Growing like Topsy (Australian housing)

More on housing from Steven Keen.

My Walk to Mt Kosciuszko is no longer a solitary affair: at last count, I will have a dozen companions for the entire distance, and another 16 joining me for at least one day.

One of those coming for the entire trip is the Commentary Editor from Business Spectator, Rob Burgess. Rob will report from and on the Walk on a daily basis, covering it both as a news story, and as the basis for a discussion of the wider issues facing business and economics in the uncharted terrain of the supposedly  ‘post-GFC’ world.

The others joining me on the trek are doing so not just for the scenery, but because they too believe that Australia’s economic policy has become beholden to maintaining house prices at unsustainable levels. Despite government rhetoric (and some action) about improving home affordability, the First Home Vendors Boost  did far more to make houses more unaffordable than the government’s minor actions in the opposite direction. The other walkers are joining me to bring attention to the absurdity of managing the Australian economy by making it impossible for people to afford houses in their own country.

But though The Walk will have a political protest at its core, it is not party partisan: our call here is “A Plague on Both Your Houses”. Whatever else might change if Tony replaces Kevin, one thing that won’t change is a sky-high house price policy, since both sides of politics in Canberra (not to mention the commercial Banks and their economists) have become convinced that the major reason the GFC occurred was that house prices fell.

This is true in the same sense that jumping off a cliff is painless—it’s hitting the ground at its bottom that hurts. The real cause of the GFC wasn’t falling house prices per se, but the mortgage debt that drove them higher as households took part in a speculative bubble. The rising debt level was, in effect, climbing the mountain in the first place: deleveraging was jumping off it.

The only way to prevent a financial crisis is not to climb the mountain in the first place: to stop debt being taken on for speculative reasons. But instead politicians the world over encouraged households to do precisely that, in the misguided belief that financial engineering was a road to wealth. Instead, it was the road to debt penury.

Once that debt has been accumulated,  trying to stop house prices falling is like keeping Wily Coyote stationary in midair after he’s fallen off a cliff with an anvil attached to his legs: he’ll stay there for a moment, but after a while, it’s “Hello Terra Firma”.

House prices rose in America and the rest of the OECD because households took on bucketloads of mortgage debt, and they fell because households stopped taking on more debt. The fall in house prices was a symptom of households ending the leveraging game: it was coincident with the crisis, it made it worse because the collapse in house prices and the rise in insolvencies made banks insolvent, but the real problem was that households had got into too much debt.

So how does Australia keep house prices high? By encouraging households to get into yet more debt. The next chart shows what happened to the household debt ratios (both to disposable income and to GDP) before and after the First Home Vendors Boost.

The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically last year (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC).  The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009.

We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff.

Is the Chinese economy running out of steam?

From Gerard Jackson's Brooke's news.

Is the Chinese economy running out of steam?

Gerard Jackson

BrookesNews.Com

Monday 22 March 2010

There are signs that China's economy could be sliding into recession. The reason these signs are being largely ignored is because virtually all of the economic commentariat believe the fallacy that consumer spending is what drives an economy when in fact it is entrepreneurship that drives it and savings that fuel it. This fallacy has led some commentators to assert that China is entering a mature phase in its economic development which will result in Chinese savers buying more Chinese goods which in turn could raise real wages.

This is appalling nonsense. Any classical economist would have quickly pointed out that it is the demand for investment goods and not consumer goods that intensifies the demand for labour and hence raises real wages. Moreover, such an economist would have been just as quick to stress that loose monetary policies are not only inflationary they also "derange" production. The second observation is of critical importance.

These economists noted how manufacturing not only went into recession first but that heavy industry also suffered the greatest contraction in output relative to the consumer goods industries. Therefore, to the older economists manufacturing was something of an economic bellwether, particularly the capital goods industries. (Economic commentary is so bad in Australia that one cannot even get this basic fact publicly discussed, not even by our so-called think tanks.)

There is no doubt that Chinese manufacturing is slowing (obviously a slowdown always precedes a contraction) which is described as a rate of reduction in expansion. However, excess capacity ("derangement") "in some industries" is making itself felt. This is not surprising given that the country probably has the largest steel producing capacity in the world, producing about 50 per cent of global output in 2009. Yet no one is asking whether this capacity is necessary.

Commentators are putting the emergence of excess capacity down to an attempt by the People's Bank of China to cool the economy by reducing the rate of inflation. (In China the central bank proposes and the government disposes.) What is not being asked is why the phenomenon of excess capacity is not uniform throughout the economy. The answer is to be found in the fact that money is not neutral. If it were then inflation-created malinvestments would not be possible because price changes would be uniform.

Therefore the appearance of excess capacity is signalling the emergence of malinvestments that must at some point be liquidated. Now these malinvestments are the creation of a reckless monetary policy which some are assuring us that Beijing is trying to reverse. When it comes to monetary policy — which includes monetary theory — Beijing is every bit as clueless as Washington and London. According to official PBC figures M1 jumped by 25 per cent from January 2009 to December 2009.

It's reported that in an effort to maintain economic growth and prevent "overheating" at the same time the government has curbed bank lending while also ordering the banks to increase their reserves. This is dangerous nonsense. Genuine economic growth cannot cause "overheating" which is another term for inflation. Those who argue otherwise are spouting rubbish. (One should have thought that some of these people would have noticed by now that this fallacy only appeared after Keynesian policies left us in a permanent state of inflation.)

If the present trend continues manufacturing will start to contract and the recession will then rapidly spread down China's production structure. Of course, the government can once again push down on the monetary accelerator. But in a sense this is where monetary and capital theory combine to produce an unstable and highly explosive mixture.

