Financial chickens are flocking home to roost Steve Keen "The Age" September 28, 2008
"BUSINESS as usual" is over. What we have taken as normal times - the ups and downs of Western economies since the 1960s, and the "financial engineering" of the past two decades - have been underwritten by the greatest debt bubble in human history. The meltdown on global financial markets is merely a reflection of the fact that, one day, this bubble had to end. In 1945, the US economy had a private (business and household) debt-to- GDP ratio of 38%. It is now 283%. Australia took longer to get into the borrowing habit: our ratio was roughly constant at 25% from 1945 until 1964. But since 1964, it has increased almost sevenfold, and as Australia congratulated itself on the long boom from 1994, the debt ratio more than doubled to its current 165%. The rest of the OECD - bar France - was also caught up in this debt folly, with the result that the global economy is now carrying roughly twice the level of debt that precipitated the Great Depression in 1930. This is why once-lauded Wall Street firms such as Lehman Brothers have collapsed. Their fundamental business model was to buy assets with borrowed money then sell them for a profit. But that model only works while asset prices rise, and they rise only because others are willing to borrow even more money to buy them. If asset prices falter and fall, the model fails and whoever is holding the assets loses money. The collapse of AIG raised a spectre that even the Great Depression didn't have - the collapse of the derivatives market, something Warren Buffett once described as "financial weapons of mass destruction". These are highly leveraged bets between financial players on movements in economic variables such as interest rates, commodity prices, and so on. The sheer volume of these is both unknown and staggering - anywhere from $US60 trillion to $US180 trillion ($A72 trillion to $A216 trillion) - and they were only invented in the past 20 years. So will what is acknowledged as the worst financial crisis since the Great Depression be followed by an equally traumatic economic downturn? Many a pet shop galah can be heard parroting that "the fundamentals are sound". But other animals admit that, once debt is regarded as a "fundamental", the prognosis is not good. The one fundamental that is truly in our favour is our low level of government debt - effectively zero, versus 53% of GDP for America. That gives our Government some ammunition to run deficits that will to some extent help the private sector repair its balance sheets. But ultimately, it won't be enough. So much unnecessary debt was accumulated in pointless speculation that the only way to get rid of it is to write it off - to declare debt moratoriums. Households may have been naive to take the debt on, but the financial sector was culpable in extending it. Ultimately, it must pay for this folly. Steve Keen is associate professor at the school of economics & finance, University of Western Sydney. James Kirby returns next week. --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
