Monday, March 12, 2012

379 No hope from Dems, GOP, Tea Party - The Decadence of Election 2010, by Peter Morici

No hope from Dems, GOP, Tea Party - The Decadence of Election 2010, by Peter Morici

Australia's banks say they'll raise interest rates by more than the increase in the RBA's Bank Rate, because they're raising money overeas (from overseas investors).

Why borrow from overseas? And especially if it's costing more?

In item 1, there are three reports on this.

(1) Australia's banks to raise interest rates because they're borrowing from overseas investors
(2) America on the brink of a Second Revolution - Political chaos, class war
(3) No hope from Dems, GOP, Tea Party - The Decadence of Election 2010, by Peter Morici
(4) Democratic capitalism is in eclipse - Peter Merici
(5) Congress & Senate defer votes on Budget & contentious issues, until after election
(6) "Trinkets and Beads" in return for Australia's mineral resources
(7) US economy is delevering as in the Great Depression - Steve Keen

(1) Banks tipped to raise rates above the odds

By Finance reporter Lexi Metherell

ABC (Australia) October 1, 2010 08:29:00

Borrowers are being warned to brace for the banks to lift their interest rates by more than any official increase.

The Reserve Bank is broadly expected to lift rates by 0.25 of a percentage point next week, but the banks may put their rates up by more.

UBS analyst Chris Williams says the banks are likely to increase their rates by an extra 0.15 of a percentage point.

The banks have complained that the higher costs of funding their loans is squeezing their profit margins.

But Treasurer Wayne Swan has launched a pre-emptive attack on any extra increase by the banks, saying they have reported solid profits.

The RBA yesterday said the interest rates the banks charge have been enough to make up for the higher costs they pay for overseas funds. ==

Banks warn buyers on home interest rates

Peter Taylor and Holly Ife  

Herald Sun   Melbourne, October 02, 2010 12:00AM

NOT content with multi-billion-dollar profits, the big banks are coming after borrowers in response to what they argue is the "real cost" of the money they lend.

The banks have launched into a war of words with the Reserve Bank and Treasurer Wayne Swan as they pave the way to jack up interest rates as early as Tuesday.

Their powerful lobby group has issued a stern reminder that the banks - and not the RBA - set mortgage rates, and that the RBA's official interest rate is "only one consideration".

The warning comes ahead of a raft of profit announcements, with the "big four" expected to report a total profit for the year of $21 billion - almost $1000 for every man, woman and child.

Executive pay packets have exploded amid the mushrooming profits, with Commonwealth Bank chief executive Ralph Norris on a $16 million package this year, up 75 per cent from last year.

Economists say there is an even-money chance the RBA board will lift the official cash rate 0.25 percentage points to 4.75 per cent when it meets next week.

A string of economists and analysts told the Herald Sun if the RBA did lift the cash rate, the banks were likely to grasp the opportunity to hike mortgage rates higher still - by up to 0.45 percentage points.

That would add $88 a month - or more than $1000 every year - to the typical $300,000 mortgage, pushing many household budgets to the brink.

Mr Swan said this week there was "absolutely no justification" for any bank to raise interest rates beyond RBA movements.

But the Australian Bankers Association has returned fire, saying "the real cost of money" is different to the RBA's official cash rate, and 30c in every dollar lent by the big banks is raised overseas.

Chief executive Steven M adinchenberg said: "The cost of that money has remained high and volatile, and is not controlled by the Reserve Bank. (The banks) have a responsibility to remain solid and healthy so that they can continue to raise money offshore from overseas investors to support the growing Australian economy."

Christopher Zinn, spokesman for consumer group Choice, said the banks' healthy profits more than compensated for the increased cost of overseas funding.

Consumers felt powerless when the banks acted together to lift home loan rates out of step with the RBA, he added.

