Keen: Brace for 2017 recession

From Steven Keen today at BS:


During the life of the next Parliament — and probably by 2017 — Australia will fall into a prolonged recession.

…whenever a crisis has loomed, [politicians] avoided recession by encouraging the private sector to borrow and spend…Australia’s most famous recession sidestep was during the GFC, when it was one of only two countries in the OECD to avoid experiencing two consecutive quarters of negative GDP growth (the other country was South Korea). Since then, the private sectors of the advanced countries have collectively de-levered, reducing their debt levels from about 170 to 160 per cent of GDP. Australia, in stark contrast, has levered up.

…The day of reckoning can be delayed by encouraging yet more private borrowing, which the RBA can attempt to do by cutting interest rates, and the government can reduce the crunch by running a large budget deficit. But these are likely to happen after a crisis rather than before it, because our Reserve Bank and our politicians are as oblivious to the dangers of private debt today as Bernanke was back in 2007.

As we say at MB, it’ll run until authorities run out of bullets and that time approaches.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. it’s not so much about ammunition it’s about ignorance and confidence.- – like all ponzi schemes it’s all about psychology

    • DoctorX nails it. As long as we don’t run out of dumb, there will be no recession!

      • As I’ve said many times, Dumb is unlimited, credit is not. Don’t expect dumb to dry up anytime soon.

    • and one of the reasons we may seen recession sooner is that media is turning, the endless boom is not good enough anymore in selling precious media “time and space continuum”

      • so why do you think that was not the case in USA, UK, Ireland, … bubbles there burst when central banks had much more to cut, governments had more to spend ….

      • I strongly dislike the thesis, yet find it supported by the evidence, that cycle length and timing is highly predictable absolutely independently of the fundamentals. Circa 2007 was simply the timing for the cycle to end in recession of some kind, in many first world economies. Why? I don’t know if anyone knows, perhaps it is psychology and herd behaviour.

        It may well turn out to be preferable for the government and central bank to have been taken by surprise and the crash not being averted, in spite of “ammunition” that could have been used – in Ireland. As Dr X is saying.

        However, it is fairly certain that averting a more painful cycle end by using more ammo, and re-launching the bubble to new heights, will result in absolutely unavoidable pain next time the cycle end comes around. The thesis would say this is 2022 – 2025 for Australia, but the thesis also says that major economies cycles exert a gravitational pull on their trading partners cycles so that they will tend to come into alignment in the long term. Seeing China’s cycle is due to end any time now, this may well pull Australia’s cycle end forwards.

      • why is europe different?

        there is the issue of the unholy or impossible trinity that means that each country has to give up monetary policy due to joining the union. Hence spain, italy, ireland etc could not adjust their interest rates level independently to keep the ponzi going – which is the key release valve – and added to insult is the fact that they are not net resources exporters.

      • @ young
        Let’s say europe is different but how about USA? how about other eu countries that are not part of eurozone?

    • From Bhattacharyya on rational actor theory and ponzi schemes and their terminal points

      As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this
      “too big to fail” doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed—France (1719), Britain (1720), Russia (1994), and Albania (1997).

      • I absolutely agree with that general thesis – it is TBTF and bailouts that are responsible for new highs of moral hazard. “Market failure”? There is usually the sticky fingers of government and government-created controlling agencies, implicit in it somewhere.

    • And those are old figures, Debt will still be increasing, and GDP will have fallen through the floor
      so the Strayan line will now look like the slope of the Matterhorn.

      • And once we get past the peak, the toboggan ride down will follow the profile of the right slope of the Matterhorn!

      • have to remember that it may be called debt there, however as long as property prices remain high and interest rates low, it is actually also called ‘wealth’. It’s not until prices recede and/or interest rates rise that it shares the characteristic of pure debt, as until then, the debt is exchangeable at market for the asset.

        Where the assumption that debt=wealth holds, that chart is of no interest; where wealth < debt ; terminal contagion will ensue, fingers pointed, a villain offered up, and the taxpayer asked to pay – not only for the defaults, yet for the society that has been ripped apart.

