Webdiary - Independent, Ethical, Accountable and Transparent
header_02 home about login header_06
sidebar-top content-top


For mine, this is the most interesting local take so far on what's going on in the world's wacky finances:

Economists debate market collapse

MARK COLVIN: The underlying fact about the global economy is that there's still a huge discrepancy between what the economic historian, Niall Ferguson, calls Planet Finance and Planet Earth.

After the global financial crisis, he told this program that the true GDP of Earth was 10 times less than the valuation that Planet Finance put on it. A couple of years later he said it was down a bit, but Planet Finance was still seven times overvalued. Another way of describing this is a bubble - and bubbles that aren't properly pricked keep re-inflating.

Plenty of economists have been pointing this out over the last few years and this year with the US debt debate and the Euro crisis, people have been saying it ever more frequently. In some ways one of the few mysteries is why the markets have suddenly chosen this time to listen.

I'm joined in the studio by Steve Keen, associate professor in economics, from the University of Western Sydney, and on the phone Chris Caton, chief economist of the BT Financial Group.

Chris Caton, you watch the markets, why now, I mean why not three weeks ago or three weeks from now?

CHRIS CATON: Well there isn't a good reason. I suppose the catalyst, well we've had two catalysts, certainly in the US.

Number one, the agonising about the debt ceiling, would it be raised?

Was there a chance of default?

Was there a chance of downgrade?

That's catalyst number one.

And catalyst number two, there has been just a rapid-fire series of very weak economic data points: the GDP reports for the second quarter, the purchasing managers survey that covers manufacturing, and news about real consumption growth in recent months. And of course on top of that, you know, renewed rumblings about eurozone debt.

This could have happened at some other stage, but to me those were the catalysts. Catalysts don't cause things, they just bring them on if you like.

MARK COLVIN: And some of it is just sentiment, as they call it in the market, in other words a sort of skittishness I suppose?

CHRIS CATON: Absolutely, whenever these things start they always continue essentially because, well you can call it panic, you can just call it people trying to get out, but yes panic sets in.

MARK COLVIN: Steve Keen is this the beginning of another global financial crisis?

STEVE KEEN: It's the continuation of the last one. I mean Chris is quite right to say that there are catalysts and there are causes, and he's identified a couple of important catalysts as to why it happened now. But the real cause is what's happening with private debt. This is being ignored in all the ballyhoo over the level of government debt in America right now but this is always been a crisis caused by private debt, which fuelled the biggest stock-market bubble in history, beginning back around 1994, and going right to 2000.

MARK COLVIN: What do you mean by private debt? Just explain what private debt consists of.

STEVE KEEN: Borrowing by households and corporations and that's what…

MARK COLVIN: So we're all in it, I mean this is about our mortgages too?

STEVE KEEN: Yeah mortgages actually drove up the level of house prices obviously. But equally financial-sector borrowings and lending to marginal loans and stuff like that, actually drove up the stock market as well. And to have a rising set of asset markets, you don't just need rising debt you need accelerating debt. And that's what's been going on in America for the last 20 years and it's been completely ignored by the Federal Reserve. They actually, and now the deceleration is what actually set the financial crisis in train.

MARK COLVIN: Is there a housing bubble in South-East Asia as well, or in Asia generally?

STEVE KEEN: I think Asia had its huge crisis back in 97/98 and…

MARK COLVIN: I've just seen stuff in recent days suggesting that…

STEVE KEEN: There seems to be a yeah. Every time the finance sector gets away with a particular explosion in debt, as you said with Niall Ferguson's work, it gets back to it again if you don't completely put them back inside their boxes.

And not only did we not put them back inside the box, we put them in the governing seat and spent most of our time trying to rescue the financial sector that caused the trouble in the first place.

MARK COLVIN: Chris Caton is this the extension of the global financial crisis?

CHRIS CATON: It's the hangover after the drunken binge in my view. So yeah, it is still essentially caused by everything that brought the GFC on.