"It is really riling for customers, but every time it happens, the consumer anger grows, and that may one day lead to the Government moving against the incredible power of the banks," Mr Zinn said. ==

RBA gives reminder on key rates factor

Colin Brinsden, Economics Correspondent

Sydney Morning Herald, October 1, 2010 - 6:04PM


The banking industry has warned borrowers that if retail banks need to jack up their lending rates by more than the Reserve Bank's adjustments, they will.

Just days out from the central bank's monthly board meeting, where it could lift the cash rate by 25 basis points for the first time since May, there is speculation that retail banks may move by a greater amount.

On Thursday, Treasurer Wayne Swan pre-empted such a move by the banks, saying there was "no justification" for independent increases.

But the Australian Bankers' Association (ABA) chief executive Steven Munchenberg says changes in the cash rate is "only one" consideration in determining the cost of money lent by banks to homeowners and business.

He said while the lending rates banks charge are a matter for individual institutions, and decisions the ABA is not involved in, rates are determined by the "real cost of money".

"Thirty cents in every dollar lent by Australia's major banks has to be raised from overseas investors," Mr Munchenberg said in a statement on Friday.

"The cost of money has remained high and volatile, and is not controlled by the Reserve Bank."

He said banks have a responsibility to look after their customers, while remaining solid and healthy so they can continue to raise money overseas to support a growing economy. ...

(2) America on the brink of a Second Revolution - Political chaos, class war
From: chris lenczner <> Date: 02.10.2010 12:41 AM

America on the brink of a Second Revolution - MarketWatch

By Paul B. Farrell

“What’s distinctive about the Tea Party is its anarchist streak -- its antagonism toward any authority, its belligerent self-expression, and its lack of any coherent program or alternative to the policies it condemns,” warns Jacob Weisberg in Newsweek. But why not three cheers for the Tea Party Express?

Admit it, something historic is brewing. And yes, it’s good for America, even the anarchy. Revolution is renewal. Tea-baggers want to take on both parties, “restore honor” and “take back the country.” Bring it on, the feeling’s mutual.

Obama: GOP pledge a disastrous plan

President Barack Obama used his weekly radio address Saturday to accuse Republicans of overlooking the middle class by creating policies that would benefit only the rich while making a pledge of his own to continue supporting the national economy.

OK, maybe most Americans just silently mimic the words, “we’re mad as hell, won’t take it any more.” But watch out: After November the campaign’s shrill rhetoric explodes into action.

Tea-baggers are kicking the revolution into high gear. Debt is sinking America. Both parties are to blame. So vote out incumbents. Spare no one. We need new leadership, another Reagan or Truman. Congress better get the message: Cut that budget, or they’ll dump the rest of you in the coming Great Purge of 2012.

Unfortunately they’re tone deaf. Congress cannot see past the election. All that changes in November.

So thanks Tea Party, Vegas odds must favor a Second American Revolution. Actually, the revolution is already roaring, hot, it’s about time. The GOP and the Dems had more than a decade. But America’s worse off. We need a real revolution to restore sanity … or we can kiss democracy and capitalism good-bye, permanently.

Warning: Another revolution will cost investors 20% more losses

Yes, big warning, the Second American Revolution will extract painful austerity, not the “happy days are here again” future touted by tea-baggers. For years it’ll be impossible for most of America’s 95 million investors to develop a successful investment or logical retirement strategy.

Why? Political chaos will translate into extreme volatility and a highly unpredictable stock market. Result: Wall Street will lose another 20% of the value of your retirement portfolio in the next decade, just as Wall Street did the last decade. So if you think you’re “mad as hell” now, “you ain’t seen nuthin’ yet!”

Here’s the timeline:

Stage 1: The Dems just put the nail in their coffin by confirming they are wimps, refusing to force the GOP to filibuster the Bush tax cuts for America’s richest.

Stage 2: The GOP takes over the House, expanding its war to destroy Obama with its new policy of “complete gridlock,” even “shutting down government.”

Stage 3: Obama goes lame-duck.

Stage 4: The GOP wins back the White House and Senate in 2012. Health care returns to insurers. Free market financial deregulation returns.

