Thanks ...your occasional articles and newsletters are very useful. I don't believe that the 'd' word / problem was discussed once in last night's debate. Do I get that right? If so, what do you make of that? I think also it is important to develop proposals for a re-managing of the finance system. What might they be? To what extent should / can it be based on the concept of social solidarity?

I loved the comment on ABC Radio National's AM programme today on inflation figures - food prices and energy are going up but inflation is low because import costs are coming down - i.e. I don't need to worry so much about my ability to buy food because that essential wide-screen TV just got cheaper! Anyway, food and energy are not part of the "core inflation" figures in any case - because who needs food and energy?

Recent predictions have been for a tripling of food prices within 5 years. If Australian's are so debt-laden that a 0.25% increase in the interest rate makes them scream then what will happen as food budgets triple (and oil is on a trajectory to pass US$100/barrel soon)? There is an economic bloodbath coming! There will be hunger and homelessness in the mortgage belt - but Howard insists we must be optimistic about this country or we do not deserve to lead it!

The article does not draw attention to one of the principal causes of the problem, the lack of adequate control over the volume of the money supply. The USA has been creating money at a furious rate largely to pay for their imports of oil to fuel their SUVs and to fund their Iraq activities. They have been doing this since early in the Vietnam War. Our banks have been borrowing these dollars to fund speculation in the investment housing market in competition with those young people really needing a home. All of this is attributable to John Howard and his Campbell Report, eventually put into effect by economic illiterates with Howard's support. In the early seventies the Financial Review ran a series of articles by Neil McInnes, "What do we do with these worthless American Dollars?" What we did was put off the evil day. Putting those days off only makes the final reckoning worse. Any industry which needs a licence to operate and a lender of last resort to bail it out of its mistakes must be closely regulated. On this basis Campbell and Howard were wrong.
As for never having it so good; We are exporting assets such as coal, natural gas, Uranium and other minerals to pay for current consumption. We should only sell assets in exchange for assets such as infrastructure assets either here or overseas but now owned by foreigners such as the Singaporean Government.

Dear Foyle / Michael,
This is an important discussion that needs to be further developed. Foyle's comment suggests that one proposal for fixing the mess lies in a role for government in controlling the volume of money transfers. I agree with that but, does this also mean controlling the type of money flows also. Can this be laid out in a bit more detail? How would it fit into a broader program of democratic, change based on principles of social solidarity?
Don

Surely the key problem is that we are living far beyond our means. I am afraid I have always acted as an economic terrorist by believing that the only necessities in life are bread, water and something to keep off the rain, and that everything else is a luxury. As a result I have been spending as little as possible, only borrowing to buy assets, and always looking out for bargains. As a result, although I only have a moderate income, I have more money than I can spend. It seems to me that the thirty-five years since Gough Whitlam have been spent on profligacy by both government and public, with the reckoning being endlessly postponed. Believing as I do that borrowing is always a sign of moral failure, and that the inevitable reckoning only serves as just retribution for stupidity, I have also noted that the Americans leave us for dead in the profligacy stakes.

The coming reckoning, when our foreign debt is called in, (as has happened twice before), which could be associated with the Americans having theirs called in, means that we will have an eventful decade.

What is needed NOW is a substantial INCREASE in interest rates.

Howard has left us with a real time bomb and when it detonates he will probably have retired. The voters will blame the unfortunate government in power at the time,( probably Labor).

Well said Pierdsus and Mac. I couldn't agree more and I'm reminded of what Charles Dickens said In David Copperfield.........
"I remember to take the warning by his fate and to observe that if a man had twenty pounds a year for his income and spent nineteen pounds nineteen shillings and sixpence, he would be happy, but if he spent twenty pounds and sixpence, he would be miserable"

Have things changed so much ?

Firstly, the Great Depression was in the 1890's when the banks shut their doors and grabbed the holdings of all the small depositers. Some of the bigger depositers were given priviledged considerations allowing them to withdraw their money. When the depression emerged after the 1929 stock market crash this was called again 'The Great Depression.' The factors that caused the crash were never resolved right through the 1930's eventually spiralling downwards into World War2. A war fought out by the great powers over different markets, resources and spheres of influence.
The building and farm equipment manufacturer Caterpillar said recently that the US economy was “near to, or even in, recession.” Another finance guru explained "the financial crisis that erupted in July and August has by no means run its course" “We still do not know precisely how the losses from the US subprime mortgage market will be distributed nor whether credit conditions will tighten further as expectations of losses affect bank behaviour.” There may be a ripple or wave felt widely and diversely through all the other money markets. How does that pan out? No one is sure but there will be casualties.

