Avant garde economics

My esteemed co-blogger Deep T made the comment that too little attention is being paid on MacroBusiness to creative solutions to the problems that are documented in great detail on MacroBusiness. I would go a step further. Economic analysis generally suffers from a deep flaw. Because it is a quasi-science (although in no respect truly scientific) is does not concentrate on what is new and unique. Science is not interested in the unique, only what is always the same. Having discovered what is always the case, then predictions can be made. Economics, in endeavouring to replicate that method, is not sensitive to what is new and what is changing.

Consequently it is a very poor tool for prediction. When economics looks forward it is usually to say that the system is out of balance, it must return to what it has always been (the current argument on MacroBusiness are a case in point: the housing market must return to the mean).

This is, if not nonsense, at best only a part of the story. Economic systems are human collective behaviour. That behaviour is always evolving. It throws up the new just as all human history has come up with something new. To try to predict it based on historical data is always to get it partly wrong. So I would go a bit further than Deep T. I would say it is time to start trying to anticipate the system, predict events, by not assuming that the system is static. In addition to conventional analyses (“we’ve seen this before, and we all know that this time it is not different, it will return to the mean”), we need to find what is new and step through what that uniqueness is likely to lead to.

To show what I mean, consider two reports, one about the Australian stock market and one about the US market.

The first is by Morningstar, and it shows how new the Australian resources boom has been for investors:

Since the start of the current GICS sectors in March 2000, the price index of the Materials sector (XMJ) has risen 321% compared to the S&P/ ASX200 index (XJO) advancing 46%. Of course, dividends need to be added to calculate total shareholder returns, but the relative capital appreciation of the indices is apparent when compared against the A$/US$ exchange rate. Returns are even stronger for a foreign investor, assuming the investment was un-hedged, with the Materials sector up 639% in US$ terms, while the S&P/ASX200 index is up 157%.

This is new in the Australian context. What are the implications of Australia’s capital markets being skewed so much towards one sector? Yes, we know that manufacturing and services are in trouble, but it means things like:

1. Many Australian non-resource companies will only focus on the domestic market because the high currency makes them uncompetitive internationally;

2. Exporters will be in trouble;

3. Globalisers, those that do not export but who look around for the cheapest hands and smartest minds, can thrive if they are smart enough.

4. There has to be a rise in the relative political power of mining companies and government, the recipients of the resources boom and that will have political, and then economic, implications.

The temptation, of course, is having seen the historical trend, to immediately invest in resources stocks. But is it the best play? Often big returns have priced in the future, meaning that even if the future transpires in the way predicted it is already anticipated in the price. Also, as prices rise the effect of further price rises become smaller. For example, the rise of the $A from US70 cents to $US1.10 is over 50%. A rise from $1.10 to $1.20 is less than 10%.

The second report is from Prudential on the American stock market:

It starts with what is different about this current cycle:

Compared with previous post-war recessions – all of which were triggered by imbalances in capital goods, business inventories, and world oil markets – the Great Recession can be best understood as a balance sheet recession. The primary characteristics of a balance sheet recession are as follows:

  • A prolonged period of excessive household debt accumulation;
  • An unsustainable rise in financial leverage within the banking system;
  • Creation of extremely low quality debt owing to unsound underwriting standards, resulting in massive bank losses and writedowns;
  • Overinflated real estate assets resulting from a bubble in the housing and commercial property markets.

The key point is that the necessary adjustments to correct these excesses in private sector balance sheets – deleveraging, absorption of massive credit losses and asset write-downs, rebuilding of net worth, and reliquification – can only occur over a protracted multi-year period. This is in sharp contrast with only several quarters of adjustment necessary to correct excesses and imbalances in business inventory accumulation and business investment in plant and equipment.

Creditless Recovery – While the severity of the recession can be attributed to the collapse in banking and credit markets, the defining feature of this economic recovery is the total absence of credit creation which normally accompanies a cyclical rebound in spending and output. Similar to Japan in the 1990s and the U.S. in the 1930s, the current business and financial environment can be best understood as a post-bubble credit collapse. Under such a scenario, flow of credit through the financial system comes to a sudden halt.

