Steve Keen's Debtwatch

My focus is and will remain on explain­ing how the cri­sis came about, but in the mid­dle of the cri­sis, gov­ern­ment poli­cies have the poten­tial to either lessen the cri­sis or make it more extreme. Two of the best com­men­ta­tors on sen­si­ble poli­cies to lessen the cri­sis are Yanis Varo­ufakis and Richard Koo.

Yanis (togeth­er with Stu­art Hol­land) has authored the “Mod­est Pro­pos­al” to over­come the Euro­pean cri­sis (the lat­est ver­sion is here in PDF: “The Mod­est Pro­pos­al”). Richard Koo recounts the Japan­ese expe­ri­ence with the burst­ing of its Bub­ble Econ­o­my and the many pol­i­cy twists and turns after­wards in the Holy Grail of Macro­eco­nom­ics: Lessons from Japan’s Great Reces­sion.

A num­ber of blog mem­bers argued that my lead/lag analy­sis of the Cred­it Accel­er­a­tor and eco­nom­ic and finan­cial vari­ables (unem­ploy­ment, share and house price indices) appeared erro­neous.

I am the first to admit that–though my math­e­mat­i­cal mod­el­ling is strong–my sta­tis­ti­cal analy­sis is not up to the same lev­el. I long ago react­ed adverse­ly to the prac­tice of econo­met­rics in eco­nom­ics, large­ly on the same grounds that led Ed Leam­er to pub­lish his famous paper “Let’s Take the Con out of Econo­met­rics” (AER, March 1983), omit­ted vari­able bias, etc.

Par­don the Bib­li­cal open­ing from an agnos­tic, but there’s wis­dom in Jesus’s say­ing that is rel­e­vant here: what­ev­er we do to reduce home­less­ness, there will still be home­less.

At the most basic lev­el, it’s a sim­ple func­tion of turnover. Even if we could house every­one who was home­less today, there would be home­less peo­ple liv­ing on the streets tomor­row, because there are always peo­ple leav­ing where they live and hav­ing nowhere to go.

This is the pre­sen­ta­tion I gave at the 2011 con­fer­ence of the Soci­ety for the Advance­ment of Socio-Eco­nom­ics (SASE) annu­al con­fer­ence in Madrid last week:

It com­bines four themes that will be promi­nent in my pub­lic talks from now on:

• Neo­clas­si­cal econ­o­mists don’t under­stand neo­clas­si­cal eco­nom­ics;
• Neo­clas­si­cal “rep­re­sen­ta­tive agent” macro­eco­nom­ics (both the so-called New Clas­si­cal and New Key­ne­sian vari­ants) vio­late fun­da­men­tal research by neo­clas­si­cal econ­o­mists into the foun­da­tions of neo­clas­si­cal the­o­ry;
• The Cred­it Accel­er­a­tor explains the Great Depres­sion and the Great Reces­sion (here my argu­ments are sim­i­lar to those of Richard Koo, and the Cred­it Accel­er­a­tor is the same con­cept ini­tial­ly derived by Big­gs, May­er and Pick that they called the Cred­it Impulse); and

This is the fifth video from an inter­view by Ben­ny Sut­ton:

It’s less ana­lyt­ic than my usu­al effort–I don’t have the data to be an “expert” on Chi­na, and I doubt that I’d trust the data all that much even if I did have it. But I reflect on what could hap­pen to Aus­tralia if Chi­na’s cur­rent boom proves to be dri­ven by poor­ly direct­ed cred­it, and dis­cuss Chi­na’s very delib­er­ate and suc­cess­ful pro­gram of indus­tri­al­iza­tion in the last 3 decades, where pre­dom­i­nant­ly US cor­po­ra­tions were encour­aged to relo­cate tech­nol­o­gy and pro­duc­tion to Chi­na. The Chi­nese ensured that there was the devel­op­ment of a viable cap­i­tal­ist class, as well as a growth in employment–unlike many oth­er devel­op­ing nations fol­low­ing export-ori­ent­ed indus­tri­al­iza­tion strategies–by requir­ing for­eign ven­tures to have a local part­ner, and trans­fer­ring a large slab of the own­er­ship to that part­ner over time.

I ini­tial­ly planned to call this post “Eco­nom­ic Growth, Asset Mar­kets and the Cred­it Accel­er­a­tor”, but recent neg­a­tive data out of Amer­i­ca makes me think that this title is more in line with con­ver­sa­tions cur­rent­ly tak­ing place in the White House.

(Click here for this post in PDF)

Accord­ing to the NBER, the “Great Reces­sion” is now two years behind us, but the recov­ery that nor­mal­ly fol­lows a reces­sion has not occurred. While growth did rise for a while, it has been anaemic com­pared to the norm after a reces­sion, and it is already trend­ing down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be sub­stan­tial­ly high­er than this to make seri­ous inroads into it. Instead, growth bare­ly peeped its head above Okun’s lev­el. It is now below it again, and trend­ing down.

Thanks again to Ben­ny Sut­ton for pro­duc­ing a brief inter­view debunk­ing the “pop­u­la­tion growth caus­es house price ris­es” argu­ment:

I decid­ed to add my recent Pow­er­point Pre­sen­ta­tion to the mix:

My pre­sen­ta­tion at today’s debate is avail­able below (the PPT slides are here). ABC Late­line Busi­ness ran a report on the debate which is now avail­able on their web­site: Click for the transcript+video or just the video. In the next few days I’ll post an entry on asset prices (in both the USA and Aus­tralia) and the Cred­it Impulse, which will go into the argu­ments pre­sent­ed here in much more detail.

| Open Play­er in New Win­dow

I did an inter­view with Phil Dob­bie from BT Aus­tralia on the Aus­tralian econ­o­my this morn­ing. You can hear it on Phil’s pro­gram on BT, or on iTunes, or click below:

And one with Peter Schiff on the US econ­o­my and whether it will face infla­tion or defla­tion:

Steve Keen’s Debt­watch Pod­cast

Ordi­nar­i­ly I’d back these up with some data graphs, but I’m in even more of a hur­ry than usu­al this week, so I’ll just leave you with the audios.

I’ve just post­ed a new video to the Prof­Keen YouTube Chan­nel; watch it there or click below. Thanks again to Ben­ny Sut­ton for the superb pro­duc­tion!