Zero Percent Interest Rate - Steve Keen

[tcocaro]

HAHHAAHAHAH ok now i am laughing. He is a "speculator". Oh please this gets more amusing to what end will you defend his position of a 40% drop and him not selling WITHIN AGENT GUIDANCE?

This post was the cherry on-top... Keen the specufestor

PS even GHPC is making fun of this fact and thats telling you something... seriously wake up and smell the roses at the very least on this point.

oh evand you really made me laugh on this one..

Mate, he is talking about a 40% fall over a long time frame. That he is allegedly holding out for a higher price RIGHT NOW is of no relevance.

Its not like he's saying property will 40% in the next month and i better take the best offer i can get.

In holding out for a better price he is no different to any other seller. No hypocrisy there that i can see.

 

[Max Carnage]

How is it "grossly" misrepresented? Keen said WORSE than the recession of 1990 - unemployment hit in 1993 i think from memory 10.9%?

So by "worse" he means greater than 10.9% and this was his "best case" so given Keens "worst case" is 20% then whats his own view? 18%?

His own words mate.. in black and white.

No, that's not "black and white". And it's most certainly not "his own words", it's your derivation. Keens first quote (his best case scenario) did not mention an unemployment figure, it related to changes in GDP only. GDP and employment are related but not by a strictly quantifiable correlation. And Keen's words most certainly were not a "20 per cent" "estimate of looming unemployment", as Henderson stated. So it is a gross misrepresentation. Both by yourself, and Henderson.

Why say "whats his own view? 18%?", rather than "what's his own view, 15%"? Why choose a figure nearer your misrepresentation than one half-way between the two figures you've derived? I would suggest to make it sound like it's similar enough to be insignificant. Am I on track?

 

[evand]

Can you explain why it makes you laugh?

If he wasnt selling at all he could be labelled a hypocrite.

But its getting to be a desperate debate when he's just holding out for a better price in the immediate time frame and he's labelled a hypocrite.

oh evand you really made me laugh on this one..

 

[tcocaro]

mate we are splitting hairs.. but when asked about unemployment he said best case worse than the previous recession i.e. 10.9% and worse case 20%.

*note "worse than"

which means he thinks the best case is about 12? 13? and his position is somewhere between that and 20?

pick a number... he doesn't give a consistent message so I agree who knows? but from "his words" its between at least 12 and 20... so 16%.

whatever it is... bit far fetched to say the least. Am I on track?

No, that's not "black and white". And it's most certainly not "his own words", it's your derivation. Keens first quote (his best case scenario) did not mention an unemployment figure, it related to changes in GDP only. GDP and employment are related but not by a strictly quantifiable correlation. And Keen's words most certainly were not a "20 per cent" "estimate of looming unemployment", as Henderson stated. So it is a gross misrepresentation. Both by yourself, and Henderson.

Why say "whats his own view? 18%?", rather than "what's his own view, 15%"? Why choose a figure nearer your misrepresentation than one half-way between the two figures you've derived? I would suggest to make it sound like it's similar enough to be insignificant. Am I on track?

 

[tcocaro]

because he had an OFFER TO BUY!!! and said NO!!!

seriously don't understand where your taking this. Its black and white.. he went to auction got an offer and said no because he thinks he can get higher.

full stop.

note "thinks he can get higher" sort of flies in the face of his picture of Armageddon and falling property values... or if he is to believed plummeting house prices.

Can you explain why it makes you laugh?

If he wasnt selling at all he could be labelled a hypocrite.

But its getting to be a desperate debate when he's just holding out for a better price in the immediate time frame and he's labelled a hypocrite.

 

[evand]

I disagree because it just means he wants a higher price in the short term. Nothing to do with property prices falling over the next 5-10 years.

Like i asked, what would you label him if he wasnt selling at all.

because he had an OFFER TO BUY!!! and said NO!!!

seriously don't understand where your taking this. Its black and white.. he went to auction got an offer and said no because he thinks he can get higher.

full stop.

note "thinks he can get higher" sort of flies in the face of his picture of Armageddon and falling property values... or if he is to believed plummeting house prices.

 

[Max Carnage]

whatever it is... bit far fetched to say the least.

Sure, it's far-fetched if you don't understand the dynamics of debt deflation. If you do understand the dynamics of debt deflation it falls well within the realm of possible. I would simply suggest that anybody who wishes to criticise Keen's perspective from an informed position should at least familiarise themselves with the broader implications of a debt-financed economy and its potential unwinding.

Remember it was not so very long ago that forecasts of 40%+ stockmarket falls were considered "far fetched", when suggestions that the global economy might meltdown in unprecedented fashion were considered "far fetched", when thoughts of major bank failures were considered "far fetched" and so on. As it turns out, these "far fetched" forecasts were on the money. And if people had bothered to look at the reasoning behind their forecasts, reasons that ranged from unprecedented debt growth to an immense financial engineering system that could spin low grade securities into AAA rated bonds that spawned trillions of dollars of additional engineered securities... for example.... if people had held back on their "far fetched" commentary at least until they understood the issues underlying the forecasts, then maybe they would have at least admitted that they were "unlikely but within the realm of possible outcomes".