The report details a shift from consumers to businesses and management being in charge:

New Sector Leadership – GDP data since the end of the recession in mid-2009 suggests that our economy may be undergoing a major shift in leadership from consumers and housing to business investment, manufacturing, and exports. Compared with cumulative real GDP growth of less than 5% during the past seven quarters of recovery, business capital spending, exports, and manufacturing output have enjoyed cumulative increases of 25%, 20%, and 13%, respectively. Growth in consumer spending has been only 5%. These relative growth rates are likely to continue.

The report then details this shift in terms of profits and productivity:

Corporate Profits And GDP – The rebound in corporate earnings in the current cycle has exceeded that of all previous cycles by a wide margin (see chart). More noteworthy, however, is the unprecedented disparity between earnings and GDP: Through Q1 of this year, cumulative growth in profits has been an astounding 75%, which compares with cumulative growth in current dollar GDP of only 7%.

Management – The strong growth in profits in a slow growth economy can be attributed to the skill of business managers, in three key areas: (1) Massive restructuring of firms, accompanied by aggressive utilization of cost-effective IT applications; (2) Adoption of new business models to streamline operations and achieve enhancements in productivity, which have contributed directly to record profit margins; and (3) Repositioning within the global economy and penetration into rapid growth BRIC economies.

Productivity and Labor Costs – Productivity growth during the current economic cycle has been extraordinary. The combination of surging productivity and anemic growth in labor compensation has resulted in unprecedented declines in unit labor costs. Although productivity typically experiences a sharp rebound during the early years of an economic recovery, the current cycle has been exceptional.

Current Cycle – Average annual productivity growth of 4% (nonfarm business sector) during the past two years has far exceeded that of previous economic recoveries. Manufacturing sector productivity of 6% (annual rate) is even more impressive and partially explains the resurgence of the U.S. industrial sector. The result has been a collapse in unit labor costs of a cumulative 4.5% in the nonfarm business sector and more than 6% in manufacturing. Falling unit labor costs are highly favorable for both corporate profit margins and inflation.

Households and Firms Diverge – The current cycle has witnessed a massive divergence between business sector and household sector finances. The economic rewards associated with rising productivity have traditionally been distributed equally between workers and business firms; in the current cycle, virtually all of the benefits have accrued to businesses, as manifested in the sharp rise in returns on invested capital in our economy and surge in corporate earnings, while labor compensation has stagnated.

U.S. Living Standards – Not surprisingly, advances in U.S. living standards have slowed dramatically in recent years, the result of slumping net worth and profound weakness in personal income. Compared with a long-term average of 3.3%, growth in real disposable income (consumer purchasing power) has slowed to an annual rate of only 1.2% since the demise of Lehman, or close to zero on a per capita basis. Based upon current growth in per capita income, the number of years needed to double consumer purchasing power has increased significantly. The current trend in U.S. living standards is among the slowest since 1945.

In both these reports were are seeing things that are comparartively new. But what is new about this newness? What is happening outside the system to cause these things within the system to behave unusually?

The answer in both cases is the shift to the developing world. The end of Western hegemony in financial markets. Both Australia and America are creating wealth being suppliers to the industrialisation of emerging economies. Wealth creation from serving the domestic population on both cases is not working as it did before. The ate stage industrialisation of the West is in serious trouble; the housing and finance bubbles were really its death throes. The mid-stage industrialisation of the emerging world is not in trouble.

It has not been seen before and predictions based on what is likely to occur from such historical developments are far more likely to be on the money.

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Comments

  1. What! No Gravy!

    A scientific theory should be falsifiable, e.g. some physicists claim string theory isn’t science because it is not falsifiable. What happens in economics when data contradicts a theory? When I have complained about economics to economists they have said things to the effect that science is different because you can conduct experiments. I point out that some branches of science perform experiments whereas others, such as astronomy are based entirely on empirical observation. In other words if astronomers can observe and form theories to fit the empirical data why can’t economists? When you converse with an economist it is amazing how much can be traced back to a priori axioms, some dating 100 years.

