Exclusive: Steve Keen on the secret source of eternal Australian growth

Exclusively from Professor Steve Keen: How to delay a recession

Much was made of the fact that Australia recently replaced The Netherlands as the world record holder for the longest period without a recession (using the colloquial definition of two consecutive quarters of negative growth). The Netherlands went just under 26 years (103 quarters between 1982 and 2008) without a recession, and Australia surpassed this when it recorded 0.3% growth in the March 2017 quarter (for an annual growth rate of 1.7%).

Rather less attention was given to another Australian record: household debt. Before its recessionfree record was set, Australia had already overtaken The Netherlands for the record of the highest level of household debt ever recorded for a large country (one with more than 10 million people).

Australia’s household debt level of 123% of GDP has been exceeded only by Switzerland (population 8.3 million, household debt of 128% of GDP in 2016 Q3) and Denmark (population 5.6 million, 139% of GDP in 2009).2 Australia also stands apart from its household leverage competitors in another important respect: Denmark, Switzerland and The Netherlands also run significant current account surpluses—Switzerland’s average surplus since 2000 has been the highest on the planet at over 10% of GDP; Denmark’s has averaged 5.75% since 2005; The Netherlands’ average current account surplus is around 8% of GDP.

Australia, in contrast, has averaged a current account deficit of 3.2% of GDP since 1960, and 4.3% since 2000. Australia therefore holds the record of the highest level of household debt for a country running a trade deficit, and has done so since 2010, when it overtook the previous record-holder: Ireland. Ireland’s household debt level has also plunged since then, from a peak of 118% of GDP in 2010 to 54%. Australia’s closest competitor now is Canada, which has a household debt level 22% lower than Australia’s, and an average trade deficit of 1.4% of GDP, versus Australia’s long-run average of 3.2%.

Why does this matter? Because Australia’s two records are related: Australia avoided a recession in 2008 only by adding additional leverage to its already over-indebted household sector, and the only ways that Australia can keep its winning streak on GDP growth going (given that its government is obsessed with trying to run a surplus) is to either to achieve a huge trade surplus, or for the household sector to continue piling on debt faster than GDP itself grows.

A trade surplus is one of three ways to increase both aggregate demand and the amount of money in an economy:3 goods you sell to foreigners are paid for in US dollars, which the exporter then effectively sells to its country’s Central Bank in return for domestic currency (on that front, The Netherlands is, like Germany, a huge beneficiary of the Euro).

With the China export boom over, and its history of sustained trade deficits, Australia has zero chance of emulating The Netherlands on the trade surplus front. That leaves expanding private debt, which is the method that Australia has relied on throughout its long boom: Australia hasn’t had a period of negative credit (falling private debt) since Keating’s “recession we had to have”, and that was the only time that credit was negative in Australia in the last sixty years.

Since bank credit is matched one for one by new bank debt, this has driven Australia’s private debt to GDP ratio from just over 50% of GDP in 1960 to almost 210% of GDP today.

(As an aside, this was not simply in response to falling interest rates: in 1960, when private debt was less than ¼ of today’s level, the interest rate on mortgages was 5%, much the same level as it is today.

Interest payments as a percentage of GDP are lower than they were during the 1990s when interest rates and inflation were several times today’s levels, but even on a conservative estimate, interest payments today are three times as large a percentage of GDP as they were in the 1960s).

So how did Australia avoid recording a recession in 2008? It did so by encouraging the private sector to continue getting into debt, via government policies like Rudd’s First Home Vendors’ Boost (as I prefer to call it). Credit fell dramatically from 24% to 3% of GDP between August 2007 and January 2010, but it never turned negative (as it did during the Keating Recession, when it hit minus 2.3% of GDP in March 1992).

The same observation applies to numerous countries which had a “good” GFC, in that they either didn’t have a recession at time (Australia and South Korea were the only OECD countries not to have a recession in 2008-09), or they didn’t have a sustained slump afterwards: they all did so by increasing private sector leverage. The four largest such economies are (in size order) China, South Korea, Canada, and Australia.

On the other hand, those countries that had a “bad” GFC, with both a serious recession and sustained below-par growth afterwards, had negative credit during the GFC itself, and have had anaemic levels of credit since.

Countries that had negative credit during the GFC have de-levered to some extent—the UK’s debt is 25% of GDP lower than at the GFC, and the USA’s is about 20% (the Netherlands is the outlier here— its debt level is marginally higher than at the GFC—but it is still below its peak level of over 245% in 2010).

In contrast, the countries that powered their way through the GFC with credit all have substantially higher levels of private debt than they had back in 2008. Australia’s increase was actually relatively modest, though still substantial: private debt rose from 185% at the time of the GFC to 205% today. Korean private debt rose from 160% to 195% of GDP, Canada from just under 170% to 220%, and the big whopper of them all, China, rose from 120% to 210%.

These countries avoided a crisis during the GFC because they kept demand expanding via credit. They can continue booming only if they keep credit—the annual change in private debt—positive. This is the Faustian bargain of private debt: because total demand is the sum of the turnover of existing money plus credit, then once private debt is very large compared to GDP, aggregate demand can fall even if GDP and private debt are still rising. When you have become dependent on credit to sustain demand, you need to continually increase debt faster than GDP rises, or you suffer a fall in aggregate demand, and therefore a recession.

To appreciate this, imagine an economy where private debt is growing twice as fast as GDP—debt is growing at 20% per annum in nominal terms, and GDP is growing at 10%—and where credit is 100% used for asset purchases, rather than for goods and services. Ignore for the moment any feedback between credit and GDP growth. What happens to aggregate expenditure on goods and services and assets if the rate of growth of debt simply slows down to the same as the rate of growth of GDP?

If GDP is one trillion dollars a year, and the debt ratio is 50%, then debt is $500 billion and credit that year is $100 billion (20% of $500 billion). Total expenditure is $1.1 trillion—$1 trillion from the turnover of existing money (GDP in this hypothetical example), and $100 billion from credit.

Next year, if GDP grows by 10%, and debt growth slows down from 20% a year to 10%, total demand will be $1.16 trillion: $1.1 trillion from GDP, and $60 billion from credit (10% of $600 billion). This is $40 billion less demand from credit than the year before, but overall demand is $60 billion higher than in the previous year, because of the increase in GDP.

If the debt ratio starts at 200% of GDP, then total expenditure in the first year is much higher at $1.4 trillion—$1 trillion from the turnover of existing money and $400 billion from credit (20% of $2 trillion). But when the growth of credit slows to 10% the following year, total demand falls to $1.34 trillion: $1.1 trillion from GDP, and $240 billion from credit (10% of $2.4 trillion). This is $60 billion less expenditure than the year beforehand—even though both GDP and debt have continued to grow.

So Australia can’t avoid a crisis by merely stabilising its level of private debt to GDP: to avoid a crisis—or rather to delay it even further—Australia’s private debt has to keep growing faster than GDP forever.

This can’t happen: the higher debt gets compared to GDP, the more of available income is taken up by debt servicing, the more bad debts are taken on, the more wary both banks and borrowers (and even so-called regulators like Australia’s asleep-at-the-wheel champions APRA and the RBA) get about yet more debt. This process is already clearly visible in Australia.

It’s also never happened: no large country has ever exceeded 250% of GDP as its private debt level. The record is held by the tiny tax-haven of Luxembourg in 2008 (when its population was 488,000) at 453% of GDP (it’s since fallen to 410%). The Netherlands maxed out at 247% in 2010 (it’s now 236%), Japan at 220% in 1994 (it’s now 156%). They all have the luxury of trade surpluses that enable a larger level of private debt (tiny Luxembourg has averaged a current account surplus of 8.2% of GDP, lower only than Switzerland); Australia is unlikely to reach their levels before its recession begins.

Credit-based demand certainly won’t be forthcoming from Australia’s business sector, which generally borrows to invest, which has regularly de-levered during recessions in the past, and which has shown a marked reluctance to exceed 80% of GDP as its aggregate debt level. For Australia to do keep credit demand high, the household sector would need to push even further into record household debt territory.

It may continue to do so for a while, particularly if encouraged by government policies like a renewed First Home Vendors Grant, further interest rate cuts by the RBA, or some policy doozie like letting suckers—sorry, I meant first home buyers—use their superannuation for a house purchase. But it will reach a plateau, and before it does, credit-based demand will at best fall to zero. Far more likely is that it will turn negative, as it has done in every other country that has experienced a recession caused by falling credit, with both the business sector and the household sector deleveraging.

Which brings me to Australia’s favourite topic: its housing bubble.

“It’s not a bubble”©™

When prices took off in response to the RBA’s unplanned cuts in its reserve rate from 2012 on (when the inflation bogey-man the RBA expected after the GFC failed to materialise), the property lobby trotted out the standard argument that house prices were determined by supply and demand, and with inflexible supply, well, prices had to rise to clear the market, and therefore there isn’t a bubble, is there?

