Posts
Prof. Akhtar Kalam, Sh. Taj Aldin Alhilali, Ms. M Keen, K Trad, His Excellency Hasan T Nazer, Ambassador of Saudi Arabia, His Grace Bishop Kevin Manning
Facilitator Mr. Noel Dubien (from the ABC), Associate Professor Steve Keen, Prof. Akhtar Kalam and K Trad.
Mr. David Mills, Rev. Iain Pearson, Julie Owens MP and Philip Ruddock MP.
F Kassar, Justice John Dowd, Dr. John Hewson, C Watson and Mr. Anthony Roberts MP
His Grace Bishop Kevin Manning, K Trad, R and H Trad and Ms. Julie Owens MPNotes from the keynote Address by Associate Professor Steve Keen:
Notes from the speech by Associate Professor Steve Keen:
Worst Crisis Since The Great Depression”?
Steve Keen
School of Economics & Finance
www.debtdeflation.com/blogs
http://www.debunkingeconomics.com/
Steve Keen
School of Economics & Finance
www.debtdeflation.com/blogs
http://www.debunkingeconomics.com/
OECD Economic Outlook June 2007
“the current economic situation is in many ways better than what we have experienced in years…
Our central forecast remains indeed quite benign:
a soft landing in the United States,
a strong and sustained recovery in Europe,
a solid trajectory in Japan
and buoyant activity in China and India.
In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (p. 9)
Chief Economist Jean-Philippe Cotis
Crisis began August 9 2007—just 2 months later!
BNP closes 3 funds with strong subprime exposure…
Macroeconomic Debate 2000-2007…
Crisis began August 9 2007—just 2 months later!
BNP closes 3 funds with strong subprime exposure…
Macroeconomic Debate 2000-2007…
“The Great Moderation”
Belief amongst (conventional) economists that slumps were—thanks to them—“a thing of the past”…
What went wrong?
Belief amongst (conventional) economists that slumps were—thanks to them—“a thing of the past”…
What went wrong?
2 vital questions:
1.How could the economy suddenly go so bad?
2.How could economists have got it so wrong?
1.How could the economy suddenly go so bad?
2.How could economists have got it so wrong?
The answers:
The bursting of a debt-financed speculative bubble
Conventional economics ignores debt and money
Debt bubbles independent of politics…
Debt and GDP grew at same rate 1945-1964
From mid-1964, debt grew 4.2% faster than GDP
Debt:GDP Ratio 25% in 1964
Peaked at 165% in 2008…
The bursting of a debt-financed speculative bubble
Conventional economics ignores debt and money
Debt bubbles independent of politics…
Debt and GDP grew at same rate 1945-1964
From mid-1964, debt grew 4.2% faster than GDP
Debt:GDP Ratio 25% in 1964
Peaked at 165% in 2008…
2 “superbubbles” under McMahon, Hawke…
Australia’s Debt Bubble (1965-2008)
Australia’s Debt Bubble (1965-2008)
It doesn’t matter who runs Treasury…
What went wrong?
OECD Economies have become debt-dependent
During boom, 20% of demand from increased debt
What went wrong?
What went wrong?
OECD Economies have become debt-dependent
During boom, 20% of demand from increased debt
What went wrong?
Not long…
The Great Deleveraging
Correlation between debt change & unemployment from trivial to 90%
Why economists didn’t see it coming…
The Great Deleveraging
Correlation between debt change & unemployment from trivial to 90%
Why economists didn’t see it coming…
“The model could be described as broadly new Keynesian in its dynamic structure but with an equilibrating long run.
Activity is demand determined in the short run but supply determined in the long run…
The model will eventually return to a supply determined equilibrium growth path in the absence of demand or other shocks.”
The model will eventually return to a supply determined equilibrium growth path in the absence of demand or other shocks.”
Australian Treasury “The Macroeconomics Of The TRYM Model Of The Australian Economy”, p. 6
“One thing which has not changed over the past five years is the philosophy underpinning the model. It remains small, highly aggregated, empirically based, and non-monetary in nature.”
