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Bubble, bubble – toil and trouble?toil and trouble? - Portfolio … · 2011-03-03 · The Global...
Transcript of Bubble, bubble – toil and trouble?toil and trouble? - Portfolio … · 2011-03-03 · The Global...
Bubble, bubble –,toil and trouble?toil and trouble?
15 February 201115 February 2011
facilitating debate on the outlook for the markets
Dr Steve KeenS e e eeAssociate ProfessorUniversity of Western SydneyUniversity of Western Sydney
The Global Context: The “Great Recession”USA f “G t M d ti ” t “G t R i ”
Great Moderation to Great Recession• USA: from “Great Moderation” to “Great Recession”
12.5
15 2008
7 5
10
5
7.5
0
2.5
Inflation 0
5−
2.5−InflationUnemployment
1975 1980 1985 1990 1995 2000 2005 2010 20155
• Conventional economics gave no warning of this event:
“No-one could have seen this coming…”“Th f th G t M d ti i h t• “The sources of the Great Moderation remain somewhat controversial, but … improved control of inflation has contributed in important measure to this welcome changecontributed in important measure to this welcome change in the economy.” (Bernanke, Federal Reserve 2004)
• “Our central forecast remains indeed quite benign: a soft Our c ntra for cast r ma ns n qu t n gn a softlanding in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and b h d d l hbuoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and fallingunderpinned by strong job creation and falling unemployment.” (Cotis, OECD 2007, p. 7)
• “I do not know anyone who predicted this course ofI do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts…” (Glenn j g yStevens, RBA, 2008)
WE did see “It” coming!At l t 12 did d d f it (B 2009 2010)• At least 12 did, and warned of it (Bezemer 2009, 2010)
Analyst “Di ti ti b t fi i l lthAnalystDean BakerWynne GodleyF d H i
• “Distinction between financial wealth and real assets…
• Concern with debt as theFred HarrisonMichael HudsonEric Janszen
• Concern with debt as the counterpart of financial wealth…
• Growth in financial wealth and theStephen KeenJakob Brøchner Madsen & Jens Kjaer Sørensen
Growth in financial wealth and the attendant growth in debt can become a determinant (instead of an
Kurt RichebächerNouriel RoubiniPeter Schiff
(outcome) of economic growth …
• Recessionary impact of the bursting Robert Shiller of asset bubbles…
• Emphasis on the role of credit l i h b i l ”
• Common themes f B cycles in the business cycle…”from Bezemer 2009 (pp. 10-11)
Common theme: credit in the business cycle
• Conventional economics ignores credit & debt– Non-monetary economy: aggregate demand (AD, GDP
Income) equals aggregate supply (AS, GDP Output)• Credit economy fundamentally different to barter
– “The granting of credit comes first ... purchasing power is created to which ... no new goods correspond. F m this it f ll s th f th t in l lif t t lFrom this it follows, therefore, that in real life total credit must be greater than it could be if there were only fully covered credit ” (Schumpeter 1934 p 101)only fully covered credit. (Schumpeter 1934, p. 101)
– Growth in debt finances economic growth• Monetary economy: AD = GDP Income + Change in DebtMonetary economy: AD = GDP Income + Change in Debt
– Spent on GDP plus net sales of existing assets– Focus on dynamics of debt is why I and other rebelFocus on dynamics of debt is why I and other rebel
economists did “see “It” coming”:
Macroeconomics of Private Debt (USA)Bi t d bt b bbl i US hi t b t• Biggest debt bubble in US history burst:
300USA Private Debt to GDP
My 1My 1stst warningwarning
rst
rst240
260
280
fore
fore
bur
bur
160
180
200
220
f GD
P •• Why did crisis Why did crisis start in 07start in 07--08?08?
gins
gi
ns b
efbef
100
120
140
160
Perc
ent o
f start in 07start in 07--08?08?
risi
s be
gri
sis
beg
40
60
80
100
CrCr
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 20200
20
40
Year
Macroeconomics of Private Debt (USA)A t d d GDP h i d bt• Aggregate demand = GDP + change in debt– Change in debt began to fall in 2007-08:
tt1 8 107×
1.9 107×GDP alone
US Aggregate Demand GDP 2000-2011
T T ΔΔD
ebt
Deb
t
1.6 107×
1.7 107×
1.8 10×+ Change in Private Debt+ Change in Public Debt
+$4T
+$4T
--$2$21.4 107×
1.5 107×
mill
ion
2.5T2.5T
7
1.2 107×
1.3 107×$
28% b t t k i 200828% b t t k i 2008
9 106×
1 107×
1.1 107× •• 28% boost at peak in 200828% boost at peak in 2008•• 18% cut at trough in 201018% cut at trough in 2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20119 10×
Year
The Credit Impulse (USA)Si AD GDP ΔD bt• Since AD = GDP + ΔDebt
• Then ΔAD = ΔGDP + ΔΔDebt“C dit I l ” (Bi t l 2010) DebtΔΔ– “Credit Impulse” (Biggs et al. 2010) DebtCreditImpulse
GDPΔΔ=
• Change in GDP dominant factor in employmentB t C dit I l d thi i “G t”• But Credit Impulse made this recession “Great”• Fastest Debt Deceleration ever:
5
10Change in real GDP & change in employment, USA
5
10Acceleration of private debt & change in employment, USA
10−
5−
0
rcen
t p.a
.