Now virtually everyone agrees there’s a bubble, and that households have taken on too much debt. But the persistent delusions are: (a) that there won’t be much macroeconomic fallout from the end of the housing bubble, since (so long as unemployment doesn’t rise) the households that have the debt can service it (thanks to low interest rates); and (b) that house prices won’t fall much, because demand is still high (given immigration and overseas buying).

There will be serious macroeconomic fallout from the end of the bubble, because credit-based demand will turn negative.

As the world’s largest and, despite Donald Trump’s protestations, still most self-contained economy, the USA provides the best example of this phenomenon. Credit fell from plus 15% of GDP at the peak of its Subprime Boom in 2007 to minus 6% of GDP in the depths of its recession in 2010. Because credit had become such a large component of aggregate demand, the fall in credit directly caused economic activity to fall and unemployment to rise.

The USA’s experience of negative credit was shared by every country that had a bad GFC—including the Netherlands. Credit turned negative, subtracting from aggregate demand rather than adding to it. Unemployment rose and asset markets tanked. Australia therefore didn’t avoid a recession: it has merely delayed it, at the price of an increased level of private debt from which its recession will soon spring (though the fall from peak credit will not be as steep as it could have been at the time of the GFC, when credit peaked at 24% of GDP).

The belief that house prices will hold up so long as unemployment doesn’t rise too much also gets the causal mechanism arse-about-tit (to use a quintessential Australian expression). House prices will fall first, as they did in the USA, because “people” don’t buy houses: people with mortgages buy houses. This little detail is overlooked by property lobbyists who point to rigid supply as the cause of higher prices.

The monetary demand for housing is overwhelmingly sourced from new mortgages. Divide the flow of new mortgages per year by the price level, and you have the physical flow of demand for houses per year. There is thus a relationship between the flow of new mortgages and the price level.

It follows that there is a relationship between the change in new mortgages per year and the change in the price level. While the strength of this relationship varies between countries given variations in government policy and the impact of non-resident purchases of real estate, it applies in countries whose experience has been as disparate as the USA and Australia. Therefore, to maintain forever rising house prices, mortgage debt not merely has to rise, but has to continue rising at an increasing rate. This simply can’t happen: nothing accelerates forever, even private debt. At some point households reach saturation levels of debt compared to income. Before this happens, the rate of growth of debt reaches a peak and then starts to fall.

Since the acceleration of (mortgage) debt determines house prices, and the rate of growth of (all private) debt determines credit-based demand in general and hence a major component of aggregate demand, the fall in asset prices tends to precede the decline in economic activity in a credit-driven recession. Therefore, rather than a rise in unemployment being needed to cause house prices to fall, deceleration in mortgage debt causes the rate of increase of house prices to slow and ultimately turn negative, and the overall decline in credit causes unemployment to rise.

This effect can be seen by comparing the USA, which obviously had a crisis in 2008, to Australia, which managed to delay its crisis. At first glance, the US and Australian experiences appear fundamentally different. The USA had rising household debt in the lead-up to the GFC, and it has fallen since. House prices rose and peaked before the GFC, fell through it, bottomed in 2011 and are now rising again.

Australia, on the other hand, has had rising household debt and rising house prices almost continuously since 1986, which is superficially a very different pattern.

But when you consider the change in household credit (the acceleration of household debt) and change in inflation-adjusted house prices, the causal similarities are obvious: the rate of change of house prices rises when household debt acceleration is increasing and falls when it is falling. The fall in the rate of growth of house prices in the USA also clearly preceded the economic crisis itself.

Australia has avoided a crisis to date because government policies have turned the acceleration of household debt up every time that a crisis has loomed. Doubtless more means to do this will be tried as the price fall takes hold, and they may work for a while. When the fall in house prices becomes widespread, we can expect the government to revamp the “First Home Vendors Boost”, or even worse, to allow first home buyers to use their superannuation for deposits. This will work for a while, as the First Home Vendors Boost did for the Rudd government.

Such policies will increase the maximum ratio for household debt to GDP—when Australia is already the second only to Denmark in 2010. But it cannot enable households to have a forever-rising ratio of debt to income, and this is what is required to forever delay the recession. As household debt level approach their ultimate peak, Australians will finally appreciate the real reason that Donald Horne described Australia as “The Lucky Country”:

“Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people’s ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.” (Donald Horne, 1964)



    Straya’s long and destructive bubble-armageddon is coming.

    • reusachtigeMEMBER

      LOLOLOL!! When’s that happening again? Come back in 5 or so years to tell me.

      • Keen: Empirical data; detailed analysis; stated methods; transparent public profile;uses public forum to educate; no self interest in outcome; fronts cameras and takes it on the chin; disclosure of interests known

        Reusachtige: Uses spin; provides zero analysis; no method; uses pseudonym; uses public forum to spruik; a high level of self interest in outcome; too cowardly to reveal their identity; no disclosure of interests

      • In reply to Clive.
        Following reusachtige’s advice in the last 5 years would have made you wealthy, following Keen, not so much. Economics is not rational.

      • Keen has predicted disaster every year since 2008, and he’s been wrong every year since 2008. Nobody has been proven more wrong, more often, more decisively than Steve Keen.

      • reusachtigeMEMBER

        Hey Clove… Ken – An over-educated spruiker of doom… Reusa – An absolute legend at relations! Who wins in the game of life?

      • Dude – which part about ever expanding exponential growth in debt did yoo knot understand ?

        Once we get to the apex whereby it all falls in on top of itself (yoo need to think of Cindarella here fella when the clock strikes midnight) everything will change. Former good looking property investors will immediately turn butt ugly as their investments crater and they become the laughing stock to the rest of the world. Not only butt ugly but no chance of any relations for the foreseeable future.

        Yes yoo too will get your time on centre stage under the spotlight but they will not be falling over themselves or throwing accolades at you – the crowd will instead be in awe of your abject ugliness !

        They say every dog has his day – be careful when it is all over red rover….

      • In case you guys didn’t notice, Professor Keen is not predicting any imminent bust here. So if you’re betting he will be wrong again then bend over and kiss your arse goodbye.

      • Clive,
        reus has been here (MB) since 2010 and what he does is satire (best description I can think of). He hates what most hate here.

      • In case you guys didn’t notice, Professor Keen is not predicting any imminent bust here. So if you’re betting he will be wrong again then bend over and kiss your arse goodbye.

        I think that you will find that most people are not really interested in “maths n’ stuff” and prefer the predictions, whether that be a calamitous,dramatic collapse or a 7-year doubling in value of house prices. Media and communication experts are aware of this and crucial to their craft.

      • @tanmedia, no, we don’t need a date (a mugs game). It is about degrees of risk, something Australia’s rampant property specufestors have forgotten in their lunacy.

        Keen identifies quite clearly, that if there was risk previously, that risk has now grown critical. We’ve swam in shark infested waters and not been bitten, great! Good for us! Now we’re swimming in those same waters with blood pissing out our leg; how’s the risk of having a leg sheared off now?

        There is a reason that the ratings agencies have turned on Australia, it is because the risk is very real.

      • In reply to Phil,
        “Following ‘insert name here’ in the last 50 years would have made you wealthy, following Keen, not so much. Economics is not rational.”

        Bunker Hunt
        Bernard Madoff
        Dutch tulips
        Ostrich egg farming
        Irish real estate
        US real estate pre 2008
        Icelandic investment
        90s Tech stocks

        etc etc etc

        All of these schemes had people just like you spruiking them and saying the same BS.

        Not rational? You guys must be a hoot to go bushwalking with. After walking for an hour up hill you bunch of spruikers decide to convince yourself that the top of the hill will never come. In fact, this mountain is like the Tower of Babel it goes up to heaven and beyond. Geography, you say, is not rational.

        Keen is a bloke pointing to the map saying, ‘guys, the top ain’t far away, and watch out for the bloody great cliff that follows the summit!’

        ‘Nah,’ say the spruikoids, ‘You said that 15 minutes ago. There is no top. There is no cliff. The map is wrong. Idiot! Your map is not rational! Listen to me – I was right 15 minutes ago, so I will be right in another 15 minutes!’

        Wealthy? What you call wealth is actually debt fuelled mountain built from mass hysteria bolstered by an immigration policy that treats people like they logs for the debt furnace. Your debt has destroyed the wealth and the opportunity of our youth and put the entire nation at risk on many levels. Even people like me who actually make things will not mind copping a loss just to see the back of you lot. None of this really worries my pocket in a big way, but I honestly detest your vacuous spin because of the social cost and the moronic get rich quick scheme through housing. You’re like people who sold Amway at work in the 80s.

        What you are going to do is to drive your followers over the cliff. Your “wealth” is going to eat you and a lot of others. But just remember, while ‘economics is not rational’ neither is stupidity.

        I bet that you guys can kind of smell it in the wind now. Most adults can. Keep repeating you mantra ‘economics is not rational’ as the Sheriff pulls up to take your furnisher and change your locks.

      • @Clive

        Come on Clive, he’s been parroting the same old same old for a decade and the reality is he is wrong. It doesn’t mean his theory has no merit, just debt is only ONE of MANY variables in this complex system, and you can’t afford to put blinkers on to fit some pet theory. I also believe a house crash will happen but the timing is not going to be what you think it is.