RBA Research Discussion Paper 2005-11, p. 1
RBA Research Discussion Paper 2005-11, p. 1
Why economists didn’t see it coming…
Conventional “neoclassical” economics:
Ignores private debt completely
Ignores money except as a factor in inflation
Model of money has been empirically falsified
Presumes the economy always tends to equilibrium
Treats finance markets as inherently prescient
Financial deregulation it promoted helped cause crisis
US economist Hyman Minsky developed “Financial Instability Hypothesis” as explanation for crisis
Supported by Bill White (ex-Head, Monetary and Economic Department, Bank International Settlements)
Minsky’s hypothesis known by RBA & other Central Bank economists but ignored…
Minsky’s “Financial Instability Hypothesis”
Economy in historical time
Debt-induced recession in recent past
Firms and banks conservative re debt/equity, assets
Only conservative projects are funded
Recovery means most projects succeed
Firms and banks revise risk premiums
Accepted debt/equity ratio rises
Assets revalued upwards…
“Stability is destabilising”
Period of tranquility causes expectations to rise…
The Euphoric Economy
Self-fulfilling expectations
Decline in risk aversion causes increase in investment
Investment expansion causes economy to grow faster
Asset prices rise
speculation on assets profitable
Increased willingness to lend increases money supply
Money supply endogenous money, not under RBA control
Riskier investments enabled, asset speculation rises
The emergence of “Ponzi” (Bond, Skase…) financiers
Cash flow less than debt servicing costs
Profit by selling assets on rising market
Interest-rate insensitive demand for finance
The Assets Boom and Bust
Eventually:
Rising rates make conservative projects speculative
Non-Ponzi investors sell assets to service debts
Entry of new sellers floods asset markets
Rising trend of asset prices falters or reverses
Ponzi financiers go bankrupt:
Can no longer sell assets for a profit
Debt servicing on assets far exceeds cash flows
Asset prices collapse, increasing debt/equity ratios
Endogenous expansion of money supply reverses
Investment evaporates; economic growth slows
Economy enters a debt-induced recession
Back where we started...
Crisis and Aftermath
Modelling Minsky
Extension of Goodwin’s Growth Cycle to include debt
4 “stylised facts”
Wages share grows if wage rises exceed productivity
Employment rises if growth exceeds productivity + population increase
Bank lend money to finance investment & speculation
Speculation rises when growth rises
Dynamics
Borrow money to finance investment during a boom
Repay some of it during a slump
Debt/ Income ratio rises in series of booms/busts
Eventually one boom where debt accumulation passes “point of no return”…
A Minsky Model with Ponzi Finance
Honouring irresponsibly created debt will lock us into a permanent slump…
What could happen?
USA & Australia debt ratios highest in history:
What could happen?
Decline in spending inevitable given collapse of debt-financed spending
Aggregate demand sum of GDP plus change in debt
At peak, change in debt accounted for
23% of demand in USA, 20% in Australia
Change from debt-dependent to debt-free economy makes prolonged slump inevitable:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions.
The perspective I would bring is not one of recession.
Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy.” (Microsoft CEO Steve Ballmer)
The future
A Depression as private sector de-levers
Deleveraging will overwhelm government remedies
Government stimulus: +A$42 billion…
Australian Private debt A$2 trillion
5% reduction: -A$100 billion
Deleveraging swamps stimulus
Only medium term solution requires debt reduction
Cause inflation?
Neoclassical “printing press” model won’t work
Reduce debt by fiat
Would we honour Bernie Madoff’s debts?
