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Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year
Submitted by Chris Martenson
Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year
At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.
Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.
Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:
The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.
Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation.
Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt -- so debt is slowing down more rapidly at this time rather than accelerating -- that is going to mean falling asset markets.
Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down -- which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.
He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:
Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.
I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.
And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.
America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt -- for a while you were accelerating very rapidly and that's what gave you a boost in employment -- so you are falling back down again.
Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.
China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.
Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.
In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have end:
[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.
The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.
And he offers an unconventional proposal for how this can be achieved:
I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying "who is responsible for bad debt?" you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.
They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.
Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create 'central bank money' (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down -- no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.
Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.
The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller. That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered.
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What I fear is human nature and people believing things because they heard it from what they consider an authritey on the matter. Yes I saw through the bullshit and I bet many other did too, but many did not and they believed this crap as if it was true.
I'm all for the freedom of speech, but zerehedge is not a sidewalk to a public road, it's private property, and by definition the owners must have the freedom to limit and restrict it's use, even speech. And I'd just prefer if ZH continues to do the good job of weeding out the truth from under all the bullshit and avoid publishing posts from people spewing that same bullshit. That's all.
You disapprove of open dialog and only follow certain "authorities"? What are you, a fascist enabler? This too scary for you?
I sympathize with you because it's obvious you were never taught reading comprehension, I can't imagine how difficult your life must that make.
I sympathize with you that you can't think outside your predefined box.
Hazek, this here is fight club you pussy, If you cant deal with the occassional whacko on this site, then how do you expect do deal with reality ?? Reality is that the world is full of people that are good , bad , smart, and dumb as stovepipes. Quit yer cryin.
You want to shut down free speech! Disgusting! You almost sound like one of these provokers that hang out on comment threads, distracting and eventually getting the threads shut down, like in several sites on the Web this has happened too (and always with the same suspicious characters who spew the same words over and over).
North dakota signs muslim sharia into law,
“Government may not burden a person’s or religious organization’s religious liberty. The right to act or refuse to act in a manner motivated by a sincerely held religious belief may not be burdened unless the government proves it has a compelling governmental interest in infringing the specific act or refusal to act and has used the least restrictive means to further that interest. A burden includes indirect burdens such as withholding benefits, assessing penalties, or an exclusion from programs or access to facilities.”
Actually, I see it as a welcome break from the yellow journalism/propaganda that causes so many to dismiss ZH.
So what do you see as propaganda in this piece? It is economic analysis. Point out the propaganda.
By the way, you did realize Keen is critical of Keynes, right?
"Nuts"? Krugman's been having an ongoing debate with this guy. Hardly a wingnut. Too wonkish for you?
The real problem is when the servants ( public sector ) make more money than the master ( public sector ) the master becomes the servant.
If average productive private sector joe was paid a minimum wage of $65.00 per hour for his labour there would be no need for a welfare or unemployment departments. Debts could be taken care of by everyone.
The big question :will it deflate of hyperinflate?
-Will the money supply collapse under the force of debt repayment or expand under the forces of the printing press?
-Will the universe collapse under the pull of gravity, or continue to expand under the forces of the big bang?
Latest news from the cosmology front: universe does not only expand, but the expansion accelerates:draw your conclusions
I think Keen is right and I vote for deflation. His ideas will have a chance of offsetting it.
He's also right about the definancialization of our economy. Fat chance of that happening with the duopoly benefitting so much from status quo.
The problem is that asset price deflation hurts the creditors and the creditors are very much in charge. Debtors will be forced to liquidate their assets before creditors take a hit. Creditors will end up with all the physical assets before the hyperinflationary collapse (at least that is the plan).
that conclusion/news was arrived at by a cosmologist
that grew up in fiat monetary system, probably still has student loans and never challenged the standard model
ideas, hubble's interpretation of the red shift.
.
