Click here for this post in PDF: Debt­watch mem­bers; CfE­SI mem­bers
Click here for the data in this post: Debt­watch mem­bers; CfE­SI mem­bers

The “Glob­al Finan­cial Cri­sis”, which began in late 2007, marked a turn­ing point in the nature of mar­ket economies. Their per­for­mance from at least the mid-1960s had been under-writ­ten by a faster growth of pri­vate debt than of GDP: this was the “Age of Lever­age”. In late 2007, the growth rate of pri­vate debt fell, and since then we have been in the Age of Delever­ag­ing.

I was approached by Bloomberg to write an 800-word fea­ture on “The Future of Eco­nom­ics” for the World Eco­nom­ic Forum, which starts today in Davos. Here is the  Bloomberg newslet­ter, with my com­men­tary on page 5.

For its entire his­to­ry, macro­eco­nom­ics has been dom­i­nat­ed by math­e­mat­i­cal mod­els that ignore the exis­tence of mon­ey, debt and bank­ing, and that per­ceive the econ­o­my’s move­ment through time as tran­si­tions from one state of equi­lib­ri­um to anoth­er.

Neil Wil­son is a UK-based  finance and infor­ma­tion sys­tems pro­fes­sion­al who blogs at 3Spoken.co.uk, and who is an active par­tic­i­pant in mon­e­tary debates. He has just pub­lished a post where he takes my “God­ley table” mod­el­ing approach and rejigs it to make it con­sis­tent with dou­ble-entry book­keep­ing stan­dards.

I am no accountant–I nev­er stud­ied account­ing at uni­ver­si­ty (I did an Arts/Law degree as an under­grad­u­ate, major­ing in Eco­nom­ics with minors in Maths & Psy­chol­o­gy), and have nev­er had to devel­op the skills subsequently–so I am hap­py to take advice from some­one like Neil about how to con­form to prop­er dou­ble-entry stan­dards.

Debt­watch began in March 2007 as a way of dis­trib­ut­ing my month­ly newslet­ter on the eco­nom­ic cri­sis I expect­ed to soon erupt, and about which I had been warn­ing in media inter­views since Decem­ber 2005.

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Fig­ure 1: Excerpt from the 1st Debt­watch Report in Novem­ber 2006

From hum­ble begin­nings, the blog has grown like Top­sy to have over 12,500 sub­scribers, about 60,000 unique vis­i­tors, amost one mil­lion page views and six mil­lion hits per month.

Fig­ure 2: Debt­watch read­er­ship stats for 2011

Click here for this post in PDF (Debt­watch Mem­bers; CfE­SI Mem­bers);
Click here for the data in this post (Debt­watch Mem­bers; CfE­SI Mem­bers)

Mort­gage debt is by far the largest com­po­nent of debt in Aus­tralia today—government debt, which is the focus of polit­i­cal debate, is triv­ial by com­par­i­son (a quick caveat though—finance sec­tor debt may be larg­er again than mort­gage debt, if this claim, sourced from Mor­gan Stan­ley, is accurate—since it shows Aus­trali­a’s aggre­gate pri­vate debt ratio as almost equal to the USA’s).

Fig­ure 1

Preamble

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The fun­da­men­tal cause of the eco­nom­ic and finan­cial cri­sis that began in late 2007 was lend­ing by the finance sec­tor that pri­mar­i­ly financed spec­u­la­tion rather than invest­ment. The pri­vate debt bub­ble this caused is unprece­dent­ed, prob­a­bly in human his­to­ry and cer­tain­ly in the last cen­tu­ry (see Fig­ure 1). Its unwind­ing now is the pri­ma­ry cause of the sus­tained slump in eco­nom­ic growth. The recent growth in sov­er­eign debt is a symp­tom of this under­ly­ing cri­sis, not the cause, and the cur­rent polit­i­cal obses­sion with reduc­ing sov­er­eign debt will exac­er­bate the root prob­lem of pri­vate sec­tor delever­ag­ing.

PDF For­mat: Debt­watch Sub­scribers; CfE­SI Sub­scribers

Data: Debt­watch Sub­scribers; CfE­SI Sub­scribers

As much as I crit­i­cize the US of A for its eco­nom­ic man­age­ment, I can’t fault its sta­tis­ti­cal agen­cies on the col­lec­tion and dis­sem­i­na­tion of data: data is read­i­ly avail­able and almost always in an eas­i­ly acces­si­ble for­mat. That, and the fact that it’s the world’s biggest econ­o­my, is why most of my analy­sis is of the US. Aus­trali­a’s ABS deserves sim­i­lar acco­lades for mak­ing data read­i­ly acces­si­ble and rel­a­tive­ly easy to locate.

Every year, The Age pub­lish­es a sur­vey of econ­o­mists’ opin­ions on the year ahead. Most of these are “mar­ket econ­o­mists” rather than academics—working for banks, insur­ance com­pa­nies and the like. Three aca­d­e­mics are surveyed—myself, Jacob Mars­den of Monash and Neville Nor­man of the Uni­ver­si­ty of Melbourne—and one econ­o­mist work­ing for a trade union, Brad Crofts of the AWU.

Peter Mar­tin does an overview of the results each year, as well as pro­vid­ing snip­pets of the answers giv­en to sup­ple­men­tary ques­tions. He made one slip-up this year when he sum­marised views on achiev­ing a sur­plus as:

Eco­nom­ic Reform Aus­tralia has just alert­ed me to a pro­pos­al for a par­tial mort­gage debt for­give­ness pro­pos­al put for­ward by econ­o­mists from the US Fed­er­al Reserve in Jan­u­ary 2009. ERA repro­duced this post from WhoWhat­Why, which in turn referred to a Boston Fed pub­li­ca­tion Com­mu­ni­ties & Bank­ing and the paper “A pro­pos­al to Help Dis­tressed Home­own­ers”.

The pro­pos­al includes the sug­ges­tion of a grant to home­own­ers who are both in neg­a­tive equi­ty and unem­ployed, where the grant would pay up to 25% of the repay­ment costs over a 2 year peri­od.

It’s always a plea­sure to talk with Max, and in this inter­view he drops a bomb­shell that I still have a hard time even con­tem­plat­ing: the claim that the UK’s pri­vate debt to GDP ratio is 950%, and the finance sec­tor alone has a debt ratio of 600% of GDP. Our dis­cus­sion starts at the 14 minute mark.

I still have to see the data for myself, and until then I’ll remain skep­ti­cal, but here’s a chart alleged­ly sourced from Mor­gan Stan­ley that makes that claim.