Anyone who’s worked in a large public sector organisation will know how “efficiency dividends” work. Or don’t work. Or work in unintended ways – by destroying the capacity to do what your actual main purpose is. There’s a bit of a parable about managerialism there, I suspect. But certainly one of the most egregious of the effects of the efficiency dividends of Lindsay Tanner’s first round of cross-cutting was reducing the sample size of the ABS’ labour market statistics. Not such a smart move at this stage of the game, I’d suggest. But presumably not having Peter Costello raving about Labor deficits trumps informed policy making.
This sort of thing only compounds the fog of economic war at a time of crisis. It is true that economic predictions are a dime a dozen and at best indicative the further they’re projected forward in time. Media savvy ex-Treasury boffins in Access Economics were warning of runaway inflation this time last year. This year, they’re worried that we’re “buggered”. (And they’ve always got some neato right wing policy prescription to go with the diagnosis.)
But at a time when the tectonic plates of the economy are shifting rapidly, it is essential to have access to good data. Nobody seems willing to credit Treasury modelling anymore, so with Rudd’s pre-Christmas stimulus package, we were treated to prediction by anecdote. And, all of a sudden, Gerry Norman, retailer Harvey Norman’s boss, was some sort of folk wisdom personified.
Apparently, he still is. In his column today, Peter Martin explains why deflation is a *bad thing*. He traces a scenario where consumer expectations of price discounting lead to the deferral of discretionary purchases, which then creates a vicious cycle.
Rather than keep cutting prices, retailer Gerry Harvey has begun shutting stores. Others will follow if deflation takes hold, and the resulting unemployment will make even the majority of us who keep our jobs still more wary about buying, pushing prices down further and pushing more of us out of work.
I was actually in one of Gerry’s emporia yesterday – because my dvd player died on the long weekend. (I don’t know whether a dvd player is a “non-essential purchase”, and maybe there’s more precision needed in defining exactly what that means.) I’m not flush with cash at the moment, but I did consider purchasing an all in one LCD tv, and had my eye on a Grundig with a 22c screen which had been knocked down to $749. But I decided to defer the said purchase, figuring such items would later come down in price, and my search for a cheapo dvd player actually took me to David Jones, of all places, where they were less expensive than at Harvey Norman.
So perhaps I am creating unemployment. Or something.
I’m actually highly sceptical about the value of using Harvey Norman’s supposed travails and competitive strategy as a parable for the economy as a whole, or even for consumer behaviour. How important are computers and tvs and gadgets as a component of the retail sector and of retail spending as a whole? How usual was it in the past for people to defer purchases of big things like tvs and computers on the assumption that the price would come down – because often it has? What contribution does discretionary spending actually make to the economy and how is it defined?
In thinking about the economy’s plight, it doesn’t seem to me that anecdote, possibly self-serving pronouncements by retailers and argument by theoretical prediction go all that far. I’m certainly not to be read as suggesting that we should wait endlessly for perfect data before acting, but it might be nice if we were a little less unquestioning of the data we think we have, and how it was derived.
It wasn’t or isn’t only the ABS. The Commissioner of Taxation told Senate Estimates in 2007 that the efficiency dividend might save $45 million from the ATO’s budget but could possibly lead to a loss of about $450 million in revenue. Save $45 million, lose $450 million. That is efficient.
I was in Harvey Norman’s and Domayne (owned by HN’s) Penrith NSW last Sunday and I’ve never seen it so quiet – there wouldn’t have been more than half-a-dozen customers in each. Normally you have to queue to get out or get to talk to a salesperson, and there’s always a large line leading to the offices where they sign you up for ‘interest-free’ credit. Despite paying cash for what I was buying the staff weren’t interested in the normal haggling.
Interesting thing is the rise in prices in many stores: I had my eye on a new guitar just before Christmas and it was $800, it’s now $1200. And I was told it was old stock but they needed to increase the price so new stock could be bought. Needless to say there is now way I buying it now.
Raising prices will ensure the demise of many retailers, I think.
I’ve always assumed Harvey Norman’s main profits are derived from financing…isn’t all the ’36 months interest free’ stuff the retail equivalent of sub-prime mortgages?
A dvd is an essential buy and often the cheapest models are the best, most durable and more likely to play burnt and ripped dvds. I’m still thinking about getting an LCD tv. They’re getting very cheap. Oops – I musn’t be left wing enough.
I know, Fine! We hate tvs. It detracts from communal singing of The Internationale and The Red Flag every night.
Well, not exactly, but everybody contributes in their own little way to a contagion of reluctance to buy big ticket items. It might start in odd ways (say, hearing about somebody getting knocked back on finance for something) or that odd effect of having a circle of friends, one of whom is referred to for technology related purchases who might be saying “Blu-ray is a dud” or “save your dough and buy a netbook instead of a big laptop”. All of us underestimate our effects on peers when they defer to us as an authority in something – they talk to their other friends and suddenly Harvey-Norman can’t get enough netbooks but is saddled with a lot of expensive and soon to be outdated laptops – the financial effects of which can snowball very rapidly.
And come to think of it, I have been telling everybody to buy netbooks if all they want to do is email and web surfing. I do tell people I think a $450 blu-ray player is an expensive white elephant when a $99 scaling DVD player looks so nice. It’s not irrational behaviour in uncertain times – it’s necessary.
In my house, we’re hanging on to the old family car for another year while we wait to see what happens, making do with the telly until it breaks, painting our own house rather than getting in a tradesman. It’s all anecdote, but that is how economic contractions start to add up, so perhaps Gerry Harvey as a leading indicator isn’t any less reliable than treasury estimates. It’s no worse than tracking job ads on the internet for example.