MARK COLVIN: A hangover you can get over, can we get over this in, obviously not in a day or two which you can with a hangover, but the global equivalent?

CHRIS CATON: Yes. It's my belief, and this is where I think Steve and I will probably disagree, yes you can get over it, but you get over it only slowly. And yeah I must admit it's difficult looking forward to see anything other than, you know, fiscal austerity and consolidation around the world, slow growth for a long time. So the hangover's going to last a long time, but to me we're not, mixing metaphors just slightly, we're not about to fall off another precipice.

MARK COLVIN: Do you agree with Kenneth Rogoff, the professor of economics at Harvard University, who says that the world is just basically still grossly over-leveraged?

CHRIS CATON: I don't see it quite that way, but I'm sure that Steve would have a different opinion. I think that a lot of that…

MARK COLVIN: He's nodding vigorously and he'll come in in a minute.

CHRIS CATON: (laughs) I think a lot of that has gone away. But, yeah, it is quite clear there are still some stupendously wrong valuations, if you like. I don't see that, incidentally, in the equity market which of course is where we're seeing a lot of action lately.

Over to Steve …

MARK COLVIN: Steve Keen.

STEVE KEEN: (laughs) Well in terms of the level of debt we're in, if you go back to the beginning of the post-war period in America, America's private debt to GDP ratio was 45 per cent. It peaked out in 2009 at 300 per cent, so more than six times as much debt compared to income as when the Second World War ended. And that's now turned around, you've fallen from 300 per cent of GDP as the private debt level to 260 per cent, which is a pretty huge fall, but it still leaves America with more debt than it had at the absolute peak of the Great Depression.

MARK COLVIN: Doesn't Professor Rogoff give a tipping point of 90 per cent?

STEVE KEEN: He's talking about government debt.

MARK COLVIN: Right ok.

STEVE KEEN: I'm talking about private debt.

MARK COLVIN: So where are we on that?

STEVE KEEN: Government debt we're hitting about the 100 per cent level again.

MARK COLVIN: So they're 10 per cent over his tipping point?

STEVE KEEN: But it wouldn't matter if it wasn't for the level of private debt. The American government began with a higher debt to GDP ratio than 100 per cent after the Second World War, but the private sector was at, you know, a trivial level of debt, frankly, for America's debtcarrying capacity. So it was quite possible for the private sector to boom, and with the booming private sector the government to gradually reduce its debt level by running surpluses.

MARK COLVIN: So this does go back to the previous global financial crisis, it does go back to that period where there were those companies that were over-leveraged, and people trying to make a nest-egg for their retirement were investing in firms like Lehmans, and so forth, and also investing in CDOs (collateralized debt obligations), those terrible instruments which really basically were instruments of…

STEVE KEEN: Mass destruction.

MARK COLVIN: …instruments of mass destruction, but what they represented was mortgages that were never, ever going to be paid back. And all that still hasn't washed out of the system?

STEVE KEEN: It still hasn't washed out. There's still, I mean there's level of derivatives peaked at something like $530 trillion, about three to four times the size of the global economy, that people say that's a gross position rather than net. But fundamentally that only works if you can rely upon your counterparty not going bankrupt. Well so much for that particular reliance.

MARK COLVIN: Chris Caton, the counter argument?

CHRIS CATON: Can I just say that in the long run there's no magic constancy between debt and GDP. For a start what you're doing is dividing a stock…

STEVE KEEN: Oh please Chris don't hit me with that one, that's a silly comment because the people did the same thing about government debt and nobody ever whinges about that. It's a blind spot neoclassical economists have about the level of private debt because they believe the private sector's always rational, they've been through the biggest irrational bubble in history.

MARK COLVIN: Let's Chris …

CHRIS CATON: All I'm saying Steve is, you can make your same point if you like another way, but to me you really have to look at the level of debt and the level of assets.

STEVE KEEN: Level of assets have got three letters at the front ASS. I think we should take them importantly. Assets can collapse in value overnight, as we've seen today, your liabilities remain there, and it's liabilities that are driving this debt crisis.