        Keen has no understanding of international finance, so he totally under analyses China from his models which is why he’s been wrong for so long. China is a wildcard, yet he doesn’t understand a thing about it. Really the problem with Keen is none of his analysis have any bearing on WHEN/TIMING which is kind of important when you are talking about investment OR buying a PPOR.

        Keen only understands debt, he finds high correlation in his data yet correlation isn’t causation and there are many other factors not in his model that he ignores because they are not quantitative and doesn’t plug nicely into his ridiculous spreadsheets.

        In a related interview, he said he is not wrong yet as he has given himself a FIFTEEN year time horizon in his 2008 interview. 15 years? Seriously, that is a useless time frame for investment especially since the asset you accuse of crashing have doubled in the first 10. I mean I might as well say stocks will be higher in 100 years, yet I can’t claim I’m some kind of genius.

        My prediction is that this bubble has a long way to go unfortunately.

      • 5 years! That’s the first time I’ve heard you put a time limit on it Reus!

        Still. Sell now. Pocket the winnings.
        Or try to time it to perfection over the next five years… and pay. Big time.

      • @Ajax Keen isnt wrong. But government and business keep playing “double or nothing” – kicking the can down the road and making the eventual bust all the worse.

  2. Yes brilliant, brilliant, brilliant work by keen that he’s been on for years and now the central banks are starting to understand with their recent papers on the money multiplier etc. If you understand keens dynamic models, you can forcast the future bar the monetary or fiscal response to what the models suggest. Yes the day of reckoning is not far for Australia’s mega debt bubble. Further to this is the extrapolation I’ve been making which keen doesn’t have. Productivity due to automation. Yes his dynamics of spring credit leading to recession and then unemployment is spot on but it gets better, if rates of technological advance remains the same, you can get a condition where wages not only rise slowly but possibly start falling yet unemployment remains very low due to government expenditure. In that scenario, the debt bubble blows up as well. This is in extension to keens work as in this scenario government debt increasing would offset private debt decreasing thus avoiding a recession but falling wages under full employment and zero bound rates with marginally increasing debt will also see the debt bubble collapse. Come to think of it, that’s what keen explains in this article as a recession even with increasing GDP and aggregate debt. Beautiful, beautiful stuff as is all his work in this area. Good on MB for posting.

    • ErmingtonPlumbingMEMBER

      “but falling wages under full employment and zero bound rates with marginally increasing debt will also see the debt bubble collapse”

      So no faith in Reserve Bank governor Philip Lowes, “Hopes”?

      “Hopefully running for a few years now with quite tight labour markets (will be) re-energising workers to get more of the labour share.
      At some point, one imagines that’s going to lead to workers being prepared to ask for larger wage rises.”

      “If that were to happen, it would be a good thing.”


      So if our only hope to save the bubble is massive wage inflation, could we see an NLP government set up their own Prices and Incomes Accord!!!???
      Instead of being nutted out between Government and Unions,.. maybe Sachs man Mal can cut a similar deal with employers,… Some tax cuts in exchange for for wage rises, or some other bullshit like that.


      Other, Non Goldman Sachs man, Prime Ministerial Mal was calling for a a wage Pause!!!
      Indeed Mr Dylan,… “Times they are a changing”.


      • haroldusMEMBER

        There are only two tragedies in life: one is not getting what one wants, and the other is getting it.

        If TISM doesn’t have a quote, Oscar will.

      • ErmingtonPlumbingMEMBER

        Yes, Harry,

        The extreams at either end of the Political, Economic and Idelogical spectrum are undesirable.
        This is what Democracy is for, to keep the always, courpted winners of Power in check and on a tight leash.
        It a pity that so many that citizens have been brainwashed and indoctrinated into a false belief, that Democracy is our problem.

    • Productivity due to automation

      There is a very interestikng argument that I’ve recently come across by Matthew Rognlie that rising house prices are actually due to the accelerated depreciation of tools of the modern economy (think destruction of capital of IT equipment & software ).
      A note on Piketty and diminishing returns to capital

      From another article linked below:
      Rognlie’s blockbuster rebuttal to Piketty is that “recent trends in both capital wealth and income are driven almost entirely by housing.” Software, robots, and other modern investments all depreciate in price as fast as the iPod. Technology doesn’t hold value like it used to, so it’s misleading to believe that investments in capital now will give rich folks a long-term advantage.

      Land/housing is really one of the only investments that give wealthy people a long-term leg up. According to the Economist, this changes how we should rethink policy related to income inequality.

      A 26-year-old MIT graduate is turning heads over his theory that income inequality is actually about housing (in 1 graph)

      • Automation? Then why not in Japan? Also, why are productivity gains so weak compared to the great gains made in the post war decades if this is the case? People seem to forget that those decades were a period of unprecedented technological and productivity gains. Something here is not computing. Anyway, I’ll certainly have a look at his arguments.

      • I think this is basically the answer

        its the death of labour as marx predicted, plus the technological aspect which he couldn’t have foreseen the full extent of

        Basically, labour is relatively worthless now. So the number of labour units required to buy land (which is of fixed value) increases relatively.

        If the fiat monetary system wasn’t designed to increase the money supply, and we were on the gold standard or something similar we simply would have seen falling wages and stable land prices (instead of stable wises and rising land prices)

        The only “fix” to this is political (ie fiscal)

        There will be no crash in house prices without the political will to cause it

      • BrentonMEMBER

        “There will be no crash in house prices without the political will to cause it.”
        This is horribly wrong. I suggest reading the above essay again. There is nothing unique or different about Australian housing that makes it immune to the serviceability of ever increasing debt.

        In regard to automation, the solution is the same as it has always been, wealth redistribution. If the majority are not appeased, than eventually they will rise up and seize the means of production for enforced redistribution. In a fully automated society, a universal wage seems the most likely scenario to maintain social harmony…. failing that, it is a system of oppression by force; not a happy solution for anyone and doomed to eventual revolution.

      • “There is nothing unique or different about Australian housing that makes it immune to the serviceability of ever increasing debt.”

        When will you realize Brenton that it is all monopoly money, ones and zeros.
        The debt is meaningless if you inflate it away by increasing the money supply

        You act like its a natural system, but it isnt

      • SweeperMEMBER

        Faster amortisation of physical capital is being offset by slower amortisation of intangible capital. Which has an infinite life in theory. Most of the return on capital Picketty pointed out is probably monopoly rent on government protected intangibles. This explains weak investment combined with high profit shares.

        Coming, the automation destroying labour thing doesn’t make sense from a Marxist point of view. per Marx, labour is the sole source of profit. So you can’t have a fully automated privately owned market based system where everything is produced by machines and robots who design and maintain the machines. Why would a capitalist buy more robots to make more machines when the return on investment is zero. And if labour has no spending power, and capital has no incentive to invest it follows that the government is the only source of demand. I think, if I have this right, Marx would say full automation leads to the socialist utopia – workers no longer have to work, and capitalists can no longer exploit workers. I think he would also disagree with you that automation leads to higher house prices, since land rents were supposedly paid out of profits and no labour means no profits.

      • BrentonMEMBER

        “When will you realize Brenton that it is all monopoly money, ones and zeros.”
        “The debt is meaningless if you inflate it away by increasing the money supply”
        Never said any different, the currency could be rice grains for all I care. It doesn’t change the fact that people are owing more rice grains than they earn with each passing day. You can print all the money in the world, if it doesn’t reach wage earners to offset their growing debt, than it still leads to the same thing, default on debt with a requisite lock-up/crash of the financial system.

        Just based on pure logic/historical precedent, how is Australia able to do what EVERY other nation in history has not been able to (including a past Australia)? People will be lining up to learn how Australian Realtors were able to engineer the perpetual motion engine of infinite wealth.

      • No. Housing is not the culprit. Rising house prices are a symptom of the culprit.

        The culprit is the fractional reserve banking system which effectively allows money to be created out of thin air and used to buy real assets. Hedge funds, few as they are, can typically access 3-4 times leverage but the average man on the street (plentiful in number) can access up to 20x leverage via the residential housing market which itself drives house prices and housing becomes the font of wealth for the average man as a result.

        Piketty’s theories are pure bullshit, for sure and highly unsophisticated but Rognlie is way off target in a very different way. Neither has any understanding of monetary dynamics. The fiat money system is front and centre the cause of the vast majority of economic issues in the modern era. Keen, meanwhile is one of the few Keynesians who have begun to understand the problem and if he continues on the current path he’ll ditch Keynes and see the Mises light (one can only hope).