    Both science and economic may start out with hypotheses and assumptions but the problem as I see it is that the assumptions in economics are largely ideological. Also if you read Mirowski or Keen it seems that the profession evolved as physics wannabees trying to find ways of describing an economy that matched what physicists were modelling in thermodynamics. (plus what appears to be an unhealthy obsession that things are in equilibrium. Guess what, the real world is dynamic.)

    If an astronomer has an hypothesis that planetry orbits are circular this can be tested and rejected. If an economist has an “hypothesis” that governments are bad, or that the workers, united, will never be defeated, these are ideological things that people want to cling to regardless of empirical data.

    The best hope for economics? Start from scratch with a blank sheet of paper and no starting assumptions, make empirical measurements about how the world works and then and only then put forward theories. The chances of that happening? Buckleys and none. Economists are in positions of influence that do not depend on them being right so no reason to change.

    • For what it’s worth…

      I would argue that all human thought in inherently, and inescapably, axiomatic, belief-driven at the core (ie. objectivity does not exist, there is only degrees of subjectivity.

      What flows on from that in part, is that, when data “contradict” a notion, the notion can re-attain logical validity via appendation or modification, thus preserving the preferred core axiom(s)…and, as such, this is how human thought works generally, and science included.

      For me, philosophically, one of Economics’ greatest flaws is that it is actually an argument from analogy that does not realise it is an argument from analogy – it thinks it is a mechanistic description, but it is not?

      Any why? Because Economics is a moral system, and a sub-set of human interaction and experience, a conglomerate of human
      Choice and the out-workings of choice applied; and Choice cannot be modelled, as it is inherently creative and meta-logical.

      Hence, mechanistic notions and their subsequent detailed models rooted in a handful of arbitrary descriptors/parameters, are but descriptive analogies – but Economics is not mechanistic, but human, and consequently, models have only limited descriptive windows, at best.

      My 245356456456 cents!!!

      Stewart

      • …lol…

        That being said, I have my own property mechanistic models that I am developing to “predict” short, medium and long-term movements!!

        😀

  2. I think the distinction between economics and physical science is not so obvious. For example, it is not possible to conduct experiments on, say, the global atmosphere, but this does not prevent researchers from making observations, applying reason, developing theories and making predictions about atmospheric phenomena.

    Likewise, it is possible to carry out the same kind of empirical investigation of and predictions about, say, the global financial system.

    There are problems in the collection and measurement of data, to be sure. Maybe it is easier to measure barometric pressure than real interest rates. But I doubt that there is an in-principle difference between the two systems.

    It is also quite obviously possible to carry out experiments in economics – for example, it would be easy to set up experiments that would demonstrate how demand and supply interact to determine prices, and how differing conditions would generate different price outcomes.

    We can and do use such observations and relevant theories to make predictions about the empirical world and we regularly get to see if our predictions turn out to be correct.

    Observers have perhaps tended to say that human behaviour is not susceptible to the same kind of rigorous study as physics or genetics because we are “irrational” or “subjective”, therefore making it difficult to deduce “laws” about pyscho-social phenomena, such as economic events. But perhaps this is too mechanistic.

    There is plenty to suggest that even when humans are behaving “irrationally” or “unconsciously”, they are still behaving according to measurable sequences and modalities of human brain function.

    And nowadays, of course, many “decisions” made in the financial sector are the result of mathematical algorithms encoded in computers.

    In principle, it is possible to make relevant observations and deductions about economic phenomena and, therefore, to help make decisions that will optimize economic welfare.

    I think it may not be necessary to re-write economics, but to ask again: what is economics about, what is it trying to explain and what analytical tools do we have at our disposal?

  3. Alex Heyworth

    In addition to the transfer of industrial activity to the developing nations, we are also at the very beginning of the “Sixth Wave” transition (see book of that title) that involves many of our needs that were once met by the supply of things being met instead by services. This is wrapped up with other huge changes like cloud computing, smart housing and appliances and the value of waste. Not long until barcodes and barcode readers are obsolete, for example.

