A sudden eruption, and the surprise of realising that the world he understands is not the one he actually inhabits. – Paolo Bacigalupi, The Windup Girl
This time really is different.
Stock markets are crashing after a runaway boom. Again. And the financial sector is peddling complex derivative products. Again. (Check out the US satirical rag The Onion’s brilliant take on this: “Financial Sector Thinks It’s About Ready To Ruin World Again”)
One of the handful of journalists to fully grasp the enormity of the economic crisis that was to commence in late 2007 has died, long before the crisis itself will end. In his column Planet Wall Street, David Hirst’s poetic prose warned his readers of the coming economic tsunami, at the same time as the officials who should have prevented it continued to laud the very instruments of financial deceit that made it possible.
Though the Fourth Estate’s higher purpose is to keep the other three in check, the human fear of being an outcast keeps most journalists within the bounds of conventional wisdom. David had no problem stepping outside it, as he stepped outside the conventions of so much else in life.
Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:
“So as I see it, we should first of all be evaluating models, not individuals; obviously we need people to interpret those entrails models, but we’re looking for the right economic framework, not the dismal Nostradamus.
In 1992, I built a model of Minsky’s ‘Financial Instability Hypothesis’ that simulated the debt-induced breakdown he argued could happen in a capitalist economy. But it also had an unexpected feature: the breakdown was preceded by a period of apparent stability. Initial volatility gave way to a period of tranquillity, which was then followed by increasing volatility and finally a breakdown (see Figure 1: the two variables are the employment rate and the wage share of GDP):
Read more: http://www.businessspectator.com.au/article/2013/6/3/economy/calm-deathly-debt-storm#ixzz2V7oG1C7R
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
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:
