Steve Keen's Debtwatch

Stephen Zarlen­ga of the Amer­i­can Mon­e­tary Insti­tute invit­ed me to speak at the 2010 con­fer­ence in Chica­go, which I did on the top­ic of “why a cred­it mon­ey sys­tem does­n’t have to crash, and why it always does”. My speech, the dis­cus­sion, the speech­es of Michael Hud­son and Kaoru Yam­aguchi, and a pan­el dis­cus­sion, are linked at the end of this post. I rec­om­mend watch­ing them all if you can spare the time.

I was pleased to be invit­ed, since this indi­cat­ed a very open-mind­ed approach by the AMI: they are cam­paign­ing to have the Amer­i­can Mon­e­tary Act passed to estab­lish a 100% reserve mon­e­tary sys­tem, which is a pro­pos­al that I have expressed ambiva­lence about in the past.

I’m pre­sent­ing this talk to the Aus­tralian Con­fer­ence of Econ­o­mists this morn­ing (at 11 am). If you’d like to see the slideshow, right click on the link to save it to your PC (a sim­ple click may bring it up in Google Docs where you lose the ani­ma­tions and some of the for­mat­ting).

The lat­est Flow of Funds release by the US Fed­er­al Reserve shows that the pri­vate sec­tor is con­tin­u­ing to delever. How­ev­er there are nuances in this process that to some extent explain why a recov­ery appeared fea­si­ble for a while.

The aggre­gate data is unam­bigu­ous: the US econ­o­my is delev­er­ing in a way that it has­n’t done since the Great Depres­sion, from debt lev­els that are the high­est in its his­to­ry. The aggre­gate pri­vate debt to GDP ratio is now 267%,  ver­sus the peak lev­el of 298% achieved back in Feb­ru­ary 2009–an absolute fall of 31 points and a per­cent­age fall of 10.3% from the peak.

I took part in this debate host­ed by Intel­li­gence Squared Aus­tralia (an ini­tia­tive of the St James Ethics Cen­tre) last month. I was on the oppo­si­tion side, along with Paul Gild­ing and Kate Jen­nings; the gov­ern­ment posi­tion was put by Lucy Turn­bull, Ross Git­tins and Geof­frey Cousins. Details on all the speak­ers are avail­able here, as is a video of the entire debate from begin­ning to end. In this post I’m repro­duc­ing this video in bite-sized chunks–9 min­utes for each of the speak­ers (plus a 2 minute sum­ming-up peri­od), plus the audi­ence dis­cus­sion that includ­ed a cou­ple of Debt­watch stal­warts.

My last post on the Com­mon­wealth Bank’s “there’s no hous­ing bub­ble in Aus­tralia” doc­u­ment focused sim­ply on the use of two dif­fer­ent data sources for the House Price to Income ratio; I left the argu­ments the bank made untouched.

Not so David Llewellyn-Smith, who ran a logi­cian’s eye over the bank’s doc­u­ment and found “log­ic” of Mon­ty Python “if she weighs more than a duck, she’s a witch” cal­i­ble. David pub­lished this post in the Hen­ry Thorn­ton blog, and he has kind­ly con­sent­ed to me repro­duc­ing it here.

On Thurs­day Sep­tem­ber 9th 2010, the Com­mon­wealth Bank released a doc­u­ment on the Aus­tralian hous­ing mar­ket, to sup­port a tour that its senior exec­u­tives are mak­ing to meet over­seas investors.  The press release for the doc­u­ment was as fol­lows:

Aus­tralian Res­i­den­tial Hous­ing

Syd­ney, 9 Sep­tem­ber 2010: Senior exec­u­tives from the Com­mon­wealth Bank of Aus­tralia (“the Group”) will soon be trav­el­ling over­seas to meet with some of the Group’s off­shore share­hold­ers and oth­er investors inter­est­ed in Aus­tralia and the Aus­tralian bank­ing sec­tor.

My recent post “What Bernanke does­n’t under­stand about defla­tion” has hit a chord, with a num­ber of sites around the world repro­duc­ing it—including John Mauld­in’s Out­side the Box col­umn. But it has raised a cou­ple of queries in peo­ple’s minds too:

1. Does my def­i­n­i­tion that “aggre­gate demand equals GDP plus the change in debt” involve dou­ble-count­ing?
2. My fig­ures for the USA are dif­fi­cult to rec­on­cile with the pub­lished US Flow of Funds data.

Things are look­ing grim indeed for the US econ­o­my. Unem­ploy­ment is out of con­trol—espe­cial­ly if you con­sid­er the U‑6 (16.7%, up 0.2% in the last month) and Shad­ow­stats (22%, up 0.3%) mea­sures, which are far more real­is­tic than the effec­tive­ly pub­lic rela­tions U‑3 num­ber that pass­es for the “offi­cial” unem­ploy­ment rate (9.6%, up 0.1%).

The US is in a Depres­sion, and the soon­er it acknowl­edges that—rather than con­tin­u­ing to pre­tend otherwise—the bet­ter. Gov­ern­ment action has atten­u­at­ed the rate of decline, but not reversed it: a huge fis­cal and mon­e­tary stim­u­lus has put the econ­o­my in lim­bo rather than restart­ing growth, and the Fed’s con­ven­tion­al mon­e­tary pol­i­cy arse­nal is all but deplet­ed.

The webi­nar organ­ised by Phil Dob­bie for BTNet went over very well this morn­ing, with about 80 atten­dees and a live­ly dis­cus­sion medi­at­ed by Phil. Unfor­tu­nate­ly a pow­er out­age meant that GoToMeet­ing’s record­ing of the pre­sen­ta­tion only com­menced half way through, so to make amends Phil and I re-record­ed it this after­noon. We lost some of the inter­ac­tiv­i­ty, but the infor­ma­tion comes through very well in this for­mat.

To see this re-record­ing, please click on either of the fol­low­ing links:

Phil Dob­bie’s BTNet page “Aussie Rules”; or

A direct link to GoToMeet­ing.

Bernanke’s recent Jack­son Hole speech did­n’t con­tain one ref­er­ence to the key force dri­ving the Amer­i­can econ­o­my right now: pri­vate sec­tor delever­ag­ing (here’s the pre­vi­ous year’s speech for com­par­ison’s sake). The rea­son the US econ­o­my is not recov­er­ing from this cri­sis is because all sec­tors of Amer­i­can soci­ety took on too much debt dur­ing the false boom of the last two decades, and they are now busi­ly get­ting them­selves out of debt any way they can.