Vale David Hirst

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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.

The Neoclassical conspiracy against Post Keynesian Economics

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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.

Read more: http://www.businessspectator.com.au/article/2013/6/11/economy/more-forecasting-neoclassicals-and-nostradamus#ixzz2VszIBLQ2

Calm before the Storm: Instability series (4)

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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):

Figure 1: Volatility gives way to tranquillity, only to be followed by breakdown (Figure 9 in Keen 1995)

Graph for Calm before a deathly debt storm

Read more: http://www.businessspectator.com.au/article/2013/6/3/economy/calm-deathly-debt-storm#ixzz2V7oG1C7R

To QE Or Not To QE

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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.

Is Capitalism Inherently Unstable? (3)

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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

Speaking in Seattle (and elsewhere)

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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):

ABS House Price Update Today

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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

Who says zero is the right level for deficits?

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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

Graph for A deficit debate that's all out of whack

Read more: http://www.businessspectator.com.au/article/2013/5/6/federal-budget/deficit-debate-thats-all-out-whack#ixzz2STx3kt4g

Instability May Not Be Optional (2)

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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:

Instability may not be optional (1)

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Syd­ney Morn­ing Her­ald com­men­ta­tor Gareth Hutchens com­ment­ed that the Rogoff and Rein­hart affair shows how slow econ­o­mists are to realise that their data may be dodgy, but to my mind that is insignif­i­cant com­pared to how slow they are to realise that their the­o­ries are dodgi­er still.

A defin­ing fea­ture of main­stream eco­nom­ic mod­el­ling is the belief that the econ­o­my is sta­ble: giv­en any dis­tur­bance, it will ulti­mate­ly return to a state of tran­quil growth. Main­stream­ers argue over how fast this will hap­pen: Chicago/Freshwater /New Clas­si­cals argue it adjusts instant­ly, while Saltwalter/New Key­ne­sians say it will take time because of ‘fric­tions’ in the economy’s adjust­ment process­es. But they both take the innate sta­bil­i­ty of the econ­o­my for grant­ed, and this belief is hard-cod­ed into their math­e­mat­i­cal mod­els
Read more: http://www.businessspectator.com.au/article/2013/4/23/economy/instability-may-not-be-optional#ixzz2RFy8NpNX