      • @Sweeper

        You can hear already the calls for “universal basic income” etc promoted by the usual suspect vested interest media
        Why do you think this might be the case?
        So that wealth can continue to be concentrated in the hands of the owners of capital, transferred from the government to the now unemployed peons and then to the wealthy
        Continuing to squeeze the aspirational

        Don’t forget that ultimately all AUD comes from australian government “deficit” spending one way or another (if we ignore money creation by private banks, which can be eventually extinguished)

        its simply a question of who holds the chips

        @Brenton “People will be lining up to learn how Australian Realtors were able to engineer the perpetual motion engine of infinite wealth.”

        there you go again trying to equate laws of nature with arbitrary human constructs. It can’t be done.
        There is no entropy, conservation of energy, return to mean – none of this applies

        If we wanted to we could make house prices 10 million, 100 million, 1 billion.
        Absolute value is arbitrary and meaningless

        Its relative value that can change: relative to units of human labour.

      • SweeperMEMBER

        Maybe the UBI crowd will be right and robots will lead to an even more extreme concentration of wealth. In which case Marx will have been proved completely wrong – capital can accumulate on “constant capital”. But I’m pretty sure his position would have been that automisation would lead to socialism or at least a non-capitalist mode of production.

      • BrentonMEMBER

        “If we wanted to we could make house prices 10 million, 100 million, 1 billion.
        Absolute value is arbitrary and meaningless”
        “Its relative value that can change: relative to units of human labour.”

        ….for the second time, I’m not in disagreement about Australia operating with fiat currency.

        You’re right, housing could cost 10 million, then 100 million, then 1 billion, but people’s wages must match that inflation, which is not happening. Hence they’re making up the difference with credit supplied by institutions that do have access to all those inflated 1 & 0’s, but with the understanding of an ongoing obligation, debt. However, now we’re reaching a point where people cannot meet that obligation.

        PS Australia does not operate in a vacuum, but operates in a global setting.

        PPS That $1 billion house is based on sentiment. What happens when a significant number of people no longer believe it is ‘worth’ $1 billion because they only earn $1 million?

  3. “House prices will fall first, as they did in the USA, because “people” don’t buy houses: people with mortgages buy houses. This little detail is overlooked by property lobbyists who point to rigid supply as the cause of higher prices.”

    Not in Australia. Here, 25% of newly built properties go to foreign investors who most likely do not have mortgages.

    • Most Chinese buyers (70%) pay in cash. The rest already have other properties to use as collateral.

      Luckily for them realtors are exempt from money laundering laws.

      • Complete fallacy. The vast majority of Chinese are leveraged to the eye-balls, one way or another.

        If a Chinese borrows heavily in China and brings cash here, then yes, they’re a ‘cash buyer’ in the eyes of the market.

    • BrentonMEMBER

      Was that before or after capital clamp downs?

      Chinamen don’t arrive on Australia’s shores, clap their hands and AUD falls from the sky…foreign investors days are numbered.

    • The marginal house price is set by Chinese cash buyers. Bank credit is unlimited here to match that.loans at 10 or 20 tines income no worries.govt guaranteed so easy profits. Ausstraia is a secondary bubble of China where prices are still double. Sadly this could go up got years..

      • What? Australian institutions dont lend to chinamen like in Canada. Highrise Harry may choose to bank roll them on his own steam, but then he is effectively acting as an unregulated shadow bank, taking on all the requisite risks of dodgey chinese buyers; soon, those buyers will not be able to bring in cash even if they want to anyway.

      • You are assuming that their cash is 100% savings, but I can tell you this is not so in many cases, and increasingly in general. OJ is a lot more familiar with the situation on the ground, but in GUA it is common for SMEs to use their companies as collateral to speculate in stocks and properties. A lot of this debt is tied to Aussie, NZ and CAD properties. The ongoing Canadian correction (only started recently) should send a shiver down many a back, so expect foreign buyers getting cold feet.

    • A lot buy illegally. Not sure if PM Shorten will stop that – maybe he will legalise it!

      Maybe he will use the money saved by abolishing negative gearing to fund a doubling of the first home seller’s grant!

      Given how ignorant the electorate is (from 2001 till 2014 they thought that traffic jams are caused by refugees) – you could slash real estate prices in real terms and keep them rising in nominal terms by printing banknotes like mad. I swear the electorate will not notice that their houses have gone down in price by 30% in real terms because they only ever look at nominal prices.

  4. So I posit… do you have a debt problem or a mortgage problem and if so what constitutes a mortgage problem – structurally.

    • God you are tedious. No one here gets anything out of your garbage.

      Please go and join Mig.

      • At work so reply to come after.

        Disheveled… ad hom does not grant much gravatis to your feelings imo.

      • ErmingtonPlumbingMEMBER

        Hey!,… Back off buddy.

        Skip is a Macrobusiness.com.au treasure,…I have learnt a great deal trying to decipher Skips, often cryptic and at times, incoherent seeming ramblings.

        Over the 3 or 4 Years I have been here , I frequently find myself laughing out loud at his his contumelious, haughty, abstruse and peremptory manner.

        I’m hoping for the Macrobusiness.com.au Christmas Party, to be held in Sydney this year, just so I can get on the piss with him and my other faviorate MB contarians.

        Im predicting it will be quite a hoot!,…esp if we can get that other treasure,…reusachtige, to pay for it!

      • reusachtigeMEMBER

        ^^ I’m always up for a party but I’m not sure if there’s anyone here worth having relations with….

      • @reusa, I’m happy to show you some tender jailhouse love…just don’t tell the missus, else it’ll be less tender and more jailhouse.

      • @Matt – the devil is always in the details e.g. not all debt is the same i.e. jumbo or sub prime as its a matter of both comprehensive risk weighing or the opposite like control fraud / abuse of data to burnish things for bonuses. I would also state that risk and uncertainty are two completely different things. Risk can be evaluated where uncertainty can not.

        @melbourneguy – the blokes at work can sledge better and probably don’t have the same level of education that you have.

        @Bob Sickle – banks borrowed cheap after implicit government guarantees, that will change, albeit slowly.

        @JasonMNan – you should know I ascribe to the MMT camp, as such the tax payer thingy is largely moot. America injected somewhere around 24T without any of the monetarist doomsday outcomes and the tax payers are not on the hook. Now wrt austerity, hell does the currant main stream neoliberal camp need a reason[????]. As sweeper notes about its got a lot to do with amortization metrics and hopes of out with the bad in with the good. So as long as wages are stagnate its going to be hard yacka, no floor under any of it.

        Disheveled…. Whilst I agree in principle that mortgages are an issue, I would also point out corporate debt for things such as stock by backs juicing equities. As such all debt is not created, used, or functions exactly the same.

      • haroldusMEMBER

        @ Brenton I think reus is a pitcher, not a catcher. And he’s got a bit goin on down below.

        So you might want to stock up on amyl and depends.

    • Aren’t they the same thing? A ‘mortgage’ is simply debt with the title of a property as security.

      Debt is debt, and too much of it is risky. Let’s not overcomplicate the matter.

    • There is no difference ultimately Skip, as it always ends up being a public debt problem. So Australian tax- payers are in the hook ultimately (austerity imposed from within or from the outside being the ultimate result). A more interesting question is if the Chinese shadow-bank debacle will engulf the local banks, in particular the smaller ones. Who knows where these guys have been getting their funding.

      • +1000 on everything.

        The looming shadow collateral debacle should make for interesting popcorn material.

    • Unfortunately the timing of the deflation of the bubble ia not something that we can look to Prof. Keen for.

      He is now more savvy and alive to the potential strength of government responses, but he doesn’t attempt to predict a reckoning date. Apart, perhaps from the 250% debt to income ration, which apparently has never been exceeded by a “big” country.

      Who knows if we may become the exception? 250% isn’t too far away; we are not that “big”; there is still a lot of room for interest rate cuts; there is still borrowing capacity on the sovereign balance sheet; we are pretty bloody delusiona about our own awesomenessl; etc, etc.

      • Peachy
        There is a massive push now in the banks for mortgage holders to be p and I and it’s happening – I would say that the deleveraging in household debt has started and won’t stop now regardless of a global shock
        Because only p and I loans will receive any interest rate cuts now monetary policy is exhausted
        Yes there is gov response but it won’t be quick enough.

      • Bcnich – this has only started because the Government (ie APRA) has demanded it. But what the government giveth, the government is capable of taking away.

        If house prices roll over and start taking the broader economy with it, the strings may well be loosened again. Or other fuel may be added to counteract the tightening (more rate cuts? You got it!) Will it be in time to arrest the fall before it damages bank balance sheets to the extent that they no longer want/aren’t able to expand credit fast enough? Perhaps….

        I do acknowledge that thr job for gov will be harder this time than in 2008, but it would be silly to under estimate this actor, let alone write it off.

      • “lot of room for rate cuts”? Errr….RBA says 1% is ZIRP…even if it’s lower, banks keep half. Can’t renew interest only charge. AAA on last legs. Funding costs are going to rise. Bubble is trouble this time.

      • HnH – the CLF is setup to provide funding (errrr “liquidity” lol) to the banks at the overnight cash rate +25bps. While nationalizing the banks mortgage book, to boot. This will enable loans at <4% to the punter.

        This source of funding is, insofar as is relevant (or in the short-medium term) unlimited.