But I’m not sure about the premises here, David. I bought a netbook just before Christmas – because I had a need for one. I bought a big screen analogue tv about four years ago, because they were on the way out and were cheap. I may buy an LCD tv when I have the money, but I’d also be waiting for a further fall in price. It’s not necessarily a reluctance to spend – it’s spending according to criteria that have little relevance to the condition of the economy! Which you’re saying too, if I read the rest of your comment correctly. A lot of these decisions appear to me to be made on other grounds than some ethereal “consumer confidence”, and a presumption that everyone’s in Harvey Norman each pay day or throwing credit cards through their door.
I’d go back to the questions I asked about the composition of spending and employment on “big ticket items” etc. in the post.
I think I remarked before Christmas as to the “Harvey Norman Indicator”. As for anecdote, for Christmas my wife bought me (i.e. I bought me), a new DSLR camera. I actually asked the saleswoman in the camera store (I would describe it as a “major high street photographic retailer”) if business had slackened off and she said it hadn’t.
This year we are planning on a new car. The first car I’ve bought in over 20 years. And if my new job comes off next week, a brand new Macbook Pro to go with it, this old one is nearly 2 years and has scratches.
On the other hand I’ve been diligently hoping … “small recession small recession small recession” for the last 3 months. However I get the feeling we are in for a protracted downturn. Should I just be saving for unexpected unemployment?
Apropos of your buying your DVD at DJ’s instead of Harvey’s because it was cheaper… is it just me or has harvey been v uncompetitive over the last 12 months. Thinking back most of my electrical/computer purchases have been with the good guys, target, or retravision – even on an identical make and model.
Different pricing? Economic modelling? Just plain old hubris? Frankly Mr Harvey, I know there is a downturn but the need to close stores is not just the recession…
Yep, I’m with you, minxy. I often go there now just because they have a pretty good range – ie of netbooks – and you can do some quick visual comparison, before going off and buying what you want cheaper somewhere else. It should also be noted that you can increasingly buy stuff like computers on … the internet. As I was suggesting in the post, Gerry Harvey’s business model might be out of date, which might tell us bugger all about the economy.
to fine and mark, i think it was only plasma tv’s that are a problem. lcd’s and even crt’s are ok for lefties- just make sure you don’t watch the commercial channels.
Well, if Channel Ten would keep 90210 on a regular schedule, I’d watch it!
Mark wrote:
Maybe netbooks aren’t a good example – they seem to be a category all on their own competing with 2nd hand laptops (and yep, we bought one at christmas too, the $327 pricetag perfect for something that lives in the corner of the lounge for casual web surfing and kids games).
Maybe Harvey Norman’s whole strategy *is* wrong – although that’s where we bought our netbook because they were the cheapest. My experience has been that, for the last 30 years or so, technology *always* gets cheaper regardless of the economy. If Harvey Norman have been living off the cream of the finance deals done to sell over-priced TV’s rather than the ever shrinking margins on the TV itself, then it’s no wonder he has to shut stores when people stop borrowing or are unable to borrow. Maybe he’s a victim of a credit crunch rather than the economy, but where do you draw the line of difference?
…but, if he’s laying off workers, they have to go somewhere and presumably they’ll have less money to spend, and the snowball starts piling up. So it’s perhaps irrelevent whether Harvey-Norman’s business model has run it’s course.
Tyro Rex wrote:
Just out of interest, who here has saved for unexpected unemployment? Who has cash in the bank (or some other highly liquid assets) that could keep them going for months or years if required.
But it depends a lot on whether it’s just him, David, though the general point holds. If others in the sector – or in retail (and I’d point out again that electronics stores don’t exhaust employment or spending in retail) – are doing better and running their business better, it’s possible those workers will get jobs somewhere else.
Incidentally, the netbook I bought was cheaper at Myer than at Harvey Norman!
I have cash in the bank good for a few months.
I want at least a year’s worth though.
“I have cash in the bank good for a few months.”
Same here. I picked up the habit when working as a contractor for a few years. I could probably last a year if I resorted to selling my motorbikes. But, to be honest, I’d probably sell the house first.
are you talking about the Acer netbooks? I’m in the market for one of those, but I want the one that runs Linux out of the box? Sorry, it’s off topic, but did any of you buy that one? opinions?
Also speaking of such things…Apple…and the Air…ha! such a bad, bad call…they should have done a similar thing as the netbook, especially given the downturn. I reckon the Macbook Air will go on to be an emblem for excess, a full stop to market confidence. I never owned anything but a Mac, but the Acer with Linux it will be unless Apple unwrap a netbook in the next month or so.
On such matters, Acer are said to be moving to Linux on the netbooks becauswe the 50$ extra that Windows adds to the pricetag is crucial at that end of the market, but can be absorbed in the bigger ticket items. Price consciousness can encourage tangental thinking in some situations, so it aint all bad.
Tyro and darin: So you guys have a few months of cash saved and no debts? Or do you have hundreds of thousands in debts (mortgage, credit cards, car loan etc) and (say) tens of thousands in cash?
P.S. No obligation to answer. My guess is that the vast majority of Australians are underwater in a big way and totally unprepared for long-term unemployment.
