Steve Keen’s surprise appearance yesterday turned out to be quite a harrowing experience for any homeowners in the audience. After laying out the importance of debt in the economy, Steve analysed the Australian housing market.
The best chart was this one:
It shows that, adjusted for the time at which house prices peaked, the Australian housing bubble is in lockstep with house price declines in Japan… And not far behind the US. We’re on track for trouble, even if you don’t think we’ll get there.
So why is Australia suffering now and not last year and the year before?
Part of the answer, according to Keen, is that we managed to buy time with what he calls the ‘first-home vendors grant’ (because it benefitted home sellers rather than first-home buyers).
But buying time just makes the pain worse when the crash does come, especially for the first-home buyers tricked into the market by their government. The question is whether they will deserve a bailout when things turn sour.
So how much does debt really matter to an economy as a whole?
Keen seems to think it’s the unseen elephant in the room. At least the conventional economists can’t spot it. And he’s very persuasive.
You might think the world of debt-based economics is difficult or complicated. But if you’re on the side of the person consuming the information, it’s actually very intuitive. Keen has done the hard yards for you.
Think of it in terms of your own household. If you borrow money to buy a house, has your income increased in that year? If you asked your accountant, they would say no. But an economist measuring the GDP of your household would say yes – you’ve got money and spent it – that’s economic activity.
So borrowing adds to GDP. And if you separate the change in GDP out from the rest of GDP, you discover that a lot of our world’s growth has been debt funded. The last time that happened it ended badly.
Here’s another chart featured in Keen’s presentation that he kindly allowed your editor to use. It shows that aggregate private debt has a habit of raging out of control and then plummeting back to earth at precisely the moments when booms and busts are particularly severe. The Great Depression and the current economic debacle feature prominently.
Australia’s worm (the blue) has turned but not yet plunged like America’s (in red).
Satyajit Das spoke about much the same topic, but used sovereign debt as his measure for debt doom and gloom. The obvious link between Keen – who focused on private debt – and Das is, of course, bailouts. Each time the private sector trips, stumbles and face plants, the nanny state is there. And the nanny state has a larger balance sheet. Which means bigger solutions, but also bigger problems.
Together with their friends at the central banks, the politicians are practicing an art Das calls ‘Botox Economics’. It’s all about keeping up appearances by injecting cash into anything that shows signs of sagging.
Das’s most powerful point was about China. Using what resembled Keen’s method of separating change in debt from GDP figures, Das showed that China is in fact only growing because it is willing to incur debts that will most likely go bad. If you adjust GDP figures for a reasonable expectation of debts that will go bad, you end up with a barely growing – or even shrinking – China.
Let’s make that clearer. China’s growth is around 8%, but most of that 8% consists of spending borrowed money that will be defaulted on eventually. Sounds like America’s housing bubble based growth, right?
‘Think of yourselves as lab rats in an experiment by Ben Benrnanke, Mervin King and Mario Draghi’, Das told listeners. The Chinese communist party is lining up right behind them to have their go… if you survive that long.
for Markets and Money