Jump to content
House Price Crash Forum
Andrew Lainton

New Steve Keen Theory Explains Double Dip

Recommended Posts

With great timing Steve Keen has just published at http://www.debtdeflation.com a  masterly draft paper - 'Dude wheres my recovery' which uses some of the latest thinking to explain why we my be heading for a double dip when most economists predicted a rapid recovery .

Steve is one of the few economist to predict the 2007 crash.

The equations didnt come out so the full pdf is http://www.debtdeflation.com/blogs/wp-content/uploads/2011/06/DudeWheresMyRecovery.pdf

The bad news - a predicted collapse in asset prices over a number of years before things get better

Share this post


Link to post
Share on other sites

With great timing Steve Keen has just published at http://www.debtdeflation.com a  masterly draft paper - 'Dude wheres my recovery' which uses some of the latest thinking to explain why we my be heading for a double dip when most economists predicted a rapid recovery .

Steve is one of the few economist to predict the 2007 crash.

The equations didnt come out so the full pdf is http://www.debtdeflation.com/blogs/wp-content/uploads/2011/06/DudeWheresMyRecovery.pdf

The bad news - a predicted collapse in asset prices over a number of years before things get better

Here's the dumbed down version.

Share this post


Link to post
Share on other sites

With great timing Steve Keen has just published at http://www.debtdeflation.com a  masterly draft paper - 'Dude wheres my recovery' which uses some of the latest thinking to explain why we my be heading for a double dip when most economists predicted a rapid recovery .

Steve is one of the few economist to predict the 2007 crash.

The equations didnt come out so the full pdf is http://www.debtdeflation.com/blogs/wp-content/uploads/2011/06/DudeWheresMyRecovery.pdf

The bad news - a predicted collapse in asset prices over a number of years before things get better

Steve keen has predicted more crashes than I've had hot dinners and he's been wrong many more times than right.

Which is why he now rents a flat he can't afford to buy having stred before another non-existent crash.

Share this post


Link to post
Share on other sites

He was/is right about Europe and the USA. In fairness the blow has been lessened by governments actually following his advice and running very large deficits to cushion some of the blow of the unwind in private sector debt.

Where he was wrong was in Australia. He underestimated the sheer power of the global commodities boom.. high house prices aren't that big a problem if real wages are skyrocketing upwards like in Australia. And even with some debt slowdown in the housing market, the huge expansion of debt in the mining sector means there isn't the monetary pullback.

In the coming years we could see America start becoming a great exporter of commodities too. Remember it is also a continental sized nation.

Share this post


Link to post
Share on other sites

he now rents a flat he can't afford to buy

I think all the information you need to assess if he is right is in that one short sentence!! For a minute I thought you were making the opposite point to the one that you were....

Share this post


Link to post
Share on other sites

Steve keen has predicted more crashes than I've had hot dinners and he's been wrong many more times than right.

Which is why he now rents a flat he can't afford to buy having stred before another non-existent crash.

"Markets can remain irrational a lot longer than you and I can remain solvent." :(

( From A. Gary Shilling, Forbes (1993) v. 151, iss. 4, pg. 236, as quoted in When Genius Failed (2000) by Roger Lowenstein, p. 123)

Share this post


Link to post
Share on other sites

He was/is right about Europe and the USA. In fairness the blow has been lessened by governments actually following his advice and running very large deficits to cushion some of the blow of the unwind in private sector debt.

Where he was wrong was in Australia. He underestimated the sheer power of the global commodities boom.. high house prices aren't that big a problem if real wages are skyrocketing upwards like in Australia. And even with some debt slowdown in the housing market, the huge expansion of debt in the mining sector means there isn't the monetary pullback.

In the coming years we could see America start becoming a great exporter of commodities too. Remember it is also a continental sized nation.

Good job everybody in Australia works in the mining industry! Oh wait, they don't, the vast majority of them are hairdressers, shop staff and office drones just like every country.

The Australian mining industry in 2011 is like the Irish IT industry circa 2006, a fig leaf used to justify a property bubble.

Share this post


Link to post
Share on other sites

I think all the information you need to assess if he is right is in that one short sentence!! For a minute I thought you were making the opposite point to the one that you were....

Not really. He picked the market wrong and continues to do so.

Sure, he'll be right one day. But that's hardly a skill.

Share this post


Link to post
Share on other sites

Good job everybody in Australia works in the mining industry! Oh wait, they don't, the vast majority of them are hairdressers, shop staff and office drones just like every country.

The Australian mining industry in 2011 is like the Irish IT industry circa 2006, a fig leaf used to justify a property bubble.

Absolutely - there are hardly any differences between a primary industry and a service industry.

Share this post


Link to post
Share on other sites

Not really. He picked the market wrong and continues to do so.

Sure, he'll be right one day. But that's hardly a skill.

So you agree with Steve Keen that there will be a property crash in Australia, but you just think he got the timing wrong?