    The Sixth Wave has the potential to transform the actual living standards of the west for the better, while using far less materials. However, the transition is going to be painful for many people and many companies (probably fatal for quite a few of the latter).

  4. As regards falsifiability, I think a reasonable test is to look at the success rate of economic predictions. As I understand it, economic forecasts are god at the obvious and worse than tossing a coin for the not-so-obvious. In other words, where it matters, economic “science” tends to have little utility.

    • Agreed.

      Perhaps we can start by all (all those interested in Economic descriptions) realising that very limited windows/boundaries of validity of models, and focus a little more on limited interpolations, rather than abitious and frequently philosophically/logically ignorant extrapolations.

      Then there is some value; it is something that engineering tends to be quite good at – mainly because it they’re ignorant about their assumptions, and then wrong, things implode and people die…

      Hence, knowing just how narrow is the valid window of your selected model’s real-life application, is very good for one’s health and success!

      Same could/should go for Economists on their assertions.

      And why not? It’s a humanity-wide logical phenomena: you are inherently descriptive in what you think (not prescriptive!), and your outcomes are no better than your logical starting points….so get some humility and try on some other “glasses” to see how the world looks.

      OK…done now 😉

  5. Avant gard economics? Is it different this time? Oh look the whole world is out of step with finance? Now where have I heard that last sentence before?
    From the article above:

    Economic systems are human collective behaviour. I believe that they are not. They are the studies of some human behaviour. Human behaviour is what it is. Economics is about outcomes based on human interaction. Lowest frictional outcomes.

    “The great mass of people are incapable of realizing that in economic life nothing is permanent except change. They regard the existing state of affairs as eternal; as it has been so shall it always be.” Ludwig von Mises

    It is a human organisational management optimisational model. Inclusive from the individual to the masses.

    However, empirical evidence tends to lead me to the conclusion that it is human behaviour that is the more constant like.

    All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. – Jesse Livermore.

    Political economy:Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy. It developed in the 18th century as the study of the economies of states, polities, hence political economy. http://en.wikipedia.org/wiki/Political_economy
    Politics tells us how power is wielded. Liberty vs power. Government has only one proposition ever. Security vs freedom.

    Politics: Cui Bono? Who benefits?
    Economics: Cui bono? Who benefits?

    Society, Culture, Civilisation: Cui bono? Who benefits?

    Collective behaviour: groups, tribes, clans, elites,regions, states, nations and empires.

    It is the ignorant and/or malevolent in economics that does/ not know what is transpiring. All is in flux.

    Politics/power rules. Land of the flip flop.
    Economics is in general seconded. Did Stalin or Mao really believe Marxian economics? No. It’s just a cover note for the ignorant.

    Do Western politicians believe in Keynesian economics? No. Only where it suits them.It’s just a cover note for the ignorant.

    Good economics tells you what you could achieve.

    Culture tells you if it is acceptable.

    Politics tells you why you won’t be getting it.

    Learn to be a multi disciplinary in interpolation.

    Marx was the champion of communistic socialism. Leads to totalitarianism.

    Keynes was the champion of empire economics.Leads to fascism.

    Fascism is capitalism in decay. Lenin.

    “The state is the great fiction by which everybody tries to live at the expense of everyone else.” Frederick Bastiat.

    “Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individual’s life and the unrestricted supremacy of the government in its capacity as central board of production management. There is no compromise possible between these two systems. Contrary to a popular fallacy there is no middle way, no third system possible as a pattern of a permanent social order. The citizens must choose between capitalism and socialism.” Ludwig von Mises
    “The issue is always the same: the government or the market. There is no third solution.” Ludwig von Mises.

    From the article: The end of Western hegemony in financial markets.

    Finance: Does not create wealth. It is only a transfer mechanism. A wealth redistribution mechanism. Other peoples money, OPM. If it is not enganged as the handmaiden (service) of wealth creating activities then it is an abomination. Societal distribution vs Self accumulation and concetration aka the tail wagging the dog. Pinstripe pirates under royal charter.