They've got totally out of hand, and you, mate there may not be a magical level of debt, but when you have it going from 45 per cent of GDP to 300 per cent that is a runaway exponential growth process that can't be sustained. And when it broke that's what caused the financial crisis.

And we're now in a permanent stage of deleveraging until we get back down to similar levels, about 100 per cent of GDP.

MARK COLVIN: Incidentally, since we're talking about valuing assets, to what extent are the ratings agencies at the centre of this, as they were back in 2007 Chris Caton?

CHRIS CATON: They, well I guess the ratings agencies didn't distinguish themselves.

STEVE KEEN: (laughs) I think they did.

CHRIS CATON: Well perhaps they did, but for the wrong reasons, during the GFC, and it may be that they're a bit trigger happy right now and hence not helping matters either. For example, this overhanging threat to downgrade the US government debt anyway, despite the, well despite what has been done there. Now, you know, maybe US government debt does deserve to be downgraded, but there's something like 17 other nations that have Triple-A debt and when you look at them, you think, well surely if the US, and maybe here again Steven might come in with this, surely if the US deserves to lose its Triple-A status, then all of the other 17 do too. There's not, nobody there whose debt should be more highly ranked than that of the US.

STEVE KEEN: Well I think the reason the USA gets away with it because it's the reserve currency for the globe.


STEVE KEEN: And of course also it's got a captive central bank. So if it runs a deficit and it can't sell the bonds the Federal Bank, the Federal Reserve, necessarily underwrites it. The reason we're getting a debt crisis, a genuine one, in Europe, rather than America, is because they don't have a captive central bank. In fact, frankly, they don't really have a central bank at all.

MARK COLVIN: Alright, let me, we ought to wind up gradually.

Chris Caton, what do you think are the chances of avoiding stagflation and what should we do about it?

CHRIS CATON: Well there's no inflation to be stagflation. The…

MARK COLVIN: In Australia, what about the world?

CHRIS CATON: Well the issue is avoiding …

STEVE KEEN: Deflation, debt deflation.

CHRIS CATON: …I would say we're 80 per cent likely to avoid a double-dip recession in, well either in Europe, or the US, or the world in general. It is clear this is a period that the world economy has lost a lot of momentum. My suspicion is that this is a temporary thing it's going through.

MARK COLVIN: Steve Keen?

STEVE KEEN: I think it's permanent until the debt levels are paid down. We're in a debt deflation where deleveraging by the private sector is going to reduce aggregate demand below aggregate supply and will slowly grind down.

MARK COLVIN: And the question of what we do about it?

STEVE KEEN: We have to abolish the debt. The debt should never have been issued in the first place and the financial institution that issued should go bankrupt.

MARK COLVIN: And for Australia, the ramifications and what we should do?

STEVE KEEN: Similar sort of thing. We had equally a bigger housing bubble, house debt bubble, than America had, and that debt should never have been issued, so we have to get that debt reset otherwise we'll face the same sort of grinding future America has.

MARK COLVIN: And you'll be on top of Mount Kosciusko again?

STEVE KEEN: No, no, I'll be showing Rory Robertson how to run.

(Chris Caton and Mark Colvin laugh)

MARK COLVIN: Chris Caton your prescriptions?

CHRIS CATON: Well I thought I just basically, I mean I think we will get through this very, but get through it very slowly and I just wonder…

MARK COLVIN: I mean for the government, what would you be advising the government on how to buckle up for this one?

CHRIS CATON: Well prayer I guess would be the first thing…

(Steve Keen and Mark Colvin laugh) MARK COLVIN: Prayer, right...

CHRIS CATON: … and also ...

MARK COLVIN: We'll call in Cardinal Pell and Archbishop Jensen.

CHRIS CATON: Australia has no endemic problem here, we're looking a paragon compared with everybody else.

STEVE KEEN: Not with our private debt levels.

CHRIS CATON: And we've also got more flexibility...

STEVE KEEN: That I'll agree.