Share this post


Link to post
Share on other sites

In a well-functioning economy, periods of acceleration of debt would be followed by periods of deceleration, so that the ratio of debt to GDP cycled but did not rise over time. In a Ponzi economy, the acceleration of debt remains positive most of the time, leading not merely to cycles in the debt to GDP ratio, but a secular trend towards rising debt. When that trend exhausts itself, a Depression ensues—which is where we are now. Deleveraging replaces rising debt, the debt to GDP ratio falls, and debt starts to reduce aggregate demand rather than increase it as happens during a boom.

Even in that situation, however, the acceleration of debt can still give the economy a temporary boost—as Biggs, Meyer and Pick pointed out. A slowdown in the rate of decline of debt means that debt is accelerating: therefore even when aggregate private debt is falling—as it has since 2009—a slowdown in that rate of decline can give the economy a boost.

That’s the major factor that generated the apparent recovery from the Great Recession: a slowdown in the rate of decline of private debt gave the economy a temporary boost. The same force caused the apparent boom of the Great Moderation: it wasn’t “improved monetary policy” that caused the Great Moderation, as Bernanke once argued (Ben S. Bernanke, 2004), but bad monetary policy that wrongly ignored the impact of rising private debt upon the economy.

I imagine the current UK government incumbents are giving a lot of thought about how to time "a slowdown in the rate of decline of private debt" to give the economy a sufficient temporary boost to be timed in the approach to the next general election (another one like Brown's early 2010 one?).

I doubt they can time it precisely for 5 years after May 2010? so it might well be the governing factor for the timing of the election so any slowdown in the rate of decline could be a leading indicator for the time of next general election (that is if they want re-election which I'm sure they will want as they evidently like power so much).

There's some interesting videos at the end of the Steve Keen link. Including

putting population numbers into perspective

a video on "What Drives House Prices" which, like the main text, shows the importance of debt acceleration

Edited by billybong

Share this post


Link to post
Share on other sites

Good job everybody in Australia works in the mining industry! Oh wait, they don't, the vast majority of them are hairdressers, shop staff and office drones just like every country.

The Australian mining industry in 2011 is like the Irish IT industry circa 2006, a fig leaf used to justify a property bubble.

Ya but when the big cash starts being spent, it flows around the economy. Whether by the miners, the shareholders or the local and national governments spending the royalties and income tax revenues.

Ok the poor ******* office drones and shop staff are still making next to nothing. But I'm sure the building contractors are living it up. (plumbers, sparks, roofers, tilers, pavers, etc..)

Edit to add: I believe the minimum wage even for shop staff is 17 AUS dollars. Which is £11 pounds an hour.

Edited by aa3

Share this post


Link to post
Share on other sites
It becomes a bad thing when this additional credit goes, not to entrepreneurs, but to Ponzi merchants in the finance sector, who use it not to innovate or add to productive capacity, but to gamble on asset prices. This adds to debt levels without adding to the economy’s capacity to service them, leading to a blowout in the ratio of private debt to GDP. Ultimately, this process leads to a crisis like the one we are now in, where so much debt has been taken on that the growth of debt comes to an end. The economy then enters not a recession, but a Depression.

I quite like this.

Share this post


Link to post
Share on other sites

It is amazing, the absolute silence in the MSM over the private debt situation. I guess partly because once people see that along with Japan we are in THE WORST position of any country they might just get it. And the PTB wouldnt want that.

Share this post


Link to post
Share on other sites

So you agree with Steve Keen that there will be a property crash in Australia, but you just think he got the timing wrong?

Of course. But timing's everything, otherwise what's the point?

Share this post


Link to post
Share on other sites

Of course. But timing's everything, otherwise what's the point?

Indeed it is.

I've got a lot of time for Steve Keen's analysis pieces but there is always a fatal error in his work; he always underestimates the desperation of the politicians to cling to power and quite how profligate they are prepared to be with other people's money to stay there.

The stimulus package for FTBs is a case in point. As everyone with half a brain predicted, all it did was add several tens of thousands to the price of the property these poor saps ended up "buying". Since then, the RBA has admitted that a shocking number of the people who took out mortgages during that period are defaulting.

When there's a serious dip in the economy in Australia (perm one from the following potential causes; China, Greece, Ben Bernanke, Japan, etc.) the question will be not whether the government will intervene but how will they and how successful could they be?

Interest rates could be slashed but the problem is that will make everything Australia imports eye-wateringly expensive (compared to the erm, relative cheapness of these things now /sarcasm mode off) so will eat further into incomes resulting in less appetite to trade up/buy a first property.

More money could be chucked at FTBs but one has to question how many more of them are going to come out of the woodwork now and what effect that would have?

I think the best case scenario is a gradual deflation over a very long period. Certainly that's what the folk I work with who get paid to plan for these sorts of scenarios are hoping. Which reminds me of the quote in my signature below.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.