    Why is it that the people in finance are always whinging/on the lookout for self justification? Legalise theft? If you didn’t earn the capital then it is not yours. That applies to everyone. Governments, banks and finance especially and the rest of the community, from the individual all the way up to empires. The legitacy of Western finance is not economic but political. Are you looking at a cover note from Sherlock Holmes “Professor Moriarty” to the minion? Moriarty is something of a Mafia Godfather: he protects nearly all of the criminals of England in exchange for their obedience and a share in their profits. Holmes, by his own account, was originally led to Moriarty by the suggestion that many of the crimes he perceived were not the spontaneous work of random criminals, but the machinations of a vast and subtle criminal ring.

    Finance has declared war on Western society.

    You are looking at the systemic crackup of Anglo power. As equally devastating as the fall of communism. The fish in the fishbowl cannot understand why there is oxygen depletion.

    Creating money out of thin air, hyperventilating it through finance and a pawn in a far bigger political game. Fiat money, unbacked is only a concept. You are enganged in psy-ops warfare by the very fact of its utilisation. A claim on wealth. Debt based money, hyperventilating through financial contortions is a believe sysytem. Money owned vs money owed.
    Fiduciary media is debt organized into currency. Charles Holt Caroll
    There can be nothing more unreal in its pretensions than debt currency itself. Charles Holt Carrol

    Obviously you don’t know history. At the time of iniation of debt based money, there was another power struggle going on. That of the Church and its place in the firmament. The vacuum created by this struggle, was filled by banking. Banking had a long run vision. Power, that of the present ruler (and his dynasty) was only interested in the short run by comparision. Notice how the weakening of social structure allowed for this. Power vacuum.

    There is an old story on wall street: A wealthy Oriental gentleman visiting wall street was courted and fated by the best in finance.

    He was shown the opulence and taken along to view all the financial top leaders magnificent yachts.

    Upon viewing , he paused, then thought and made an exemplary comment: Where are all the customers yachts!

    So we move from economics to belief systems and politics.

    New economics? Try the economics of rent seeking. aka legitimised theft under the political economy.

    Nice try but no cigar!

    Mammon or its disciplines and disciples do not rule. The church of sinner john law, the bastard.

    • What! No Gravy!

      Marx was the champion of communistic socialism. Leads to totalitarianism.

      Keynes was the champion of empire economics.Leads to fascism.

      What kind of “ism” does Mises belief system ultimately lead to?

      If actual data contradicts Mises belief system then what?

      Isn’t this a case of everyone elses ideology is wrong except mine?

      In other words why replace one fantasy ideology with another. Why not get fair dinkum and learn how the real world works.

  6. O.K. Here are some places to start looking.

    Economic Recessions, Banking Reform and the Future of Capitalism.

    http://blog.mises.org/14444/economic-recessions-banking-reform-and-the-future-of-capitalism/

    Keynes, judge, jury and economist.

    Keynes: kaptain flip flop himself.–
    Surely this is in part because Keynes was an overly agreeable man, one who could write to F. A. Hayek to communicate his “deeply moved agreement” with The Road to Serfdom, and to FDR to express his agreement with the view that “investment must come increasingly under state direction,” and to socialist Kingsley Martin to note his agreement with his observation that “capitalism is an out-of-date institution incapable of meeting the requirements of the twentieth century.”

    That’s a lot of contradictory stuff to agree with.
    http://www.nationalreview.com/articles/267555/judge-jury-and-economist-kevin-d-williamson

    Financial delusions and chicanery.
    Reflections on the Revolution in France
    What happens when you cut off heads instead of credit.
    http://www.nationalreview.com/articles/267989/reflections-revolution-france-kevin-d-williamson?page=4

    Economic Depressions: Their Cause and Cure by Murray N. Rothbard
    http://www.lewrockwell.com/rothbard/rothbard183.html

    • For a more holistic view, try a social behaviour of crowds approach and see if we are missing anything.

