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The Aussie Economy: Good Times or Stormy Waters?

The Aussie Economy: Good Times or Stormy Waters?. BTalk’s Phil Dobbie and Steve Keen, Associate Professor, University of Western Sydney. Aussie Economy: Good Times or Stormy Waters?. Steve Keen Uni Western Sydney. Aren’t good times here again?. Aren’t good times here again?.

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The Aussie Economy: Good Times or Stormy Waters?

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  1. The Aussie Economy: Good Timesor Stormy Waters? BTalk’sPhil Dobbie and Steve Keen, Associate Professor, University of Western Sydney

  2. Aussie Economy: Good Times or Stormy Waters? Steve Keen Uni Western Sydney

  3. Aren’t good times here again?

  4. Aren’t good times here again?

  5. Growing debt necessary in a growing economy… “If income is to grow, the financial markets … must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, … it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets.” (Minsky 1982, p. 6; emphasis added) But not when it finances speculation rather than investment…

  6. This is the biggest debt bubble in history

  7. Debt and GDP Rising debt winds the economy up Falling debt winds it down… Spending = sum of GDP plus change in debt Illustration: 1920-1940

  8. Aggregate Demand

  9. Aggregate Demand and unemployment 1920-1940 R2=-0.938

  10. Debt and GDP Same exercise for 1990-2010:

  11. Aggregate Demand

  12. Aggregate Demand and unemployment 1990-2010 R2=-0.955

  13. Debt-financed fraction of aggregate demand is... Scale of downturn 2.25 years in 2000s Scale of government response 1930s 1930s 2000s

  14. Australia is doing better because of less deleveraging Government Private Sector Aus Aus USA USA

  15. Debt financed demand & unemployment, Australia Less deleveraging here but same change in debt—unemployment correlation

  16. It’s a second order thing… • If demand = GDP + change in debt • The growth in demand is • Change in GDP + change in change in debt • Not just debt, or the rate of growth of debt • But how rapidly that rate of growth is changing… How deleveraging works

  17. A numerical example • In “dream world” where GDP growth unaffected… How deleveraging works

  18. USA then…

  19. USA now. Slowdown in debtcan cause crisis

  20. Australia now. Australia still not deleveraging

  21. Booming…? What about house prices?

  22. Far higher than US, Japan What about house prices? • But only because their price bubbles have already crashed • Notice our prices below USA 2005-08

  23. Can population pressure justify high prices?... What about house prices? • Dwelling growth exceeded population growth every year except 2007-10

  24. And Chinese demand? What about house prices? • We beat GFC because of Victoria and housing • Chinese growth only kicked in mid-2010

  25. Biggest growth industries stimulus and FHVB driven Chinese-driven demand a late arrival

  26. Or does financial pressure explain it? What about house prices?

  27. Just like the USA… What about house prices? • Australian households now more indebted than USA • Debt servicing costs 1.5 times as high here as in USA

  28. And government manipulation of the market? • Prices bubbled when FHOG introduced or doubled… • No trend in real prices prior to 1st First Home Owners Scheme (1983) What about house prices?

  29. But what about “underlying demand”? • Legitimate measurement of social need • Illegitimate measure of demand pressure on house prices: • (National Housing Supply Council 2010, p. 66) • “2008 gap size = • additional private rental dwellings required in 2008 to increase the number of vacant private rental dwellings to 3 per cent of the total private rental stock • + dwellings required to accommodate people who are homeless and sleeping rough or staying with friends and relatives • + dwellings required to house marginal residents of caravan parks.” What about house prices?

  30. Past 40 years of economic history driven by leveraging up • Sustained false boom since 1987 Stock Market Crash • Foreseeable future driven by deleveraging • Private sector now debt-saturated • There has never been a post-WWII recovery without rising debt • Sign of inherently sick economy • But absence of rising debt now means little likelihood of sustained economic “recovery” • Ultimately have to confront excessive debt • “Debts that can’t be repaid, won’t be repaid” (Michael Hudson) • Debt moratoria better than honouring debt that should never have been issued • Structural problems (excessive financial sector, trade imbalance) remain even if debt problems confronted Summary

  31. Thanks Steve! Any questions? • Complete the questionnaire Steve Keen

  32. Complete the Questionnaire • Complete the questionnaire Phil Dobbie Steve Keen

  33. Queries “Those convincing us that housing is not in a bubble, among other measures use household income to show that prices are still reasonable, rather then an individual income. Women's participation rate is at the historic high. Does that make the housing market more stable, considering also high divorce rate?” • Complete the questionnaire

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