Stage 5: Under the new president, Wall Street’s insatiable greed triggers the catastrophic third meltdown of the 21st century Shiller predicted, with defaults on dollar-denominated debt.

Stage 6: The Second American Revolution explodes into a brutal full-scale class war rebelling against the out-of-touch, out-of-control greedy conspiracy-of-the-rich now running America.

Stage 7: Domestic class warfare is compounded by Pentagon’s prediction that by 2020 “an ancient pattern of desperate, all-out wars over food, water, and energy supplies would emerge” worldwide and “warfare is defining human life.”

What’s behind our 2010-2020 countdown? It became obvious after reading the brilliant but bleak “Decadence of Election 2010” report by Prof. Peter Morici, former chief economist at the International Trade Commission. He sees no hope from America’s political parties, just a dark scenario ahead. ...

... once the GOP Tea Party of No-No is back in power, compromising is not on their agenda, “gridlock” is. So anarchy is the only choice -- they will never, never work with Democrats … until forced by the Second America Revolution when the middle class finally rises up and overthrows the greedy wealth conspiracy of Wall Street, Washington, CEOs and the Forbes 400.

Till then, anarchy rules as the conspiracy keeps looting Treasury, stealing from taxpayers, conning us all.

(3) No hope from Dems, GOP, Tea Party - The Decadence of Election 2010, by Peter Morici

The Decadence of Election 2010

Published: Sept. 21, 2010 at 6:29 AM

By PETER MORICI, UPI Outside View Commentator

COLLEGE PARK, Md., Sept. 21 (UPI) -- Americans are justifiably ticked off with both political parties but Election 2010 offers little hope. Democrats, Republicans, and, yes the Tea Party, offer little that is encouraging.

U.S. President Barack Obama's droning complaints about the failures of George W. Bush, notwithstanding, the current economic quagmire is a bipartisan creation.

The Great Recession was caused by reckless Wall Street pay and fraud, a breakdown in sound lending standards by Fannie Mae, Freddie Mac and mortgage mills like Countrywide and a huge trade deficit with China and on oil. The latter left Beijing and Middle East royals with trillions of U.S. dollars that they invested foolishly in the U.S. bond market and which financed the housing and commercial real estate bubbles.

Scrape away the finger-pointing. All was set in motion by bank deregulation engineered by Clinton administration Treasury Secretaries Robert Rubin and Lawrence Summers and Bill Clinton's deal to admit China into the World Trade Organization. The latter permitted China free access to U.S. markets while maintaining an undervalued currency and huge tariffs and other barriers to U.S. exports.

Democrats in Congress and the White House, when they occupied it, took every opportunity to block domestic oil and gas development and, led by the ever-thoughtful and high-minded Michigan congressional delegation, froze auto mileage standards.

If I like anything Obama did, it was to finally impose higher mileage requirements. And initially, he pushed for more offshore drilling. Unfortunately, some tropisms can't be overcome and, when BP disaster hit, the president punished the entire petroleum industry.

If Bush is culpable for anything, it was to not see the gathering storm on Wall Street. But Treasury Secretary John Snow was a railroad man and understood finance little and Treasury Secretary Henry Paulson, a shining star from Goldman Sachs, honestly believed banks could borrow at 3 percent and lend at 5 percent and pay MBAs three years out of school $5 million bonuses to create mortgage-backed securities.

The best way to understand the Bush Treasury is to view the Eric von Stroheim 1924 masterpiece "Greed."

Whichever bunch of second rate incompetents you favor -- the Clinton or Bush White Houses -- one thing is clear, Obama ratcheting up government spending and taxes won't fix what's broke and neither will the GOP prescription of tax cuts and deregulation.

Obama's two signature initiatives -- healthcare reform and financial services re-regulation -- simply don't work. The former fails to address the root problem -- Americans pay 50 percent more for doctors, hospitals and drugs -- than subscribers to national health plans in Germany, France and other decadent socialist European countries and the banks are back to their old tricks.