There is absolutely no way these malinvestments can be 'reversed'. Liquidation is the only solution for the great majority of them. Even trying to hold him them in check would require greater and greater quantities of monetary injections. Hence any relief would be only temporary until the point is reached where inflationary pressure is considered so great that the government is left with no alternative but to slam on the monetary brakes.

Gerard Jackson is Brookesnews' economics editor

F.A. Hayek: Video and Discussion

Here are two excellent C-SPAN videos on F. A. Hayek’s mega-seller The Road to Serfdom.

• Historian Bruce Caldwell discusses his new edition of F. A. Hayek’s The Road to Serfdom on C-SPAN.

• The Great Books Council of Delaware has a reading group discussion on Hayek’s The Road to Serfdom, with a special introduction featuring Lanny Ebenstein, William Rehnquist, Milton Friedman Robert Bork, George Will, David Boaz, and Seymour Martin Lipset.

Brian Lamb, from a clip introducing the Great Books video:  “One of the reasons that we wanted to asked you [Lanny Ebenstein] here to do this [is] because over the years .. the name Hayek — I never knew it before I started the show — it pops up all the time .. “.

More C-SPAN videos discussing Hayek here.

Original link at Cafe Hayek (http://hayekcenter.org/?p=2103)

Australia Worst in Defence Spending

DEFENCE officials have been caught short by a new report revealing that Australia and its closest ally, the US, are the world's most wasteful nations when it comes to buying and maintaining military equipment.

The US and Australia came at the bottom of a list of 33 countries ranked according to how efficiently they spent their defence budgets in the analysis prepared by global consultants McKinsey.

Brazil, Poland and Russia came out on top of the 33 nations which account for 90 per cent of global defence spending.

McKinsey is uniquely placed to compare the effectiveness of defence spending across nations because it had been invited to carry out comprehensive audits in many of the countries included in its latest research.

The US-based company was called in by the Rudd government to carry out a massive internal search for waste in the Australian Defence Force and the Department of Defence. It recommended that the government should force Defence to find savings of $20 billion over a decade to help pay for major purchases of ships, submarines, aircraft and guns.

That advice triggered an extensive waste elimination program within the department.

The latest McKinsey study says the US and Australia are the world's worst performing countries with regard to "equipment output for every dollar spent".

But Australia did much better than the US when the "tooth to tail" ratio was calculated to show how many personnel it took to keep fighting soldiers in battle.

Norway came out top with 54 per cent at the teeth end, 36 per cent considered non-combatants and 11 per cent in combat support.

The US had just 16 per cent of its personnel in front-line roles and 84 per cent in non-combat or support roles.

Australia had 34 per cent of its personnel in combat roles.

The average was 26 per cent in combat roles.

McKinsey says countries that support their own defence industries by building their own equipment rather than buying it off the shelf from international suppliers were likely to pay more for it.

The Australian government plans to have 12 submarines built in Adelaide to replace the Navy's six Collins Class boats. Analysts have warned that could cost at least $35bn, while submarines could be bought off the shelf for much less.

A spokesman for Defence Minister John Faulkner said the minister was aware of the report and that the government had made eliminating waste a high priority.

Analyst Andrew Davies of the Australian Strategic Policy Institute said "a long-term epidemic of over-optimism in Defence" was largely to blame for regular cost blowouts.

As an example, he said, at the start of the process of buying the US Joint Strike Fighter to replace the RAAF's F-111 bombers and F/A-18 fighter-bombers, the RAAF estimated that each JSF would cost $US50m. That had now blown out to $US90m each.

Meldown: What would Hayek say??

Bruce Caldwell speaking at the Heritage Foundation on Hayek and the America meltdown.

Link to original post: http://hayekcenter.org/?p=2110
Link to written paper on post: http://econfaculty.gmu.edu/pboettke/workshop/Spring2010/Caldwell.pdf

Nanny state by the sea...

These photos from the 'Sculptures by the Sea' at Cottesloe Beach were too much to pass up on. Enjoy!!!

Don Boudreaux on Public Choice in Politics

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about public choice: the application of economics to the political process. Boudreaux argues that political competition is a blunt instrument that works less effectively than economic competition. One reason for this bluntness is the voting process itself--where intensity does not matter, only whether a voter prefers one candidate to the other. A second reason is that political outcomes tend to be one-size-fits-all, which often leads to dissatisfaction. Boudreaux defends the morality of not voting, while Roberts, who does vote from time to time, concedes that one's vote is almost always irrelevant in determining the outcome.

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Readings and Links related to this podcast

Podcast Readings HIDE READINGS

About this week's guest: Don Boudreaux's Home page Cafe Hayek. Don Boudreaux's blog (with Russ Roberts) About ideas and people mentioned in this podcast: Books: Collected Works of James M. Buchanan, 9 vols. available on Econlib.In print, 20 vols. available individually or as a set from Liberty Fund, Inc. Articles: "Public Choice," by William Shughart II. Concise Encyclopedia of Economics. "Rent Seeking," by David R. Henderson. Concise Encyclopedia of Economics. David Hume. Biography. Concise Encyclopedia of Economics. Friedrich A. Hayek. Biography. Concise Encyclopedia of Economics. James Buchanan. Biography. Concise Encyclopedia of Economics. Kenneth Arrow. Biography. Concise Encyclopedia of Economics. Web Pages: Southeast Texas Nursery Growers' Association. (Could find no website yet for the Southwest Texas association.) Podcasts and Blogs: Garett Jones on Macro and Twitter. EconTalk podcast. Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School. Shame and other cultural deterrents of undesirable behavior. EconTalk podcast. Caplan on the Myth of the Rational Voter. EconTalk podcast. Giving Away Money: An Economist's Guide to Political Life. EconTalk podcast. Previous episodes featuring Don Boudreaux. EconTalk podcasts.