        Of course funding the banks this way takes the non-bank lenders out of the game, but it will be happening at a time when those guys have been neutered already (as they can't get funding from the market, without a capital base).

      • @Peachy “Who knows if we may become the exception? 250% isn’t too far away”

        I tend to agree. I also can’t help querying whether the household debt figures are comparable between countries. It is quite a different risk circumstance to have one $1M house with a $700K mortgage and two $1M properties (one rented out) with a $1.40M mortgage. If the measure of household debt includes investor property debt and (if) the ratio of investor property ownership is higher in AU than in comparable countries, logically our overall household debt will be higher. I’m always suspicious of international comparisons of complex issues, and single comparative measures such as “debt” without the corresponding side of the equation are open to misinterpretation.

      • @Peachy exactly

        This nonsense about dependent on foreign funding.

        The RBA can do as it pleases, and APRA can ease foreign funding requirements if it desires

        The currency will take the hit

      • In fact we could easily exceed it should nominal GDP go down!
        In any case, the RBA is not all powerful. Australia can´t print and gorge without consequences, and they know it. That is why they are not cutting, because if they do then everybody will realize the king is naked, and goodbye AAA, economy and pretty much everything for a decade. The system is running on inertia, waiting for a miracle to come along.

  5. Figure 14 since 2010 with credit and unemployment tracking together for first time in a long time looks ominous !

  6. A trillion dollars was poured into Australia for the mining boom capex. Then another in over the top commodities prices. Then another in apartment capex. Then another in foreign purchases of apartments.

    All of these are gone.

    And ratings are falling. That distant sound on the wind, that eerie flute ? That is the piper.

    • I have a lot of time for Steve and his analysis BUT , like a true (lefty?) academic, he ignores the influence of immigration and its economic effects..

      • I think you are mistaken, however if you can show your working …. I may change my attitude. The statement on its own doesn’t carry much (any) weight Mark.

      • Mark, it is true that immigration increases demand, and by consequence, nominal GDP. However, now that mining capex bubble is gone, immigration is increasing wage pressures which is a major spanner in the works of the need for ever rising rates of debt expansion. Please note I wrote ever rising rate of expansion, as simple linear expansion is not sufficient to keep the charade going.

        It’s a matter of when, not if, the whole edifice of greed blows up.

      • Jumping jack flash

        Mark, whatever they choose to prolong the new paradigm – the FIRE economy – where the smart get instantly and insanely rich from the rubes’ debt mountains, it will continue until someone says “enough”.

        10 years ago (or more?) they decoupled interest rates from risk and then slashed interest rates to perilously and ridiculously low levels.
        After that stopped working, they chose immigration to keep up debt demand as all the locals tapped out.
        Who knows what they’ll choose next year, or in 5 years’ time to keep this economic abomination going, but they’ll surely choose something, and it will continue until it can’t possibly.

      • Speculative immigration is a two-way street, and in a downturn it will exacerbate the drop. Look at other countries that had strong immigration volumes up until the GFC.

      • Like Ireland ?

        You know – where housing crash caused a mass flooding of Irish into Australia and everywhere else ?

        Thats right – immigrants are in Australia as cheap labour looking for work – period.

        They are not able to buy million dollar houses. And they will leave as soon as the economy contracts exacerbating the problem.

        Will be a mass exodus.

  7. reusachtigeMEMBER

    What’s Stan Keen’s house worth he sold back in the early 00’s while dooming away? Nuff said!!

    • You were bound to claim that. He sold it in the demise of his marriage and to give security to his former wife. Leave it alone.

      • reusachtigeMEMBER

        No one cares about the circumstances but everyone knows it happened hence credibility. Sorry if this upsets you but the guy has zero cred outside the circle-jerk. Everyone believes he has always got it wrong. It’s called reality!

      • That’s before you even count the Mt Kosciuszko situation. If you take that into account, his credibility is negative!

      • Zero credibility here in the land of the stupid real estate besotted populace.

        However overseas, ever since the GFC, Steve Keens reputation has grown in leaps and bounds, his credibility is very real and no doubt his career progression (in terms of earning power) ever since leaving dumbed-down Australia has gone through the roof.

        So whenever we like to lash out and have a go at Australia’s very own whipping boy I just remind myself that those doing so are the real circle jerks.

      • The science is sound, he allowed his ego to place a date on it.

        At any rate, third time lucky. We will be left hoping he had been right the first time…what a joke to watch this corrupt, grotesque thing lumber on, whipped by the government/regulators/FIRE sector…

      • @bob
        yes that’s how I see Keen, he got it right for most countries and wrong in a few, Australia being one. Well actually he probably didn’t get it wrong, just the timing, he did say within 10yrs or so, but did Mt Kozzy anyhow, now it’s liking increasingly likely that the recession he predicted is finally catching up with us!)

  8. What good in an unfettered recession economy, if people think twice before going out for a meal.
    What good if people are squeezed to the point that they think “Do we put on the heater or have dinner with the kids?”
    What good if your 50% of your income is going to the bank (or your slumlord)for the next 30 + years

    All for the sake of the “Infinity fake growth”
    NUFF said

    • Indeed. I’m in a nice part of inner west Sydney and the restaurants and shops are empty. Discretionary spending is clearly tanking. Still lots or luxury cars around, though.

      But then again, perhaps everyone is at the orgy at Reusa’s place.

  9. The Patrician

    God knows sustained record low interest rates and the consequential record mortgage debt have played their part but to write a paper with over 3000 words and 20 charts about the source of Aus growth since 2007 and not mention the role of the deliberate crush loading of nearly 4million extra residents to the population in that time, is odd.
    What say you Dr Keen on the role of population growth?

    • Unlike you, Pat, Prof Keen isn’t a raging racist redneck!

      Only racists question the cultural enrichment and quality of life benefits that 4million extra brown and yellow dudes (mostly dudes) have brought us all.

    • they are drawing the exact same conclusions GG. As credit growth turns negative so will asset/property prices. They are both saying that increasing credit demand are causation (independent value) for the increase in asset/property prices globally (dependent variable). Citi observes that credit growth has just turned negative globally and Keen expects credit growth to turn -ve in Australia. Again both saying the same thing, “the times they are a changing”.

      • Thanks travis.

        I see that HnH has also posted credit impulse charts from UBS, including for Australia.

        He circled both the China and Australia charts. Given the size of their GDP and our dependence on them, we might as well just look at China’s chart?


    35-40% of everything we buy is the interest component and it grows exponentially. Not long ago it was just single digits but once the ‘math’ of what’s been built is understood, the magnitude of all this debt and what it will do eventually WILL take your breath away. It’s a significant part of GDP too, but that is usually overlooked.


    • All explained here in detail, way back in 2009……….

      The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. … However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt.Mar 30, 2009

      The Marginal Productivity of Debt – Antal Fekete



        Thanks Bob!
        Yep! The design and complexity of how this ‘model’ works makes me think the blueprint must have arrived by asteroid or other ‘craft’.
        It traces to antiquity and yet we still cannot shake free from its grip.
        Loved this little gem: “how falling interest rates make the liquidation value of debt rise, which becomes a negative item in the profit/loss statement eating into capital that has to be replenished as a consequence.

        What do you think Captain Spock would advise under our current circumstances?

    • “May I say that I have not thoroughly enjoyed serving with Humans? I find their illogic and foolish emotions a constant irritant.”

      “Your logic was impeccable, Captain. We are in grave danger.”

      “In critical moments, men sometimes see exactly what they wish to see.”

      Or he might even come out with a new gem;

      “All this borrowing from the future seems to have somehow also pulled forward the time continuum via the NGC 1277 black hole and all this shit is actually happening now – escape velocity please Captain Kirk”


        (Vigorous applause!)

        “What you want is irrelevant.” “What you’ve chosen is at hand.” CS

  11. Private bank credit given the status of public credit was always a very bad idea.

    Deregulating it and thinking you could run the world economy on it was just nuts.

    It is time for another banking and monetary Royal Commission so we can end this farce once and for all.


    Public money should be a monopoly of the public sector

    Private parties should be free to create whatever private money they can find customers for.

    Bitcoin, Westpac Drongo, ANZ Shiny Numpty, etherium, NAB Rusty Wombat, Macquarie Bank’s Unholy Dollar etc.

    Exchange rates between the public and private money will be no drama to navigate and will ensure that everyone takes their responsibilities as money ‘creators’ seriously.

    You get to choose what money you wish to use as a store of wealth and for transactions.

    Give the private banks what they need most dearly …….freedom…..from blood sucking on the general public with government protection.

    • yeah sure Pfh, all that works in a vacuum. Basically when it all blows up that needs to playout without government intervention. People need to be thrown out into the street and denied all their wealth when their financial decisions go wrong BUT that never happens does it. The government always tries to tinker with the system so the chances of your vacuum occurring are fark all I’m afraid.

      • Travis,

        What vacuum?

        The foundations of the current corrupt model are already falling apart and people are looking for alternatives. Bit coin etc is just the start of the rise of private monetary systems.