Wall Street is hustling municipal governments into the kind of quick-fix budget schemes -- like selling parking meters and airports fees -- that made Greece the most historically elegant insolvent entity since bankruptcies were invented in the courts of ancient Athens. Now bankers are shoring up 2011 bonuses by hustling shoddy corporate bonds that lack adequate collateral and may never be repaid.

Republicans like former Massachusetts Gov. Mitt Romney and House Minority Leader John Boehner, R-Ohio, offer little that is encouraging. Cutting taxes and mindless deregulation aren't the answer. Washington can't forsake any revenue until the GOP trims $1 trillion from federal spending and few believe deregulation will fix healthcare or Wall Street.

Republicans don't believe in effective government solutions to healthcare, Wall Street, fixing trade with China and dependence on foreign oil.

Enter the Tea Party. It really only offers a purer form of failed Republicanism. Tax and spend less and turn the country over to the robber barons.

Americans needs a prophet -- another Harry Truman or Ronald Reagan -- who will level with them.

Americans must accept fewer government-paid benefits -- for the rich, the poor and those in between -- and must acknowledge the market works best most of the time but it isn't working in healthcare, banking, China and oil.

Those mean new approaches to regulating -- yes, regulating -- what the medical industry charges, bankers pay themselves, what Americans tolerate and buy in the Middle Kingdom and guiding big oil and car companies to sustainable solutions.

Sounds radical but running the world has never been a choice between statism and anarchy. And running it effectively accepts that the private sector isn't the enemy and government isn't evil but neither can serve the other, and us, if value isn't seen in each.--

(Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission.)

(4) Democratic capitalism is in eclipse - Peter Merici

Deception, delusion and major abuse

Democratic capitalism is suffering at the hands of politicians

June 10, 2010 | By Peter Morici

Democratic capitalism is in eclipse.

From Berlin to Tokyo, governments struggle to instigate enough growth to pay their bills and gainfully employ workers. Meanwhile, China enjoys breakneck progress.

Democratic capitalism is not flawed. Rather, government policymakers are destroying a system that took mankind from dark feudal superstitions to cracking the secrets of life with deceptions, delusions and abuse.

From Athens, Greece, to Sacramento, Calif., politicians have deceived voters by telling them pension systems can be constructed allowing retirement at age 55 or 60. Whether funded by savings and investments or taxes, no solvent pension system is possible that permits educated professionals, unionized workers and government employees, who get most of the income and benefits, to work only 30 or 35 years and retire for another 20 or 25 years.

In the U.S., President Barack Obama has convinced American families earning less than $250,000 a year that they can have guaranteed health care that costs 50 percent more than what Germans and Canadians pay and double what the British shell out, without paying a dime in additional health insurance premiums and taxes.

To make that work, he will have to start selling shares in the Brooklyn Bridge — thankfully, New York Mayor Michael Bloomberg owns it.

Sadly, after Greece defaults, the dominoes won't stop in Berlin but rather Washington.

Politicians have deluded themselves into believing an education system that encourages young people to "find themselves," instead of "finding something productive" will give society enough scientists and engineers to solve the tough problems needed to perpetuate growth. They have deluded themselves into thinking that professors spending six hours a week or less teaching and the rest thinking great thoughts, or verbally pistol-whipping the society that supports them, is somehow wealth-creating.

Finally, free markets can't be wholly free, but from Tokyo to Berlin national leaders have peculiar notions about who should compete, who should be regulated and how.

Most national leaders, having been educated in squeaky-clean environs like Harvard, Oxford or the University of Tokyo, believe anything created by hand, other than an exquisite meal or with a computer keystroke, is somehow unworthy of Western post-industrial society.

Hence, they have granted virtually free access to Western markets for manufacturers from China. For its part, China maintains high tariffs and other arcane import barriers on Western products, subsidizes exports through an undervalued currency, and offers other inducements to keep Chinese products artificially cheap on world markets. China grows at 10 percent a year, and the West sheds millions of "unworthy" manufacturing jobs and stagnates.