CHRIS CATON: …certainly in monetary policy than the rest of the world does. But we are not immune to what happens elsewhere, we know that, so yeah, if the worst outcome were to come about elsewhere then we would be affected, through loss of wealth, through consumer sentiment, etc.

MARK COLVIN: Thank you both very much.

Chris Caton, chief economist of the BT Financial Group and Associate Professor Steve Keen from the University of Western Sydney.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Are you sure you're not confusing them with the Coen brothers?

What's this nutty thing about the Koch brothers?

Everyone knows who they are. It's no secret. The patriarch was a Texas oil man and chemical engineer who made a fortune out of an oil processing invention and who had strong views about Communists after first hand experience of the Soviet Union. The sons are into libertarianism which is one of those weird American things. It is supposed to be to the right of the American conservatives but except for the suits and haircuts would not look out of place at  a back room meeting on top of the Black and Red Bookshop circa 1975.

In 1980 one of them ran for Vice President on a ticket that included the abolition  of social security, the Federal Reserve Board, welfare, minimum wage laws, corporate taxes, all price supports and subsidies for agriculture and business, and US Federal agencies including the SEC, EPA ICC, FTC, OSHA, FBI, CIA and DOE. The ticket also proposed legalisation of prostitution, recreational drugs and suicide.

The abolition of government. Right on bro'. Absolutely insane. But how can the left complain? It's not if they are Greens or something. 

a koch in hand

Wot Justin says.

The Koch bros are usually at the bottom of these things, you have to think Murdoch and beyond to begin to grasp their reach.

With John Pratt's comment, methinks also the death of memory as the pace of media dumbing down continues apace. The state can become a mere instrument for the plutocracy in Australia, there is not the overt violence and suffering of other countries, it's more immanent and mildly repressive tolerant.

To deny the very errors of not discerning change correctly, we have the killing off of the Murdoch Press/Cameron story, the (wilful) failure to discern correctly the meaning of Anders Breivik and the sheer humongousness of the latest Great Heist in the USA.

It's not hard to miss the deterioration in Australian media and politics in the abysmal conduct of out leaders, Gillard and Abbott, over asylum seekers, did we have to go to the real depths this time?

Team Work

The Koch brothers keep a low profile, and use the dumb punters to champion their cause, with the help of fluffer Murdoch, who does it for the cash.

Keep Your Government Hands Off My Medicare!

Pray or prey?

Chris Caton seems like a glass half full type of guy, I suppose one would expect that from a BT guy, no use talking the market down. Steve Keen on the other hand is an empty glass type of guy, probably what you'd expect from an academic who enjoys attention (and fear mongering attracts attention), maybe.

But SK is probably closer to the mark than the BT guy, who believes in prayer (telling) - but it appears that all it will take is for people to start getting laid off and The Lucky Country will not be so lucky (or unique). The punters will then demand free cash/mortgage aid/stimulus and all that - with public debt only being around 6% of GDP I'm sure our current government would see such as a profitable investment in its future.

The Tea Party - funny mob - haha - one should not forget that the only difference between a mob and a movement is leadership.  The TP was the creation of the Koch brothers for obvious reasons - do your own homework, but it would appear the greater majority of TP grass roots members would not have a clue about what/who they are dealing with, let alone manage an economy (not that the current mob can either).

Anyway lots of fun and games ahead, but when the crunch comes (and it will) many are going to realise just how debilitating (and unforgiving) debt can really be, here in The Lucky Country.

PS. It will be interesting to see if the market has already factored in the US downgrade when the markets open on Monday - it all has a lot to do with confidence/faith from from here on in, methinks,

Maybe Caton was right: we need to pray, but did he really mean: prey?

Strange ideas

Fiona, Planet Finance or Planet Earth?

The Democrats and now the Greens have been accused by conservatives as believing in "fairies at the bottom of the garden"

Some ideas that seem like fairy stories to me.

Economies can grow without limits.

Fossil fuels will last forever. 

Raising interest rates will bring down inflation, especially inflation caused by the price of bananas.

