In my previous post, Mea Cupla, I discussed my new economic framework built on Money Realism with influences of Behavioural Economics, Post-Keynesian economics, some Austrian Economics (malinvestments) and a few others. Now it is time to review ALL my past prediction and make forecasts on what lies ahead using my new economic framework.
Anyway let's go back and review my posts:
First we have "Downfall of the US Empire". In this post
I rebuke the debt incurred by the US in addition to "printing money"
and QE. The error made in this post was to only focus only on the liability side of
the US balance sheet and not the asset side. The US is the most productive and innovative economy in the world. Additionally, the US government has trillions of dollars worth of land and natural resource
assets. When this is considered, the debt can easily be repaid. On a more
technical note, the US government can avoid bankruptcy or default by monetising
its debt. Therefore the debt is not a problem and neither is QE. The main limitation on endless government borrowing is inflation not the debt itself.
The next economic article I wrote was one entitled "Asset Bubbles" in February 2010.
I recognised that asset bubbles are driven by irrationality, which aligns well with my current view of understanding behavioural biases when analysing the economy. I then write about property
bubbles and predict Sydney's property market will crash. While I still think
the Australian property market is prone to a correction. I no longer think a
crash is likely given the government imposed supply constraints and because the
RBA can still cut interest rates or even purchase RMBS to ease the supply of credit for mortgages. But what is the difference between a correction and a crash? I'm going to use the same loose definitions of both as they apply to the stock market. A correction is a decline of 10% and a crash is a rapid decline in a short period of time. Let's say a crash is 20% or more.
I then go on to identify China as a bubble, which I still think is true given the enormous expansion of credit used to fund unproductive investments. The main lesson to learn from this post is that when price deviates from its long-term average, it cannot be said that there is a bubble. There may be legitimate fundamental factors driving prices and as long as that does not change, prices will remain elevated. This is not true for China because even though they will be a powerhouse economy of the future, no economy is immune to a bust following a massive credit boom. You can read about my dire predictions on the Chinese economy here.
In July 2012, I wrote about why we want a stronger currency. Ultimately we should not want a strong or a weak currency but one that reflects the fundamentals. Now obviously that is as ambiguous as it comes in economics. But the main point is that a strong currency will hurt domestic exporters while consumers will benefit from cheaper imports. Conversely, a weak currency will boost exports but foreign imports will be expensive. Central banks are conflicted on this topic because a strong currency will reduce imported inflation while reducing employment in export industries and vice-versa with a weak currency. Trying to stimulate the economy by purposely weakening the currency is ineffective as Japan has recently found out (research from GS).
In August 2012, I wrote about how banks feed off inflation. This is probably the best example of my incorrect understanding of the monetary system. I explicitly reference the money multiplier when talking about fractional reserve banking. What's funny is that the conclusions about banks needing inflation to generate increasing profits are correct. If the money supply contracts because people are repaying loans, then the interest income banks receive decline, which will impact their profits. The main point is that we have a credit based monetary system that requires inflation or else the system implodes in a deflationary spiral. Hence why central banks are terrified by the prospect of deflation.
In June 2013 I wrote an article provocatively titled, "Apocalypse Now", in which I outline the main risks I see for the Australian economy. This article was light on theory so there's not much revision here except for my comments on Japan. Obviously QE is not inflationary for the general price level in the economy. It could be said that QE results in asset price inflation but that's not inflation in the traditional sense of the word. I still retain my bearish bias on the Chinese economy which you can read about here. I later mention the main risks to the global economy which is still 100% valid today:
This year we've seen the war in Ukraine and in Iraq with ISIS. Then there's the global health pandemic of 2014 - ebola. Thus far the markets seems to be shrugging off these risks. But it only takes a slight escalation in the spread of ebola for example, before the market rapidly reprices risk to the detriment of asset valuations. I still believe the following prediction made in June 2013 will eventuate:
The next post I want to look at is one entitled "Escape is Impossible" in December 2013. Back then I realised that QE from the Fed was largely ineffective, albeit for the wrong reasons. This is the post where I start getting more things right than wrong.
There you have it. A quick review of my past posts and what I missed or got right. It's difficult to believe that for years I had been operating under a flawed economic model, leading to erroneous conclusions. While I have updated my knowledge, most economists still don't understand the monetary system an in particular the concept of endogenous money. It will only be a matter of time before they change their views (I hope) because their predictions will be consistently wrong.
I then go on to identify China as a bubble, which I still think is true given the enormous expansion of credit used to fund unproductive investments. The main lesson to learn from this post is that when price deviates from its long-term average, it cannot be said that there is a bubble. There may be legitimate fundamental factors driving prices and as long as that does not change, prices will remain elevated. This is not true for China because even though they will be a powerhouse economy of the future, no economy is immune to a bust following a massive credit boom. You can read about my dire predictions on the Chinese economy here.
