Transcript and debt
The global debt bubble Steve Keen University of Western Sydney A booming economy… • Seventeen years of growth… Economic Growth 6 5 4 Percent 3 2 1 0 Change in Real GDP Hewson Loses Howard Wins 1 2 1992 1994 1996 1998 2000 2002 2004 2006 2008 A booming economy… • Fifteen years of falling unemployment… Unemployment 12 Unemployment Hewson Loses Howard Wins 11 10 Percent 9 8 7 6 5 4 1992 1994 1996 1998 2000 2002 2004 2006 2008 A booming economy… • And 43 years of debt rising faster than GDP… Debt and Nominal GDP 2000000 1800000 1600000 $ Millions 1400000 1200000 Debt GDP Menzies 49-72 Whitlam 72-75 Fraser 75-83 Hawke 83-96 Hewson Howard 96-07? 1000000 800000 600000 400000 200000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Having the (borrowed) time of our lives… • Another look at the medium term trend… Debt and Nominal GDP 110 7 $ Millions 1000000 Debt GDP Menzies 49-72 Whitlam 72-75 Fraser 75-83 Hawke 83-96 Hewson Howard 96-07? 100000 • Does that look sustainable to you? 10000 1000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Asset Rich and Debt Poor… • Assets are rising too… Household Assets and Liabilities 6000000 • But not as fast as debt has risen… Assets Liabilities Net Position $ Million 4000000 2000000 0 1990 1995 2000 2005 Asset Rich and Debt Poor… House Prices and Mortgage Debt 40 House Price Index Mortgage Debt Annual percentage change 30 20 10 0 10 1990 1995 2000 2005 • And housing assets have risen only because they’ve become more expensive… Volatile Prices & Sluggish Output • Additions to housing stock lower in 2004 than in 1997… Changes in Housing Stock Price Quantity Percent 20 10 0 1998 2000 2002 2004 • We had a borrowing boom, not a building boom… Volatile Prices & Sluggish Output • Which is why we’re having a rental crisis… • But even rents haven’t kept pace with debt servicing: Rental income versus mortgage interest Current $ million 80000 60000 40000 Rental Income Interest Payments Gap (RHS) 30000 40000 20000 20000 10000 0 1980 1990 2000 0 • Apparent high value of assets illusory Volatile Prices & Sluggish Output • Houses more expensive simply because we’ve been willing to borrow more money to buy them… – Prices up 250% since 1996; mortgage debt up 520% Dwelling Price & Value vs Mortgage Debt 600 Indeces (1996=100) Value of Housing Price of Housing Mortgage Debt 400 200 0 2000 2005 Ponzi Households • Lending for housing rose from 5-25% of GDP: Aggregate New Lending for Housing Housing Construction 25 15 10 5 Percent of Total Lending Percent of GDP 20 70 60 Owner Occupiers Investors 50 40 30 20 10 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 • No wonder we’re having a • Proportion that financed rental crisis… construction fell from 30% to under 10%: – We didn’t build (m)any houses! • What’s driving the debt? Having the (borrowed) time of our lives… • There’s something systematic going on here… Debt and Politics 160 Percent of nominal GDP 140 120 100 Debt Ratio Trend from 64 Menzies 49-72 Whitlam 72-75 Fraser 75-83 Hawke 83-96 Hewson Howard 96-07? 80 60 40 20 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 • And we’re not alone… unfortunately Having the (borrowed) time of our lives… Household Debt to GDP 100 Percent 80 USA Australia 1990+ trend 2.1% 1990+ trend 6.8% 60 40 20 0 1960 1980 2000 Date • Not for the first time in our history either… The Ponzi Economy Debt to GDP: The Long Term View 160 Percent of nominal GDP 140 120 Debt Ratio Trend 1964-Now Trend 1880-1892 Trend 1925-1932 100 80 60 40 20 0 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 The Ponzi Economy • Correlation isn’t causation, but… 0 T 1 2 3 0 "Variable" "Credit" "Credit" "Credit" 1 "Compared to" "GDP" "GDP" "GDP" 2 "Start Date" 1880 1925 1964.5 3 "End Date" 1892.5 1932 2007.7 4 "Growth Rate" 9.2 9.5 4.2 5 "Correlation %" 6 "Doubling Period" 7.5 7.3 16.6 7 "Duration" 12.5 7 43.2 8 "Initial Value" 33.9 40.3 24.7 9 "Final Value" 103.9 76.2 159.5 10 Clearly exponential process 97.9 97.6 Biggest bubble in our history "Increase %" 206.5 88.8 99.1 546.9 • Serious Depressions after previous two debt bubbles • What can we expect after this one? • According to RBA, there’s nothing to worry about!… Efficient markets & financial democracy? • Ric Battellino, Deputy Governor, RBA: – “Has the expansion of household credit run its course? Will it reverse? We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course...” – “Eventually, household debt will reach a point where it is in some form of equilibrium relative to GDP or income, but the evidence suggests that this point is higher than current levels.” • (Battellino, “Some Observations on Financial Trends”, 25 September 2007) Another interpretation: limitless lending • Who’s in control of the money supply and debt? – Economics textbooks • The Government/Central Bank – Central Bank creates “base money” – Sets “money multiplier” – Credit Money = Base Money * Credit Money – Economic data • “There is no evidence that either the monetary base … leads the cycle, although some economists still believe this monetary myth. • … the monetary base lags the cycle slightly… • The difference of M2-M1 leads the cycle by … about three quarters.” (Kydland & Prescott 1990, p. 15) The new monetary paradigm • Money supply “endogenous” – Credit money not under government control • Inherent bias towards providing as much debt as can flog • How does it work? Simple! – Consider bank loan of $L to Firm – Simultaneously creates Deposit $L and Loan $L – Charges rL% p.a. on loan – Pays rD% p.a. on deposit – And so on… • Put together flows & you can understand credit creation – Starting from the beginning • Loan by bank created both money and debt… “Money from nothing, but your cheques ain’t free” • Loan an asset of bank • Simultaneously creates liability of money in firm’s deposit account: • Sets off series of obligations: – Interest charged on loan at rL% p.a. – Interest paid on deposit at rD% p.a. where rL > rD – Third account needed to record this: Bank Deposit BD “Money from nothing, but your cheques ain’t free” • Full system is: Interest flows: bank<―>firm Wage flows: firm―>workers Interest flows: bank―>workers Consumption flows: bank & workers―>firms New Money/Debt flows: bank<―>firms Debt repayment flows: firms―>bank Reserve relending flows: bank―>firms • Table describes self-sustaining pure credit economy • Can now ask “What happens to bank income if…” – New money created more quickly – Loans repaid more quickly – Reserves re-lent more quickly? “Would you like a credit card with that?” • Surprise surprise! 