Cutting government spending is good for the economy, and will produce jobs.

Taxing the rich is bad for the economy. 

Markets know best.

Uncommon Commonsense

Hello John.

Your comments are spot on except that the billion or so people that have benefitted from the standard of living explosion will never desist.

Unfortunately, I am also in that number and only too keenly know that I can't easily surrender to whatever commonsense says.

There never was going to be a GFC until it happened and there will never be a human extinction event until it happens it in our own land. That is our nature; the problems "over there" will never happen to us. Instead prophets are called nutters as they have always been.

While it may be true that we have the resources to feed 12 billion people or more, where is the will to do it? It is not a priority for any country even for those badly affected by human tragedy.

Eventually, billions will die as the dispassionate, indifferent and insensitive natural world enforces a balance to our systems out of kilter. Economic theories are not divorced from the real earth except in the minds of those who practice its alchemic wizardry. A hen lays an egg and you eat. Everything else is sleght-of-hand. Trying to turn base metal into gold is a dirty big lie that we have all fallen for. Superannuation, 5 bed room house, $100 steaks, you don't need them when you're dead, and you're dead for an eternity.

The stench of  many billions of corpses will envelop the planet and we will have learned nothing because a few years after we will be in the same place again as George Santayana has reminded us.Poor me, poor us.


Fiona, as one totally ignorant in these matters (me, not you), I have been wondering why our entertainment media, show biz publications such as The Australian, and the ABC radio stations have been running so hard with the drama and conflict of the U.S. House/Senate, why the portrayal of dramatic brinkmanship over raising their debt ceiling when I don't remember any such drama in those media on the numerous occasions in the past when that debt ceiling was raised by the exact same process, politicking between the Democrats and Republicans in the House and Senate?

What has changed, or have journalists just found a new gold mine, a new imaginary drama to sensationalise, after previously just being ignorant of it?

What's wrong with this picture?

Michael, the difference between this and the previous 140 raises in the debt ceiling was that this time there were a significant group of legislators on the Hill (helpfully described by the UK's Business minister as "a bunch of right-wing nutters") who actually thought that a default would be a Good Thing, because the immediate pain would be worth it if it moved the world toward their ideal one in which there was essentially no government at all.

They never seem to accept that there is an example or two of their ideal world already available to point to, in Sudan and Somalia ... 

This time, only this time

A man of the Shaw ilk, one George Bernard of that ilk, wrote

 SIR O.  But surely such a procedure was never contemplated when the Powers joined the League?

JUDGE.  I do not think anything was contemplated when the Powers joined the League.   They signed the Covenant without reading it, to oblige President Wilson.  The United States then refused to sign it to disoblige President Wilson, also without reading it.  Since then...

David, what difference? 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
© 2005-2011, Webdiary Pty Ltd
Disclaimer: This site is home to many debates, and the views expressed on this site are not necessarily those of the site editors.
Contributors submit comments on their own responsibility: if you believe that a comment is incorrect or offensive in any way,
please submit a comment to that effect and we will make corrections or deletions as necessary.
Margo Kingston Photo © Elaine Campaner

Recent Comments

Roger Fedyk: Jingoistic Tripe in "Labor in Australia is a movement" 1 day 5 hours ago
Paul Walter: Cleeses Parrott. in Spring Fever Oz Politics Style 3 days 12 hours ago
Alan Curran: Lamp on the desk. in "Labor in Australia is a movement" 4 days 4 hours ago
Marilyn Shepherd: I have in 2001 – 2011: Here We Go Again 1 week 4 days ago
Justin Obodie: Because... in 2001 – 2011: Here We Go Again 1 week 5 days ago
Justin Obodie: PTSD in 2001 – 2011: Here We Go Again 1 week 5 days ago
Marilyn Shepherd: No papers needed in 2001 – 2011: Here We Go Again 1 week 6 days ago
Alan Curran: Marilyn in 2001 – 2011: Here We Go Again 2 weeks 4 hours ago