The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, July 27, 2011

Rory Robertson smashes Rob Burgess and Steve Keen

Completely agree with Rory on this one (see his response in Business Spectator posted at the bottom).

Glenn Stevens actually violently disagrees with Keen, contrary to what Rob suggests in his article today. Stevens says, as I have done many times before, that the "big leveraging" we had during the 1990s and 2000s was driven by the 42% reduction in nominal interest rates between the periods 1980 and 1995 and 1995 and 2011 (from 12.6% average mortgage rates during the first to 7.3% in the second).

Since interest rates have remained much more stable in lock-step with much lower and more stable inflation following the early 1990s, households have been able to comfortably service a much greater debt burden. And guess what (Rob/Steve), they did! The leverage in the economy grew consistently during the 1990s and 2000s off very low bases (back when interest rates were double digit and unpredictable), as did the household debt-to-income ratios.

But guess what (Rob/Steve)? This was a once-off "level-effect" (ie, sustainable adjustment reflecting the huge reduction in the cost of debt), not a permanent growth effect, and now these ratios are flat-lining. This is why the household debt-to-disposable income ratio, as shown below, has gone sideways since 2005, years before the GFC first materialised. That is, credit has been tracking incomes, as you would expect.

This is not remotely close to the catastrophic decline in credit, asset prices, incomes and growth relentlessly forecast by Steve Keen. This is not a 40% drop in house prices, or "double digit" unemployment, as he repeatedly projected on TV stations around the country. This is not the "greatest recession since the depression". Indeed, unemployment has fallen and house prices have risen modestly since he made these claims.

So Glenn Stevens was not paying homage to Steve Keen. Interpreted correctly, he was actually saying something along the lines of, "Here is the sensible explanation for what has happened to Australia, and, by the way, it looks nothing like what Steve Keen led us to believe."

And this is what Rory Robertson said today:

"Too bad Rob Burgess forgot to mention that the long walk from Canberra to Mt Kosciuszko he enjoyed with Dr Steve Keen last year only happened because the relevant peak-to-trough fall in house prices from Q1 2008 turned out to be just 5 per cent, somewhat short of the 40 per cent forecast (See Steve Keen's RBA convert, July 27).

That is, Dr Keen didn't muster a "rag-tag group of walkers" because he knows what he is talking about. And now, amusingly, Rob Burgess sees Governor Stevens' sensible analysis of household debt, asset prices and spending as echoing Dr Keen's dopey one-dimensional doomsday story (in which he forecast unemployment at three times our current level of 5 per cent). Sure, and my artistic skills aren't much different from those of Margaret Olley, because one time I managed to get more paint on a canvas than on myself."