12 • Bank income rises if – Loans are repaid slowly10 (or not at all) 8 – Repaid money is recycled more quickly; and 6 – More new money is 4 created 2 Bank Net Income and Bank Parameters Standard New Money Loan Repayment Recycling Loans 0 2 4 6 8 • Lenders profits by extending more credit… – Structural reason for lenders creating rising debt – What if they decide to change direction? 10 200 “Money from nothing, but your cheques ain’t free” • “Credit Crunch”: the rate of money creation drops – & repayment of loans increases – & relending drops… 100 0 300 0 5 5 10 15 10 15 15 Firm Loan Bank Reserve Firm Deposit Worker Deposit Bank Deposit Assets Bank Reserves Firm Loan 300 200 10 200 100 5 100 0 0 5 10 15 0 0 0 5 • Loans—Assets in circulation fall even without bankruptcy Assets Bank Reserves • Credit-driven economic reversal… Firm Loan 300 10 0 Why do borrowers accept debt in the first place? • Hyman Minsky’s “Financial Instability Hypothesis” – An explanation for debt-driven booms & depressions • Economy in historical time • Debt-induced recession in recent past • Firms and banks conservative re debt/equity ratios, asset valuation • Only conservative projects are funded • Recovery means conservative projects succeed • Firms and banks revise risk premiums – Accepted debt/equity ratio rises – Assets revalued upwards The Euphoric Economy • Self-fulfilling expectations – Decline in risk aversion causes increase in investment • Investment causes economy to grow faster – Asset prices rise • Speculation on assets becomes profitable – Increased willingness to lend increases money supply • Credit money endogenous – Riskier investments enabled, more asset speculation • Emergence of “Ponzi” financiers – Cash flow always less than debt servicing costs – Profits made by selling assets on a rising market – Interest-rate insensitive demand for finance The Assets Boom and Bust • Initial profitability of asset speculation: – reduces debt and interest rate sensitivity – drives up supply of and demand for finance – market interest rates rise • But eventually: – rising interest rates make many once conservative projects speculative – forces non-Ponzi investors to attempt to sell assets to service debts – entry of new sellers floods asset markets – rising trend of asset prices falters or reverses Crisis and Aftermath • Ponzi financiers go bankrupt: – can no longer sell assets for a profit – debt servicing on assets far exceeds cash flows • Asset prices collapse, drastically increasing debt/equity ratios • Endogenous expansion of money supply reverses • Investment evaporates; economic growth slows or reverses • Economy enters a debt-induced recession ... • High Inflation? – Debts repaid by rising price level – Economic growth remains low: Stagflation – Renewal of cycle once debt levels reduced Crisis and Aftermath • Low Inflation? – Debts cannot be repaid – Chain of bankruptcy affects even non-speculative businesses – Economic activity remains suppressed: a Depression • Big Government? – Anti-cyclical spending and taxation of government enables debts to be repaid – Renewal of cycle once debt levels reduced • Sounds like history lesson rather than economic theory… Meanwhile, in the real world… • Combination of record Debt/GDP, high nominal interest rates and low inflation means huge real interest burden: • Debt servicing pressure will 15 constrain debt growth at 10 some point 5 – Borrowers cease 0 borrowing 5 – Lenders cause credit 10 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 crunch… Inflation-adjusted interest payment burden Percent of GDP 20 The Ponzi Economy • Rising debt in the economic driver’s seat – No influence on unemployment in the 60s – Accounts for 90% of unemployment now Change in Debt, Politics, & Unemployment Unemployment & Debt Contribution to Demand 16 14 12 Debt Change Whitlam 72-75 Fraser 75-83 Hawke 83-96 Hewson Howard 96-07? Unemployment 10 10 9 0 10 8 20 7 10 8 6 30 6 40 5 50 4 60 4 3 70 2 2 80 0 1 90 2 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 • What happens next?... 2005 Unemployment 18 11 20 Percent Percentage Contribution to Aggregate Demand 20 0 100 2010 1960 Correlation Whitlam Fraser Hawke 1965 1970 1975 1980 1985 1990 1995 2000 Back in the USA… • USA Housing Bubble has clearly burst: Case-Schiller US Housing Index 250 3 200 Index 1 150 0 100 1 50 1990 1995 2000 2005 2 Index Monthly Change House prices falling by more than 1% per month! Monthly Change Percent 2 In China we trust… • Macroeconomic link: – Aggregate demand = GDP + change in debt – As debt rises, dependence on change in debt has risen • Now accounts for 18% of aggregate demand • Even stabilising debt/GDP ratio will cause 5%+ cut in spending • Serious downturn inevitable • Counter forces – Possible global warming/peak oil inflation • Inflation reduces debt burden – China boom… • We are entering stormy economic waters… For more information…