Author Archives: Steve Keen

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As I’ve not­ed in ear­li­er posts, the con­cept of the Cred­it Accel­er­a­tor is still a work in progress. A major objec­tive is to be able to use month­ly data and remove the noise that gen­er­ates, but for now I’m work­ing with the change in the change in debt over a year, divid­ed by GDP at the mid­point of that year. In order to be able to still use the lat­est month­ly debt data from Aus­tralia (and quar­ter­ly from the USA), I’ve revised the for­mu­la to “freeze” the last avail­able val­ue of GDP six months in advance of the last data for debt. This gives an accu­rate mea­sure of the change in the change in debt, but divides it by a GDP fig­ure that will lat­er need revi­sion.

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Real­i­ty came to Real­i­ty TV in Aus­tralia last week, when 3 of the 4 prop­er­ties in the much-hyped “Flip that House” pro­gram The Block failed to sell at their nation­al­ly tele­vised auc­tion. A 400 per­son live audi­ence, watched by over 3 mil­lion TV view­ers, could­n’t entice more than one per­son to part with mon­ey rather than eye­balls. As the SMH observed:

What­ev­er the lure of a celebri­ty house, the would-be buy­ers in Fitzroy Town Hall were just as jit­tery as the would-be buy­ers at any oth­er auc­tion in recent weeks. (“Auc­tion fail­ure shocks The Block”, SMH August 22)

That was the title of an “Intel­li­gence Squared” debate I took part in last month–on the affir­ma­tive side. It was broad­cast on ABC TV’s Big Ideas pro­gram last week. The title is a play on a favourite say­ing of Aus­tralian politi­cians back in the coun­try’s “White Aus­tralia” days, and the immi­gra­tion surge it caused iron­i­cal­ly led to Aus­tralia becom­ing one of the world’s most mul­ti-cul­tur­al nations. You can watch it on the Big Ideas Web­site:

http://www.abc.net.au/tv/bigideas/stories/2011/08/23/3299095.htm

Or on YouTube, below:

If you’d pre­fer to lis­ten rather than watch, here is the audio, down­loaded from the ABC Radio Pro­gram Big Ideas:

The CAPM and EMH stick to the neo­clas­si­cal script of believ­ing that the econ­o­my and finance mar­kets are sta­ble, at or near equi­lib­ri­um, and on this basis argue that “you can’t beat the mar­ket”. But there is an alter­na­tive view, far more aligned with the actu­al data, that says that mar­kets are chaot­ic, far from equi­lib­ri­um sys­tems, and for that rea­son it’s very hard to beat the mar­ket.

Eugene Fama was an enthu­si­as­tic pro­mot­er of CAPM and the Effi­cient Mar­kets Hypoth­e­sis, argu­ing that despite their absurd assump­tions, the data sup­port­ed the the­o­ries. But was this a fluke, the result of the nar­row data range he used–from 1950 till 1966?

The Finance News Net­work has just released an inter­view with me on the cur­rent finan­cial tur­moil. Click the link below to watch it (or read the tran­script):

Steve Keen pre­dicts a decade of volatil­i­ty

FNN is about to estab­lish a paid sub­scrip­tion ser­vice, so short­ly inter­views such as this will only be avail­able to sub­scribers.

On a sim­i­lar note, I urge read­ers of this blog to sup­port CfE­SI, the Cen­ter for Eco­nom­ic Sta­bil­i­ty Incor­po­rat­ed (www.cfesi.org) by sign­ing up to one of the three lev­els of mem­ber­ship (see the table below for details).

The Cen­ter for Eco­nom­ic Sta­bil­i­ty Incor­po­rat­ed was first formed in March 2010, with the ini­tial aim of sup­port­ing the Keen Walk to Kosciuszko (which took place in April 2010). That ven­ture was extreme­ly suc­cess­ful, but it took place at a time when–certainly in Australia–there was opti­mism that the  eco­nom­ic and finan­cial cri­sis that began in 2007/08 was over.

One year lat­er, that opti­mism is evap­o­rat­ing around the world, in the face of per­sis­tent bad news. Eco­nom­ic growth in Amer­i­ca, Europe and Aus­tralia is ane­mic, unem­ploy­ment is ris­ing, and stock mar­kets have gone from a sus­tained ral­ly back into near Bear Mar­ket ter­ri­to­ry.

The ABC Radio Nation­al pro­gram Rear Vision is a cur­rent affairs pro­gram that presents “con­tem­po­rary events and peo­ple in their his­tor­i­cal con­text”.

I was recent­ly inter­viewed by Rear Vision for a ret­ro­spec­tive on the cri­sis, enti­tled “Here we go again: A look at the US econ­o­my post the 2008 GFC crash” which debat­ed why the cri­sis is still with us today.

Oth­er speak­ers were Ed Har­ri­son from Cred­it Write­downs, with whom I’m very much in agree­ment, eco­nom­ic his­to­ri­an Richard Syl­la from New York Uni­ver­si­ty, and Steve Han­ke from John Hop­kins with whom I almost com­plete­ly dis­agree. Han­ke does­n’t even dis­cuss the lev­el of pri­vate debt, puts the stan­dard neo­clas­si­cal argu­ment that gov­ern­ment debt is the prob­lem, that a stim­u­lus is con­trac­tionary (the so-called “reverse Ricar­dian Equiv­a­lence” argu­ment) and so on, ideas which I regard as total non­sense.

I was high­ly crit­i­cal of Paul Krug­man’s recent aca­d­e­m­ic paper on the finan­cial cri­sis, because it argued, on neo­clas­si­cal a pri­ori grounds, that:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all lev­el of debt makes no dif­fer­ence to aggre­gate net worth — one per­son­’s lia­bil­i­ty is anoth­er per­son­’s asset. (p. 3)

Giv­en that crit­i­cism, I feel oblig­ed to point out that in his recent com­ment on Rick Per­ry’s nom­i­na­tion for the Pres­i­den­cy, “The Texas Unmir­a­cle”, Krug­man makes a very sen­si­ble obser­va­tion about the impor­tance of “the over­all lev­el of debt” that con­tra­dicts the assump­tion he made in that paper. Observ­ing that Tex­as­’s alleged­ly bet­ter per­for­mance on employ­ment growth is due main­ly to “cheap labor”, Krug­man com­ments that:

CAPM still dom­i­nates the teach­ing of finance, but it was always non­sense because it relied on the fol­low­ing two assump­tions:

In the first half of this lec­ture, I show that even if all con­sumers were util­i­ty max­i­miz­ers whose indi­vid­ual demand curves obeyed the “Law of Demand”, the mar­ket demand curve derived from aggre­gat­ing these con­sumers could have any shape at all. This result, known as the “Son­nen­schein-Man­tel-Debreu Con­di­tions”, is actu­al­ly a Proof by Con­tra­dic­tion that mar­ket demand curves do not obey the “Law” of Demand, and there­fore that Mar­shal­lian par­tial equi­lib­ri­um mod­el­ing of indi­vid­ual mar­kets is invalid–let alone the Neo­clas­si­cal prac­tice of mod­el­ing the entire macro­econ­o­my as a sin­gle agent in “Dynam­ic Sto­chas­tic Gen­er­al Equi­lib­ri­um” mod­els.