0
10−
5−
0
rcen
t p.a
.0
25−
20−
15−
Change in real GDPChange in Private Employment
Per
25−
20−
15−
Credit ImpulseChange in Private Employment
Per
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 201530−
C a ge vate p oy e t
Year( )
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 201530−
Change in Private Employment
Year
The Credit Impulse (USA)C dit I l i th d i ’ t• Credit Impulse in the driver’s seat– Leads changes in Employment by 3 months
L d h i GDP b 5 th– Leads changes in GDP by 5 months1
Credit Impulse
Credit Impulse Leads Change in Employment, GDP Lags
ent 3− 2
Credit ImpulseChange in GDP
in e
mpl
oym
e
0.5
with
cha
nge
0
n C
oeff
icie
nt
0 5
Cor
rela
tion
20− 10− 0 10 20 300.5−
Lag in Months with respect to change in employment
Australia’s different, right?Ri ht d W• Right… and Wrong…
• Wrong:Same debt debt change credit impulse dynamics– Same debt, debt change, credit impulse dynamics• Sort-of-right
Different magnitudes– Different magnitudes• Government policy key factor here• First Home Vendors’ Boost• First Home Vendors Boost
– Credit Impulse starting to turn negative again…• RightRight
– More effective fiscal stimulus• Sort-of-wrongSort of wrong
– About to be reversed…– China boomChina boom
• Sort-of-wrong: Our eggs in a China basket?
Australia: Crisis? What Crisis?S dd t d i l t• Same sudden turnaround in unemployment– But rapid reversal of trend
• Same decline in inflation (if more volatile)• Same decline in inflation (if more volatile)15
Australia: Crisis? What crisis?2008•• US 4 4%US 4 4%--10 2%: 131% increase10 2%: 131% increase
10
12.5US 4.4%US 4.4% 10.2%: 131% increase10.2%: 131% increase
•• Aus 4%Aus 4%--5.8% 46% increase5.8% 46% increase
5
7.5
6%6%
131%
131%
2.5
5 4646
2.5−
0 InflationUnemploymentUSA Unemployment
0
1975 1980 1985 1990 1995 2000 2005 2010 20155−
USA Unemployment
Australia: Crisis? What Crisis?S b ti f d bt b bbl• Same bursting of debt bubble– From lower level
Th h i il f fi i l t d bt• Though similar for non-financial sector debt
280
300Australia
Australian Private Debt to GDP2008
220
240
260
280USAUSA excuding financial
140
160
180
200
nt o
f GD
P
80
100
120
140
Perc
en
0
20
40
60
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 20200
Year
Macroeconomics of Private Debt (Australia)W id d i i b idi d l i• We avoided crisis by avoiding deleveraging:
1.5 106×Australian Aggregate Demand GDP 2000-2011
2008
1 3 106×
1.4 106×GDP alone+ Change in Private Debt+ Change in Public Debt
2008
1 1 106×
1.2 106×
1.3 10× + Change in Public Debt
ion
900000
1 106×
1.1 10×
$ m
illi
800000
900000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011600000
700000
Year
The Credit Impulse (Australia)S GDP/C dit I l d i USA• Same GDP/Credit Impulse dynamics as USA– But smaller negative impulse, rapidly turned positive:
10Change in real GDP & change in employment, Australia
10Acceleration of private debt & change in employment, Australia
5−
0
5
t p.a
.
0
5−
0
5
t p.a
.
0
20−
15−
10−
Change in real GDP
Perc
ent
20−
15−
10−
Credit Impulse
Perc
ent
USA hitUSA hit 26%26%1975 1980 1985 1990 1995 2000 2005 2010 2015
30−
25−Change in real GDPChange in Private Employment
Year( )
1975 1980 1985 1990 1995 2000 2005 2010 201530−
25−Credit ImpulseChange in Employment
Year
USA hit USA hit --26%26%
• Result was we never experienced deleveraging• Debt continued to expand demandDebt continued to expand demand…
Caveat! Australian Credit Impulse differentGDP l d l t & C dit I l h• GDP leads employment & Credit Impulse here– Probably reflects greater export exposure of
Australian economyAustralian economy– Economy more affected by global factors than USA
Australian Credit Impulse Lags GDP, Change in Employment
0.6
0.8Credit ImpulseChange in GDP
21−
0.4
n C
oeff
icie
nt
0.2
Cor
rela
tion
20 10 0 10 20 300.2−
0
20− 10− 0 10 20 30
Lag in Months with respect to change in employment
Comparative Macroeconomics of Private DebtD bt fi d d d t d ti i A t li• Debt-financed demand never turned negative in Australia
25Debt-financed demand
d 2008
15
20
te d
eman
008
5
10
f agg
rega
t
0
5
perc
ent o
f
0
10−
5−
debt
as p
20−
15−
AustraliaUSAC
hang
e in
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201125−
USAC
Comparison of the Credit ImpulseN ti C dit I l f l i US• Negative Credit Impulse far larger in US
• Demand in Australia now being boosted by credit impulseA t li l d it t f t bl• Australia re-levered its way out of trouble…
10Credit Impulse, USA & Australia
0
5
0
10−
5−
ent p
.a. •• 3 questions3 questions
•• Why did we do it?Why did we do it?