      “The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.” Gustave Le Bon

      “The characteristics of the reasoning of crowds are the association of
      dissimilar things possessing a merely apparent connection between each other,
      and the immediate generalisation of particular cases. It is arguments of this
      kind that are always presented to crowds by those who know how to manage
      them. They are the only arguments by which crowds are to be influenced. A
      chain of logical argumentation is totally incomprehensible to crowds, and for
      this reason it is permissible to say that they do not reason or that they reason
      falsely and are not to be influenced by reasoning. Astonishment is felt at times
      on reading certain speeches at their weakness, and yet they had an enormous
      influence on the crowds which listened to them, but it is forgotten that they
      were intended to persuade collectivities and not to be read by philosophers. An
      orator in intimate communication with a crowd can evoke images by which it
      will be seduced. If he is successful his object has been attained, and twenty
      volumes of harangues — always the outcome of reflection — are not worth the
      few phrases which appealed to the brains it was required to convince”.

      Gustave Le Bon Crowds

  7. Avant garde ? . Oh come on..

    >Having discovered what is always the case, then predictions can be made. Economics, in endeavouring to replicate that method, is not sensitive to what is new and what is changing. Consequently it is a very poor tool for prediction.

    Ummmm??? NO. Economists don’t replicate anything, because as far as I can tell they can’t remember past last wednesday.

    Economic history is a VERY GOOD predictor of what will happen. But modern economics is an art form for people with dementia. No one is learning anything from history. It isn’t “new thinking” that is required it is “any thinking at all”.

    How many more countries do we need to see that have unrelenting current accounts that implode into a debt crisis before “economists” learn from it? Just take a look at the current Greek Crisis, it is embarrassing.

    How many more countries with every increasing private and/or public sector debt leading to economic collapse do we need?

    Look at our local breed of eco-morons. Australian economists are happy to throw rocks at the PIIGS, but for some reason are unable to take a look in their own backyard and see the amazing similarities. Can’t happen here ? We are different!!!, That is not science it is faith based on long-term memory loss.

    Look at the state of the equities markets, as H&H aptly called it “madonna’s third breast”. Tech Bubble->Crash->Housing Bubble->Crash->Commodities Bubble – >> ???? .

    Can anyone with a memory longer than a week fill in the blank ??

    And this one…

    >When economics looks forward it is usually to say that the system is out of balance, it must return to what it has always been (the current argument on MacroBusiness are a case in point: the housing market must return to the mean). This is, if not nonsense, at best only a part of the story

    Ummm??.. I think you just proved my point. It is a bubble, it will end the same way every other one before it did. We don’t need innovating thinking about it, we just need to ACTUALLY think about it.

    In my opinion that means re-regulating private credit creation, and matching wages to production. But I am open to other suggestions.

    I am all for “new thinking” but lets get the old stuff right first.

  8. “When economics looks forward it is usually to say that the system is out of balance, it must return to what it has always been (the current argument on MacroBusiness are a case in point: the housing market must return to the mean).”

    House prices will revert to mean. Sure.

    So housing will return to its long term mean of $50k (in 2005 dollars) in real terms or its long term mean multiple of ONE times income?

    http://img687.imageshack.us/img687/4963/ltt.png

    ..and you say that’s the macrobusiness position. Well well.

    Reversion to mean implies a reversion to mean of all contributing historic factors such as outside dunnies, lower population density, non-working spouses, larger families, no building regulations, cedit only for the rich, etc etc.

    Nothing follows reversion to mean. As Mises wrote, everything is always changing. You need another reason for your house price crash.

    • I think Sinbad raises a valid point..

      SON is that really MacroBusiness’s position on housing? I certainly can’t remember any of the other bloggers suggesting such a thing.

      Can you clarify, is this actually a “position” it certainly doesn’t fit with anything I have read here.

      Sinbad, you said.

      >You need another reason for your house price crash.

      Yes .. I think it is called unsustainable private sector debt growth. Oh hang on, we’ve already got it.

      Coming clean yet ??

      • Private sector nominal credit has been growing slower than national income for the last two years. Credit growing at the rate of national income is sustainable for ever.
        Oh, and I’m very clean. No vested interest other than helping people with a balanced picture.

        • > Credit growing at the rate of national income is sustainable for ever.

          Wrong !!