        Once people stop freaking out and trying to suppress them and accept that ending the ‘fused’ model is long overdue we can start to move forward.

        It’s a big world out there and it only takes one country to separate public and the private and we will have our experiment. Public sector using public money for public policy. Private sector using a combination of public and private systems that suit their purposes.

        Making the change is not a big deal anyway as it is ultimately just the logical end point of re-regulating private bank credit creation like my constant companion Sweeper prefers.

        Once you accept what is possible it is not nearly so strange.

        Monothlithic monetary models are good for little more than boiler suits and corporatist thievery.

        Our current monetary system is just another barbaric relic of the 19th century that needs a special exhibit at the Powerhouse Museum.

        “Early Modern approaches to public monetary systems”

      • Cheers, Mediocritas.

        PS: Skippy will finish work soon so better go run and hide. He has a fixation on fresh juice…….and Ellen Brown

    • SweeperMEMBER

      Any thoughts on the human beings who actually run these banks?
      Like these friendly chaps from Barclays…
      Is there any connection in your mind between the ethical vacuum which exists between the ears of these people and what these banks actually do? Or is it all just faulty plumbing (note: in an alternative universe where the plumbing works as you think it does)?
      If we fixed the plumbing in this alternative universe would that prevent the job creators hypothetically constructing schemes to trade in their own shares to avoid having to take public capital which may result in lower bonuses?

      • Sweeper,

        There will always bad people but we don’t have to make it quite so easy for them. As you know, we are essentially talking about how best to introduce into circulation public money. How can that be done productively and fairly. Bitcoin uses algorithms and ‘mining’, gold bugs prefer real mining.

        I think our current PPP unleashed model is a shocker but I think we agree on that.

        It’s what to do about it and what is possible politically is the fun bit.

      • SweeperMEMBER

        So you don’t think it is a problem having bad people running banks? Which are really essential public services
        How about hospitals? nuclear power plants? the court system? the public water supply?

      • Sweeper,


        I have no idea how you managed to get to your point B from my point A. I don’t have much time for ‘bad people’ at all but I certainly want to keep them as far away as possible from the process of creating (or withdrawing) public money.

        As for regulating them when they are creating or destroying private money – once it really is private – well yes that is likely to be necessary for the same reason we have consumer protection laws. Bad people just love fraud and misrepresentation and private banking proved quite the finishing school back in the day.

      • drsmithyMEMBER

        How do you identify bad people before they do something bad ?

        Is a system that prevents or at least somewhat inhibits their ability to do something bad preferable to one that does not, or does less ?

      • SweeperMEMBER

        Cause you talk a lot about banks and banking, but never about bankers. However you think credit is or isn’t created, a human being is making the decision on how much and who gets it.
        So how would banning Barclay’s from issuing demand deposits denominated in state money (which are only about 12% of their total liabilities anyway) prevent the wrong people being put in charge and making bad decisions.

      • Sweeper,

        How do we stop bad people from cornering the “profit” associated with creating and withdrawing public money?

        A huge step forward is to make the process as transparent as possible. You cannot get more obscured and hidden than the current process which the majority of the population do not even understand – that Chifley post, that you refuse to read, has gotten quite a strong response on Facebook and I deliberately targeted my $20 ad budget towards people who are unlikely to ever read MB.

        Transparency can be achieved by directly monetising (or issuing a 0% bond direct to the Central bank) part of a fiscal deficit. Everyone watches the fiscal deficit like a hawk and if they understand that it is used to create public money they will watch it even closer. As to how much can be monetised well that can be determined by measurements of inflation – assuming the objective is neither inflation nor deflation. A poor inflation result will send a powerful message to the government about the fiscal stance of past budgets.

        As to what the deficit is spent on or whether it is achieved by tax cuts is a matter for the political process. There is more than enough core functions of government to make generating a sufficient deficit to ‘create’ public money a non-issue. We are probably talking about a fairly modest deficit in most years – especially as we approach full employment.

        Preferably it will be a political process renovated along the lines suggested by Stephen Morris so that it is a bit more democratic and representative than what we have at the moment.

      • Sweeper,

        Sorry you will have to be clearer about what you were asking and what I haven’t answered.

      • SweeperMEMBER

        “how would banning Barclay’s from issuing demand deposits denominated in state money (which are only about 12% of their total liabilities anyway) prevent the wrong people being put in charge and making bad decisions?”

      • Sweeper,

        “..how would banning Barclay’s from issuing demand deposits denominated in state money (which are only about 12% of their total liabilities anyway) prevent the wrong people being put in charge and making bad decisions?…”

        What wrong people?

        In charge of what?

        What decisions?

        We are at the place we always we end up.

        With you insisting that banks are nothing special but nonetheless you demanding that their nothing specialness be preserved.

        “Please not the briar patch of private bank credit creation! Don’t throw us in those nasty briars”

        And then to toss a cherry on the top you insist the best solution is to have an army of public servants intermediate every relationship between saver and borrower.

        As always it has been a pleasure.

      • drsmithyMEMBER

        I think the point is to try and have a system that limits the damage caused by bad people, rather than try and pretend we can prevent them from existing at all.

      • These are things which appear obvious Smithy, but aren’t really.
        007 can’t explain how the 007 system limits the damage caused by bad people to a greater extent than it would the damage caused by bad people under the current system.
        Specifically I haven’t heard why the human beings running Barclays would have been prevented from behaving any differently to the way they could have behaved under the 007 architecture.
        I asked a specific question on this and got no answer.
        As a matter of fact, there is ample evidence that if they could have created their own “money” – (lets say barclays bazookas) backed only by their shareholders (who the friendly execs clearly didn’t give a shit about) resolve to put their hard earned into the bank – they would have behaved even worse.

      • Sweeper,

        I answered your original question with all its graitutious and snarky crap about alternative universes. Why not read what I said and apply some of that horse power of yours and all will be revealed.

        I cannot make it any simpler for you than this.

        A system that is hidden, poorly understood, poorly controlled and inherently confusing is tailor made for crooks.

        What I propose makes the process of public money creation highly transparent and much easier to understand. Crooks will find it much harder to siphon off profits of the process because the process is right in front of everyone.

        A fiscal deficit creates public money.

        If you want some specific clarification you need to be more specific in your question.

        Hope this helps but doubt that it will.

        Give my best to the products of YOUR system – the Barclay Boys. As for your assertion that the situation would have been no different if Barclays were just a private non-bank organisation that is absurd. The transactions were only necessary and only entered into because Barclays was a BANK.

  12. During the last year there was a lot of discussion on limitting credit to foreign investors. So obviously there are many borrowing here, but servicing their debt with their overseas economic activity. This activity would not register in our GDP, while their debt would. Is there any measure on how significant this is and how it affects this Debt to GDP analysis?

    • servicing would turn up in the Capital account. Rightly you observe it’s not Australian income related so it won’t be in the GDP. The FX lows required to service will be in the Capital account

  13. For me the really worrying case is not that our Aussie exceptionalism is living on borrowed time but rather that this time it is different.
    Imagine you were a local Aboriginal living in the Sydney area when Captain Cook arrived, I’m guessing you would have congratulated yourself on having chased away that White devil, but the bastards came back and this time they came properly armed. Sixty thousand years of inter-tribal fighting in no way prepared the Gadigal mob for what was to happen when the next wave of White devils stepped ashore. Nothing that they knew could have helped them, none of their Elders had a solution. It was game over for my people, they were fighting a war that was impossible for them to win, heck they didn’t even understand the rules.
    I think modern economies are at a similar crossroads today and Australia is leading the charge into the unknowable.
    Imagine that we can develop a fully automated mine-to-market machine, if I owned such a beast, would I share the benefits that this automation bestowed, or would I be inclined to say F’you it’s my machine. This machine is Private property and its output is exclusively reserved for an elite group of owners.
    If we assume that such an outcome were desired, what preliminary steps would be necessary to create the moral high ground from which a techno-capital elite could rule?
    Seems to me that step number one would be a transfer of Public assets (mineral rights etc) into the private sphere.
    Step two: Indenturing the majority of the population….nothing like a bit of Debt servitude to create an obedient and compliant majority, willing to do the bidding of their betters.
    Step three: Hopelessness, the realization that nothing they can possibly do will get them out of their predicament
    Step four: I’ll call eating your Glock, it’s the final solution …just not all at once, someone needs to clean up the mess.

    There’s a lot to suggest that parts of the Middle East are at least two decades ahead of the west in the implementation of step 4 and are have even moved to an execution model where they’re exporting their advancements to the rest of the world.

    To be honest I’m not kept awake at night by the thought that this bubble is the same as all previous bubbles but rather by the possibility that this time it is different.

    • You doth worry too much Mr B Fella….

      Here have a read of this and I can guarantee your self-belief will be restored and your will sleep soundly at night from now on.


      Or failing that go out and buy Carmen and Reinharts “This Time Is Different: Eight Centuries of Financial Folly”


      Just join the other side and go all in

      Either way you will get a result.

