Category Archives: Debtwatch

Amer­i­ca is a land of con­tention, and one of the most con­tentious top­ics here (I’m in Seat­tle as I write) is the impact of the Fed­er­al Reserve’s pol­i­cy of “Quan­ti­ta­tive Eas­ing” – oth­er­wise known as ‘QE’. The Fed­er­al Reserve has com­mit­ted to spend­ing $85 bil­lion every month buy­ing a wide range of bonds from banks, until such time as the US unem­ploy­ment rate falls below 6.5 per cent.

The Fed has imple­ment­ed this pol­i­cy because it believes it is the best way to stim­u­late demand in a depressed econ­o­my. Its crit­ics oppose it because they believe this mas­sive amount of ‘mon­ey print­ing’ must inevitably lead to ruinous infla­tion.

One of the many schisms in eco­nom­ics is between econ­o­mists – new and old – who believe that prices are set by sup­ply and demand, and econ­o­mists – also new and old – who believe they are set by a mark-up on the cost of pro­duc­tion.

The for­mer argu­ment is the over­whelm­ing favourite today, but two cen­turies ago, it was the minor­i­ty view. Though mod­ern ‘neo­clas­si­cal’ econ­o­mists are wont to claim Adam Smith as one of their own, he dis­owned their pre­ferred ‘sup­ply and demand’ pric­ing mod­el to argue that prod­ucts exchange at prices that are relat­ed to their rel­a­tive costs of pro­duc­tion.
Read more: http://www.businessspectator.com.au/article/2013/5/20/economy/seductive-super-models-supply-and-demand#ixzz2UW9uTCoF

The Seat­tle Eco­nom­ics Coun­cil has invit­ed me to speak on the top­ic of “The Great Finan­cial Cri­sis and the Great Reces­sion: How we got here and the way out”. The details are:

Venue: Seat­tle Town Hall
Date: May 23rd
Time: 6PM

If you’d like to attend, click on this link.

I’ll also be speak­ing with Ger­ard Fitz­patrick (Rus­sell Invest­ments strate­gic bond fund man­ag­er) on “Mon­ey, Mon­e­tary Pol­i­cy and Finan­cial Repres­sion” at a day­time event (11:30 — 1:30) at the Town Hall.

This is the start of what can only be described as a tru­ly ridicu­lous speak­ing and sem­i­nar tour (if I had any con­trol over the sequence, it would be entire­ly dif­fer­ent):

The ABS pub­lish­es its house price index data today. My lead­ing indi­ca­tor for this is the Mort­gage Accel­er­a­tor, and it implies anoth­er increase in prices—and the first sign of ris­ing real prices on an annu­al basis since ear­ly 2011. But there’s also a turn­around devel­op­ing in mort­gage accel­er­a­tion which implies that the rate of increase will top out at a much low­er lev­el than the 2008 and 2010 booms.

I’d like to post a fig­ure here, but as usu­al there are has­sles with the ISP! Check on Twit­ter for the graph­ic.

Fig­ure 1: Before the release of ABS data on May 7 2013

I inter­rupt my series on the insta­bil­i­ty of cap­i­tal­ism for a spe­cial report on the seri­ous prob­lem of Australia’s bud­get deficit. As every­one knows, the world will end tomor­row unless Australia’s gov­ern­ment plugs its $12 bil­lion ‘bud­get black hole’.

And I have proof! After all, we have 40 years of data show­ing the ratio of the bud­get deficit (and some­times sur­plus) to GDP. Let’s see how the cur­rent deficit com­pares to oth­er years since 1975. And look, it’s one of the worst ever!

