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Chart of the Day: Australian Credit Growth Has Collapsed

Edward Harrison — Thu, 03 May 2012 17:00:20 +0000

If you look at the rate of growth in credit, it tells you something. When it hits an inflection point i.e. when credit growth peaks and begins to decelerate, investors should take it as a harbinger of declining GDP and a signal to shift assets toward risk-off trades. Right now, Australia is demonstrating some serious softness in credit growth as the chart below attests

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Australian House Prices down 10% from Peak

Steve Keen — Tue, 01 May 2012 12:26:07 +0000

Australian house prices peaked in June 2010. The motive force behind Australia’s bubble was the same as in the USA and Japan: accelerating debt drove rising house prices during the boom. Now in both those countries, decelerating debt is driving house prices down. The same pattern applies in Australia

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The ECB is on Mars

Macro Business — Thu, 26 Apr 2012 18:19:00 +0000

Collapsing credit demand ultimately leads to a loss of banking capital, which is the exact opposite of what the LTRO program was set up to achieve. Interestingly, as the charts below show, banks seem to think that there will be a slowing of the fall in credit demand in the next quarter across all markets. Given European fiscal policy is setting up Europe up for perpetual recession, I have no idea why the banks think this will occur

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Alan Blinder gets it

Edward Harrison — Thu, 05 Apr 2012 01:15:42 +0000

I caught this statement from Alan Blinder in a debate on the New York Times about teaching economics. Clearly, Blinder sees a huge financial crisis and reflexively understands changes must be made

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Endogenous or exogenous money?

Edward Harrison — Tue, 03 Apr 2012 17:49:51 +0000

I think the real difference between what Nick Rowe is saying and what people like Scott Fullwiler and Steve are saying is that Nick believes over the medium-term, central bank interest rate policy is endogenous. What I think Nick means is that Scott Fullwiler's view is reasonably clear and straightforward but that it only matters over a short-term time horizon because central bank interest rate policy adjusts endogenously over the medium-term to commercial bank and other economic variables such that it is really endogenous rather than exogenous

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Ptolemaic Economics in the Age of Einstein

Steve Keen — Sun, 01 Apr 2012 18:49:32 +0000

Paul Krugman’s claim that those who argue banks play an essential role in macroeconomics are “Banking Mystics” has a natural riposte: Neoclassical economists like Krugman who believe that capitalism can be modelled without either money or banks are Barter Mystics (David Graeber, 2011). How on earth can someone believe that the manifest reality that transactions involve money being exchanged for goods can be ignored, and pretend instead that goods are exchanged for goods? How on earth can the institutional reality of banks be ignored by those who claim to be macroeconomists

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Ludwig von Mises on Austrian Business Cycle Theory

Edward Harrison — Fri, 30 Mar 2012 17:36:15 +0000

Yesterday, John Carney at CNBC had a nice little post comparing Hyman Minsky's Financial Instability Hypothesis with some of the thinking by Friedrich von Hayek behind Austrian Business Cycle Theory. John rightly points to this passage as "a theory about banking as an endogenous destabilizer of the economy." And this certainly fits with the Minsky view of the world. von Mises takes the view that it is in having "bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably". Nevertheless, whether you believe the genesis of the credit expansion is Federal Reserve interest rate policy, animal spirits, fiat currency or fractional-reserve banking, what should be clear is that it is the lower rate of interest that creates the credit growth. The question is whether this lowering of rates is beneficial over the long-term. Vom Mises argues it is not

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On debt’s centrality to modelling complex economic systems

Edward Harrison — Wed, 28 Mar 2012 21:36:49 +0000

My view as developed in that post is that debt is central to understanding economic systems, and not just because it has a redistributive element in apportioning losses between creditors and debtors when recession forces credit writedowns. More importantly, debt accumulation adds to an economy's ability to sutain economic growth (and malinvestment) by adding to aggregate demand. The video in this post gets to why this. matters

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On bank lending’s creating deposits and Paul Krugman’s response

Steve Keen — Wed, 28 Mar 2012 20:52:14 +0000

Alan Holmes wrote in 1969 that "in the real world, banks extend credit, creating deposits in the process, and look for the reserves later." Holmes would turn in his grave at Krugman’s naïve assertion, half a century later, that banks need deposits before they can lend. Bank lending creates deposits. That’s why banks matter in macroeconomics, and it’s not “Banking Mysticism” to point this out

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Bill Gross on Risk Seeking Return and Safe Carry

Edward Harrison — Tue, 27 Mar 2012 14:00:32 +0000

Bill Gross is out with his monthly commentary. Because his points are central to the discussion of policy and markets right now, I am going to write this weekly newsletter commentary outside the paywall. The major question is about how to invest in a world that levers much more slowly in total, and can delever sharply in selective sectors and countries. Gross has some answers and I have some comments on the macro backdrop

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