Meanwhile, in New York, London and elsewhere, 30-year-old MBAs pull down bonuses of $1 million, $10 million and $20 million a year for trading securities that really don't exist, and creating havoc that has cost U.S. and European governments upward of $4 trillion to clean up.

Simply, on Harvard Square and at King's College, where tenured professors supported by the wealth of dead people inbreed and define our values — remember where Obama learned about law and economics — the intelligentsia has decided that IT entrepreneurs, financiers and Hollywood stars should be paid more than God.

The rest of us, suffering this abuse, should be satisfied with low pay, unemployment benefits and subsidized health care, all paid for by borrowing from the Chinese.

From Obama to German Chancellor Angela Merkel, the system is suffering from delusions of grandeur, self-deception and old-fashioned abuse by leaders who address the world as Ivy League intellectuals think it should, rather than how the facts of physics, demography and economics define it.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former chief economist at the U.S. International Trade Commission.

(5) Congress & Senate defer votes on Budget & contentious issues, until after election

From: ReporterNotebook <> Date: 02.10.2010 04:35 AM

Why Do We Pay Congress?

Posted: 01 Oct 2010 03:43 AM PDT

The base salary of a U.S. Congressman and Senator is $174,000 plus benefits and official expenses which totals around $1.5 million per year each. Yet these leaders can’t even be bothered to do the work for which they are so well-paid.

The shocking state of affairs was revealed for the world to see this week when Congress “ended” its current sitting without even completing its most basic job, that of approving a budget for the government year.

In addition, legislators also simply postponed votes on a number of vital issues, including an economic stimulus measure, the health care law, and global warming legislation, amongst other things.

In any other profession, a failure to complete those basic tasks which are vital to the central core of a job would result in instant dismissal. But the august gentlemen and ladies of Congress and the Senate seem to be immune from this rule which applies to the rest of us.

So what is the real reason for their refusal to do even the most basic of tasks for which they are paid?

The answer is more obvious than one might at first consider: they are cowards without the courage of their convictions to make decisions for which the voters might find them accountable.

The Congress and Senate have deliberately put off votes on all issues which are “political hot potatoes” until after the November elections so their voting choices cannot be used against them in the campaign.

The game was given away by Sen. Joe Lieberman, I-Conn., who admitted to the Associated Press (AP) that “It would be one thing if you have a chance to pass something, then by all means have a vote. But it was pretty clear that it was going to be mutually assured destruction.”

Senate Majority leader Harry Reid confirmed this reasoning by telling the AP that “We may not agree on much, but I think, with rare exception, all 100 senators want to get out of here and get back to their states.”

Even more interesting was the decision to delay the ethics trials of Reps. Charles Rangel, D-N.Y., and Maxine Waters, D-Calif., until after the elections.

The reason for the postponement is that both these cases will reveal how legislators “legally” abuse the system for their own benefit. This in turn will demonstrate how many of their colleagues are shamelessly, but probably legally, ripping off the taxpayers.

Instead of passing a budget for the year, Congress passed a stopgap bill to keep the government functioning until after November in a move which the AP correctly described as a “reminder of the dismal performance by Congress in doing its most basic job, passing an annual budget and the spending bills for agency operations.”

According to the AP, only “two of a dozen annual appropriations bills have passed the House this year and none has passed the Senate as Democratic leaders have opted against lengthy floor debates and politically difficult votes on spending.”

(6) "Trinkets and Beads" in return for Australia's mineral resources

From : Howard Miller <> Date: 30 September 2010 00:55

The Australian population are allowing themselves to be treated as ignorant savages by Multinational and Asian companies and in return for our valuable mineral resources we are accepting "Trinkets and Beads" just like every indigenous tribe in history that was conquered by previous warlike merchant nations.