Fig­ure 1: Bud­get posi­tion as per­cent of GDP since 1975

Read more: http://www.businessspectator.com.au/article/2013/5/6/federal-budget/deficit-debate-thats-all-out-whack#ixzz2STx3kt4g

As I not­ed in my pre­vi­ous post, neo­clas­si­cal eco­nom­ics made it an item of faith that cap­i­tal­ism was inher­ent­ly sta­ble, and dis­missed argu­ments to the con­trary as no more than left-wing pro­pa­gan­da. My favourite state­ment of this per­spec­tive came from the pen of Nobel Prize win­ner Ed Prescott, who was one of the key play­ers in intro­duc­ing the con­cept of “ratio­nal expec­ta­tions” into eco­nom­ics. Not only was cap­i­tal­ism inher­ent­ly sta­ble, he claimed in 1999, but it was so sta­ble that we can reli­ably expect the econ­o­my to dou­ble the stan­dard of liv­ing every 40 years. Marx and his ilk were sim­ply wrong:

Syd­ney Morn­ing Her­ald com­men­ta­tor Gareth Hutchens com­ment­ed that the Rogoff and Rein­hart affair shows how slow econ­o­mists are to realise that their data may be dodgy, but to my mind that is insignif­i­cant com­pared to how slow they are to realise that their the­o­ries are dodgi­er still.

A defin­ing fea­ture of main­stream eco­nom­ic mod­el­ling is the belief that the econ­o­my is sta­ble: giv­en any dis­tur­bance, it will ulti­mate­ly return to a state of tran­quil growth. Main­stream­ers argue over how fast this will hap­pen: Chicago/Freshwater /New Clas­si­cals argue it adjusts instant­ly, while Saltwalter/New Key­ne­sians say it will take time because of ‘fric­tions’ in the economy’s adjust­ment process­es. But they both take the innate sta­bil­i­ty of the econ­o­my for grant­ed, and this belief is hard-cod­ed into their math­e­mat­i­cal mod­els
Read more: http://www.businessspectator.com.au/article/2013/4/23/economy/instability-may-not-be-optional#ixzz2RFy8NpNX

The bulls are roar­ing, house prices are ris­ing, and all’s well with the world.

Or maybe not. Cer­tain­ly house prices have risen — and con­trary to pop­u­lar opin­ion, I expect­ed price ris­es this year, since mort­gage debt has been accel­er­at­ing since the begin­ning of 2012 (see Fig­ure 1). One of my many eco­nom­ic here­sies is the argu­ment that asset prices are dri­ven by ris­ing debt. Ris­ing asset prices — in this case, hous­es — require accel­er­at­ing debt (in this case, mort­gage debt), and that’s indeed what we’ve had since the begin­ning of 2012.

Read more: http://www.businessspectator.com.au/article/2013/4/15/property/house-prices-shoot-towards-ceiling#ixzz2QUFV7fFv

Sor­ry for the late notice here (the total crash of my ISP pre­vent­ed me from post­ing when I had hoped to—and thanks to Phil Stevens for his bril­liant work in reviv­ing the site from the wreck­age), but if any­one in Syd­ney has free time today (Sun­day 14 April) I rec­om­mend attend­ing this event between 2:00 pm and 5:00 pm. It is a festschrift to Eric Aarons, a remark­able man whom I am proud to call a friend.

Eric Aarons, now 94 years old, has been a sig­nif­i­cant fig­ure in left and pro­gres­sive pol­i­tics for over six­ty years.

Last week’s col­umn on mar­gin debt and the US stock mar­ket con­firmed that lever­age plays a key role in dri­ving move­ments in share mar­kets – and vice ver­sa. But it left one tech­ni­cal ques­tion unan­swered for me: is the causal link between change in debt and change in asset prices, or between accel­er­a­tion in debt and change in asset prices?

My log­i­cal argu­ment was the lat­ter. In my mon­e­tary approach to macro­eco­nom­ics, aggre­gate demand is income (effec­tive­ly gross domes­tic prod­uct) plus the change in debt, and this mon­ey is expend­ed on both goods and ser­vices (also effec­tive­ly GDP) plus net asset sales. Net asset sales in turn reflect the price lev­el of assets, the quan­ti­ty in exis­tence, and the frac­tion of that stock that is sold over a year.