debt bubble Archives - the patient investor

August 17, 2014

The Joseph Cycle: 7 Fat years and 7 lean years

George Dorgan writes:

Since both the positive and the negative phases of a financial cycles take around seven years, financial cycles are sometimes called “Joseph cycle“, from the biblical prophet Joseph that speaks of seven good and seven bad years. The financial cycle connected to expectations about real estate prices, is also called credit cycle…..After the bust of dot com bubble in 2001, the Fed lowered interest rates. Credit was easily available and private debt strongly increased. Government debt remained relatively stable.

Only in few countries like Germany, Japan or Switzerland people were far more cautious, because they had seen a real estate bubble bust in the 1990s. The leveraging phase finally ended in 2011, in China and in some other emerging markets…..

We think that the reduction of debt will continue to be the main driver of global economies during the next Joseph cycle, in the next seven years. After the US lowered debt levels until 2011/2012 it is now time for Europe except Germany and Switzerland and Emerging Markets….

October 9, 2013

Household Debt to Income ratio

Barry Ritholz highlights the alarming debt to income ratio for Canada compared to the USA:
Household Debt to Income ratio

How does Australia compare?

Australian household debt to income is similar to Canada’s. There has been discussion recently about whether Australia is in a housing bubble. As Anna Schwartz (joint author of A Monetary History of the United States, 1867-1960 with Milton Friedman) pointed out: there is only one kind of bubble and that is a debt bubble. It may manifest through rising real estate, stock or other asset prices, but the underlying driver is the same: a rapid expansion of the money supply through easy credit.

December 6, 2011

Asset prices, financial and monetary stability

If financial imbalances can build up in an environment of low inflation it stands to reason that a monetary policy reaction function that does not respond to these imbalances when they occur can unwittingly accommodate an unsustainable and disruptive boom in the real economy. The result need not take the form of inflation, although latent inflationary pressures would normally exist. Rather, it would be a contraction in economic activity, possibly accompanied by outright deflation, amplified by widespread financial strains. Accordingly, one could argue that the more serious “bubble” was in the real economy itself.

In this scenario, the consequences of failing to act early enough can be serious. If the contraction in economic activity is deep enough and prices actually decline, they can cripple the effectiveness of monetary policy tools and undermine the credibility of institutions. The Japanese experience is very instructive here. Moreover, reaction functions that are seen to imply asymmetric responses, lowering rates or providing ample liquidity when problems materialise but not raising rates as imbalances build up, can be rather insidious in the longer run. They promote a form of moral hazard that can sow the seeds of instability and of costly fluctuations in the real economy.

This paradigm sees the financial imbalances as contributing to, but, more importantly, as signaling distortions in the real economy that will at some point have to be unwound. In other words, the behaviour of prices of goods and services is not a sufficient statistic for those distortions. This runs contrary to the standard macroeconomic models used nowadays.

Asset prices, financial and monetary stability: exploring the nexus
by Claudio Borio and Philip Lowe
July 2002

Colin Twiggs: ~ Extract from BIS Working Paper No.114, co-authored in 2002 by Dr Philip Lowe, who has been appointed as the new RBA deputy governor. Looks like a good choice.

November 27, 2011

Steve Keen on Hard Talk

Steve Keen on how we can safely deflate the debt bubble. There may be alternative, less radical measures that could be taken to help the de-leveraging process but his basic message is right: deleveraging could cause 10 years or more of pain if we do not take measures to address the problem.

October 17, 2011

The Platypus blues – macrobusiness.com.au

Ms Luci Ellis, RBA Head of the Financial Stability Department:

Indeed, credit booms are very often part of the story in the lead-up to a period of financial instability. We published that assessment in the March and September Reviews. In the wake of that, we have sometimes been asked: how fast is too fast? Do we have a target for credit growth? Or for the ratio of credit to GDP? Or, perhaps, for housing and other asset prices? I can tell you quite plainly that we do not have numerical targets for any of these things. A target for credit growth, or any of these other variables, is not analogous to the RBA’s inflation target……….The distinction is simply that price stability is about inflation. So it can be defined as keeping inflation at an acceptably low rate. Financial stability is harder to define, but in essence it is about avoiding episodes when the financial system significantly harms the real economy.

My interpretation of this series of statements is that a fundamental flaw is at the heart of the RBA’s view of financial stability management. The RBA has specific targets for inflation and that is the single price (including assets) stability tool but has no targets or model parameters to govern financial stability. A big mistake not just of policy but market knowledge

via The Platypus blues – macrobusiness.com.au | macrobusiness.com.au.

Alarm bells should ring if household debt starts growing at 8pc to 10pc a year.