Shock, horror, you exclaim, how can you support such a naive statement as that. Well let us look at what we as a nation are accepting in exchange for finite resources that have taken millions of years to accumulate.


(1) Electronic equipment, in the form of printers, computers, mobile phones and other gadgets that have a shop shelf life that can be measured in weeks, a service life that can be measured in length of warranty and a end of life value as less than worthless. In fact Australia has a mountain of dead electronic equipment that grows in the millions each year. This equipment is purposely manufactured to be incapable of repair or even service, a simple lighting strike will blow a fuse in the power supply, this fuse cannot be accessed and the entire machine is scrapped. This scenario is common across all brands and even highly respected brand names are manufacturing "non-reparable machines", selling them to a naive natives (consumers) and making their company profit on consumables, knowing full well the moment the machine malfunctions out of warranty, the consumer will bin the unit along with unused consumables and buy a replacement.

The entire Electronic Industry is geared around short term gain with absolutely no intention of being involved in long term business prosperity or stability. The major supplier of software has no intention of ever producing a reliable, long serving product, in fact purposely changes and tweaks to be certain that constant change and upgrade remains a feature. All of this huge financial burden of purchasing this indescribable rubbish is met at the cost to generations of Australians yet to be born.

2) Motor vehicles, same old tired story, heaps of plastic junk, the government is in on the racket, old cars have to go?? they might not wear out, you see.

I find it difficult to live in a nation that has no history, anything that was any good was scrapped, shredded and sent to Japan or China to make complete rubbish that puts Australian workers out of a job. I believe in a time of war, a great many of our current Captains of Industry would have been tried for treason and shot at dawn. My view is, that it is unacceptable to raise the standard of living in a foreign country by lowering the standard of living of your fellow countrymen and women. The current view of Australian management in unpatriotic in the extreme.

Australia's Automotive and Manufacturing Industries are slowly creeping to a complete stand still as the Asian Governments dominate our marketplace by subsidizing their industries. How stupid can Australian politicians be, how can these overpaid, mostly overweight dopes we elect, genuinely believe Australia can supply coal and iron ore to China, the Chinese then burn this coal in their boilers, produce electricity and steel with our coal and it is still cheaper than making our own. AND how do the billionaires get to keep all that money selling off the mineral wealth of their fellow man, women and children.? The Nation's Future??


(1) Female apparel, skimpy, ill fitting, poorly made, cheap items of female apparel flood the Australian marketplace. The men are not left out of this horror story, it is just that men do not currently change fashion as often as the girls. A normal Australian shopping centre would contain at the most, two menswear shops, eight female fashion shops, two jewelers, two chemists, two unisex shoe shops, numerous food shops and two supermarkets. What does this tell you? the real money is spent by the women. But study carefully the standard of clothing items on the hooks and shelves, all made in China, all cheap and ill fitting. Moving on to household effects, once again the province of the fairer sex, cheap throw away items with no view to repairability, electric goods, kitchen and household items all firmly marked Made in China, seem to cover every inch of shelving in most shops.

(2) Food - It is indescribable idiocy that Australia should be importing food from nations such as Pakistan, an impoverished 3rd World nation that cannot feed it's starving millions. It is just not possible for me to express sufficient disgust at any government body that allows the importation of food to Australia, so I will end this one right now before I break into a sentence containing four letter words.

I am ending this saga right here, I simply get too depressed thinking about the mess that I observe and the lack of will to do anything about it.

What I present is the tip of a huge iceberg of a corrupt, incompetent management of Australia's financial past which will have a devastating effect on our children's future and I cannot remain silent in the light of the current political climate.

Try living in a Conservative part of Australia and then tell me, "The Liberals did nothing wrong?"

You will be "Abbotsolutely" wrong and the future looks even bleaker.

(7) Aggregate demand falls as US private sector reduces debt - Steve Keen

{visit the link to see the charts}

Deleveraging with a twist

Published in September 20th, 2010
Posted by Steve Keen in Debtwatch

The latest Flow of Funds release by the US Federal Reserve shows that the private sector is continuing to delever. However there are nuances in this process that to some extent explain why a recovery appeared feasible for a while.