"Howard has left us with a real time bomb and when it detonates he will probably have retired. The voters will blame the unfortunate government in power at the time,( probably Labor)."
Both Labor and Liberal have been looking after the oil/petrol conglomerates, the financiers and bankers, the tyrants that run the mass media etc., Let us not pretend again these right wing scoundrels have different monetary policies or for that matter planning. These politicians bring on or hasten on an economic collapse. They are very responsible.
Let us not forget either the filthy role the Labor Party played in the Great Depression in the 1890's and in the 1930's dumping the economic crisis on the backs of the workers, as well as, encouraging the banks to grab workers and their families meager savings. They earnt the name 'the great Labor rats' for their despicable treachery.

DonaldS,

I think the "d" word is forbidden because neither side wants to frighten the punters with the truth, who knows which way they might jump.

Snake,johncee,

I agree, we're dealing with a generation that has no experience of a Depression, or has any incentive to save, or reads economic history. Could you imagine earlier Australian governments allowing the population to get so far into debt financing consumption, we're all at the disastrous end of a failed neo- liberal experiment.

Costello is a tricky dicky man without the compassion we need for leadership in Australia. I just can't believe him. I am disappointed in him.

Today we are told by Costello that it is not his job to tell Rudd IF(?) he(Rudd) has a part of the 2013 budget wrong.

Given Costello himself reakons there is a mistake somewhere in his own budget that he found only yesterday, I find that his dialogue on such a serious issue childish.

NEWS FOR YOU MR COSTELLO.

You reduce Australia's economic wellbeing to a two-party domestic spat. Your ego and want for power is obstructing the National cause.

Mr Costello, given you are among the many who are paid $180.000 plus from the TAX_PAYER, you have a "RESPONSIBLITY" to ALL Australians.

Your job is not to carry on as though this is a spar with a fellow opposition. It is to contribute your best in a viable way that gives US the electors the opportunity to see the debate and help the process (where possible) to get a) the government we need and b) the best budget possible given we electors cant have our cake and eat it. Meaning....

.... with so much talent in Australia it is a crying shame that our knowledge base and talent has to be dissected to one or the other rather than the best of both. (It is disgusting!).

Quit the FEAR CAMPAIGN. STICK TO THE ISSUES. ENHANCE OUR KNOWLEDGE ABOUT THE ECONOMIC BUDGET AS YOU SEE IT and put Australia's interests First.

This comment ('it's not my job...') reminds me of the Abbort comment on Health a few weeks ago that said he (Abbort) won't do anything about HEALTH for the STATES until AFTER THE ELECTION.

I say get a grip... it is this sort of dialogue that is putting this nation at risk.

http://www.miacat.com
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The Australian Housing Market - 1996-2003

Prices of houses throughout Australia doubled in the seven years from 1996 to 2003 even though it was a period of low inflation. That is the valuation put on houses in this period went up at compound rate of 10% compared to general inflation of 2 to 3%. This appeared to be caused mainly because lenders wanted to lend people money to purchase houses more than lack of supply. Why did lenders wish to lend money to people to buy houses? One reason was because the money that people lent was not tied to the underlying value of the houses for which the money was lent. That is, the lenders were able to generate loans that were repaid - not with houses but with other assets and most notable future income of borrowers. That is, lenders were able to realise the profits from the unjustified rise in house prices for no risk.

If the above is true then we need a mechanism to attach the money for houses to the house asset class and stop the speculative profits leaving to some other asset class.

One way to do this would be to require that anyone who sold a house to use the money to either build a new house or to buy another house. This would tie all house assets money to the house asset class and would not permit the taking of speculative profits to some other area of the economy. It would stop house speculation in its tracks. It would make no difference to genuine buyers and sellers of houses for accommodation and rent but would stop speculators take their profits out of the housing market and would lead to much new construction. The policy could be reviewed once the bubble had been pricked.

