MARCH 20, 2011
Steve Keen is a professor at the University of Western Sydney and is the author of several great books on economics. He also writes the fantastic economics blog, "Debt Deflation". If you aren't familiar with his work, you owe it to yourself to get acquainted with it.
Keen recently gave a fantastic talk to the Mortgage Finance Association of Australia. The audio of the talk as well as the slide show can be viewed at the following link:
Basically Keen is discussing the Australian housing bubble, which is far larger than our own and evidently larger even than the US housing bubble. Keen's insightful discussion has inspired me to attempt to recreate some of the great charts he referenced, but using comparable Canadian data. Watch for this later in the week.
I will briefly comment on a couple of Keen's main points with reference to our own situation here in Canada:
1) Conventional economics suggests that an exponential rise in consumer debt levels is not necessarily problematic as it simply shifts the buying power from debtor to creditor. Thus, a chart like this would not necessarily make a conventional economist nervous:
Theoretically, in the event of a consumer deleveraging (where people actually start paying off their debts rather than ratcheting them up) it doesn't necessarily have to have harmful economic effects as the savers would hopefully step in to fill the spending void....at least according to some economists.
There are several problems with this line of thinking. First off, history has shown us that this is overwhelmingly unlikely, as much as it is theoretically possible. Second, and much more importantly, traditional economics does not take into consideration the significant stimulative effects of a wide swath of a population leveraging up simultaneously. A deleveraging causes a collapse in aggregate demand which leads to rising unemployment, unserviceable debts, and even less consumer spending as the process that buoyed the economy on the way up now works in reverse. So the creditors increasingly find that their loans are non-performing in a credit deleveraging cycle, particularly when they are non-secured loans.
It should be evident to us all that debt levels relative to disposable incomes cannot rise forever. They currently sit at 150% on aggregate, though that average conceals the fact that there is a less than insignificant chunk of Canadians with debt levels three or four times this amount. Clearly this ratio cannot rise beyond the ability of Canadians to service those debt levels. So let's agree that the rise in consumer debt levels relative to income will not last indefinitely.
2) A recession can be caused simply by a slowing in debt growth. Keen demonstrates this in the video.
3) House prices are directionally led by mortgage lending. In other words, when credit is made readily available and people access it, the result is fairly predictable. This is by far the best predictor of house price movement in Australia....a far better predictor than immigration or population expansion. We'll see how this stacks up here in Canada later this week hopefully.
I would add that mortgage lending which paces GDP/income growth is not what is of concern, but rather lending which outpaces it. Clearly this is unsustainable. This is our Canadian experience by the way...
Keen's video is a must see, particularly as Australia is showing clear signs of a slowing housing market. It certainly bears asking how similar our experiences are. Check back in later in the week for that answer.