The aggregate data is unambiguous: the US economy is delevering in a way that it hasn’t done since the Great Depression, from debt levels that are the highest in its history. The aggregate private debt to GDP ratio is now 267%,  versus the peak level of 298% achieved back in February 2009–an absolute fall of 31 points and a percentage fall of 10.3% from the peak.

This dwarfs any previous post-WWII experience–even the steep recession of the mid-1970s.

US Debt Downturns     Now     1990s   1970s
Duration in years       1.3       2.3       1.3
Peak Debt       298      169      114
Debt Trough     268      163      106
Fall in Debt    31       7          8
Percent Decline 10.3%   4.2%     6.7%
Rate of Decline p.a.      7.9%    1.8%     5.1%

The aggregate level of private debt now towers over the economy, putting into sharp relief the obsession that politicians of all persuasions have had with the public debt. Rather like Nero fiddling as Rome burnt, politicians have focused on the lesser problem while the major one grew out of control. Now they are obsessing about a rise in the public debt, when in a very large measure that is occurring in response to the private sector’s deleveraging.

If they had paid attention to the level of private debt in the first place, then we wouldn’t be facing exploding public debt today.

However, though the decline in private debt is steep and continuing, the rate of decline has slowed. Because debt interacts with demand through its rate of change, this has given a stimulus of sorts to the economy in the midst of its deleveraging.

This is obvious when one considers aggregate demand as I define it: the sum of GDP plus the change in debt (where this demand is spread across both goods & services and the asset markets). Though debt levels are still falling, because they are falling less rapidly there has actually been a boost to aggregate demand from debt from the fact that debt is declining less rapidly in 2010 than in 2009:

This is doubly so when the contribution to demand from the public sector is included, as this shorter term graph shows more clearly.

However while recent data shows a positive contribution to demand from debt falling more slowly, on an annualised basis, the change in debt is still subtracting from aggregate demand–and more so than in the previous year. So total demand (across all markets–commodity and assets) had to fall, even though GDP itself grew. Obviously most of the fall in demand has been absorbed by the asset markets, which have not recovered to the same level of turnover as in the boom years–and nor should they.

The next table, which uses the aggregate debt figure (public and private debt combined) from the Flow of Funds, shows that aggregate demand fell across July 2008 to June 2009, even though debt was still rising, because the rate of growth of debt fell from $3.7 trillion to $1.4 trillion. Across July 2009 to June 2010, the decline in aggregate demand was less than the previous year (a 9.7% fall versus a 15.2% fall), even though the change in debt had turned negative.

Variable\Year   2006.5  2007.5  2008.5  2009.5  2010.5
GDP     13,347,800      14,008,200      14,471,800      14,034,500      14,575,000
Change in Nominal GDP % 6.6%    4.9%    3.3%    -3.0%   3.9%
Change in Real GDP %    3.0%    1.8%    1.2%    -4.1%   3.0%
Inflation Rate %        4.1%    2.4%    5.6%    -2.1%   N/A
Total Debt      43,337,326      47,528,151      51,272,735      52,686,684      52,054,500
Debt Growth Rate %      10.0%   9.7%    7.9%    2.8%    -1.2%
Change in Debt  3,934,348       4,190,825       3,744,584       1,413,949       -632,184
GDP + Change in Debt    17,282,148      18,199,025      18,216,384      15,448,449      13,942,816
Change in Aggregate Demand %    0.0%    5.3%    0.1%    -15.2%  -9.7%

The rise in aggregate demand supported a recovery in employment, but the prospects of this continuing to the point at which economic activity booms once more are remote: with debt levels as high as they are, the potential for further deleveraging still exceeds the worst that the US experienced during the Great Depression.

I have recently become aware of some other economists using a similar concept to my measure of the debt contribution to aggregate demand, which they call the “credit impulse” (Biggs, Mayer et al., They define this as the change in the change in debt, divided by GDP.