I have about 4 months net salary in the bank and the only debts I have are the mortgage and about 8K per year in school fees. I’ve been caught before as a contractor, that’s why I have a buffer now.
furious balancing wrote:
(off topic reply)
The one we bought was the little Asus 7″ EEE PC job that runs Linux. Bad == tiny keyboard takes some getting used to, non-mainstream linux distro has also caused a couple of headaches with my favourite multimedia player (vlc). Good == pick it up, turn it on, 10 seconds later Google pops up. Very quick way to do your banking, do the email, check things at work, read the news. Very social way to internet (pass it around!) while the telly is on and you want to look something up or find a film review for example. Even better, as a little portable movie player it works a treat if you’ve got movies sitting on your network (arrrgh me hearties!).
Add a larger LCD and an external keyboard and it’s a desktop replacement from 2 years ago. They have limited storage, but we run network attached storage at my house so that doesn’t matter to me. With growing kids and the need, but not the space, for extra computer resources, I reckon it’s perfect. You will need a wireless router though, otherwise it’s a bit pointless (unless you’re neighbour is happy to, er, “share” their internet with you).
In short, if the economic blues are getting you down, you just got laid off from Hardly Normal, you could do worse than one of these gadgets and might even be able to use it to update your resume and cultivate L33T L1NUX SK177s! at the same time.
@carbonsink I have cash and no debt, save about under $2k on the credit card (I just bought an ACO 2009 concert subscription for 2, so I just added a big chunk to the credit card just then, which is why it’s up around $2k).
also, i’m not the only breadwinner in the house. DINKs.
Carbon, I agree with you, but that raises the question of when have australians not been in the position you describe? I would posit never.
FYI on the straw poll, I’ve got enough in the bank for over a year sans debts if I’m reasonably tight. Hope it doesn’t come to that, though.
Off topic on the Linux, don’t get the aspire w/ Linux, it’s hard to find and expensive. The eee 901/904 is a better deal – same price if you shop around, much better battery life (be sure to get one with an atom processor, not the athlon). Also, the distro is more polished, and it runs mainstream disties like Mandriva and the portable ubuntu easily also.
Mark
Harvey is definitely NOT a good parable for the economy as a whole. There is a wide variation in cyclicality across different sectors of the economy. The three most cyclical sectors – in order – are residential construction, machinery and equipment investment, and consumer durables. Harvey specialises in selling the latter – so it is hardly surprising that his business is being affected by the slowing of economic activity. During downturns, when current income is reduced and people feel anxious about the future, they tend to cut back on non-essential items. Take a TV – if your existing one works, you don’t have to get a new one now – you can defer the decision. That is especially the case if you were going to purchase the TV on credit and you would rather reduce your exposure to debt. The same process is in operation for motor vehicle purchases. If GFC is reducing the availability of credit – the above process will be accentuated. There is the possibility that consumption could drop more during the coming downturn than in previous downturns if Australians decide that their saving rates in recent years have been too low and predicated on too optimistic a view of their housing and financial wealth.
On the data – it is a disgrace that the government cut back ABS funding – ABS surveys as you point out, are our most comprehensive source of information about the state of the economy – as Possum has pointed out on his blog – reducing the sample size raises the noise to signal ratio.
I don’t doubt there is a lot of waste in the Australian public service. However, eliminating that waste requires identifying the precise source and eliminating it, rather than imposing generalised efficiency gains. Indeed, the absence of targeting often means that those that are spared the cuts, are those that are best at playing bureaucratic games.
David @ 21 and Patrick @ 25, thank you both for the info. Much appreciated.
Tyro & darin: Thanks for sharing.
Probably not, however savings rates have never been lower, debt levels have never been higher, and we’re entering what will be, at best, the worst global recession since WWII.
A rational response by an individual in this situation is to save, but its a disaster for the wider economy.
Carbon – a few points here:
It is not true that Australia’s saving rate has never been lower. The household saving rate is low, but has been trending up for the past few years (it is now positive after having been negative a few years ago). In that sense, household balance sheet repair has already begun. Corporate saving rates are definitely NOT at historic lows – things looked much worse going into the early 1990s recession. And public saving over the past few years have of course been very high.
When you talk about debt levels, you have to benchmark it against something – the level of debt is not a stationary variable. The debt-to-income and debt-to-assets ratios are at historic highs. However, the debt-servicing-burden – which is most important for households – will fall significantly over the next few years because mortgage interest rates are falling significantly. Whether or not an increasing proportin of housholds will have difficulty servicing there debts will depend on what happens to household disposable income and the unemployment rate. It is also worth pointing out though that most of Australia’s household debt is actually held by high income households, not low-income (lower skill) households that are at most risk of becoming unemployed. The RBA has done some interesting work using household microdatasets like HILDA and the HES that note the vulnerabilities. You should also check out the Financial Stability Review for some revealing graphs.
Finally, even if the current global downturn turns out to be the worst since the depression (which is not clear yet), that doesn’t mean that it will be Australia’s worst recession. Things are more complicated than that, as I’ve said elsewhere.
One final thing – the paradox of thrift is a key reason why some economists want stimulus packages tilted toward public spending. In simple terms, the worst effects of the household sector’s desire to increase its saving can be partially offset if the public sector runs down its saving rate. We will find out over the next 12 months whether the government will be successful in that strategy.
And unlike many other organisations its much harder for them to target the less productive people for redundancies (only voluntary redundancies). Efficiency dividends can have the effect of encouraging the good people who can find jobs elsewhere to leave making the situation worse.
I’m tired of our national broadcaster, the ABC, giving Gerry Harvey free advertising time on allegedly commercial free TV. The online version of his headline grabbing comments last week is here. It must be payola as his self-promotion is transparent. His analysis must have been based on the smallest amount of data and confined to his own franchises.
That ABC link should be: It’s like the stimulus package never happened: Harvey Norman Must be the heat wave.
I have just been told JB HiFi has put off its casuals (only really know about one store though). So maybe not just Harvey Norman.