      • My point was that humans have never been at a turning point before where their labour was totally worthless.
        At the beginning of the 20th century horses were still widely used in commerce and agriculture yet by the mid part of that century the horse had been almost completely eliminated because they were simply to expensive to maintain. It costs more to feed them than their effort was worth….same outcome awaits 90% of humans within a decade or two.
        I suspect that how we handle this unprecedented technology change will prove far more important than the debt loads we carry or our CAS/CAD status. Unfortunately in our western society the lender always seems to occupy the moral high ground while the borrower adopts an obedient and subservient status.
        Today we have very large Petro companies playing financial games to ensure that their LNG ventures always make a loss (Look at the LNG resource taxes for example) These companies won’t pay a penny for the resources they’re extracting until they make a profit and you know what they alone control when and where this profit accrues. It’s only one additional step to incorporate a completely automated manufacturing line to the back end of our mines and suddenly we have zero need for “workers”. AND zero taxes….until we make a profit.
        This time it may well be different.
        But you know what logically if it will be different than Aussies are making the right decision to exhaust their borrowing power while the borrower still has some bargaining power….in a global market that has no use for humans they also won’t have much need for debtors.

      • They are floating the concept for a universal basic income once many of us become unemployable due to automation, robotics and other efficiencies that will make you average worker obsolete…

        But I fear once we cross that threshold we will eventually get our genuine ‘This time is different’ scenario as we have never before had to entertain the idea that as history progresses we will all become redundant, not needed for our labours or our innovation and ideas.

        Completely different ball game when that happens, but it will not occur before we as a nation get our long awaited ‘Slap upside the head’ moment that will have a long lasting negative effect on our standards of living..

    • I’m no scholar on this topic, but I recall when reading about it that the relationship between the local tribes and the British wasn’t so clear cut. For example, while some reacted violently, others lived with and got along with the British (to an extent) because at that point in time with that number of foreigners, there was enough to go around. It was only after the population boom got well underway that shit started hitting the fan. Not that different to how things went down over in America. The initial colonists need friends so they dont go making a tonne of enemies. Establish all the infrastructure, start clearing some land and establishing ‘society’. Then the waves of migrants come because the barrier to entry is lower, while the possible rewards is huge.

      Then comes the whitewashing. Everything we know about early interactions with Aboriginal cultures (I mean the term globally, not just Australia) gets later re-written. We do know that the American revolutionaries for example held the native Americans and their government is pretty high esteem. A lot of parallels there. easy to get along with your foreign neighbour when his demographic is 0.01%. Gets harder when its 10%. A couple of Chinese living in Australia doesn’t give the CCP much to work with. Entire suburbs of Chinese in Australia gives them potential protest crowds.

      Edit: Upon re-reading I see you were referring to just the 1 tribe. Sorry I didn’t have much to add. I do feel some frustration that as an Aussie there is so much we don’t know about our own history. Its getting better though.

    • ErmingtonPlumbingMEMBER

      Not all the “White Devils” who came here and displaced the local Indigenous people, were supporters of “Mother England”.
      My ancestor, the first here to carry my surname, arrived in Sydney in 1816 as an Irish Catholic convict slave, transported on the Surry to Australia, for the crime of “uttering unholy oaths” (suspected of participation in seditious activities) .

      My ancestor didn’t take anybody’s land,…but I suppose you think all us White basdards look the same,…Mmm?

      As for your,

      “Imagine that we can develop a fully automated mine-to-market machine, if I owned such a beast, would I share the benefits that this automation bestowed, or would I be inclined to say F’you it’s my machine. This machine is Private property and its output is exclusively reserved for an elite group of owners.”

      Well, if we can all get over our devicive little Identity Politics, resentments and laments,..there are 2 things that can turn things around,…Solidarity and Democracy, that when combined, can easily defeat “elite groups of owners” with Democratic Socialsim.

    • Credit is new debt – today’s credit becomes part of tomorrow’s debt. So credit is the flow of new debt being created over a period of time (e.g. per year), which gets added to the stock of debt.

  14. Jumping jack flash

    Excellent as always. Thank you Prof. Keen, and thank you MB for posting it.

    Simply: Getting rich from someone else’s debt mountain.

    This has been the quickest and easiest path to unfathomable riches for quite some time – since 2010, as pointed out by the good professor.
    Sustainable? Of course it is – they will keep changing the rules and cheapening the debt so it can continue, but for how long until someone says “enough” and we have our very own 2008 moment?

    Nobody knows, and it could continue for quite some time before it stops.

  15. PrinceOfPersia

    Common Guys, take it easy on the “Dill Man”. The idiot with cowboy picture. What absolute tosser. Not once has he/she provided any data analysis, evaluation methods or even any fiscal rubric to explain any of his/her theories!!!. You always be a wanker. uneducated, low IQ and most likely not even employed who has too much time and just talk crap. Probably did not even completed the high school. It is the “Dill Man”.

    • reusachtigeMEMBER

      Meh. But rich and enjoying endless relations! Education is what has ruined you all! This comment above is the classic superiority complex of the over-educated failed.

    • two plus twoMEMBER

      Reminds me of Drax in the Guardians of the Galaxy:

      “Nothing goes over my head! My reflexes are too fast. I would catch it.”

    • Prince, you’ve posted along the same lines before and had some guidance in response. Unless you’re really PrinceofParody but I think not.

    • Just a couple:
      – Debt is higher
      – Interest rates have been dropped to record lows
      – No mining boom
      – IO saturation
      – Crediting rating downgrades

      Basically, conditions have deteriorated across the board.

    • Nothing, except:

      a) The situation is far more critical
      b) The Government, banks, etc. don’t have anywhere near as much ability to encourage people to keep taking on more and more debt to prop up the bubble much longer.

      They have been able to keep the bubble going for longer than most people expected was possible. But unfortunately that only delays things and also means the fall-out will be all the worse…

    • Yeah it’s the same compelling analysis. All that’s changed is that we’re closer to crunch point. But how much closer…he doesn’t know.

      Seems to me the crucial factor is our collective ability to service more debt without going bankrupt. Where are the charts showing we’re anywhere near that point? Don’t underestimate what Australians will suffer to grasp and hold on to a house.

    • His message hasn’t changed, draw your own conclusions. What has changed is the public consciousness. It’s now off the richter charts.

      • That’s the thing about bears. It is easier to call it a bubble than admit that they had insufficient exposure to a sustained uptrend. They will call the top endlessly and once they’re finally proven right they’ll stamp their feet and declare “I TOLD YOU SO!”

      • hahhaa yeah right fellas. You do know to maintain your credibility you have to be right every single day for the next 5yrs at least and Keen only needs to be right on one day only. Enjoy that position fellas.

    • Some of the points being made here are already in the market of course i.e. “no mining boom”, yep, and the price impact in Perth, regional mining towns and even Brisbane has already been felt. Mining employment and activity has been improving for the last 12 months. The typical MB’er (possibly because of their excitement over being “first” to call a bubble that has been talked about for years) ignores the fact that the “bubble” is almost entirely a Syd/Melb problem, the other 50%+ of Australia is enjoying lower mortgage costs (as a % of income) than a decade earlier, courtesy of relatively flat prices and much lower interest rates.

      Not mentioned in this article (oddly) is our household savings ratio which is substantially higher than it was 10 years ago. Also not mentioned in the household debt comparison is the fact that investment property debt is included as household debt, but this type of debt is different to other forms of household debt because there is an offsetting asset which is income producing. Australia has higher than average levels of investment property ‘participation, so logically it will have a high level of household debt.

      I’m not denying the other points or that Sydney and Melbourne are grossly over-valued, obviously they are, I’m questioning the generalisations, the validity of a direct household debt comparison with other countries and the exclusion of data that is contrary to the doomsday position.

  16. Will be interesting to see how it all plays out here in Perth, where prices are barely different to those of 2007 (according to yesterday’s ABS release). Even a Perth buyer in March 2005 has had capital growth of less than 5% pa compounding. So in some way there’s already been a small correction here (although still not enough). If the Syd/Mel prices pop then it’ll be fascinating to see if our market moves down or not. It certainly hasn’t been caught in the updraft of the last three years for those cities.

    Trading tip: I’m on the verge of buying here, so Perth property is likely to crash in a few months, irrespective of Syd/Mel prices haha. Don’t worry, I’m going in with my eyes open and can afford a crash. Would still prefer to buy at 15% lower but I’m not getting any younger!

    • If you can afford to watch prices in WA fall another 30%+ over the next few years then hey…. There are quite a few hedge fund guys smarter than me betting big on falling commodities 2.0 in 2017/2018 and it’s already begun. As China slows substantially in 2017/2018/2019, and commodities get taken to the cleaners, there is no way that WA will not decline further both in economic activity and then property prices.

      I also heard the WA politicians calling the bottom of property prices the other day. This is a sure sign that it is not the bottom and prices will continue to fall despite somewhat “stabilizing” in the last few months. If the government tells you something, do the opposite.