I think it might pay to treat Keen in similar fashion. I disagree with much of what he says and think there are many people better placed to forecast house prices. But I understand (to the degree I can) his debt-deflation theme and believe he has a grasp of it that very few in the world do. With that in mind, I can expand my range of plausible scenarios to account for the possibility that he might just be right, while holding his views in the "low probability, high impact" range.

 

[Shadow]

Steve Keen's credibility is in tatters...

Max Carnage / Foundation / Pollyanna / Scary etc. is a major Keen fan. Why? Because Keen supports Max's view (and Edward Karan's view) that property prices will crash by 40%. Nobody ever explains how the 40% figure is derived - I guess it just sounds like a nice round number.

To quote Keen...

'Japan also had a bubble economy in the 1980s, and its house prices have since fallen 42% in real terms, and more in nominal terms since consumer prices have fallen over the 90s and 00s courtesy of Japan's long-running Depression. That's the reason I give a 40% figure for a price decline in the press'

Huh? Very well thought out analysis there Steve... it happened in Japan so it sounds about right for Australia too.

Keen has been largely discredited by his recent actions, his hysterical playing up to the media, and the fact the he refused good offers for his property (which he bought at the peak of the boom) even though he thinks prices will crash 40% below those offers!

Keen was supposed to participate in a recent on-line debate, along with Michael Yardney and others (see link below). His 'participation' in this case involved posting three of his usual rants, with no evidence to back up his views, and then he disappeared and has refused to respond to questions and counter arguments in the subsequent 169 posts! This includes several questions from myself.

http://ourfinanceblogs.com/forums/index.php?topic=18.0

And that is the major problem with Keen. He is never seen in a real debate. He never responds to the hard questions. He has been making these hardcore doom and gloom claims for a long time. His gloomy forecasts just never eventuate.

To quote the man himself (from the above linked 'debate')

(Steve Keen) I'm happy with Polyanna's reply to Michael on the veracity of that RBA study, so I'll content myself with another RBA chart that I think is rather more apposite--on the question of credit availability as well as what may happen to house prices.

That's the real information that's driving my analysis, and the argument that what's kept house prices rising faster than incomes for the last 40 years isn't an increase in discretionary spending courtesy of falling real commodity prices, but a debt-financed speculative bubble.

Once that bursts--and the rate of growth of debt to income turns negative--then we'll see a serious economic contraction, and asset prices will dance downwards to that tune. We are therefore likely to follow a more classical economic cycle than has America--an economic downturn followed by an asset market crunch, rather than vice versa as the USA has done.

And my response (which has still not been addressed by Steve after seven days...)

Hi Steve,

Regarding your Debt to GDP chart...

Credit growing faster than GDP is not necessarily a problem. GDP is income received each and every year, while credit is an expense that is only paid once. It makes more sense to either chart GDP against the interest on the debt, or to chart total debt against total assets.

GDP is not really comparable to total credit. If my income rises by $100 and my total debt rises by $110 then even at an interest rate of 10% pa, I'm still ahead by $89 (100 - (0.1 x 110)), even though my total debt has increased at a faster rate than my income. The same analogy applies to Australia's Credit vs GDP ratio.

Also, although the interest on the total credit must be paid every year, not all of this credit is owed to foreigners, so to some degree we are paying the interest to ourselves. From the perspective of the overall economy, debts are not just negative assets. They simply represent a pledge to transfer funds from one person to another at some future point in time. They are as much an asset to the lender as they are a liability to the borrower.

An important point about Australia's debt is that it's all private debt. Private individuals choose to borrow or not as they wish. It's their own personal debt, not the governments, not yours, not the average Australians. The people most able to handle this debt, are those people who took on the debt. The Australian government is free of debt.

In short, Australia's credit vs GDP ratio is not necessarily a problem.

And the RBA agrees...

http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html

Has the expansion of household credit run its course? Will it reverse?

We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course.

In the past, the lack of access to credit had resulted in Australian household sector finances being very conservative. Even as recently as the 1960s, the overall gearing of the household sector (taking account of all household debt and all household assets) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. This meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. Financial institutions recognised this and found ways to allow households to utilise this capacity.

The increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent (Graph 6)3. I don’t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels.

I agree with the RBA, that Australia's debt to GDP ratio can continue along the present trend for quite a bit longer. I accept that it can't go on like this 'forever'. But then again, the sun won't burn 'forever'.

Cheers,

Shadow.

Shadow.

 

[Max Carnage]

Max Carnage ... is a major Keen fan. Why? Because Keen supports Max's view (and Edward Karan's view) that property prices will crash by 40%. Nobody ever explains how the 40% figure is derived - I guess it just sounds like a nice round number.

Thank you for telling me:

• What I think
• Why

On both points you are wrong. This is why I refuse to discuss this with you. I won't even point out several major flaws in your preceding analysis. So you should feel free to continue to spam them as if the absence of criticism equals the correctness of your argument. It's not.

Should anybody else wish to point out your shortcomings, that is fine by me.

Anybody?

 

[Shadow]

Thank you for telling me:

• What I think
• Why

No worries! You've done this to me often enough on <the other forum> - so right back at ya MB!