          The cost of repaying debt growing at the rate of national income is sustainable for ever. You are conveniently forgetting about interest rates.

          Your “nominal credit” view is including all sort of credit that does not flow to housing. You should probably be looking at housing credit growth which is currently at 6.6% YoY, the lowest in 30 years and still nearly double the national wage growth.

          Secondly you may want to look at the chart in a previous post from both H&H and DE.

          http://macrobusiness.com.au/wp-content/uploads/2011/06/WhyYourPoorer1.png

          Your broken model of debt and wages is telling you everyone is getting richer. But they are not, which is why it is unsustainable.

          I could go on an explain that you also need to look at the ratio of wages to company profits to get a real understanding of what is actually happening in the private sector and what is likely to happen to the housing market, but I couldn’t be bothered.

          Given your lack of understanding of how things actually work I have realised that I was wrong to assume you were an “insider”, there is no way you could be.

          Sorry for the confusion

          • Why do you persist with insults? Your way of dealing with other views?
            It was you who wrote “I think it is called unsustainable private sector debt growth.”
            Now you want to pretend you wrote something else and only wish to include housing credit. The 6.6% housing credit growth rate is aggregate – it is not per capita as per your invalid comparison with wages. It is comparable with aggregate income increases.

            I have to say that I never took you for an insider. It’s quite clear that you have a vested interest as a renter who’s been waiting years for a crash and vindication.

          • Gentlefolk.. Firstly can I ask that you both settle down, especially you Broken Model I am quite happy to ban you for insulting others. Consider yourself warned.

            Although I agree with your point that

            >The cost of repaying debt growing at the rate of national income is sustainable for ever. You are conveniently forgetting about interest rates.

            and I think that Sinbad may have missed that point ? Maybe not.

            You cannot however directly compare wages growth and housing finance growth as Sinbad states.

            Your model is broken. Sorry couldn’t resist.

            Having said that I think you may both be interested in a piece written by a guest poster from Dec last year.

            http://macrobusiness.com.au/2011/01/guest-post-its-a-question-of-fundamentals/

            Feel free to pick holes in his arguments.

          • The assertion was that the crash will come because of “unsustainable” credit growth. DE now claims:
            “You cannot however directly compare wages growth and housing finance growth as Sinbad states.”
            The claim of “unsustainable” must relate in some way to income. The credit growth figures quoted are national aggregates, therefore they must be set against national aggregate income growth, not individual wages as BM did.
            The article you linked makes the false claim that house prices have followed housing credit growth. They have certainly not followed housing credit growth. The period 1990 to 1997 had very little house price growth and huge housing credit growth. The boom of 2009 was associated with modest housing credit growth. The correlation between housing credit and house prices is poor to negligible.
            The long term correlation between house prices and M3 is stronger. M3 includes private credit but also savings (which are also available for house purchase). M3 is currently growing at around 10%.

    • “As Mises wrote, everything is always changing. You need another reason for your house price crash.”

      House price will crash because:

      1) too many people now cannot or will not pay the current asking prices

      2) Deflationary mindset will (and is, i believe) set in – there’s one of the primary changes right there: one of the ultimate bubble popping factors (prices continue to fall because they’re falling, and this is exaccerbated to the point of a crash because of systemic factors such as Point (1)).

      Yes, change always: especially in what people can and will pay for something.

      (Mind you, one of the only things that does NOT really change is people/human-nature…!)

      My 2c

    • Sinbad,

      Every time you come here, you desperately seek out anything that enables you to position MB as a single voice of housing crash nutters. It reeks of argumentum ad hominem and shows you have an agenda.

      There is NO MB position because we have no agenda beyond the truth.

      I could point to a multitude of positions held by different bloggers but really I don’t need to because SON himself has just illustrated the point nicely.

      Stick to the arguments and you may even a win a few.

      We’re all still waiting for you to disclose what you do, given the challenge you were issued last week.