Debt irresponsibly lent in first place
The future
Even if policy “correct”, have to replace 20%+ of debt-financed demand with income-generated demand
In interim, up to 20% fall in demand…
Not “the recession we can’t avoid” but
The Depression We Can’t Avoid
Long term:
To avoid a 4th crisis in 2060 (after 1890, 1930, 2009)
Regulation won’t work
“Stability is destabilising”
Regulators “captured” during good times
Debt will grow if borrowers see chance for leveraged profit
Two proposals
The future
Share market
Make shares last 25 years (like bonds)
Dividend flow & voting rights for 25 years
Can buy/sell as now
Shares redeemed at issue price at maturity
Potential for share price volatility reduced
Housing market
Base valuation on imputed rent
Set ceiling to secured debt at (say) 10 times annual imputed debt
To pay higher price, need more of buyer’s money, not more leverage
Leverage falls as price rises
“Same House” Price Index over 350 Years
Collapse in asset prices inevitable
Trying to prevent it will just prolong the agony…
USA and Australian Housing Bubbles Compared
Japan’s Burst Housing Bubbles
Ignores private debt completely
Ignores money except as a factor in inflation
Model of money has been empirically falsified
Presumes the economy always tends to equilibrium
Treats finance markets as inherently prescient
Financial deregulation it promoted helped cause crisis
US economist Hyman Minsky developed “Financial Instability Hypothesis” as explanation for crisis
Supported by Bill White (ex-Head, Monetary and Economic Department, Bank International Settlements)
Minsky’s hypothesis known by RBA & other Central Bank economists but ignored…
Minsky’s “Financial Instability Hypothesis”
Economy in historical time
Debt-induced recession in recent past
Firms and banks conservative re debt/equity, assets
Only conservative projects are funded
Recovery means most projects succeed
Firms and banks revise risk premiums
Accepted debt/equity ratio rises
Assets revalued upwards…
“Stability is destabilising”
Period of tranquility causes expectations to rise…
The Euphoric Economy
Self-fulfilling expectations
Decline in risk aversion causes increase in investment
Investment expansion causes economy to grow faster
Asset prices rise
speculation on assets profitable
Increased willingness to lend increases money supply
Money supply endogenous money, not under RBA control
Riskier investments enabled, asset speculation rises
The emergence of “Ponzi” (Bond, Skase…) financiers
Cash flow less than debt servicing costs
Profit by selling assets on rising market
Interest-rate insensitive demand for finance
The Assets Boom and Bust
Eventually:
Rising rates make conservative projects speculative
Non-Ponzi investors sell assets to service debts
Entry of new sellers floods asset markets
Rising trend of asset prices falters or reverses
Ponzi financiers go bankrupt:
Can no longer sell assets for a profit
Debt servicing on assets far exceeds cash flows
Asset prices collapse, increasing debt/equity ratios
Endogenous expansion of money supply reverses
Investment evaporates; economic growth slows
Economy enters a debt-induced recession
Back where we started...
Crisis and Aftermath
Modelling Minsky
Extension of Goodwin’s Growth Cycle to include debt
4 “stylised facts”
Wages share grows if wage rises exceed productivity
Employment rises if growth exceeds productivity + population increase
Bank lend money to finance investment & speculation
Speculation rises when growth rises
Dynamics
Borrow money to finance investment during a boom
Repay some of it during a slump
Debt/ Income ratio rises in series of booms/busts
Eventually one boom where debt accumulation passes “point of no return”…
A Minsky Model with Ponzi Finance
Honouring irresponsibly created debt will lock us into a permanent slump…
What could happen?
USA & Australia debt ratios highest in history:
What could happen?
Decline in spending inevitable given collapse of debt-financed spending
Aggregate demand sum of GDP plus change in debt
At peak, change in debt accounted for
23% of demand in USA, 20% in Australia
Change from debt-dependent to debt-free economy makes prolonged slump inevitable:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions.
The perspective I would bring is not one of recession.
Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy.” (Microsoft CEO Steve Ballmer)
The future
A Depression as private sector de-levers
Deleveraging will overwhelm government remedies
Government stimulus: +A$42 billion…
Australian Private debt A$2 trillion
5% reduction: -A$100 billion
Deleveraging swamps stimulus
Only medium term solution requires debt reduction
Cause inflation?
Neoclassical “printing press” model won’t work
Reduce debt by fiat
Would we honour Bernie Madoff’s debts?
Debt irresponsibly lent in first place
The future
Even if policy “correct”, have to replace 20%+ of debt-financed demand with income-generated demand
In interim, up to 20% fall in demand…
Not “the recession we can’t avoid” but
The Depression We Can’t Avoid
Long term:
To avoid a 4th crisis in 2060 (after 1890, 1930, 2009)
Regulation won’t work
“Stability is destabilising”
Regulators “captured” during good times
Debt will grow if borrowers see chance for leveraged profit
Two proposals
The future
Share market
Make shares last 25 years (like bonds)
Dividend flow & voting rights for 25 years
Can buy/sell as now
Shares redeemed at issue price at maturity
Potential for share price volatility reduced
Housing market
Base valuation on imputed rent
Set ceiling to secured debt at (say) 10 times annual imputed debt
To pay higher price, need more of buyer’s money, not more leverage
Leverage falls as price rises
“Same House” Price Index over 350 Years
Collapse in asset prices inevitable
Trying to prevent it will just prolong the agony…
USA and Australian Housing Bubbles Compared
Japan’s Burst Housing Bubbles
Below are the notes from the speech of Professor Akhtar Kalam, Chairman of the Muslim Community Cooperative Australia Ltd.
