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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: bart13 who wrote (106562)	12/5/2009 7:20:47 PM
From: ggersh	Read Replies (1) \| Respond to of 110194

Great stuff, Bart! Can't wait for the article!

To: bart13 who wrote (106562)	12/5/2009 8:02:20 PM
From: pogohere	5 Recommendations Read Replies (1) \| Respond to of 110194

You might find the following article rather interesting: Debtwatch No 41, December 2009: 4 Years of Calling the GFC Published in December 1st, 2009 by Steve Keen I first realised that the world faced a serious financial crisis in the very near future in December 2005, as I prepared an Expert Witness Report for the NSW Legal Aid Commission on the subject of predatory lending. My brief was to talk about the impact of such contracts on third parties, since one ground to overturn a loan contract was that it had deleterious impacts on people who were not signatories to the contract itself. I was approached because the solicitor in the case had heard of my academic work on Hyman Minsky’s “Financial Instability Hypothesis”. Minsky’s hypothesis argued that a capitalist economy with sophisticated financial institutions could fall into a Depression as an excessive buildup of private debt occurred over a number of financially-driven business cycles. I had built a mathematical model of Minsky’s hypothesis in my PhD, which generated outcomes like the one shown below: a series of booms and busts lead to debt levels ratcheting up over time, until at one point the debt-servicing costs overwhelmed the economy, leading to a Depression. . . . When I began writing my Report, I started with the comment that “debt to GDP levels have been rising exponentially”. But since I was an Expert Witness in this case rather than the Barrister, I knew that I couldn’t rely on hyperbole–and if the trend of growth wasn’t exponential, then I couldn’t call it that. I expected that there would be a rising trend, but that it wouldn’t be quite exponential, so I would need to amend my initial statement. I downloaded the data on Australian private debt and nominal GDP levels from the RBA Statistical Bulletin, plotted one against the other, and my jaw hit the floor: the trend was clearly exponential. The correlation coefficient of the data since mid 1964 with a simple exponential function was a staggering 0.9903. The only thing that stopped the correlation from being absolutely perfect were two super-bubbles (on top of the overall exponential trend) in 1972-76 and 1985-94. . . . I expected that the situation in America would be as bad or worse, which was confirmed by a quick consultation of the Federal Reserve’s Flow of Funds data. Though not as obviously exponential as in Australia’s case, the correlation with simple compound growth was still 98.8%. . . . So debt had been growing faster than GDP–4.2% per annum faster in Australia’s case for over 40 years, and 2.7% faster for longer in the USA’s. An unsustainable trend in debt had been going on for almost half a century. Staring at those graphs (at roughly 3am in Perth, Western Australia), I realised that these debt bubbles had to burst (and probably very soon), that a global financial crisis would erupt when they did, that someone had to raise the alarm, and that given my knowledge, that someone was me. As soon as my Expert Witness Report was finished, I started making comments in the media about the likelihood of a recession. Less than 2 years later, the Global Financial Crisis erupted, and economists who didn’t see it coming, and who for decades had argued that government spending could only cause inflation, suddenly called for–and got–the biggest government stimulus packages in world history to prevent an economic Armageddon. To some degree, the government stimulus packages worked. I am happy to admit that the scale of the government countermeasures surprised me. As Australia’s Prime Minister Kevin Rudd pointed out, the collective stimulus over the 3 years from September 2007 till September 2010 was expected to be equivalent to 18 percent of global GDP. That was huge–bigger in real terms than the US’s military expenditure during World War II. That huge government stimulus has attenuated the severity of the crisis, and led to positive growth figures in many countries–most notably Australia, which recorded only one quarter of falling GDP versus a norm of 4 consecutive quarters for most of the OECD. But it still has not addressed the cause of the crisis–the excessive level of private debt, and the transition from a period of decades in which rising debt fuelled aggregate demand, to one in which the private sector’s attempts to reduce debt will subtract from aggregate demand. For that reason, I do not share the belief that the GFC is behind us: while the level of private debt remains as gargantuan as it is today, the global economy remains financially fragile, and a return to “growth as usual” is highly unlikely, since that growth will no longer be propelled by rising levels of private debt. . . . So could the global economy get out of the global financial crisis the same way it got out of the 1990s recession–by borrowing its way up? That’s where the sheer level of debt becomes an issue–and it’s why I stuck my neck out and called the GFC, because I simply didn’t believe that we could borrow our way out of trouble once more. Debt did continue rising relative to GDP for several years after I called the GFC, but it has now reached levels that are simply unprecedented in human history. For the “borrowing our way out” trick to work once more, we would need to reach levels of debt that would make today’s records look like a picnic. What are the odds that that could happen again? . . . The debt servicing burden The simplest measure of the impact of debt levels on the economy is to look at the ratio of interest payments to GDP. There are obviously two factors here: the level of interest rates, and the ratio of debt to GDP. A very high rate of interest–such as applied during the 1970s–can mean that even a low level of debt (relative to income) is hard to service; conversely, a low rate of interest–such as we have now–can be hard to service if debt levels are very high. . . . Only one question remains: why do Central Banks ignore the debt to GDP ratio? There is nothing more dangerous than a bad theory The simple reason is: because they are neoclassical economists. You don’t get to be a Central Banker without a degree in economics, and the school of thought that dominates economics today is known as neoclassical economics. Though a lot of what it says appears to be superficially intelligent, almost all of it is intellectual drivel, as I outlined in my book Debunking Economics (which summarised a century of profound critiques of this theory which its practitioners have studiously ignored). Since critiques by economists and mathematicians of this theory have literally filled books, I won’t try to go into all of them here. Just three key neoclassical myths suffice to explain why they do not understand the dynamics of our credit driven society. They believe that: (1) The nominal money supply doesn’t affect real economic output; (2) The private sector is rational while the government sector is not; and (3) That they can model the economy as if it is in equilibrium. debtdeflation.com