Redshift Controversy
http://scs-inc.us/Other/QuickDisclosure/?top=9570
.
http://milesmathis.com/tired.pdf
"..What I have done is simply make the first assumption that comes to mind. If the wave isn't a field
wave, then the very first thing you would look at is a wave caused by the spin of the photon itself. I
made that assumption and found that it explained many things, including superposition, entanglement,
and a host of other famous things. So am I really the first to seriously consider it? If so, how can that
be? How can something so elementary and simple have evaded notice for this long? I would say it
isn't credible. Photon spin has been ignored on purpose, to keep it from interfering with other theories.
As I have said elsewhere, common sense is buried to prevent it from sabotaging famous theories that
lack common sense. Bad physicists got their theories up first, for various reasons of accident and
intrigue, and they then block good theories for political reasons. That is not so hard to understand, is
it?
Actually, we know I wasn't the first to consider a spinning photon. Newton may be the first to have
done that, but he gave it up as a bad job. Maxwell, too. Maxwell had a theory of vortices which mirror
my mechanics in some ways, but he too gave it up. Neither man was able to make it work, and
besides, because they were insiders, they felt incredible pressure from their colleagues to get it right the
first time. I feel no such pressure. My contemporaries attempt to apply such pressure, it is true, but the
current physics container has so many leaks, it won't hold any air. You can't apply pressure inside a
swiss cheese." ...
.
tired light, i like that one. or even dying light,
could happen. i think there is a song with that
title, "the dying of the light". but, it is "doom metal", rough going.
.
so it is the spin that has been ignored leading to
fantastic propositions!
.
it is no accident that there are no, and can be no,
economists capable of clear thinking, like mr.
keen, in the usa. they would be sent off to the
comedy club or the sanitation department.
PCRS - Dark matter repels galaxies away from each other. However, gravity first pulls objects toward one another to form those galaxies. Society is pulling us toward the center. That doesn't seem to answer an inflation vs. deflation debate. Perhaps matter being crushed and reformed is a better analogy with leadership ultimately pissing in the wind to prevent capital from reforming. Entropy in currency is hot money which is now yielding negative returns. Reorganization is inevitable.
Jumanji?
Greece has nearly fallen to fascism. Up to 5 from zero.
This US citizen has a crystal ball to sell, for sure.
Besides, how many US citizens masquerade US citizenism as being fascism?
For them, the prediction is already fulfilled: the world is fascist. Not ruled by US citizenism.
Yet many of the "market experts" were calling for a robust 2012 - just like 2011.
http://bullandbearmash.com/happy-new-year-2012-likely-to-be-a-tough-year/
Enjoyed the interview but Steve lost credibility with me when he admits to swallowing the blue pill regarding peak oil and global warming. Also, I guess Steve never heard of actually buying "PHYSICAL" gold! He is obviously a paper pusher and can not see beyond that, but a good interview nonetheless. Thanks T. D.
Tuco
ONE THING SPRING TO MIND AND HAS BEEN HERE HIGHLIGHTED ALTHOUGH THE US ECONOMY WILL ENTER A DOUBLE DIP RECESSION ON JUNE THE 15TH 2012, THE UK IS ALREADY IN ONE SINCE MARCH 12 2012...MORE PAIN FOR UK YET TO COME AND WILL START SEEING MEDIA ATTACK OVER THE NEXT WEEK OR SO....
Some scams got it
Some scams don't
Some so YU-GLAY
They never won't
(deepest apologies to Mr. Frank Zappa)
(Just) keep it greasy so it'll go down easy.
Call me old and out of date but I'd like to see a return to PM backed currency or at least a peg to gold. A vigorous enforcement of the law with firing squads to keep banks out of the hedge fund business might help also. All the governments and central bankers ( redundancy there) have pissed in the soup of what reliable data there is about money flows and technology has introduced such an unknown amount of variables that it has become imposssilbe to make sound saving or investment decisions. It is time to get away from central control of economies. All the Fed should be allowed/mandated to do is keep the US dollar pegged to gold at a minimum. I'd like to be able to go to my local bank and swap paper for gold but I don't see that happening anywhere in the near future....damn it.