Kevin Rennie, I agree, he tops my own personal Aussie Day list of the things the left should hate. I nearly choked on my organic-wood-oven-sourdough toast, with it’s perfect ratio of vegemite to biodynamic-unsalted butter, when I heard his voice bleating out from the ABC morning ‘news’. Just as well I had a latte on hand to wash it down with.
Kevin, yep, the Gerry Norman leading indicator phenomenon is certainly partly advertising for the bloke’s stores.
furious balancing, I bought an Asus EEPC – 1000 series so it’s got a decent sized keyboard and 160 gig hard drive. Running XP. Though if anyone wants to turn me onto the Linux cult, I’m open and receptive!
http://www.facebook.com/album.php?aid=81147&l=8ad14&id=680773131
Labor Outsider, thanks for those comments. It might be good if people who should know better stopped taking the Gerry Norman story as gospel. I’d still be interested if anyone could point me to specific figures about the size of the electronic stuff market as a % of consumer spending and those sort of stores as a % of retail employment.
If companies here are acting similar to those in the US, then there would be some quietly laying off people over a longer period of time to avoid big headlines. Many don’t want the bad publicity.
Harvey Norman stores are mainly franchises, aren’t they?
This would put Gerry at a remove from hirings and firings. Just what his part is in store closures of franchise operators, I am unsure.
Gerry Harvey wants to increase immigration. I am not sure why – I don’t believe a larger population will make Australia a better place to live and with increasing unemployment due to the economic downturn and the fashion of sending jobs offshore I am not sure how the new Australians will make their living. It has been argued that if Melbourne hadn’t doubled its population its water shortage wouldn’t be as severe.
Labor Outsider: Clearly I was talking about household debt because it followed a discussion about people’s personal balance sheet situation.
Sure the savings rate has bounced off the bottom, but we’ve hardly been prudent savers in recent years. Not much was saved during the boom times, and asset values have collapsed or are declining.
Debt-to-income is was what I had in mind, but if you want to talk about debt-to-assets, that’s getting worse, and fast. Debt servicing improves with very low interest rates, but I think all of us hope these very low interest rates won’t be necessary for long. God save us from deflation!
Regardless, the situation remains: Australia’s households enters this recession carrying historically high levels of debt, and little in the way of savings.
But, but … isn’t this a white-collar recession?
Mark, I can’t tell you the share of electronics – but I can tell you that the entire retail trade sector represents only just over 5% of industry gross value added!!
Carbon – Australia’s households will enter any recession with low savings out of current income. Most of Australia’s household savings however are locked up in superannuation and other financial assets and their homes. People forget that even with the recent falls in equity prices, the total value of Australian household assets is more than 5 times the total value of Australian household debt.
As for the distribution of employment losses – the headlines will talk about the employment losses in mining and financial services, but when the multipliers kick in, rising unemployment always has its greatest burden on the young and low-skilled.
Count me in the “net cash in the bank” crowd. If I keep buying toys at the usual rate I only have about a year in easy-access savings, but more like two assuming I can forgo $1000/mo or more in gadgets and expensive entertainment (you know, hear one song, buy the CD, while you’re there buy two or three that look interesting). If I stopped eating organic food and other expensive stuff… but if I was that poor I’d grow a lot more of my own… I dunno, call it 18 months.
One amusement for me is that (barring gadgets) I live quite cheaply, so a weeks after-tax income will keep me going for a month or so. Which does make negotiating pay rises interesting… there’s not a lot of incentive in a $20/week pay rise…
For the life of me I can’t understand why Gerry Harvey is the man of the moment on the economy. I’d be surprised if his commenting is for any purpose other than his own.
Harvey Norman is only partly a retailer – it is mainly a property owner and developer, [developing greenfield and brownfield sites to retail complexes] franchise owner and commision skimmer – skimming commisions from franchisees on sales, buying, rental, promotions etc.
As far as I remember they don’t do their own punter financing, it’s done by GM I think, although I’m guessing they get fees from the financers and possibly upfront fees off the punters. [I once thought I'd try the 3 years interest free deal on something - turns out there was/is a $300 upfront fee to get the interest free deal]
One of HN problems will be if the franchisees start going down the tubes the property values and rentals also go west. That is if HN closes down stores, because they own and lease stores (or floorspace)to franchisees then their income stream goes down but costs don’t alter much at all.
From memory he has to re-finance a lot of debt around mid 2009 and it is going to be tough, I’m guessing his media punditing is something to do with the re-financing or in impressing the shareholders when he announces a crap result – not sure.
Bought a TV at Harvey Normans. One month after the warranty expired it was buggered. So I certainly didn’t go back there for a replacement. And I haven’t forgptten his nasty comments about homeless people. I purposely will NEVER shop there because of those comments.
Gerry bloody Harvey leads the list of people Peter Martin asked for advice to the gov’t on a new stimulus package! (The rest are economists…)
http://petermartin.blogspot.com/2009/01/not-so-fast-with-stimulus.html
“And I haven’t forgptten his nasty comments about homeless people.”
Me neither. If I was a franchisee I would be quietly asking him to “shut the f*** up” because he is making business even more difficult. His latest fickle turn around effort on the targeted stimulus package was shot to pieces ,yesterday, by yet another report confirming it did the job well in stimulating sales in the pre-christmas period.
Mark @ 44,
And pretty nasty bloody advice from Gerry, too.
One thing that really annoys me about economists is that they’re often so busy seeing the big picture, they don’t reflect on the damage some of their science-fiction does to ordinary people.
