If I was asked to nom­i­nate the wis­est apho­rism of all time, Mark Twain’s “His­to­ry doesn’t repeat, but it sure does rhyme” would def­i­nite­ly be one of my top two can­di­dates.

On song, today Wall Street is replay­ing the 1930s, but to a slight­ly dif­fer­ent meter. With the 80^th anniver­sary of  the Great Crash of 1929 falling on Octo­ber 29^th of this year, Wall Street is cel­e­brat­ing in char­ac­ter­is­tic style–with a eupho­ria-led bub­ble that now appears to be crash­ing up against eco­nom­ic real­i­ty.

Ken­neth David­son has been one of the most con­sis­tent voic­es for sen­si­ble eco­nom­ic analy­sis in the Aus­tralian media for decades now (anoth­er I’d give a sim­i­lar acco­lade to is Bri­an Toohey), and he’s writ­ten a bril­liant piece in The Age and The Syd­ney Morn­ing Her­ald on the specual­tive bub­ble that is the Aus­tralian dol­lar.

David­son lays out the caus­es and prob­a­ble effects superbly in the length of a news­pa­per fea­ture. The caus­es are that:

• The bailout funds in the USA and UK in par­tic­u­lar have cashed up finan­cial insti­tu­tions that don’t want to lend any more to mort­gages (and have long ago for­got­ten how to lend to fund pro­duc­tive enter­pris­es), so they’re look­ing for short term hot mon­ey gains;

Thanks to all those Debt­watch read­ers who made dona­tions to assist with the costs of bring­ing Michael to Aus­tralia for this speak­ing tour. Rough­ly A$800 has been raised–I’ve allowed $10 for every dona­tion made since I put that mes­sage up to go to Michael’s expens­es, and there have been 81 dona­tions (many of more than $10, some of less) since then.

Paul Krug­man some­times intro­duces his more com­pli­cat­ed posts on his blog as being “wonk­ish”. This post is wonk­ish in spades–though in the linked papers rather than the con­tent here.

I’ve just fin­ished the first rea­son­able descrip­tion of my mul­ti-sec­toral mon­e­tary mod­el of pro­duc­tion, which I’ll be pre­sent­ing at the Paul Wool­ley Cen­tre for Cap­i­tal Mar­ket Dys­func­tion­al­i­ty con­fer­ence lat­er this month.

There’s lots more to add before the mod­el is com­plete, but this is a work­ing first draft. Lat­er addi­tions will include a ten­den­cy to equalise prof­it rates across sec­tors and fixed cap­i­tal, as well as fiat mon­ey cre­ation in addi­tion to pure cred­it mon­ey as in this mod­el.

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).

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.

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.