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The GFC is over and the news is likely to continue improving - Steve Keen; The rate of change of private debt is now strongly positive
Topic Started: 13 Mar 2014, 08:38 AM (3,201 Views)
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Closing the door on the GFC

Steve Keen

One of the ironies of the economic crisis that began in late 2007 is that the best acronym for it -- the “GFC” for “global financial crisis” -- was coined in the one country that suffered the least from it, Australia. The year 2014 is the seventh of the “GFC” (the panic began on August 9, 2007, when BNP Paribas shut down three of its subprime-based funds), but at last the majority of economic reports are of sustained if anaemic growth, rather than of bank failures and recession. Australia’s reported growth rate for 2013 of 2.8 per cent follows the UK reporting 1.9 per cent and the US 2.4 per cent; even the EU, where several countries are still mired in outright Depressions, recorded an overall growth rate of 0.1 per cent for 2013.

These are hardly sterling growth rates, but the fact that they are all positive is causing a noticeable change of mood in economic commentary -- and a shift in public expectations as well. Is it enough to call the GFC/Great Recession/North Atlantic Financial Crisis over?

It isn’t. But I’m willing to do so on an entirely different measure: the rate of change of private debt is now strongly positive. The period of private sector deleveraging that caused the crisis appears to be over. Debt is now not merely growing, but growing faster than GDP -- see figure 1.

With sustained positive growth in credit comes a tendency to positive economic news as well, and out of that a tendency to take on more credit too -- after all, that’s what gave us the previous boom, isn’t it?

So the news is likely to continue improving, and at some stage in the future, “the GFC” will be the preceding crisis, not the one we will be in.

So have we learnt enough out of what was universally acknowledged as the greatest economic crisis since the Great Depression to avoid another one in the future? Not on your Nellie. As Bill White (the research director for the Bank of International Settlements, and the only official to warn of the GFC before it happened) said recently, central banks and Treasuries don’t know what they are doing, and are making it up as they go along. They didn’t see this crisis coming, and now that it’s ending they’re not sure why it has ended either: they’re just happy that it has.

This wouldn’t be a problem if the cause of the crisis was merely cyclical: private debt rose for a while, then it fell, now it’s rising again, so what’s the big deal? The Big Deal is the secular trend: it’s now rising again from previously unprecedented levels -- and this can’t all be blamed simply on real interest rates being too low. As figure 2 shows, real interest rates were as low as they are now from 1970-1980, when overall private debt didn’t grow all that much. Instead, the substantial growth in debt occurred from the early 1980s till 1990, and then again from 1995 till 2009, when for the most part real interest rates were above their average level for the last half-century.

Read more: http://www.businessspectator.com.au/article/2014/3/10/economy/closing-door-gfc
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peter fraser
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Steve is moving on, and good on him for that.
Any expressed market opinion is my own and is not to be taken as financial advice
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Dr Watson
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peter fraser
13 Mar 2014, 08:47 AM
Steve is moving on, and good on him for that.
Ah, Peter. Pushing buttons so early in the morning? I'm not sure Keen's "moving on" so much as preparing for the next crisis:
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This wouldn’t be a problem if the cause of the crisis was merely cyclical: private debt rose for a while, then it fell, now it’s rising again, so what’s the big deal? The Big Deal is the secular trend: it’s now rising again from previously unprecedented levels -- and this can’t all be blamed simply on real interest rates being too low.
He seems to be saying that there wasn't sufficient deleveraging prior to the recent upturn. From reading your posts here and at MB Peter, you seem to think the GFC was a purely cyclical event and now it's back to business and blue skies as usual. You don't seem to appreciate the bigger picture, or what Keen refers to as the "secular trend". I think there are limits as to how high debt-to-GDP can rise (as some European nations have recently found out) and if this number keeps rising here, we'll find that out too.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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newjez
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Dr Watson
13 Mar 2014, 08:59 AM
Ah, Peter. Pushing buttons so early in the morning? I'm not sure Keen's "moving on" so much as preparing for the next crisis:
He seems to be saying that there wasn't sufficient deleveraging prior to the recent upturn. From reading your posts here and at MB Peter, you seem to think the GFC was a purely cyclical event and now it's back to business and blue skies as usual. You don't seem to appreciate the bigger picture, or what Keen refers to as the "secular trend". I think there are limits as to how high debt-to-GDP can rise (as some European nations have recently found out) and if this number keeps rising here, we'll find that out too.
The GFC is like a ravenous beast lurching from country to country, and all they feed it is bread. It has yet to taste meat, and we all shall rue the day when it does, for then it shall descend upon us!