LO @ 40:
Do you have a long term debt-to-assets chart for Australia? Is 5x good, bad, or indifferent?
Here is Steve Keen’s long term debt-to-GDP ratio chart. You tell me what those peaks correspond to.
Mark @ 44: RE: Peter Martin’s advice:
John Freebairn from Melbourne University talks a lot of sense…
The idea that you fix a debt bubble by spending borrowed money and inflating a new bubble with near-ZIRP seems, well, silly. But that is the prevailing wisdom at the moment.
We lived beyond our means for many years. Its time to pay the piper.
Kohler is spot on again: Nation building, not hand-outs
Classic. Kohler for PM.
“…and the money should not be wasted on tax cuts and cash hand-outs as the last $10 billion was.”
Al is correct to call for clever infrastructure spending. That is a no brainer. Trouble is, like all ABC commentators, he has taken to bagging completely the original stimulatory package just like Hardly Normal, as it happens.
It was just not the “waste” that he and the opposition would have all believe. Indeed, it has saved us from a very sharp economic downturn and helped a lot of people who had missed out completely during the boom time. Certainly the generlised English tax cuts failed to help them, while Australia held up quite well because of the targeting.
@ David Rubie – from what I have been reading there is an excess of 08 plated cars so dealers are doing good deals to get rid of them. Production will be slowed in 09 because of lack of demand, so 09 models will be more expensive. Presumably this will mean 2nd hand cars are more pricey as well. I have no ties to the car market or manufacturers, I just read the Drive section in the weekend SMH occassionally.
Is there clear evidence that the stimulus package helped the Australian economy? Are there stats on whether it was spent on things that would help the economy rather than saved or burnt on the pokies?
Saved or just delayed? I don’t think its done anything more than delay the downturn by a few months. The China shock is only now starting to affect Australia, and will have us in deep recession by the end of 09.
IMO, the worst of the initial stimulus package was the increased FHOG. All that achieved was to suck people into mortgages they couldn’t previously afford, on houses that will almost certainly fall in value over the next few years.
Thousands more in debt up to their eyeballs. Well done Kevin.
On the cutbacks in the critical ABS surveys, I have a theory about how that happened. Note it’s speculation – I wasn’t involved in the decision.
The public service sometimes plays cute games with governments by offering up three options on an issue, two of which are intended to be unacceptable. It usually works and the bureaucrats’ preferred option gets up. But every now and then, to the public servants’ horror, the government goes for one of the unacceptable ones through ignorance or contrariness.
I wonder what the ABS’ preferred option was.
Interesting theory DD.
Sounds like the Briar Patch Gambit turned on its head.
“Is there clear evidence that the stimulus package helped the Australian economy?”
Anon, I choose not to respond to your ‘they pissed it all up at the pokey’ stuff because it SO boring. You wanted some evidence of the package helping the economy….
http://money.ninemsn.com.au/article.aspx?id=733467
And Carbonsink I agree on the FHOG aspect of the package. Also that things will get worse. I just think that the targeted spending, on the whole, has kept things ticking over and bought some needed time. It was a brave jump and the critical bandwagon against it is generally partisan hotwind with no regard to any evidence.
FDB – O/T – replied to your question about firewire ports on FB.
Cheers Mark!
I have no time for Malcolm T now. He’s lost the plot. That said, I don’t see how “buying time” is a good way to spend the surplus. There’s little point in keeping people employed for a few more months — you either keep people employed for the duration of the downturn (with sensible infrastructure spending) or not at all.
Three months ago it was plausible this was going to be a short, mild recession, only affecting the US, UK and Europe. The China-will-pull-us-through view still had some credibility, so I reckon Rudd and Swannie thought they could get away with a quick one-off stimulus to get us through to a recovery in mid-09. Clearly that’s not going to happen now.
The really brave jump was the deposit guarantee. Turnbull and co like to bang on about the distortions its introduced into the financial system, but in mid-October anything was possible — runs on banks, total collapse of the financial system, anything — something had to be done to stabilise the system.
Mindy wrote:
I hear it anecdotally in town here – clearly the dealers are struggling a bit to rid themselves of vehicles. I’m still not buying though – like I said, I’ll get another year out of our low-k family falcon and another year of no car loan payments while her indoors isn’t working is a happy thing. So what if I have to burn a couple of weekends underneath the old bugger, it’s cheap motoring and it frees up dough for other things (like study material for her indoors and her teaching degree).
Plus, by next year the credit market might have recovered a bit and the interest rate might be cheaper. I wonder how many other people are doing the same thing? It ties in a bit with the Hardly Normal dilemma too – it perhaps isn’t so much a case that income isn’t available to service loans, it’s that people aren’t interested in the loans and/or the loans just aren’t available. GM Finance and Ford Credit have shut up shop to private buyers anyway. That will make a real mess (at least in the short term) of dealers trying to ditch new/old stock.
A longer term way of keeping people employed may be to cut the number of hours worked per week (and a proportionally reduce pay) or permanent employees, much like the car industry is doing with reduced production. Better that everyone goes to a 4 day week than cutting 20% of the workforce. And that way when the recession starts to ease you don’t have as many long term unemployed.
Carbon – as I have implied elsewhere, Keen’s chat is MEANINGLESS in determining the sustainable level of the debt-to income ratio because we effectively made the transition from an economy WITH credit rationing to an economy WITHOUT credit rationing. It may well be that the ratio will fall over the coming years, but it certainly will not be to the long-term average of that graph!
Tell me, why should the stock of debt outstanding fall to below the flow of disposable income in a particular year? There is simply no economic reason for it to occur.
