bird says. ”The government can take little or no credit for either of these, a point it (and our learned academics) conveniently forget.” (Peter Martin, “Reserve Bank backing for stimulus”, The Age August 18 2010)