I won't even point out several major flaws in your preceding analysis.

In that case, I will assume that they don't exist! (since Steve was unable to point them out either...)

Cheers,

Shadow.

 

[tcocaro]

so Keen thinks prices will rise in the short term? If thats his position then the label i would give him is idiot. - ps your pushing the limits of rationality in his defence and digging the hole deeper. Keep going.... what other reasons you can think of? - please say it out loud so you can realise how idiotic it sounds "Keen didnt sell because he thinks prices will rise in the SHORT TERM".

If he didn't sell then I would still label him idiot for buying only 3 years earlier (when he was ranting the same way as now about property prices falling).

Problem is i don't think he is an idiot despite what he says being idiotic... unfortunately he is driven by vanity which is worse than stupidity.

I disagree because it just means he wants a higher price in the short term. Nothing to do with property prices falling over the next 5-10 years.

Like i asked, what would you label him if he wasnt selling at all.

 

[evand]

No one said he thinks prices will rise in the short term. He just didn't accept the price he was offered at auction. Big deal.

Talk about twisting what people say.

so Keen thinks prices will rise in the short term? If thats his position then the label i would give him is idiot. -

 

[fatboy4]

Thank you for telling me:

• What I think
• Why

On both points you are wrong. This is why I refuse to discuss this with you. I won't even point out several major flaws in your preceding analysis. So you should feel free to continue to spam them as if the absence of criticism equals the correctness of your argument. It's not.

Should anybody else wish to point out your shortcomings, that is fine by me.

Anybody?

Max

If you can see major flaws in Shadow's analysis you should point them out- it will benefit the quality of the discussion and educate the forumites.

Otherwise it sounds a bit peevish.

 

[plusnq]

Hi

It might be better for all (both D&G and others) to be less emotional and more analytical in assessing the good Professor's actions.

We might use the expectancy equation to choose whether to take a choice. Lets assume 50% chance of him being right about 40% loss and 50% chance that he may get the upper end of the valuation.

So we have a 10% possible gain and a 40% possible loss if we are to follow his beliefs.

Expectancy = (0.5*50,000)-(0.5*200,000)
= 25,000-100,000
= -75,000 loss

So we have a negative expectancy on a 50% chance of a loss or a gain. So the next question is to assess the veracity of his beliefs by his actions. To assess this we would need to calculate the point at which his waiting for the additional 10% gain would be loss neutral?

So

(X*50,000)=(Y*200,000)
X=0.8 and Y=0.2

So the good professor must believe the chances of a 40% fall in the value of his property in the time it takes to sell is less than 20% and that he has an 80% chance of a 10% gain in the offered price.

Takes the emotion and supposition out of the argument when you can calculate what his actions may mean vs his rhetoric.

Cheers

Shane

 

[fatboy4]

Doesn't his post "at least brush on the economic theory that underlies Keen's expectations."

 

[Pushka]

He is selling his apartment before it drops in value by 40%. Isnt that whats he's doing?

But who would be stupid enough to buy a falling asset (according to him). Actually, I think we did a couple of years ago but that is another story, and the rules were changed on us.

Anyone else finding these Keen threads are doing their head in

 

[Max Carnage]

it will benefit the quality of the discussion and educate the forumites.

First: Can you spot it? The big one? Hint - Stocks and flows.

Second: When was the RBA piece written? Can you think of anything that might have happened since then that would directly impact the conclusion?

Third: Draw up a spreadsheet that compares the future earning capacity and therefore debt capacity of a 30 year old vs a 55 year old.

Fourth: How does the statement "Australia's debt to GDP ratio can continue along the present trend for quite a bit longer" look in light of the marked slowdown in debt accumulation this year? It has fallen to a rate that will not even sustain home prices at their current levels, let alone aid them in continuing the 8%pa (Shadow) or 10%pa (Yardney) expected growth trends...

 

[Shadow]

the 8%pa (Shadow) ... expected growth trends...

I expect average house price growth to generally be a few percent above the rate of inflation (as measured by CPI, but also influenced by monetary inflation) over the long term, with booms and busts along the way of course. I expect over the next few years we will see Sydney prices rising at a moderate pace, and performing better than most other cities. I expect prices to fall in Perth.

 

[AUSPROP...]

I expect over the next few years we will see Sydney prices rising at a moderate pace, and performing better than most other cities. I expect prices to fall in Perth.

why? Sydney has the highest median yet the weakest economy. the financial crisis will tear the heart out of the property market there as that is its biggest industry

 

[Shadow]

why? Sydney has the highest median yet the weakest economy. the financial crisis will tear the heart out of the property market there as that is its biggest industry

Because Sydney prices are currently 15% lower than their 2003 peak in real terms. Sydney prices have gone backwards for half a decade while the rest of Australia boomed.

Sydney has one of the tightest rental markets, and the biggest gap between supply and underlying demand due to the very high overseas immigration levels into Sydney and the record low construction activity.

The past trend for net interstate migration from NSW to other states is starting to reverse.

Net Interstate Migration

Sydney will be the next city to experience strong growth - beginning next year. Watch this space!

Cheers,

Shadow.