    • Yay Gold medal for Australia for going in balls deep to keep buying stuff with credit from other countries banks. Now just need to find a greater fool to sell it back to.

    • DaylightMEMBER

      Are we even sure those debt numbers capture offset account amounts? Everyone I know has high nominal debt but often offset by decent cash amounts

  2. FACT: Australian households are the most indebted in the world; how can even our Reserve Bank be oblivious to the huge risks made inherently obvious by that FACT?

  3. Keen’s focus on private debt is absolutely correct – we are super-saturated in it. Nested within private debt is the real parasite sucking blood: giant mortgages for owner-occupied housing.

    Too many are renting money from the bank when renting a house is cheaper, less risky and allows capital formation.

    How will they ever repay the principal in time to retire?

    Don’t Look Down!

    • Well, this is it – they will never be able to afford to repay all the principal. This is what makes it a classic Ponzi; they need to sell it on at a higher price to the next mug in order to stay solvent.

    • moderate mouse

      Repay the principle?? We are too busy jogging, and watching MKR and doing more jogging, and catching up on work emails because it just NEVER STOPS! (I love my job), and then some nice calming colouring books (me time), and buying designer jogging clothes, then watching more MKR….Don’t worry about actually repaying anything. Just meet the minimums and we’ll all be rich so long as prices keep booming….right? That’s what the bank told me…I do what I’m told.

  4. From a purely numbers perspective I agree with Steve, recession starts in 2017. That said as long as Australia continues to win this global least ugly contest, we’re safe from a major recession and we’ll probably even return to our quasi reserve currency status, as global hot money tries to find a temporary safe haven still offering some yield. It’ll be interesting to see which Public assets survive the sell down that’s coming because to keep GDP growing we’ll need to fund our economic leakage and that means government borrowing and or Public asset sales. Personally I’m not sure the Aussie public is ready for a government that undertakes major public works projects so asset sales will need to be the go.

    • What I really hate about agreeing with Steve Keen is that it forces me to examine my prejudices and like most people I’m really attached to my prejudices…they’re what makes me me. Sometimes I wish he could go back to talking gibberish and climbing Kosciuszko.

    • China ole mate the recession is already here. If you take the negative case from the last set of numbers (well within the order of accuracy f the data) we are in recession. Easter will tell. Just watch the spending of the punters.
      For me the equities market is the leading indicator, and recently any price rises have been cashed in, heavily. I dont know where the money is, but it is off the table.

      • No net money was taken off the table (other than transaction costs) because all those who sold were replaced by those who purchased. Every time someone sold those equities, someone else bought them. They are all still there. Every time the price went up there were as many enthusiastic buyers as there were sellers.

  5. reusachtigeMEMBER

    Steve Keen says something bearish… AHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!!!

    Boom times ahead, massively!!!!!!!

    • He’ll be so wrong he will be walking up Mount Everest in his undies while carrying the fattest pie-addicted fattie from ‘The Biggest Loser’ on his back.

    • Keen has been wrong so many times it’s not funny anymore. Although it is funny listening to all the prophets and truth holders. One day they will be right, but we may not be on this earth anymore… What about Harry Dent, how many books has he sold and how many times he predicted catastrophe down under. I think he got tired of predicting now….

  6. Steve Keen has been wrong since 2007. Worse than a broken clock.
    He will be wrong in 2017, and hopefully this time he walks down George St naked, which is more appropriate for a perma bear.

    • It could be argued that Keen was spot on, but he underestimated the desperation of the governing authorities to interfere in the markets.
      I doubt any of us foresaw 0% interest rates even as recently as 10 years ago. But Keen’s work did anticipate the structural impact of accumulated debt on society quite well. Besides. It doesn’t matter if the clock is only right twice a day, as long as we aren’t the ones caught with the wrong positions when the clock strikes the correct time….

      • Janet

        “It could be argued that Keen was spot on, but he underestimated the desperation of the governing authorities to interfere in the markets.”

        That makes him wrong.