Look at a similar graph of the assets/income ratio – it will show an almost identical pattern. Unless you think the total value of Australian assets (all financial assets!) will fall by 80% over the coming years, we will simply never return to the long-term average of that graph.
If you want to demonstrate the unsustainability of the present situtation, you have to do it in terms of fundamentals, and you have to demonstrate why the adjustment must occur in the short-term, rather than over a period of decades.
Also – look at that graph again – the shape of the two debt/asset bubbles in the 1890s and 1930s look completely different to this one. Those ran up over a few short years. In this case, the debt-to-income ratio has been running up for 5 decades!! There is a structural break in the series (financial deregulation) that renders the long-term average meaningless.
Carbon, again, there is a good reason why Kohler’s suggestion won’t happen and can’t work. There are simply not $40 billion worth of fully costed, well thought through infrastructure projects that can be brought online during the period in which the economy needs the stimulus. It is also completely unclear where Kohler got the $40 billion from. How is that calibrated (in conjunction with the likely change in interest rates) with the expected size of the Australian output gap? I have no idea why you have so much faith in Kohler as an economic analyst. Also, easing monetary policy does not act on the economy only through stimulating consumption – it has its largest impact on investment – residential construction, which we need more of, and business investment, which is also needed to ensure that the capital stock keeps growing.
Keynes As Public Works Skeptic
Have we successfully made that transition? The events of the past 6 months suggests we might not have, and we have in fact been living through a multi-decade credit bubble.
I don’t know who is right, you or Keen, but Keen is looking a hell of a lot more right than he did six months ago. Keen, as you know, has been banging on about unsustainable debt for years, and I dismissed his views for a long time, but he’s looking like a dead-set Nostradamus at the moment, and mainstream economics has egg all over its face.
It will if confidence cannot be restored to the banking system, and credit is hard to come by for an extended period.
Please supply this graph. I’m still waiting for the long term debt-to-assets chart as well.
A combination of falling asset (or stable) prices and rising incomes could bring the chart back to the long term average.
Why does it have to occur in the short term? The Japanese economy is still “adjusting” to the bubble economy of the 1980s.
Well there are two possible conclusions: 1. The structure of the economy has changed permanently. 2. We’re in for a very big adjustment that could last decades.
It seems to me much of this mess is the result of (almost universally accepted) assumptions that turned out to be incorrect:
1. House prices increase forever. When the financial engineers assessed the risk of mortgage-backed securities they looked back 50 years and saw that house prices had never fallen in any significant way, for any significant period. They therefore assumed the risk was near zero, and decades-old standards of risk management went out the window. If they’d looked back 100 years they would have seen huge falls in house prices during the depression.
2. Financial deregulation is unambiguously a good thing and credit rationing is a thing of the past. Surely this view has been seriously challenged in recent months?! We’re looking at a situation where a large proportion of banks in the US, UK and Europe are effectively insolvent, cannot function without support by central banks and governments, and should probably be nationalised. Lending has effectively ceased across most developed economies. That’s not a good outcome for 30 years of financial deregulation!
I’m not the only one who believes a few economic “truths” have been shaken in recent months. Here are John Quiggin’s “refuted economic doctrines”…
Refuted economic doctrines #1: The efficient markets hypothesis
Refuted economic doctrines #2: The case for privatisation
Refuted economic doctrines #3: The Great Moderation
Refuted economic doctrines #4: Individual retirement accounts
Number 4 and counting. Will “credit rationing is finished” be next?
For the record, I am very dubious of the need for more residential construction. I suspect the “rental crisis” and the “housing shortage” is at least partly housing industry spin.
It was debt-funded housing that got us into this mess. Trillions of dollars of debt were invested in residential housing, a lot of which has now vanished in the US, UK and some European countries. I just don’t buy the “it can’t happen here because we have a housing shortage” argument. Much the same argument was being run in the UK 12 months ago.
“I suspect the “rental crisis” and the “housing shortage” is at least partly housing industry spin.”
Ask some renters about it, particularly ones with young children. The rental market has been awful for tenants for years, at least in Bne.
d
Peter, on Keynes
Yes, large-scale public works can’t be rapidly organised, and the workforce can’t be pulled off them quickly. E.g. you start to build the Great Ocean Road, then could you stop it suddenly just before Pearl Bay…? or if you start building the Shrine of Remembrance could you leave it as an ungainly, abandoned worksite for 35 years….?
But small-scale community projects CAN be organised rapidly, and being usually done in smaller chunks, can flow or ebb as needed. Thinking of solar panel installation, local conservation/Landcare tasks, local school grounds & buildings renovation, improving public parks, bushfire preparations, drought-hardy plantings, reafforestation, riparian plantings etc etc Add your own local projects. Existing volunteers as a core of expertise. Oh, hang on, that sounds like “work for the dole” or conservation volunteers.
Rejected and despised?
The list of possible small-scale comminity & public works programs I posted earler was based on the naive view that public benefit should override other considerations. Empirical observations lead one to conclude that other factors are, however, stronger. Who could forget the famous RosKellyWhiteboardPrinzip of fundamental grants physics? Or the predominance of marginal and Coalition seats in the geographic distribution of another batch of Federal grants.
For my naivetee, je suis desloee – truly sorry. As another poster said, if I had a head, I’d hang it in shame.
You could also pay people to dig holes and pay others to fill them in again.
Sorry guys, but these worldwide stimulus proposals will just make the situation worse and leave a legacy debt to your children – if you have them – such that they will despise you for the rest of your life.
Maybe because so many on the left don’t have children they find this idea attractive?
Word!
