Neither the ABS nor Steve Keen deduct baseline inflation. Steve Keen decries the practice of ignoring "absolute" prices and only looking at "relative" prices in the "About" page of his website.
Strindburg not sure what you mean. Steve is discussing what he says is a problem with neoclassical economists ignoring existing debt (and savings ) levels when they discard absolute price levels and only concern themselves with relative income vs costs. Hence he says that absolute price levels matter also.
Well I thought he was talking about that, so just to be sure he wasn't saying just what you highlighted I decided to read the comments and see if there was some clarification - which there is below:
Steven Shaw February 13, 2011 at 9:03 am | # Surely the neoclassical economists can see that if you double all prices and incomes, then in order for things to be same – relatively – then you do, as you allude to, need to double the debts? You also need to double peoples deposits/savings but I guess that you can argue that deposits are merely a debt/liability of the bank. Of course, this analysis does seem to consider only a closed system. We live in a world of floating exchange rates, foreign debts and even Kangaroo bonds. So, if Australia passed a law to double the money level overnight, I wonder if someone – probably a foreigner – would not be disadvantaged…
Steve Keen February 13, 2011 at 7:32 pm | # No they can’t Steven! I have a plethora of quotes to that effect that will be turning up in the second edition of Debunking Economics. This is even though Milton Friedman, when he first started to resurrect this nonsense, actually did put in the proviso that debt would have to be doubled in order achieve the outcome (which itself is still false because of the nonlinearity of debt repayment dynamics).
Now it may be just me but I always assume people are talking about relative levels of EVERYTHING. This may just be my physics and chemistry knowledge bias (and I know only little about theoretical economics) but I thought economists would do the same - ie. all indexed.
So when I here Steve talking about a 20% decrease I would take this as a relative drop in prices. Since you tell me that the ABS index is not indexed for inflation then I will dispute the level required for a 20% drop by end of 2013.
Recalculating from the figures you suppplied: June 2010 - 149.8 needs to become 130.0 by June 2013 (assuming flat 3% inflation).
This represents a 14% drop from March 2008.
Then again we could index by wages, but they should be similar or a touch higher.
Strindburg not sure what you mean. Steve is discussing what he says is a problem with neoclassical economists ignoring existing debt (and savings ) levels when they discard absolute price levels and only concern themselves with relative income vs costs. Hence he says that absolute price levels matter also.
Well I thought he was talking about that, so just to be sure he wasn't saying just what you highlighted I decided to read the comments and see if there was some clarification - which there is below:
Steven Shaw February 13, 2011 at 9:03 am | # Surely the neoclassical economists can see that if you double all prices and incomes, then in order for things to be same – relatively – then you do, as you allude to, need to double the debts? You also need to double peoples deposits/savings but I guess that you can argue that deposits are merely a debt/liability of the bank. Of course, this analysis does seem to consider only a closed system. We live in a world of floating exchange rates, foreign debts and even Kangaroo bonds. So, if Australia passed a law to double the money level overnight, I wonder if someone – probably a foreigner – would not be disadvantaged…
Steve Keen February 13, 2011 at 7:32 pm | # No they can’t Steven! I have a plethora of quotes to that effect that will be turning up in the second edition of Debunking Economics. This is even though Milton Friedman, when he first started to resurrect this nonsense, actually did put in the proviso that debt would have to be doubled in order achieve the outcome (which itself is still false because of the nonlinearity of debt repayment dynamics).
Now it may be just me but I always assume people are talking about relative levels of EVERYTHING. This may just be my physics and chemistry knowledge bias (and I know only little about theoretical economics) but I thought economists would do the same - ie. all indexed.
So when I here Steve talking about a 20% decrease I would take this as a relative drop in prices. Since you tell me that the ABS index is not indexed for inflation then I will dispute the level required for a 20% drop by end of 2013.
Recalculating from the figures you suppplied: June 2010 - 149.8 needs to become 130.0 by June 2013 (assuming flat 3% inflation).
This represents a 14% drop from March 2008.
Then again we could index by wages, but they should be similar or a touch higher.
The original Keen/Robertson bet was agreed on the ABS index. Steve has never mentioned real terms in his predictions for house prices. You are very wrong to assume that people are talking in relative or real terms for everything. Take a look at all the economic data in the RBA statistics for credit, money, incomes, whatever and you'll see it is all in absolute/nominal terms. A few things might be presented in real terms like GDP, but that is an exception which fooled Leith Van Onselen (he was so used to all data be nominal he mistakenly took G10 GDP figures to be nominal). The whole discussion of housing price changes is done on the basis of nominal prices. The ABS, APM, RP Data, Residex all deal in nominal prices.
