Delever­ag­ing with a twist

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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.

Can Cap­i­tal­ism Save the Planet?

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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.

More on the Com­mon­wealth Bank

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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.

Over­seas Investors & the Com­mon­wealth Bank

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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.

GDP plus Change in Debt—and the US Flow of Funds

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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:

  1. Does my def­i­n­i­tion that “aggre­gate demand equals GDP plus the change in debt” involve dou­ble-count­ing?
  2. My fig­ures for the USA are dif­fi­cult to rec­on­cile with the pub­lished US Flow of Funds data.

Back to the Future?

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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.

Record­ing of Webi­nar on Aus­tralian Econ­omy

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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.

What Bernanke doesn’t under­stand about defla­tion

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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.

Webi­nar on the Aus­tralian Econ­omy

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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.

Giv­ing the Bird to the Stim­u­lus?

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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)