Our children will despise us even more if we do bugger-all about climate change. Assuming they’re still alive. And the children whose parents are thrown out of work will probably despise us right away if we throw them into poverty. The whole philosophy of “I’m all right, Jack, bugger you” is what’s got us into this mess in the first place.
I think you’re on the wrong thread, Paul.
Oh, okay. Thought I was responding to the lagacy to our children thingo. Not to worry.
Oh, sorry, Paul, my mistake – there was a “legacy to our children” comment on another thread. Doing three things at once!
No wucking forries, mate.
Paul Burns,
would you mind giving a definition of “wucking”?
or am I, too, on the wrong thread?
The future of Australian English may hang by a thread…..
Carbon – it is hard to know where to start.
If the stock of debt were to fall to 50% of household disposable income, that would imply, at current interest rates, that the debt servicing ratio would fall to around 4%!! You cannot make claims about where the ratio to fall without making a sound argument for why you think Australians cannot service debt at more than 4% of their incomes, when they have been able to do so for decades! The argument that house prices and debt are too high says nothing about what their equilibrium level are, and simply appealing to long-term averages in a non-stationary series is a nonsense argument. As for Keen, he has been saying for over a decade that house prices were overvalued in Australia – he thought they were overvalued when they were half of their current level. So far, he has been wrong as many times as he has been right.
“It will if confidence cannot be restored to the banking system, and credit is hard to come by for an extended period.”
That is an argument for the stock to fall, or grow much more slowly,not its ratio to fall to below 100% of disposable income.
“Please supply this graph. I’m still waiting for the long term debt-to-assets chart as well.”
The RBA publishes these graphs in its SMP and other publications. Look it up. As far as I can tell, you haven’t read a single thing the RBA has published on this issue. Btw, the household leverage ratio – the ratio of total household debt to total houshold assets is around 20%.
“A combination of falling asset (or stable) prices and rising incomes could bring the chart back to the long term average.”
Keen has been predicting a depression generated by a rapid fall in Australian house prices and deleveraging, not RISING incomes in an environment of stable asset prices. If the latter were to occur, there would be no depression. So, which is it? A crash in house prices or a slow adjustment? I think the latter but none of the ratios will fall to the long-term average because of financial deregulation.
“1. House prices increase forever. When the financial engineers assessed the risk of mortgage-backed securities they looked back 50 years and saw that house prices had never fallen in any significant way, for any significant period. They therefore assumed the risk was near zero, and decades-old standards of risk management went out the window. If they’d looked back 100 years they would have seen huge falls in house prices during the depression.”
This misses the point. Of course there are housing cycles. Even in Australia, house prices fell in Sydney and Perth during the early 1990s recession. Investors misjudged the cycle, the risk of default on certain categories of mortgages, and how exposed institutions were to credit risk. Asset markets are prone to bubbles. There is no news in that. They are prone to bubbles for a number of reasons, not least of which is that investors pile into markets because the project future returns on the basis of recent past returns. However, saying that does NOT imply that Australian house prices must fall by 50-75%. To determine the long-run equilibrium you have to take into account the cost of financing a mortgage, taxes, land availability, expected income growth in a particular market, population growth, etc. All of these things can change over time.
“2. Financial deregulation is unambiguously a good thing and credit rationing is a thing of the past. Surely this view has been seriously challenged in recent months?! We’re looking at a situation where a large proportion of banks in the US, UK and Europe are effectively insolvent, cannot function without support by central banks and governments, and should probably be nationalised. Lending has effectively ceased across most developed economies. That’s not a good outcome for 30 years of financial deregulation”
Again, you are trying to throw the baby out with the bathwater. Financial regulators and supervisors have to find a balance between facilitating financial deepening and innovation, and regulation on the other to protect the stability of the financial system. I’m in complete agreement that in a subset of countries, regulatory failures allowed imbalances to develop that are having profound consequences. However, that does not mean that all financial deregulation is inappropriate!! Saying that credit was too freely available to sub-prime borrowers doesn’t mean that the financial system should make it difficult for all borrowers to get loans, and on unfavourable terms.
Btw, lending has not ceased across all developed economies. I have no idea where you are getting that information from. Again, you aren’t distinguishing flows from stocks. There is a great deal of new lending going on, just not as much as before, and in some cases, the new lending is not enough to offset normal debt repayments, and hence the stock is contracting in some cases. However, even in the US, the stock of household debt is still rising. As it is in Australia. A number of European countries are also seeing their debt stocks rise.
And again, the fact that lending has slowed NOW does not mean that the entire 30 year history of financial deregulation in Australia was for nothing. It is still the case that financial deregulation means that is much simpler for households to smooth their consumption follwing temporary income shocks than it used to be.
And finally, the idea that there has been no residential construction shortfall is just ludicrous. Population growth and household formation rates has been much more rapid than the growth in new dwellings. The obvious consequence has been rising rents. Tell me how exactly you disagree with this? Simply stating that you think it is spin is NOT an argument.
Things are simply much more complicated and nuanced than you are prepared to believe. The fact that financial regulation in some countries was insufficient does not mean that ALL financial deregulation is bad. The fact that debt grew more quickly than was sustainable in some countries does NOT imply that a depression is necessarily coming. The fact that investment in the existing dwelling stock was too great, does NOT mean that investment in new dwellings has been sufficient.
What if debt levels decline, not because borrowers are unable to service the debt, but because lenders refuse to lend?
My guess? A sharpish fall this year of 10-20%, followed by an extended period (several years) of single digit declines. I reckon we’ll grind out a long adjustment, much like the Japanese.