Is that Deflationist Idiot Mish still in business?? The deflationists have been wiped out.
If deflation is not a threat, why does the Fed have an inflation target it is struggling to reach?
Yes, worldwide printing has managed to mask and even offset deflation. We see obvious inflation in food prices especially, but most workers know there is stagnation in wages, and deflation in wages for many who lost overtime pay or don't always have a 40-hr workweek. Even the suspect BLS numbers peg the American workweek at around 34 hours for the past few years.
Obama gave federal workers a raise for 2/3 years, even though market forces would have allowed wage containment. You may count that as inflation, but I call it vote-buying.
Despite food and commodity inflation, corporate earnings growth is slowing.
Deflationary forces continue to be offset by printing so to insinuate the inflation/deflation argument has been settled is premature. The resulting debt increase may end up giving deflation the upper hand at some point.
In a mild recession, government debt can provide missing economic demand until core economic growth resumes. We are not in a mild recession, worldwide debt continues to reach new all-time highs every day, and we've never before recovered from any slowdown where total derivatives exceeded the total level of worldwide commerce.
The inflation/deflation jury is still out.
I thought it bizarre, when early on in the financial crises, someone said to solve the problem just give every household a million dollars from the Government. With all the money our Government has created and given out since then, it would have been cheaper and all or most of that money would have flowed through the economy. Most households would have paid off debt and spending would have taken off. Still sounds bizarre but what the hell? That window, since it didn't exist, was never an option.
This was just an exercise in thought.
DOW to 36,000. Taxes lowered. A chicken in every pot. This is the best of all possible worlds.
Yes. More free Government cheese for everyone. If you can't beat them, join them. (sarc)
"We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process."
A massive amount of inflation will cure that problem and the bank management will also be happy because, on their watch, loans were repaid and not written off, even though they may have been repaid at a nickel on the dollar.Bonuses all around! So it will all look good on the surface and that is all that really counts, right?
Inflation is God's gift to can kickers and to debtors. The biggest debtor of all also owns the printing presses. Why would anyone think we are going to have deflation? Lets get real...deflation and austerity do not lead to being re-elected.
What Steve Keen talks about is EXACTLY what is needed.
Instead of governments around the world buying impaired (read overpriced) assets at full value they should simply write a check to each person of X dollars.
If you have debt that must get paid first in other words you only get the diference. If your debt is $49K and the X dollars above was calculated to be $50K you would only have 1K cash however your debt would also be gone.
There is one bubble that will need to burst before all this is over, and that is the financial institution bubble. I agree wholeheartedly that we need to reduce the size of the financial sector, both in terms of its size as well as its percentage of GDP. The enabling processes for our economy have now become its raison d'etre. Not sustainable - doesn't even make sense - when you think about it. Let them fail - Crash the Trash - this mess needs to clear NOW.
http://www.youtube.com/watch?v=tCYeL87mnik
http://translate.google.com/translate?sl=pl&tl=en&js=n&prev=_t&hl=pl&ie=...
What he's done here, is, quite cleverly, you see, is, here, he's added a serif to the Keynesian equation, brilliant, and now all, you see, is, it's fixed.
Keen is the Australian Krugman, now with added bailout-populism! He should be advising the Obomba re-election campaign, a debt-jubilee would be bullish for thingamajigs.
9 articles on Monsieurs Keen, Soros the open society, modern jubilee and libertarian paternalism since November of 2011. The reset triangle would seem to be a) roll-up of the TBTF banks and the conversion of a the Fed into a nationalized hedge fund, b) modern jubilee and the resolution of fannie mae through Keen's deflationary reset c) the implementation of a divorced currency system including a wealth component with a fractionally reserved gold provision.
http://tradewithdave.com/?s=%22steve+keen%22+
Dave Harrison
www.tradewithdave.com