The original Keen/Robertson bet was agreed on the ABS index. Steve has never mentioned real terms in his predictions for house prices. You are very wrong to assume that people are talking in relative or real terms for everything. Take a look at all the economic data in the RBA statistics for credit, money, incomes, whatever and you'll see it is all in absolute/nominal terms. A few things might be presented in real terms like GDP, but that is an exception which fooled Leith Van Onselen (he was so used to all data be nominal he mistakenly took G10 GDP figures to be nominal). The whole discussion of housing price changes is done on the basis of nominal prices. The ABS, APM, RP Data, Residex all deal in nominal prices.
I agree with Thatguy that Strindberg has mis-understood Keen's point.
However, I think Strindberg is correct in saying that Keen does think in terms of nominal prices. I've seen him struggle a few times when asked to re-frame his prediction in real terms.
I would have though a general rule is that nominal should be assumed unless the term "real" is specified (because this involves an adjustment).
OK perhaps not EVERYTHING, but almost everything. I also still think Steve is talking in relative terms here, it seems silly not to (but perhaps he is that silly?)
FWIW: Obviously I don't assume everything is indexed, just that when people talk about relative issues they are talking relatively. You can see I don't assume all ABS data is indexed - hence I asked the question if they are (after a brief read of the ABS website). I can see why the indexes aren't adjusted. In fact it is up to the user to decide what to relate them to (wages, population, measures of inflation).
In almost every respect people always talk relative to something, unless they specifically state absolute terms or it is irrelevant.
Even when people state absolute terms they are usually talking with reference to relative terms. eg. "I paid $20k for a house in 1982." They are actually talking in relative terms (even if they don't consciously realise it)- note the relative reference.
Other times it is implied. eg. I am travelling at 80km/hr (relative to the earth) I am hot (relative) I feel fat (relative) I am poor (relative)
Now that I have dealt with that minor semantic point you brought up I would like to state that if I made that bet I would be talking relatively.
My own view is that he means 20% nominal. House prices are almost always measure in nominal terms.
However, let's suppose he means real terms. Isn't Steve Keen also expecting a general deflationary outcome for Australia - i.e. inflation will be negative. Therefore, if we take his 20% fall prediction to be in 'real' terms, then in nominal terms under a deflationary environment that fall would actually be greater than 20%.
I agree with Thatguy that Strindberg has mis-understood Keen's point.
Steve's point in his"about" page is quite clear and unambiguous. He decries the use of "relative" prices in favour of "absolute" prices. He refers to the practice as "bollocks". I agree.
To illustrate, it is not necessary to take the extreme doubling case. Imagine that both house prices and CPI rose 10% in the last year. There are folk on this forum who will say "pfff that's a zero real rise in house prices - it can be ignored - home owners are no better off". They would be wrong. Home owners with debt may well be better off. Looking at it in nominal terms reveals the position very simply.
Someone with a $500k house and $450k loan at the beginning of the year ($50k net housing wealth) now has a house worth $550k and a loan of $450k even if he paid nothing off his loan. His net assets have increased by $50k to $100k with no real price increase of the house.
Now try and do it in real terms. Firstly you have to decide your base year. Let's pick last year as the base year. So the price of the house in real terms (2010 dollars) is now still $500k (550/1.1). The debt in real terms is now $409k (450/1.1). His net assets have increased to $91k in 2010 dollars or $100k in 2011 dollars.
Both methods will give the same result but the nominal method is much simpler. But more than that, looking at it in pure real terms initially gives a false indication that nothing has changed when the price change equalled the CPI change. Simultaneous house price and CPI changes DO matter. Inflation reduces debt as much as it reduces nominal price rises.
For most people the use of CPI as the adjustment factor is inappropriate. What usually matters is their own income changes. Real prices are personal.
Steve's point in his"about" page is quite clear and unambiguous. He decries the use of "relative" prices in favour of "absolute" prices. He refers to the practice as "bollocks". I agree.
The "bollocks" is a reference to ignoring debt, not to quoting in real terms.
SK: Despite the property lobby’s best attempt to tar me with saying, you know, a 40 per cent fall over the next few years – which is a shitty little quote from The Daily Telegraph that Chris Joye touts all over the place – I’ve always been strong in saying that will be over 10 to 15 years.
But in terms of bringing it to a tighter timeframe, I think you could tie me down to saying I’d expect something of the order of a 20 per cent fall from peak to trough, whatever the peak might be, whatever the trough’s going to be. I’d be quite happy now to say the last price peak was the overall peak and so I’d expect something of the order of a 20 per cent fall between now and say the end of 2013.
It doesn't look like Keen has changed his view at all here.
He's still saying prices will fall 40% over 10-15 years plus he's adding a tighter timeframe forecast of a 20% fall in the next 2 years.
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