      • It isn’t me who personalises the issues. You are doing that by asking what I do. I stick to the issues unless I get personally attacked.
        Broken model claimed there will be a crash because of “unsustainable private sector debt growth”. I pointed out that that is less than current income growth. BM then changed tack to housing credit. That too is within aggregate income growth. Burbwatcher says there’ll be crash because “too many people now cannot or will not pay the current asking prices”. Really? Affordability, in terms of repayments, was worse around 2007/8 and 1989/90 than it is now. In terms of price/income its little changed over the last 8 years. I’m still seeking reasons for such confidence of a crash.
        Irrespective of whether or not there is a macrobusiness position (SoN’s statement infers the existence of one) I’m surely entitled to point out the implications of the return to mean position. It was a direct response to the blog.

  9. Alex Heyworth

    From a Sixth Wave perspective, the issue of housing revolves around the question “what needs are met by housing, and what is the best way to meet those needs?” I’m pretty sure that the future’s answer to that question will not be for everyone to own their own home. In a generation’s time, the issue of housing costs may be a complete non-issue.

  10. Human affairs are path dependent. So initial conditions matter. The Poincare three body principle says in very short order it becomes practically impossible to predict a path. That’s why economics is largely bunk. Making predictions, at least about the future, is hard 🙂

    • Not only making predictions is hard but it maybe also useless, particularly if underlying those predictions there is some kind of manipulation: of data, of information of any initial conditions.

  11. Just to mention something completely different.
    Ugo Bardi, an italian physical chemistry professor, has an article on modeling the economy based on thermodynamics.
    Comes to some bleak conclusions.

  12. Sandgroper Sceptic

    I would agree that economics is a poor predictor. As soon as the economic model does not fit reality it fails totally, how any model can encompass reality means they are usually a waste of time. In my view they are the start point for further investigation of historical, social and political changes that are occurring. However, most economists view them as the end point. That also applies to a lot of financial theory as well, it is a start point.

    History is not taught to a wide audience in either secondary or tertiary institutions. Those that do take up the subject are often working on very narrow time periods. Economic history remains a corner case subject that doesn’t get much of a look in – yet it is critical in understanding what is actually going on. If you don’t know where has transpired previously, how can you possibly know what is happening today or what might happen tomorrow?

    Mises book Theory and History is a fascinating read, it certainly helped my macro (and to a lesser degree micro) thinking on investment calls.

    • What! No Gravy!

      Problem is it was written for a gold standard and we don’t have a gold standard. These guys pine for a gold standard and want it back rather than adjust to the real world. I want horses and buggies back. Guess what it isn’t going to happen.

      Surely to help your macro you need theories which are developed for the real world. Mises is an ideology, it might be good it might be bad, but since it is not based on the real world it is pie in the sky.

  13. Justice for all!

    Fiat Justitia Ruat Caelum (Let Justice be done, though the Heavens Fall)

    The elites claim impunity from normal rules on the basis of their purported superiority and because they claim that they are so important that applying the normal rules to them will harm society. Some pigs are more equal than others. What any competent financial regulator learns is that the best way to destroy a financial system is to refuse to hold the elites accountable. Regulators that insist on doing justice prevent the heavens from falling.
    http://neweconomicperspectives.blogspot.com/2011/04/fiat-justitia-ruat-caelum-let-justice.html?utm_source=BP_recent

  14. Major unfolding trend making prediction difficult to impossible::

    1. Late stage capitalism in the developed world renders the current trajectory unsustainable and the conventional wisdom erroneous.

    2. Early stage capitalism in the emerging world will be different from that which occurred in the developed world and the trajectory of progress will also be different in ways that are impossible to foresee based on historical precedent.

    3. Declining hegemony of the developed world, especially dominance of US and West and rising economic and political power of the emerging world is leading to tension and possibly conflict.

    4. Intersection of climate change and negative externalities, especially due to carbon-based energy sources, is becoming a game-changer and will be an increasingly significant factor for the global economy.

    5. Shocks that cannot be anticipated due to complexity are inevitable.

  15. Great article and comments.

    My 2c is that economics has some very strong principles which have been repeatedly demonstrated throughout history. It is actually when we think we have discovered something new that the old economic laws of gravity pull pack to reteach us the same lessons.