The RBA has put rates up now on the belief that the financial crisis is behind us, and it has to return to its established role of controlling inflation.
That this decision was likely was flagged by the speech by Anthony Richards last week, which implied that the RBA, having ignored the house price bubble created by private credit growth in the preceding two decades, was worried about the renewal of the bubble initiated by the Government’s First Home Vendors Boost (I refuse to call it by its official name, since the money clearly went to the vendors, while the buyers copped only higher prices).
One of the keynote speakers at the 38th Australian Conference of Economists in Adelaide last week was Edward Lazear, who was Chairman of the US President’s Council of Economic Advisers from 2006-09.
In other words, he was in one of the world’s economic hotseats right when the “Great Moderation” (see also Gerard Baker’s UK Times article in early 2007) gave way to the Global Financial Crisis.
2010 is shaping up as the year that the bulls and bears of the world’s last unpopped asset market bubble—Australia’s property market—will collide head on. The gap between those predicting yet another bubble, and those predicting its ultimate demise, has closed.
The bulls as always, emphasise the “fundamentals”—population-fuelled demand outstripping laggardly supply—and that “Australia is different”.
The bears, as always, emphasise leverage— that the true fundamental behind asset prices is people’s willingness to go into debt to buy them, in the belief that they can flog them for a leveraged profit to the next Greater Fool. And on the “We’re different because we have kangaroos” theory, the bears contend that Aussies are just as susceptible to a well disguised Ponzi Scheme as anybody else on the planet.
If the economy does in fact recover from the Global Financial Crisis—without private debt levels once again rising relative to GDP—then my approach to economics will be proven wrong.
But this won’t prove conventional neoclassical economic theory right, because, for very different reasons to those that I put forward, modern neoclassical economics argues that the government policy to improve the economy is ineffective. The success of a government rescue would thus contradict neoclassical economics just as much—or maybe even more—than it would contradict my analysis.
A new blog member asked “Why do you use Mathcad?” in response to my most recent post about using some of the funds donated by visitors to the blog to help fund my research.
It’s a very good technical question, and one that deserves more than just a reply to the comment. So I’ll try to explain why here.
I build dynamic models of the economy using systems of ordinary differential equations. There are many programs that support this these days, from public domain programs like Scilab to commercial giants like Mathematica and Mathcad. I’ve tried most of them, and I’ve stuck with Mathcad for two reasons:
Thank you to the roughly 170 individuals who have made donations to date via the “Donate” widget on the right hand side of the blog.
Donations have totalled A$7,730, of which about $800 has been for Michael Hudson’s talk in Sydney (on Friday October 23rd at Customs House, Sydney at 6pm).
I have just made the first purchase using those funds, of a Dell Studio 17 inch laptop that I will use while researching with my systems engineering colleague Trond Andresen in Europe later this year.
There will be a dinner with Michael Hudson and his wife after the talk at Customs House on Friday October 23rd at a restaurant called Young Alfred, which is also in Customs House. The dinner will start at 8pm.
If you’d like to be part of the booking, please let me know via an email to me at debunking (at) gmail dot com (spelt out this way to minimise the addition to the already ridiculous amount of spam I receive!).
I’m happy to admit that I underestimated how strongly governments would respond to this financial crisis. Dramatic reductions in interest rates, huge fiscal stimuli and—in the USA and UK—expansion of government-created money, have all had a positive impact on the economy and asset markets (both shares and houses).
In his recent essay, Australian Prime Minister Kevin Rudd estimated that the rescues were the equivalent of roughly 18 percent of global GDP over a 3 year period, which is an unprecedented level of expenditure by governments.
Eichengreen and O’Rourke’s comparison of today to the Great Depression gives the most balanced assessment of how effective these policies have been at the global level.
Ross Gittins has written a very good overview of the failings of neoclassical economics in today’s Sydney Morning Herald:
Self-righting markets and other shibboleths
The article mentions the Dahlem Report, but doesn’t provide a link to it. For those who would like to read it, here it is.
I also wrote a post on the Dahlem Report shortly after it was written, and helped publicise it by placing it on my blog. Given that its tone was in some ways even more dismissive of conventional economics than I am, the title for this post was obvious:
I delayed publishing this on the blog because I thought it was worth submitting it to a newspaper for first publication on the anniversary of the Lehman Brothers collapse. That has occurred: a slightly edited version of this post (for reasons only of length, I hasten to add!) is in today’s Sydney Morning Herald (page 4 of the print version), WA Today, and probably several other newspapers in the Fairfax chain.
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.