        Without looking at politics or psychology he succumbed to mathematics and data which is “half” the story.

        That’s why street smart cabbies know better.

        For the record – I respect Steve Keen.

      • @Escobar agreed. There’s such a thing as being right too early, and the fundamentalists have been “right” very hard since 2009. But for those of us in the real world who want to make money, shorting has rarely been a good idea. I too respect him, but I expect Keen to be proven right around 2035. There’s just so much power arrayed against the bears.

        Even in a kleptocratic country where housing crashed (Spain), real prices on the ground didn’t drop that much because of taxpayer-funded bailouts for insolvent banks who can just sit on a massive shadow inventory indefinitely. Australians haven’t even BEGUN to look in the ammunition can yet.

      • @ Janet – 100% correct Janet – The issue with Steve Keen was his belief that Central Banks would actually use common sense and prudence to manage the whole thing correctly – If they had we would have had the adjustment (painful) that was needed at the time, as it stands now we are heading further into the madness of negative rates as well as helicopter money [email protected] jdliveuk – how do you really think this is going to end? when we are at -5% -6% -10% interest rates? Then what ? Print some money and give it away in the hope that gets the world economy going? What sort of distortions do you think that is going to create in the world markets / economy? Steve Keen was wrong only because he is an economist who lives in a different era – the era of common sense economics and doing what is right. Everything we have been taught from childhood (start your dollarmite account and save!!) is being destroyed – The central banks are telling you YOUR MONEY IS NOT WORTH ANYTHING when they start charging you to hold it , Madness, Madness, Madness

      • Agreed with Escobar up above. Just like HnH and the rest of MB, they rightly look at what should happen but not what will happen. They keep on disregarding the fact that whenever a banker/politiocian or anything in between is involved, personal interest and self protection will always win against everything else so they will do whatever they can to get ahead even if that means burning down the whole joint.
        @Mathew, “how do you really think this is going to end? when we are at -5% -6% -10% interest rates? Then what ?”
        I believe the answer to that is war unfortunately…

      • @Matthew,
        Lets assume that Australia had had a significant recession in 2009/10, lets assume said recession had brought forward many structural changes which everyone agrees are long over due. OK working with that assumption: Where would Australia be now? And would it be a better place?
        Interesting questions, because even without having made any changes, matter of fact most metrics are worse, yet Australia is winning the least Ugly contest, the Aussie is screaming up the charts and our RE is the envy of the world. Does make for interesting speculation on the nature of the monetary policy that would be necessary to contain the Aussie IF we had fixed things.
        I guess we all need to drop to our knees and thank our gods that the country is so @#$%ed up!

      • Keen has made great contributions to understanding how debt works and how debt acceleration/deceleration is a leading indicator for the economic cycle. His work was one of the main reasons I discovered MacroBusiness.

        Keen always said that predicting house prices is not his main objective. Not picking on any comment here. But cherrypicking one forecast that Keen got the timing wrong due to massive government intervention, and using that to dismiss his credibility is just childish.

      • Steve Keen (and the rest of us) are trying to apply logic to an illogical situation.

    • lol Poor old Steve.
      He’s been calling it for the last 8yrs.
      He’ll get it right sooner or later

      • Steve Keen is a gutsy economist and a national treasure. Shame on us that he is more appreciated internationally than at home. It is a disgrace that he was forced from Uni of Western Sydney. I remember him on his soap box on the ABC in 2006 waving charts around, making comparisons to Japan and predicting the GFC and he was right. Look up Dirk Bezemers paper – only 12 economists world wide can truly claim to have foreseen it (for the correct reasons).

        Janet is right. He did not predict government policy.

        I wish I had been one of the 30 people who walked with him to Kosciuszko. He did it to raise awareness of the debt bubble.

    • Steve is the guy who was right about the GFC. Nailed the cause, and the timing. A bit more important than a lost bet on Aussie house prices with a former TV talking head, wouldn’t you say?

  7. I like Steven Keen but he lost a bit of credibility when he made a stupid bet on the timing of an Australian housing crash with Rory “captured” Robertson.

