Thursday, Sep 23, 2010
As we know Debt is a four letter word... here is the proof
Debtwatch: Deleveraging with a twist
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 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.
This dwarfs any previous post-WWII experience–even the steep recession of the mid-1970s.
Posted by techieman @ 08:00 PM (597 views) Add Comment
4 Comments
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1. techieman said...
Just as some background Keen gained some notoriety in Australia, as being one of the few (he claims there was about a dozen out of 30,000 plus) economists worldwide to predict the slump in 2008.
He then completely lost credibility when he took part in a bet about house prices falling 40%. He said they would, but he was challenged in Parliament. He then said that he gave a timeframe of this as quite long term - following the Japanese experience. As the debate went on with a guy called Rory Robertson, there was a bet that if house prices were to have fallen in a years time then Robertson would do a 225km trek but if they had risen by then Keen would need to do it. Whichever would do it would need to wear a t-shirt that said:
''I was hopelessly wrong on house prices – ask me how”.
In fact Aussie house prices continued higher [http://www.globalpropertyguide.com/real-estate-house-prices/A] - why? - well Keen takes up the story with max at about 12:15 in on the video below:
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Included in the video is why giving money to the banks doesnt work, dependnt upon where we are in the cycle. Well worth a watch imo.
2. Adam Smith Fan said...
Take that bet thing with a pinch of salt. What Keen originally said (in 2008) was that house prices in Australia would drop 40% over the next five to ten years. We still don't know whether that will happen or not. The reason that he conceded losing the bet was that the actual terms agreed by the two economists were "peak to trough" and because the Australian government jumped in with a stimulus package to keep prices up, there was a trough in 2009. So Keen did the decent thing and conceded even though his original prediction still hasn't been proved right or wrong
Despite the loss of the bet, he's still an economist well worth listening to. In particular his demonstration of a very tight relationship between changes in debt and changes in employment is interesting.
3. mark wadsworth said...
I look forward to the inevitable slanging match about inflation vs deflation and whether gold is a 'good investment' or 'at the top of a bubble'.
As to the last point, we've had share price bubble, housing bubble, oil price bubble, why does anybody imagine that gold is 'different'? As to the first point, I'd call a ten per cent fall in debt/money something a bit like "deflation" (in the strict monetary sense, and inflation in the more useful 'are prices rising?' sense USA appears to be nil at the moment)
4. Adam Smith Fan said...
Inflation or deflation? That's the big question. From what I can see either can result from debt reduction. Inflation happens if people default on their debts to the banks and declare bankruptcy; deflation if they pay down their debts without taking on new loans