The Depression – A Running List of Warnings

Warning, cats! - Attenti al gatto!
Creative Commons License photo credit: funadium


Over the next few posts we will bring you a series of reminders about how we and our colleagues have been warning about the impending financial peril for many years.

The Depression
An occasional commentary
(for Australia’s federal politicians)      #1
4 December 2008

ASTONISHING EVENTS?

At last night’s Lowy Institute lecture in Sydney, the former governor of the Reserve Bank of Australia, Ian Macfarlane, said that he found the events of the last year to have been quite astonishing.  Astonishing? But we foretold of this asset price deflation three and a half years ago!  In THE AGE of 15 June 2005, we warned the RBA not to increase interest rates because Australia was “primed to tank into a deflation” and “in the current deflationary environment” the next adjustment of Australian interest rates would more properly be down.”  

The RBA chose to ignore the warnings provided by this index though.  Also ignoring the looming price drop, it ratcheted interest rates up 1.75% over the next three years (seven times by 25 basis points). Now the RBA’s “seeing is believing” approach has witnessed it move into panic mode to lower interest rates by 3.00% in just three months! Surely this hopelessly dilatory action is the real ‘astonishing’ event, Mr Macfarlane?  It is a damning indictment of the very body whose raison d’etre is to maintain full employment and to protect Australians and their currency. By whom has the RBA been advised? Did the Bank take any cognisance at all of the Australian real estate bubble that we defined and quantified for it? No, it used its ‘experts’.

The Land Values Research Group (LVRG) hereby challenges any commercial economic forecaster, analyst or credit rating agency to match our economic forecasts. Alan Kohler noted in Secrets and Lies” on 2 December that Goldman Sachs admits to tailoring the truth a little in delivering it’s economic prognostications, because it is a commercial organisation, and, well …. it just has to! The LVRG isn’t a commercial organisation and we and our colleagues at Prosper Australia don’t have to ‘doctor’ any of our studies – so we’ll stick to telling people the truth about what they reveal.

OK, so Ian Macfarlane seems to agree with Christopher Joye and other bubble-deniers that people like us and Steve Keen are incorrect – that even though our real estate bubble may be bigger than all the others, ours isn’t about to burst next year.  Want a bet?

There are workable solutions to this horrible financial implosion.

Bryan Kavanagh
Land Values Research Group
Melbourne

3 Comments

  1. real estate24-01-2009

    Well said Bryan.

    These days because of the internet, people can access a wider diversity of opinion and information.

    People need to get good at accessing the right info and also discerning the vested interests behind the source.

    That’s why I like the fact that you aren’t pushing opinions based on commrcial imperatives….keep up the good work – Andrew Blachut – PropertyNow

  2. Derek27-01-2009

    When the tightening cycle began it was puzzling to me that inflation was not breaking significantly out of the Reserves stated policy of ‘to achieve an inflation rate of 2-3 per cent on average, over the cycle’. The key words there are average & cycle.

    With the strong inflationary drivers at the time being the oil price and mining boom it seemed illogical to think that raising interest rates would in any way mitigate those effects on the economy. I reasoned that rather than it being concern over the inflation rate it was probably GDP that the Reserve had its eye on; historically GDP rates of around 4% or more seemed to be followed soon after by higher inflation.

    But now I am more of the opinion that the raising of rates was pre-emptive and had more to do with currency protection than inflation. I suspect that the Reserve and its advisors could see that the US situation was precarious & sooner rather than later a sharp reduction in US demand would prick the minerals price bubble and this in turn could collapse the Aussie. The only available protection being higher relative interest rates here compared to other developed nations. The risk of a weak Aussie dollar would mean that all of that overseas debt would skyrocket in Australian dollar terms.

    Maybe the higher rates did help the Aussie from falling further than it did but the price to be paid was a rapid and painful deceleration in economic conditions well beyond what we might have otherwise experienced & this may well have tipped the balance from soft to hard landing.

    Where were the economists?
    We have a group of highly educated people in this country who seem to feel their job is nothing more than to predict what the Reserve bank might do at their next meeting and explain to mere mortals why the Reserve made the decisions that they did after their meetings. God forbid that they should ever disagree with or criticise the decisions of the reserve bank. Raising rates when almost every other developed country was holding or lowering was reckless in the extreme. The financial hardship caused to Australian families and small businesses was an inexcusable and unnecessary act and a perfect primer for a hard landing. Yet the silence from the economists was deafening.

    The backdrop for all that is a world wide economic slowdown and a financial tsunami which is just beginning to break on our shores.
    The reserve responds by throwing interest rates into reverse gear while the accelerator pedal is flat to the floor; one might think that they have been lowering rates rather quickly but given that our rates were probably already 2.5-3% above where they should have been the reserve has in fact been lowering far to slowly.

    The government responds by pumping a few billion dollars of precious budget surplus into poker machines and sends out its grey army to achieve that objective.

    Big business responds by sacking workers and wiping out the shareholder equity from retirement plans ala Babcock. Interesting idea by the way that a company employee can enter into negotiations with his employer’s bankers to whip the company out from under the owner’s feet.

    Brace yourself because the tough bit is for the man in the street coming.

    So with the benefit of hindsight we have indeed had a boom and a great deal of money has changed hands & and even greater amount of money seems to have simply evaporated into thin air. Looking back into those golden years I am hard pressed to see the social benefit that Australia has gained from the combined effects of a property boom, share boom & mining boom. It is hard not to believe that the boom was just squandered.

    I make several charges;

    * The economists have made little if any contribution to our economic wellbeing & most have contributed less to economic debate & framework than that of any financial journalist.

    * The US has repeatedly proven itself to be a morally bankrupt country and not to be trusted, we can only hope that Obama can achieve his goal of restoring morality.

    * The baby boomers have been overly indulgent with their young and we now have X & Y two generations who are used to consuming as much or more than they produce. The result is the baby boomers retirement funds are now shrinking via natural effects to pay for that consumption. Someone has to pay the piper.

    * The Reserve bank of Australia made a monumental error of judgement in raising interest rates at a time when they should have waited or perhaps began a lowering cycle. They should be publicly condemned for that error.

    * Our inexperienced federal government has squandered the budget surplus and a sizable chunk has gone overseas rather than assisting the Australian economy. Still now the treasury claim they stand ready to act, act NOW. Money needs to be pumped into infrastructure projects that have genuine social benefit & they need to be up and running ASAP.

    * Australian regulatory authorities need to get their act together, ASIC, ASX have been far to lenient with directors and CEO’s of publicly listed companies particularly with regards to disclosure. A major tool is at their disposal ‘Suspension of Listing’ use it.

    * We are far too wasteful as individuals and collectively, less waste means more to go around.

    * Australia needs to be far more selective with immigration, no I am not talking race I am talking about preference to those who are willing and able to make a positive contribution to Australian society. In short we have enough of our own home grown a-holes we don’t need to import more.

  3. Bryan Kavanagh01-02-2009

    Thanks Anthony!

    And I can’t disagree much at all with your analysis, esp. of the RBA’s woeful performance, Derek!

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