    • Bakunin, do not make sweeping statements without knowing the facts!Steven Keen did not state a clear timeframe for the crash.

      • Just like Steve Keen’s sweeping statement about a crash and a bet that went wrong.

        Without a time frame – it’s a sweeping statement.

        Without a time frame – how could he lose a bet?

        Without a time frame – why did he sell his house when he did?

      • I respect Steve, but he made two assumptions as to what would happen to Australia property. 1/ it could go the way of the US with a sudden crash and 2/ it could go the way of the Japonese with a long stretched crash. Neither happened here yet (yet), because the preconditions are different. In the US, subprime lending was quite big and on top of that they had all the dodgy financial instruments linked to property. In Japan, their main problem is lack of young people as their population has been getting older and they are not having kids and not importing foreign kids either. With no demand, you are stuffed!! In Australia we are having spot crahs here and there in speculative markets since the GFC. To make the whole market collapse would take an event out of this world and the rest of the world would implode first and famine would be everywhere. Believe it or not, Australia is a more prudent country and population growth will not stop for a long time, even if it slows a bit. Note that Australia usually imports either well educated people or high net worth individuals, which means most people should have good capacity to work.

    • Is Keen a gambling man well not really he choses to walk up mountains rather than part with $$$$ here he is again wit a wild prediction of an Aussie recession without even defining what he means by that is it when house prices fall by 20% over 12 months (his last loosing bet) or when an economy experiences two successive quarters with negative GDP growth? Who know with Steve only a Gamble works if you bet on an actual event like a house past the post but this all sounds too capitalistic for our Steve he just makes up his own event and moves the posts over a year 5 years 10 years what ever it takes Steve’s bet to Win! la de la

  8. No bullet. What about negative interest rates. You can go -17% or even -10,000% t o keep the current system alive.

    • codeazureMEMBER

      Your list is really useful – it would be great if this site (or somewhere else) could keep it as a wiki page that is updated as the job losses roll on. It’s going to be a lot of work to keep up to date over the next 2 years…

      Curtin University has a mining course. But the part of the page with “Career Opportunities” has a typo – it should say “Unemployed”

    • innocent bystanderMEMBER

      I was just thinking of that too when reading the above re ammunition.
      guns & ammo is fine when you have soldiers to load and fire them.
      But unemployment and/or reduced incomes can’t service any debt.

    • Please do keep updating that and posting it here. Always amazing to see how many high paying jobs are being shed, yet the ABS says its all great because they are now barristas and bum wipers!

  9. And now the recession starts for Slater and Gordon. The snakes are now eating the snakes.
    Justkapital enters into agreement with UK-based Woodsford to fund shareholder class action against slater & gordon Justkapital litigation partners limited (“justkapital” or “the company”) is pleased to announce that, together with london based woodsford litigation funding limited (“woodsford”), it has agreed the terms of a conditional funding agreement with leading class action lawyers aca lawyers to prosecute a class action against listed law firm slater & gordon on behalf of shareholders who have suffered losses.

  10. Negative gearing + negative rates = positive geared investment property? there’s the RBA’s ammo.

  11. Does a “recession” mean “falling property prices”? I think we are already seeing just how detached from fundamentals, the Indian Rope Trick of a house price bubble can be. The real economy of actual production is already pointed downwards.

    If you think the recession (or recessions) that precedes the property bubble collapse, are bad, you wait till after the property bubble collapse. Spain’s 50% youth unemployment is just a new norm waiting its time here.

  12. 2017! That’s too far away and I’m losing interest! Time to get a new hobby and wean myself off bear porn. I think I’ll sell my millions of physical gold and silver and buy 4 investment houses for cash!

    • I posted that video here a couple of weeks ago and didn’t get much response. Perhaps it’s all fiction?

      • nexus789MEMBER

        I would be more inclined, given the rapacious nature of the banks, to believe that is the tip of the iceberg as remember that commissions and profits are predicated around the volume of transactions. When prices dip we shall see won’t we.