20−
15−Perc
e W y wW y w•• Can we keep on doing it?Can we keep on doing it?•• Is it a good idea?Is it a good idea?
30
25−
20
USAAustralia
Is it a good idea?Is it a good idea?
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201130−
Year
Why did we do it?FHVB d $100 billi th i t d bt• FHVB encouraged $100 billion growth in mortgage debt
100Impact of First Home Vendors Boost on Mortgage Debt
90
95
100HouseholdMortgage onlyT d FHVB
FHVB
80
85
90 Trend pre-FHVBBusiness
DP $1
00bn
$100
bn
70
75
ent o
f GD
55
60
65
Perc
e
45
50
55
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201140
45
Can we keep on doing it?B t f t d bt i t• Boost from mortgage debt running out
• Business Credit Impulse still negative, but turning positive C dit I l b S t (Y l )
10Credit Impulse by Sector (Yearly)
5
5
0 0
10−
5−
BusinessMortgage
2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 201115−
g gPersonalAll private
2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011
Can we keep on doing it?Q t l d t i t l ti i ti i t• Quarterly data paints less optimistic picture– Business turning negative again (even with China boom)
Credit Impulse by Sector (Quarterly)
9
12Credit Impulse by Sector (Quarterly)
3
6
3
0
3
0
6−
3−
Business
12−
9−BusinessMortgagePersonal
All private
2008 2008.25 2008.5 2008.75 2009 2009.25 2009.5 2009.75 2010 2010.25 2010.5 2010.75 201115−
p vate
Can we keep on doing it? An analogyC i i lik d i• Crisis like a drive– Distance Debt to GDP Ratio
• Sydney to Canberra? Return drive a piece of cake• Sydney to Canberra? Return drive a piece of cake…• Sydney to Perth?...
– It’s a long way back even to CanberraIt s a long way back even to Canberra…– Speed Rate of change of debt
• Higher speed feels good (boom)Higher speed feels good (boom)• Driving backwards feels bad (deleveraging)
– Acceleration Credit Impulsep• Accelerating feels really good (faster to Perth)• Decelerating feels really bad (going backwards g y g g
faster to Canberra)– Slowing down deceleration can feel good
l l• Going backwards less rapidly• But drags out journey back…
Can we keep on doing it?USA l l f d bt ill t C dit I l t i iti• USA level of debt will stop Credit Impulse turning positive
300 30Private Debt USA: Level, Change, Credit Impulse
280
290
18
24
260
270
6
12
GD
P
t
240
250
6−
0
erce
nt o
f G
Perc
ent
0
220
230
18−
12−
Level
Pe
200
210
220
30
24−
18LevelChangeAcceleration
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011200 30−
Year
Can we keep on doing it?A t li t di b t bl d bt ili hit• Australia not as dire but same problem: debt ceiling hit
200 30Private Debt Australia: Level, Change, Credit Impulse
180
190
18
24
160
170
6
12
GD
P
t
140
150
6−
0
erce
nt o
f G
Perc
ent
0
120
130
18−
12−
Level
Pe
100
110
120
30
24−
18LevelChangeAcceleration
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011100 30−
Year
Is it a good idea?C t i l l f d bt f i t t• Certain level of debt necessary for investment– US: historical record implies under 100% of GDP
A t li 25% f GDP– Australia: 25% of GDP• Higher debt levels reflect Ponzi behavior
G bli i i i i h b d– Gambling on rising asset prices with borrowed money• Releveraging out of Ponzi crisis means a larger one later
P b bl “ ”• Probable outcome: “Turning Japanese”– Occasional growth spurts via government spending,
“ tit ti i ” iti C dit I l“quantitative easing”, positive Credit Impulse– Fall back into low/negative growth again as Credit
Impulse hits wall of high Debt/GDP ratioImpulse hits wall of high Debt/GDP ratio
What about Nature’s Revenge?St tt t f t l i ?• Stutter courtesy of natural crises?
Signposts in 12 months?
• Negative credit impulse from household sector– Credit-impulse-driven rise in unemployment
• Countered by– China Boom (if it continues)– RBA rate cuts
– Higher unemployment than todayg p y y• Low to negative GDP growth• Inflation below expectationsp
– Except for Climate/Peak Oil effects
Light relief…
Bubble, bubble –,toil and trouble?toil and trouble?
15 February 201115 February 2011
facilitating debate on the outlook for the markets