Steve Keen predicts property bubble & rate risks


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Transcription of Finance News Network interview with Kingston University Head of Economics, Politics and History, Dr Steve Keen
Lelde Smits: Hello, I'm Lelde Smits for the Finance News Network and joining me from London’s Kingston University is Head of Economics, Politics and History, Dr Steve Keen. Steve, welcome back to Sydney and to FNN.
Steve Keen: Lovely to be here again.
Lelde Smits: 2014 has just wound up. What is your assessment of the global economy’s performance?
Steve Keen: Well it’s a classic Parson’s Egg. You know parts of it were excellent but the parts of it that were excellent were quite tiny, basically being America and England both going through a form of revival after the global financial crisis. So I think you can certainly say that those two Anglo-Saxon nations are out of the global financial crisis, whatever is going to come along will be a new experience, not a continuation of the old one.
But Europe is trapped in a total quagmire, and China’s growth which has been slowing down, of course it has to slow down because it simply can’t grow at that rate indefinitely, that slowdown is starting to worry people about what is going to be the engine of growth in the global economy. If I had to use one word to describe the economy, it’s fragile. And that’s where the egg analogy comes in as well, what’s going to crack the egg?
Lelde Smits: Looking closer at the US, QE [Quantitative Easing] is winding down and US Federal Reserve Chair Janet Yellen has signaled interest rates may rise in 2015. What’s your forecast for US interest rates this year?
Steve Keen: I think they’re going to continue seeing improvements in unemployment, which would give them a signal to put rates up. They’re going to continue seeing inflation go too low, it’s well below their target of 2 per cent now heading actually towards deflation, with that combination they are going to sit on their hands, they might at some stage tentatively put up rates to try to control what they might see as a potentially overheating economy, but I think in general the rates are going to be on hold.
Lelde Smits: Closer to home Australian interest rates remain at a record low of 2.5 per cent. When do you expect we will see the next move and what is it going to be?
Steve Keen: I can see them making a couple of cuts this year, and possibly more than that. The unemployment in Australia now is the worst it’s been in ten/fifteen years, and the only thing keeping it up is the housing bubble because that is pumping borrowed money into the economy, people are spending that money, and of course also foreign buyers pumping money and buying real estate.
Those are really the only two massive inflow sources into the economy. If the housing bubble pops then that inflow also stops and we therefore have a downturn driven by having finally a housing bubble bursting. So those dangers are there, you can see plenty of reasons for the cash flow spigot to be turned off, I can’t see many ways of turning it on anymore.
Lelde Smits: Now we are at 2.5 per cent, where do you see the RBA leaving interest rates by the end of this year?
Steve Keen: Certainly in the order of 2 per cent. I’d be surprised to see it below the 2 per cent, but I wouldn’t be amazed.
Lelde Smits: If interest rates fall this year, as you suggest they will, how do you think this will play out for the so-called ‘bubble’ in the property sector.
Steve Keen: It could keep it going, but what it means is we are more and more fragile on the bubble continuing indefinitely.
Lelde Smits: What kind of catalyst will we need to see in order for this property bubble to pop?
Steve Keen: Two things - partly, the economy itself slowing down so much that the negative returns in rental become excessive. Those people are having carrying costs and of course passing those carrying costs on to the Australian public through negative gearing, but they none the less have those carrying costs to handle.
And also, if there is anything going wrong in China. Things going wrong in China can go in both directions, we have a serious downturn in China, then it’s quite possible Chinese capital could respond by going offshore and do more buying overseas. So a slowdown in China, because it is a speculative slowdown, doesn’t have to mean a slowdown in demand for Australian real estate.
Lelde Smits: Finally Steve, could you paint us a picture of the global economy this year and where may investors be surprised?
Steve Keen: The one major surprise is potential surprises in the Euro. I’ve got to say, one thing Paul Prigham and I have in common, we both got the Euro wrong, for political reasons rather than economic. We’ve both been saying it’s always been an economic disaster. What’s been amazing is how strong Europe has committed itself to staying in that disaster because they see it as a form of European unity. I think it is a form of European fragility, it will cause the place to break apart at some stage, this may be the year that somebody breaks out from the Euro and that would be the biggest surprise in the global economy.
Lelde Smits: Steve Keen, thank you for your insights and outlook.
Steve Keen: You’re welcome.