My definition emphasises aggregate demand and correlates this with the level of employment (or unemployment, as above), whereas theirs emphasises the change in aggregate demand and correlates with changes in the level of employment. The logic is identical, but has the advantage of being able to correlate the change in the change in debt with change in employment. It highlights an apparent paradox: the economy can receive a boost from debt, even though it is falling, if the rate of that decline slows.

The next few charts apply this concept using the recent Flow of Funds data, and shows why it is so important to consider the dynamics of debt when trying to understand why this downturn has been so severe—and why it also seems to have eased. Firstly, change in employment and change in real GDP are obviously correlated, and on this basis this downturn is bad, though not significantly worse than previous downturns in 1958, 1975 and 1983.

However when you consider the correlation between the “credit impulse” and the change in employment, this crisis has no precedent in the post-WWII period:

Furthermore, debt is the leading factor is this process. Though the correlation between changes in real GDP and changes in employment are higher than those for the acceleration in debt and changes in employment, the “credit impulse” leads changes in employment while GDP slightly lags changes in employment: credit, which is ignored by conventional “neoclassical” economics, is in the driving seat.

This is something that Keynes realized after writing the General Theory (Keynes 1936), but which never made its way into the textbook version of Keynes that conventional economists like Stiglitz and Krugman learnt as Keynesianism.

Planned investment — i.e. investment ex-ante — may have to secure its “financial provision” before the investment takes place; that is to say, before the corresponding saving has taken place. This service may be provided either by the new issue market or by the banks ;—which it is, makes no difference… let us call this advance provision of cash the ‘finance’ required by the current decisions to invest. Investment finance in this sense is, of course, only a special case of the finance required by any productive process; but since it is subject to special fluctuations of its own, I should (I now think) have done well to have emphasised it when I analysed the various sources of the demand for money. (Keynes 1937, pp. 246-247)

The good news in the latest Flow of Funds data is therefore that a slowdown in the rate of deleveraging can impart a positive impetus to employment. However the bad news is that the economy is now hostage to changes in the rate of deleveraging, from levels of debt that far exceed anything it has ever experienced beforehand. Since much of this debt was taken on to finance speculation on asset prices rather than genuine investment, it is highly likely that deleveraging will accelerate in the future, as speculators tire — literally as well as metaphorically — of carrying large debt loads that finance stagnant or declining asset prices.

Drilling down into the debt data, it’s apparent that the sector that caused the crisis — the finance sector — is the one that has delevered the most is also the one whose rate of delevering is slowing most rapidly.

This is not a good thing, nor is it likely to last. The finance sector exists to create debt, and the only way it can do that is by encouraging the rest of the economy to take it on. If they were funding productive investments with this money, there wouldn’t be a crisis in the first place—and debt levels would be much lower, compared to GDP, than they are today. Instead they have enticed us into debt to speculate on rising asset prices, and the only way they can expand debt again is to re-ignite bubbles in the share and property markets once more.

Here’s where the level of debt (when compared to income) matters, as opposed to its rate of change: reigniting these bubbles is easy when debt to GDP levels are low. But reigniting them when debt to income levels are astronomical is next to impossible. Speculators have to be encouraged to take on a level of debt whose servicing consumes a dangerously high proportion of their income, in the belief that rising asset prices will let them repay that debt with a profit in the near future.

With the debt to GDP levels for all non-government sectors of the American economy at unprecedented levels, the prospect that any sector can be enticed to take on yet more debt is remote. Deleveraging is America’s future.

Biggs, M., T. Mayer, et al. “Credit and Economic Recovery: Demystifying Phoenix Miracles.” SSRN eLibrary.

Keynes, J. M. (1936). The general theory of employment, interest and money. London, Macmillan.

Keynes, J. M. (1937). “Alternative theories of the rate of interest.” Economic Journal
47: 241-252.

No comments:

Post a Comment