2012 Articles
The next post I wrote is in February 2012 on fiscal policy. I criticise government borrowing and cite a few reasons why. The primary claim I make is government borrowing crowds out private sector borrowing. This is only true when the economy is booming, bond yields are rising and inflation is a problem. More government borrowing in this scenario would put upward pressure on interest rates economy wide. My original claim was wrong in normal times but correct when inflation is high.In July 2012, I wrote about why we want a stronger currency. Ultimately we should not want a strong or a weak currency but one that reflects the fundamentals. Now obviously that is as ambiguous as it comes in economics. But the main point is that a strong currency will hurt domestic exporters while consumers will benefit from cheaper imports. Conversely, a weak currency will boost exports but foreign imports will be expensive. Central banks are conflicted on this topic because a strong currency will reduce imported inflation while reducing employment in export industries and vice-versa with a weak currency. Trying to stimulate the economy by purposely weakening the currency is ineffective as Japan has recently found out (research from GS).
In August 2012, I wrote about how banks feed off inflation. This is probably the best example of my incorrect understanding of the monetary system. I explicitly reference the money multiplier when talking about fractional reserve banking. What's funny is that the conclusions about banks needing inflation to generate increasing profits are correct. If the money supply contracts because people are repaying loans, then the interest income banks receive decline, which will impact their profits. The main point is that we have a credit based monetary system that requires inflation or else the system implodes in a deflationary spiral. Hence why central banks are terrified by the prospect of deflation.
2013 Articles
Moving along to March 2013 when I wrote an article gloomily entitled, "The Keynesian Endgame". But wait till you read the first sentence: "I absolutely despite the Keynesian school of economic thought." I can only shake my head at this ridiculous diatribe. Having actually read Keynes, he's not as bad as the Austrians portray him to be. While the vilification of Keynes was gratuitous, I still believe the crux of the article. The main message is - the current debt-laden world is unsustainable. I'll address this point in the months ahead.In June 2013 I wrote an article provocatively titled, "Apocalypse Now", in which I outline the main risks I see for the Australian economy. This article was light on theory so there's not much revision here except for my comments on Japan. Obviously QE is not inflationary for the general price level in the economy. It could be said that QE results in asset price inflation but that's not inflation in the traditional sense of the word. I still retain my bearish bias on the Chinese economy which you can read about here. I later mention the main risks to the global economy which is still 100% valid today:
"There are also known unknowns (as Donald Rumsfeld likes to say), which include terrorism, global health pandemic (watch the movie Contagion), natural disasters, wars, government policies (QE, protectionist trade and capital policies)."
This year we've seen the war in Ukraine and in Iraq with ISIS. Then there's the global health pandemic of 2014 - ebola. Thus far the markets seems to be shrugging off these risks. But it only takes a slight escalation in the spread of ebola for example, before the market rapidly reprices risk to the detriment of asset valuations. I still believe the following prediction made in June 2013 will eventuate:
"My predictions: base case rates go lower in Australia to 2% and in combination with the lower AUD (70c-80c) causes the economy to re-leverage. Worst case scenario is an implosion in Asia due to any of the factors mentioned above, will cause rates to go to zero in Australia and the AUD to go sub 50c as commodity prices collapse and the high unemployment prevents credit growth from occurring. It’s difficult to see any bullish scenario simply because “we’ve been there and done that” for a few years now."
The next post I want to look at is one entitled "Escape is Impossible" in December 2013. Back then I realised that QE from the Fed was largely ineffective, albeit for the wrong reasons. This is the post where I start getting more things right than wrong.
There you have it. A quick review of my past posts and what I missed or got right. It's difficult to believe that for years I had been operating under a flawed economic model, leading to erroneous conclusions. While I have updated my knowledge, most economists still don't understand the monetary system an in particular the concept of endogenous money. It will only be a matter of time before they change their views (I hope) because their predictions will be consistently wrong.
Updated Predictions and Forecasts
As promised, here is a summary of my updated forecasts and theories:- US does not have a debt crisis due to enormous asset side of balance sheet
- Australian property market likely to fall at least 10% as economy enters recession by 2016 (same as before)
- China will crash by 2016 (same as before)
- Government borrowing does not reduce business borrowing (most of the time)
- Engineering a weaker currency through monetary policy is not a path to sustainable economic growth
- Keynesian policies such as deficit expanding tax cuts or infrastructure investments are beneficial during a recession
- The reason why high inflation won't occur is because credit growth is demand driven (as MR states) and as we've seen over the years in the US, Europe and Japan, lower interest rates have not engendered credit growth
- Basically more debt in the system results in less growth because interest must be paid from income (Post-Keynesian theory of financialisation of the economy), which means less disposable income
- Deflation is occurring across the world but could be one or a combination of many reasons including: the accumulation of private sector debt, demographic trends, globalisation or income/wealth inequality (Post-Keynesian reason)
No comments:
Post a Comment