Clearly it wasn’t just investors that got it wrong, it was the financial institutions themselves that totally misjudged the risk of falling house prices. So much so, it threatens their very survival. If 100 year old institutions can misjudge house prices so badly, it seems conceivable to me that Australian bank economists, the RBA, assorted financial journos, and anonymous blog commenters at LP can get it totally wrong too.
No its not
Perhaps we are at the top of a debt mountain? Perhaps this is just a bump on a long upward trend? I don’t know.
I do know that many of the old “truths” of six months ago now need to be challenged and reassessed because mainstream economics did not see this coming. I’m looking for something (or someone) to explain what happened and what might happen in the next 12-24 months.
I find a lot of your answers unconvincing because they simply repeat the conventional wisdom of six months ago — financial deregulation is good, the banking system is sound, house prices cannot fall. All of those things proved to be completely wrong across most developed economies.
Carbon – you are misrepresenting my answers completely.
If Australian lenders stopped lending on the magnitude necessary for the debt to income ratio to fall to 50%, which is almost impossible because it would imply a long-term voluntary massive decline in their businesses. If that even remotely looked like happenning, the Australian government would nationalise the major banks in a heartbeat and continue lending at moderate rates. It WILL NOT HAPPEN.
The trajectory of Japanese debt and asset prices is nothing like what has occurred in Australia in recent years. It is a dumb analogy. Moreover, the Japanese perpetuated the crisis by not dealing with it for a number of years and allowing zombie banks to operate for quite a long time. They didn’t even begin their quantitative easing policy until the beginning of this decade. None of those things will happen in Australia.
By investors I was talking about both those that invested in sub-prime related assets, and the banks that are EFFECTIVE investors in those markets.
Your argument seems to be pretty much, some people got things wrong, therefore it is likely that Australia will experience the deepest, longest downturn in its history (what would be necessary to generate the changes in balance sheets you are talking about).
You have simply chosen to believe what you want to believe.
It is not true that nobody in mainstream economics had any idea a financial crisis could occur. The Bank for International Settlements has been writing for years about the imbalances in the global financial system. There is a considerable economics literature that discusses that financial crises are usually precipitated by asset and debt growth that is too rapid.
But the timing of the unwinding of bubbles is always uncertain, equilibrium asset values are hard to measure, and the fall out is impossible to forecast. Nobody can tell you how things will evolve over the next 2 years without an enormous degree of uncertainty. Governments all over the world are trying policies that have never been used before. Some people will be bullish. Others bearish. Indeed, in the depth of a recession commentary is usually pessimistic about eventual recovery. I’d rather be balanced.
As for your final sentence, here is qualifier:
Financial deregulation and innovation are usually beneficial, but robust systems of oversight are necessary to ensure system stability. Banking systems have proven to be unsound in some countries (US, Iceland, Ireland, UK) but sounder in others (Australia, most of continental Europe. Some countries have been better regulated than others. House prices can and often fall, but there will a great deal of variation in future house price developments acros cities and countries due to different demand and supply factors. There is no general tendency for debt to income or asset to income ratios to fall to long-term averages following permanent changes in the financial system and broader economy.
As I said on another thread – lets come back to this in another 12 months and see how our relative assessments are fairing. I say flat to slightly negative house prices for the next two or so years, steady rises thereafter. Recession in Australia is milder than both the early 1980s and early 1990s. Household credit grows very slowly for a couple of years but does not fall noticeably. The household saving rate picks up gradually. The unemployment rate peaks at 7% in 2011.
What Harvey’s doing is another form of positioning.
Gerry Harvey might not be a lobbyist but he knows a thing or two about marketing. The idea is to create a widespread assumption where what’s good for him is good for Australia and vice versa. Kerry Packer was a past master at this, and nobody with any clout in Australia’s media or politics called him on it (Keating might have done it once but he’d have gotten over it after Packer helped spike Hewson in ’93).
Now that Packer’s dead there’s a vacancy, and who else is there? Jamie doesn’t want to, Murdoch has bigger fish to fry and everyone else in that class of wealth is under the gun from analysts and regulators. It’s a hard trick to pull off without looking like a greedy bastard, and Harvey is getting away with it so far. Any politician who called Harvey’s bluff today would be set upon, particularly by that type of commentator with set ideas about ‘the punters’.
billie: higher population = more customers. Do I have to do this myself?
I loved the jingoistic ads he was running over the Australia Day long weekend, because what could be more Aussie Aussie Aussie than a Korean telly or a Chinese laptop?
It’s only a matter of time before public policy starts to skew in Harvey’s favour. For a bit of light relief, could we please have some committed party members assure us that their people would never roll over for someone like Gerry Harvey?
Labor Outsider: Funnily enough this first paragraph in one of the lead stories at Biz Spectator this morning…
Straight from the Steve Keen play book
No. My argument is that (essentially) everyone got this wrong, therefore it is entirely possible that Australia will experience the deepest, longest downturn in its history.
You argument appears to be THIS WILL NOT HAPPEN (which you keep tying in caps for some reason). Well, I’m sorry, I don’t believe you (even if you shout it) I don’t trust you. Mainstream economics got everything wrong over the past six months, so I’m going to listen to the mavericks and fringe economists this time.
True enough. I remember sending BIS bulletins to my financial adviser early last year asking “why can’t this happen?”. Naturally I was informed “it won’t”, and promptly lost a lot of money.
Your opinion is contradicted by ABS census facts.
ABS census data 2001 – 2006
Population increased 5.78%
Dwellings increased 8.17%
Occupied Dwelings increased 7.41%
Unoccupied Dwellings increased 15.67%
http://bubblepedia.net.au/tiki-index.php?page=HousingShortage