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Download Misunderstanding the Great Depression, making the next one worse
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Housing: Bubble or Boom? Steve Keen www.debtdeflation.com/blogs www.keenwalk.com.au “Great Debate”, or talking past each other? • House price debate a welter of confusing stats – Prices high relative to incomes? – Or prices reflect supply & demand? • Each side supports case with selective statistics • My approach: Housing a side-issue – Main issue: what’s driving the economy – House prices a symptom of this… • Economic growth debt-dependent – Debt-induced downturn caused GFC – Housing market main target of Ponzi Lending – Australia avoided crisis by piling on yet more debt – Housing will suffer fate of debt-dependent economy The global debt bubble • Global economy carrying more debt than ever before: US Private Debt to GDP Ratio 300 Percent of GDP 250 200 150 100 50 0 1920 1930 1940 1950 1960 1970 Year 1980 1990 2000 2010 The global debt bubble • Ditto Australia: lower debt than USA, but same pattern: 175 150 Percent of GDP 125 100 75 50 25 0 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year What’s wrong with debt? • Debt for productive purposes good – Working capital for firms – Loans for new technology, factories, markets… • But debt for speculation on asset prices – Drives up asset prices • “Positive feedback loop” between debt & price – Doesn’t add to capacity of economy to service debts – If debt high relative to GDP, change in debt dominates economy • Crash inevitable when debt stops growing • Above ignored by conventional “neoclassical” economics • Main explanation of Great Depression by mavericks Irving Fisher & Hyman Minsky… What’s wrong with debt? • Aggregate Demand equals GDP plus the change in debt • Debt-based demand & unemployment in Great Depression: Change in US private debt and aggregate demand US Private Debt and GDP 200000 Private Debt Nominal GDP US$ million US$ million 150000 Change in Private Debt Nominal GDP Aggregate Demand 0 100000 50000 1920 100000 1925 1930 Year 1935 1940 100000 1920 0 1925 1930 Year 1935 • Reduction in debt made the Great Depression “Great” What’s wrong with debt? • Change in debt explains 77% of 1930s unemployment: 10 0 0 07 10 14 20 21 Debt Contribution to Demand Unemployment (inverted, RHS) 30 1920 1925 1930 Year 1935 1940 Percent of workforce Percent of Aggregate Demand US Debt financed demand and unemployment What’s wrong with debt? • Same factor only just begun today: US Private Debt and GDP Change in US private debt and aggregate demand 7 510 7 210 Private Debt Nominal GDP Change in Private Debt Nominal GDP Aggregate Demand 7 US$ million 7 310 7 210 7 110 7 110 0 1995 2000 2005 0 1990 2010 1995 2000 US Debt financed demand and unemployment Year Year 25 0 18 3 11 6 4 9 0 3 10 1990 12 1995 2000 Year 2005 2010 Unemployment (inverted) 0 1990 Percent of Aggregate Demand US$ million 410 2005 2010 What about Australia? 20 0 15 2.5 10 5 5 7.5 0 10 Unemployment Rate (inverted) Annual Change in Private Debt and Unemployment Annual change in debt as share of aggregate demand • Half US private debt levels • Benefit from China • Huge government stimulus (10% increase in household income during recession) • BUT – Same deleveraging processes afoot here: 5 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year Debt Based Demand • HOWEVER Unemployment Rate – Deleveraging reversed by “First Home Owners Boost”… House prices & mortgage debt • FHVB definitely boosted house prices Real House Prices and Real Incomes Ratio of House Prices to Household Disposable Income 275 250 225 150 House Prices Household Disposable Income Howard Introduces FHOG Howard doubles FHOG Rudd doubles FHOG CPI Deflated Indices, June 1986=100 CPI Deflated Indices, June 1986=100 300 200 175 150 125 100 75 1985 1990 1995 2000 2005 2010 2015 140 130 120 110 100 90 80 70 1985 Index Howard Introduces FHOG Howard doubles FHOG Rudd doubles FHOG 1990 1995 2000 2005 2010 • Worked because reversed fall in mortgage debt to GDP 2015 What about Australia? • Mortgage debt trend reversed by The Boost Private debt to GDP ratios 2005-2010 Mortgage debt with and without The Boost 160 90 80 75 2007 2008 Year 2009 2010 150 300 140 280 130 260 120 2005 2006 2007 2008 2009 Year • Australia increasing private debt while USA delevers • “Hair of the Dog” cure for a hangover…? 240 2010 USA Australia Percent of GDP 85 70 2006 320 Australia USA (Right Hand Scale) Ratio (extrapolated to 2010) Deleveraging trend What about Australia? • Fastest turnaround in debt ever… Debt by sector Recessions and the debt to GDP ratio 100 90 80 70 Percent of GDP Index Peak Debt = 100 100 98 96 200 Business Mortgage Personal Government Total Private (RHS) 150 60 50 100 40 30 50 94 92 20 1974-76 1990-94 2008-2010 0 1 2 3 4 10 5 0 1975 1980 1985 1990 1995 2000 2005 2010 0 2015 Years since peak debt ratio • But only mortgage debt rising • Is this sustainable? 5-fold increase in mortgage debt in 20 years… Total Private Debt 102 House prices & mortgage debt • Aim of House price speculation is unearned income • Sources of unearned income are – Someone else’s income – Increased debt • If everyone tries to do it… – Either offshore income (Chinese buyers?) or – Increased debt • House prices rise so long as debt rises faster… • Real problem with economy is it is debt dependent – Continued prosperity now dependent on ever-rising debt House prices & mortgage debt • It’s worked so far… Growth in debt per house vs prices & incomes 400 375 350 Index 1998=100 325 Mortgage debt per house House Price Index Consumer Price Index Disposable income per person 300 275 250 225 200 175 • But can debt keep rising forever? • In our debtdependent economy, it has to if we are to avoid recession… 150 125 100 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year The real problem with Deleveraging • Hypothetical economy Year 0 – GDP $1 trillion, growing at 10% p.a. – Debt $1.25 trillion at start of year • Increase in debt in $250 billion – Total spending on all markets: $1.25 trillion • Hypothetical economy Year 1 – GDP $1.1 trillion – Increase in debt zero – Total spending on all markets $1.1 trillion – $150 billion fall in demand because debt stabilises • Markets must “take a hit” from fall in turnover • Similar but smaller effect even if debt grows 10% – No growth in nominal demand—rise in unemployment The real problem with Deleveraging • Problem with large debt isn’t just servicing it • When debt – Grows faster than economy for many years – Becomes much larger than GDP • Then debt has to keep growing faster than GDP to sustain economy – Servicing crisis inevitable – Then slowdown in debt growth causes recession – Turnaround in debt causes Depression • Deleveraging delayed by government policy here to date • When it hits, all markets will suffer—including housing • For more information, see www.debtdeflation.com/blogs