I don't think this thing is over. Not by a long shot.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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peter fraser
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Dr Watson
13 Mar 2014, 08:59 AM
Ah, Peter. Pushing buttons so early in the morning? I'm not sure Keen's "moving on" so much as preparing for the next crisis:
He seems to be saying that there wasn't sufficient deleveraging prior to the recent upturn. From reading your posts here and at MB Peter, you seem to think the GFC was a purely cyclical event and now it's back to business and blue skies as usual. You don't seem to appreciate the bigger picture, or what Keen refers to as the "secular trend". I think there are limits as to how high debt-to-GDP can rise (as some European nations have recently found out) and if this number keeps rising here, we'll find that out too.
I hope that he is preparing for the next crisis, I certainly am.

You mention the high debt but you never mention the money that the debt creates. You only consider half of the equation, which is why you will never understand. Keen actually understands this better than you do. What matters is distribution of money and debt - who is holding it.

Go away and think about it for a while and stop trolling.
Any expressed market opinion is my own and is not to be taken as financial advice
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GloomBoomDoom
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It probably scares the bulls because if they think he is always wrong then he is probably wrong about this too.
MSE
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Dr Watson
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peter fraser
13 Mar 2014, 09:25 AM
I hope that he is preparing for the next crisis, I certainly am.

You mention the high debt but you never mention the money that the debt creates. You only consider half of the equation, which is why you will never understand. Keen actually understands this better than you do. What matters is distribution of money and debt - who is holding it.

Go away and think about it for a while and stop trolling.
Your response raises two questions.

Firstly, do you believe private (or public) debt-to-GDP can increase forever?

Secondly, you seem to be suggesting that debt ratios are no problem so long as the right people hold the debt. Who, pray tell, are the right people to hold the debt? Banks, governments, individuals?
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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peter fraser
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Dr Watson
13 Mar 2014, 09:32 AM
Your response raises two questions.

Quote:
 
Firstly, do you believe private (or public) debt-to-GDP can increase forever?


There are limits, but is GDP really the appropriate measure. Do fees for haircuts really add to our real production?

GDP can rise and fall, so what are the debt to GDP projections, what difference do the changes in the banking system 40 years ago make, do they mean that comparisons to 1930 are irrelevant or not?

Quote:
 
Secondly, you seem to be suggesting that debt ratios are no problem so long as the right people hold the debt. Who, pray tell, are the right people to hold the debt? Banks, governments, individuals?

Assuming we are talking about a currency issuer like Australia, then both the public sector and the private sector, including households can manage the level of debt that they can pay back. If you disagree then tell me how our economy would fare in a world without debt, because in that scenario no one would have any money.

If we are talking about a currency user like Spain then they have a real problem.

Now stop trolling.
Any expressed market opinion is my own and is not to be taken as financial advice
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doubleview
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GloomBoomDoom
13 Mar 2014, 09:31 AM
It probably scares the bulls because if they think he is always wrong then he is probably wrong about this too.
Ha ha exactly, nail on head !

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peter fraser
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GloomBoomDoom
13 Mar 2014, 09:31 AM
It probably scares the bulls because if they think he is always wrong then he is probably wrong about this too.
Steve is very pro stimulus to transfer the debt from households and the private sector to public debt to rebalance the debt, and I'm very comfortable with that.

Some of the right wing bulls won't be, and most bears also wouldn't be comfortable with that.

But he is right, that's what needs to be done and it's what is being done. Lower interest rates, lower tax rates, more middle class welfare like paid parental leave, it's all happening but most people aren't connecting the dots. The debt is moving from households to the public purse.
Any expressed market opinion is my own and is not to be taken as financial advice
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