It would be simple to implement and could be trialled on some limited sales (eg houses built on low cost commonwealth land)

It seems to me you guys are going about it the hard way!
Prevent negative gearing surely is the answer? A man on tele owns 100 houses!! Why because he can borrow on inflated assets.

Denying first home buyers an entrance to the market and inflating prices.

Australians are poor capitalists, relying mostly on what we dig from the ground, understanding only tangible assets, having poor understanding of banking are just some of the problems.
We need to invest more in Australian inventions and ideas, and rely less on capital gains, underpinned by easy borrowing and short term gain. Ask any developer of idea's in Australia ie. alternative power which is now being developed in USA or Germany. The funds were not available in Australia, money was going to housing, gambling and motor cars.
Am I wrong in asserting the O/S debt is private debt not govt debt?
my 2 cents fluff

"Recent predictions have been for a tripling of food prices within 5 years"

Somehow I doubt those predictions. Remember the cost of food itself
is still dirt cheap. Its the cost of value adding that is the problem.

The wheat in a loaf of bread is worth around 28c. Milk around 40c
a litre. Mutton around 1$ a kg, lamb 3$ a kg. The oats in muesli,
again a few cents.

So even if these products doubled in price, their impact on actual
food prices should be minimal, unless of course manufacturers use
the opportunity to massively increase their profits, as they
are known to do.

I remember a radio broadcast, where the milk company stated that
they were putting up milk 5c a litre, to help the"poor farmers"
It turned out in the end, that farmers were paid 0.5c a litre more,
the other 4.5c was going to the manufacturer, a multi national co.

I think it is spot on to refer to the historical development of the debt and money market problem, inlcuding especially the link to the Campbell Report and Howard's role in that as a former Treasurer under Fraser's prime ministerhip. Both were the vehicle back then to establish a trajectory of policy that rejected Keynes style economic managment for neo liberalism. Keating and Costello both have rolled on the bandwagon but let's remember that the private sector banks (foreign and Australian) were driving it along constantly.
In some comments there is a tendency to locate the problem in individual behaviour and this of course pushes towards individual solutions or government policy that is basically opunitive against individuals who make 'wrong' borrowing decisions. There are many problems with this - the most fundamental being that it does not deal with the cause of the problem.
Other comments imply that the problem is 'endemic' to the economic sustem. I think this is the correct approach and that means that solutions must challenge the logic of that system, inlcuding the private ownership of the flow of capital and undemocratic decisionmaking about capital flows and monetary policy.
The housing dimension of the problem is just that - one dimension of a bigger problem.
Stephen, you have not made comment. You should.

Coming in ridiculously late here. I’d only just spotted this article and I’m sorry to see it slide down the chronological list and into obscurity because Steve Keen is the only economist (with a media profile) that is actually worth listening to. Saul Eslake from the ANZ & a couple of others occasionally hit the truth & relevance target but Prof. Keen has identified THE crucial issue and specialised in it.

It's a shame that there’s only one of him because there is a new fad among the lunar right for pushing the idea that foreign & household debt is OK (because it funds “productive” investment) They don’t tell you that most of it has been sunk into a completely non-productive, speculative boom in the price established homes.

For an example of the “debt is good” theory on this website see “A perfect political storm may sink Coalition” (6/11/07).

Having seen the speech by RBA Dep.Gov. Ric Battelino before reading this article I noticed a couple of significant things that weren’t mentioned here.

I am not sure that Battelino is quite as unconcerned as the author thinks he is. Its just that he communicates in the uniquely reticent language of the central banker. On the one hand he says that the rise in household debt “has been overwhelmingly driven by those households that had the greatest capacity to service it” & on the other hand he concludes by saying that: “the household sector is running a highly mismatched balance sheet, with assets consisting mainly of property and equities, and liabilities comprised by debt” and that “it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise”.

Those “shocks” have already occurred in Western Sydney (and elsewhere) where the American pattern of falling property prices, negative equity, and home repossessions has taken hold. Interest rates needless to say, are heading north. The RBA (ever reluctant to raise alarm) leaves the astute and willing observer to draw their own conclusion.

To be continued…