      • No-one really knows – you, me, politicians, MB or hedge fund smarties. But yeah if that happens I can afford it. It’ll be annoying but the sun will still rise and I’ll still have my shares and cash on the side. Everyone is telling me what a great time to buy it is, and I just respond with “it’s not so much ‘good’ as ‘less terrible’ ” haha.

      • True enough. Don’t get me wrong here, I have no expectation that I’m going to make money out of this purchase. I’m viewing it the same way I view buying a pint of beer ie, it’s for fun not financial gain. Prices could go up, down, sideways and the sun will still rise. If worst comes to worst I have my tinned food and lots of ammo 🙂

      • ErmingtonPlumbingMEMBER

        I remember reading about the extended slum in Japanese consumer spending, being due to a general expectation that the prices for everthing were dropping. It became a self-fulfilling prophecy, strangling of consumption.

        I look at all those mums in their new 80k+ SUVs dropping their kids of a my boys Soccer training and wonder how many are not purchased on home mortgage refinancing.
        I suspect the arse is going to drop out of the secondhand market for these vehicles soon, as people realise, they could never really afford these cars in the first place.
        A lot will be lamenting the loss of cheap, affordable family cars, like second-hand Falcons and Commodores,…but hey, it was fun while it lasted.

  17. The rising USD is already starting and over the next 6-12 months will cause Asian crisis 2.0, will squeeze the PBOC into devaluing the currency and spiking interbank rates further and ending their investment driven growth model, tank the AUD and cause some inflation and likely force the RBA to hike rates closing down the property bubble.

    • What are you referring to?

      USD has gone nowhere against the AUD in the last 2 years.
      and is falling against the euro

      • brilliant analysis and recap Coming. Whilst your comment was backward looking I think if you re-read what he said he was looking forward.

      • “The rising USD is already starting”

        I was asking him to explain how he can justify this statement
        I didn’t include analysis

        Who put sand in your vagina by the way?

      • I’ll admit it is very early days but I have a model that shows that the USD has turned. In a separate statement, AUD is near a precipitous fall. Once this current rally is over in a week or a month or so or however long it takes, AUD will be a great short.

  18. lots of graphs and charts – simple story
    Aus growth has been on the credit card plus migrants
    And we spent most of the cash on non-productive asset (existing houses)
    As they went up we bought euro cars and that sort of shit
    And now our cities are chockas and immigration is on the nose
    At some stage the music will stop if it hasn’t already

      • Sorry how do you mean this? If it already has, why haven’t Syd/Mel prices fallen significantly in (say) the last quarter? Or are you talking about something else

    • music has stopped. Observe the interest rate rises, observe the lists of banned suburbs, observed the higher LVRs, observe the near daily commentary in public mostly now acknowledging a house price bubble, observe the discounts and inducements being offered by developers in Brisbane, observe the value transfer from developers to owners for flammable cladding, observe the reduction in credit growth, observe observe observe.
      Edit: observe my landlord no longer willing to rent to me at the end of my lease (all good wasn’t going to renew anyways) for house in South Melbourne with the quote “I’m really worried about the market and want to sell before it tanks…”

      • Now *that’s* an interesting piece of anecdata, if ever there was one!

        I suspect lots specufestors will quietly start heading for the exits once the prospect of capital gains disappears. And if capital losses come into play…hoo boy…who wants to be stuck with a depreciating asset that has lots of ongoing costs in a bear market?

      • Thanks. Interesting anecdotes. Amazing to hear that from a landlord.

        The only missing piece is the actual price falls in the East Coast

  19. Fabulous piece of work. My subscription renews in 9 days, and its worth it just for articles like this.

    Keep up the good work guys!

  20. The secret of endless Australian growth is ordinary mum and dad property millionaires with taxable incomes of less than 80k trying to get ahead, buying existing houses which wouldn’t otherwise be there, thereby creating jobs and infinite untaxed wealth.

  21. ErmingtonPlumbingMEMBER

    Sure,… I think everyone agrees that house prices have “gone to the moon” but at a continuous acceleration of 1g that’d only take around 3 and a half hours.

    It’s going to take a considerably greater amount of time and energy, getting those house prices to Alpha Centauri!
    Over 4 or so years, if one includes deceleration,…less of course if we intend to have them house prices sail right past Alpha Centauri,..and on to higher price targets,…but unfortunately, it can only happen at a constant velocity after 6 months of acceleration to near C at 1g.

    Maybe some Star Trek watching Nerd can invent house price Warp drive and save us all form a bursting bubble and the Klingons.

    “Assuming acceleration is constant, d=(1/2)at2d=(1/2)at2. So plotted over time, distance traveled is a nice parabola.

    If you want the time it’d take for a specific distance, it’s easy to manipulate d=(1/2)at2d=(1/2)at2.

    If you’re using meters and seconds as your units, a=9.8meters/sec2a=9.8meters/sec2
    To travel half the distance to the moon would take about 1.75 hours. The other half distance spent decelerating would take the same amount of time.

    Using Days and AU (astronomical units) we can see 3 days will get about 2.5 AU (halfway to Jupiter). 4.5 days will get you 5 AU (halfway to Saturn). 9 days will get you 20 AU (more than halfway to the Kuiper belt)

    It gets trickier for interstellar distances. In Newtonian mechanics v = at, so it’d take a little less than a year to reach c at 1 g acceleration. But relativity won’t allow that, we can only get close to c.

    Our Newtonian model is okay for nearly a year of acceleration and after that relativity wrecks this nice parabola:

    After 1 year at 1 g we will have traveled .5 lightyears and our velocity will be close to maxed out. There after we’re moving at close to c, so add a little more than a year for each lightyear distance.”

    I hope this helps with people’s property investment decisions,…my advice is, fucken go for it!,…house prices to the next galaxy!

    • You’re not really a plumber, are you Ermo? 🙂

      My son is doing year 11 Physics at the moment, mainly Newtonian mechanics, and he said he didn’t know understand why we can’t travel faster than I light. I had a lot of fun explaining that we can travel faster than light, we just can’t travel at *exactly* the speed of light because at that speed we end up with a zero in the denominator of an equation, your mass becomes infinite etc…

      It was a nice distraction and a helluva lot more enjoyable than contemplating the Australian housing market, and my inability to purchase a decent place to live with my woman.

    • reusachtigeMEMBER

      Right here is what’s wrong with you people. None of that sciency sh1t is necessary. All one needs to know is that house prices always boom then go off and party – a much wiser way to use your time. That is all. It’s simple, needs no scientific explanation, absolutely none… and that’s what you all struggle with!

      • LOL!!! – reusa, you owe me a cup of coffee and a clean shirt.

        But you are right. Steve keen should know better that Australia is different – I heard that even asbestos becomes harmless here so that people still keep using it.

  22. Seems to me that Keen knows only too well that the government will do whatever it takes to keep this housing bubble growing. It’s a shame he didn’t mention our very high immigration rate and unfettered foreign investment, ramped up by Rudd to stop the bubble crashing when it should have, back in 2008, but maybe he is afraid of being branded racist. He cops enough flak without racist overtones as well.

    I do sympathise with Keen though; if the bubble should have burst in 2008, it should be closer now, but there’s no telling what the govt will do, and this could (and probably will) go on for many years.

  23. At some point the deleveraging will need to take place. It’s been one long can kick for several years now.

  24. “The belief that house prices will hold up so long as unemployment doesn’t rise too much also gets the causal mechanism arse-about-tit (to use a quintessential Australian expression). House prices will fall first, as they did in the USA, because “people” don’t buy houses: people with mortgages buy houses. This little detail is overlooked by property lobbyists who point to rigid supply as the cause of higher prices.”

    Interesting point he makes here. I always thought that there would be a trigger (unemployment) that would cause housing to fall. I guess that my thinking has always been that unemployment comes about exogenously whereas what Dr. Keen is saying is that unemployment can come about in a more endogenous way via contraction in credit growth.

    • Accelerating debt to finance our RE and other asset bubbles, to pay for our consumption of imports, and to finance the infrastructure needs of our exploding cities, and much of it borrowed by the banks from OS or financed by selling off our assets, public and private. Ponzi scheme sounds about right.. Where’s flawse?

  25. The problem with economic models is that it assumes humans behave in a rational way. The reality is that humans don’t behave that way. Unless economic models can factor in irrational behaviour the model won’t reflect reality. Take a look at people’s behaviours at auctions….its not all rational. People’s decision of where to live and to rent vs buy….its not all rational

  26. Tldr; max out credit card, apply for new credit card to pay original credit card, max that out, apply for new credit card… Repeat until mathematical limit exceeded, pretend someone else is at fault.

    • I here by coin the term ‘Cactus’ for such behaviour! 🙂

      In reference to Cactus Consulting.–> google search

  27. – Steve Keen had a website on which he posted (intreresting) articles from time to time. But this website seems to be gone, vanished into thin air. Does anyone have more news on his website ? Does he have a different URL ??

  28. I found the pin which will burst the bubble

    “In February a parliamentary committee urged the Australia government to consider building a Hyperloop between cities and country towns as a solution to housing affordability.”

    There you go, millions of sq km of rural land now available for living.