Steve Keen predicts massive China crash

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Transcription of Finance News Network interview with Kingston University London, Head, School of Economics, Politics & History, Professor Steve Keen

  
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Kingston University London is Professor Steve Keen. Steve, welcome back to Sydney and to FNN.
 
Steve Keen: Good to be here again. 
 
Lelde Smits: When we last spoke in January you said that there were some cracks in the global economy. How have these cracks fared since and where do you think they may be the deepest?
 
Steve Keen: Well the deepest is obviously China because China has been involved in the biggest private credit bubble I think in history. And, when it stops growing then you are going to have a downturn in China which will be quite severe. 
 
But globally, the prediction I made was based on the fact that we have too much private debt. You would never get a level of credit driven demand like we had prior to the crisis we had again. And, therefore all the expectations of growth around the world are going to be disappointed. 
 
Lelde Smits: You have said China but obviously the spotlight has been on Greece recently as well – You are in London – Do you think that the events in Greece have been better or worse than you were expecting?
 
Steve Keen: Worse. Largely I believe, and I think Yanis [Varoufakis] believed it as well, that with a political mandate there was a chance to go and change the program and move away from austerity. Instead, in some ways the European Union took the fact that they voted against austerity as an affront and basically said, “Well if you didn’t like it have some more.” And, they’ve actually made it more extreme and more draconian and more disastrous in the long term than I expected would happen. 
 
Lelde Smits: In the meantime these events seem to continue to escalate. What are you going to be watching out for now as the next major development. 
 
Steve Keen: Well, when they start imposing the austerity program it will mean that businesses collapse, because they are going to go from a VAT rate of about 13 per cent to 23 per cent. They are going to be taxing the one area which was a growth area which was tourism – That is going to cause tourists to go to other countries because they haven’t got any option to drop prices, it’ll be putting it on top of current prices. 
 
Lelde Smits: If we can speak about another key central figure in this debt drama, it was Yanis Varoufakis, your friend, also who is now the ex-Finance Minister of Greece. How would you rate his performance recently?
 
Steve Keen: As an economic, brilliant. As a politician, he didn’t realise the brutality at which politics is played at that level. Particularly when it is played by unelected officials inside the European Union. He went in with the expectation I would have gone in with myself, with the fairly naive belief that with a political mandate behind me to some degree I could change the program. 
 
He has found that political mandate actually basically annoyed them. And, they’ve actually gone even more hardball. And, so, the situation I think is disastrous. But, it is truly the fault of the European Union, and in particular, the Finance Minister of Germany, [Wolfgang] Schäuble, if I pronounce his name properly. He is the real villain in this piece. He is the one who has made this disastrous. And, if we look back at history he will be the one who will be blamed for the breakdown of Europe. 
 
Lelde Smits: So Steve, moving on to the US now. When we spoke in January earlier this year you said that rates look likely to stay on hold. Many are tipping we could see a hike as soon as September: What is your rate outlook currently?
 
Steve Keen: I think it is quite likely they are going to put rates up, because they don’t understand how the economy functions. If you read [US Federal Reserve Chair, Janet] Yellen’s most recent academic style paper the world equilibrium turned up about 20 times in this little document. The only words that were more frequent were ‘the, of, a and if’. It is ridiculous how much they believe the economy is an equilibrium system. 
 
Lelde Smits: So when do you think we will see those rates go up?
 
Steve Keen: Oh quite possible September is a reasonable target. 
 
Lelde Smits: And what will be the likely outcome?
 
Steve Keen: Drastically more impact on the economy that they expect because what it will do is potentially trigger the private sector back into deleveraging again. The reason that the private sector has been recovering is because the private sector is borrowing money once more. And, that borrowing money is stimulating demand and income inside America. 
 
If the interest rate rise is enough to push people over the edge with their financing costs they will start paying their debt down. That reduces the money in the economy, it reduces demand, and it will cause the economy to go back down again. So basically they are replicating the same disastrous process that Japan has been through for the last quarter century. 
 
Lelde Smits: If we can look at Australia’s interest rate environment now. You correctly predicted we would go from 2.25 per cent to now a key cash rate of 2 per cent. Where do you think the Reserve Bank of Australia (RBA) will move next?
 
Steve Keen: The only thing they can do is cut rates. And, the trouble is that when they cut rates they continue to inflate the property bubble that’s here as well. And, driving down the dollar, which they drove up by putting rates up wrongly as they did in the last five or six years. 
 
So, I think they are going to be pushed down. And hopefully, finally, now that [RBA Governor] Glenn Stevens has finally used the correct word to describe the Australian property market, which is ‘crazy’, then maybe they might try to bring in some prudential controls as well.  
 
Lelde Smits: And again, this year? Do you think we are likely to see that rate cut occur this year in Australia?
 
Steve Keen: Oh yeah. The collapse in our terms of trade has been more dramatic than they [the RBA] again expected. It was roughly the magnitude that I thought was going to happen. Because, we always overshoot, and now we’re overshooting down as well. So, terms of trade collapsing. In particular, if China starts to fall over this year, which is highly likely, then that cuts our export volumes as well. And, at that point they [Australia’s key cash rate] will be driven down to 1.75 or 1.5 per cent by the end of the year. 
 
Lelde Smits: Certainly. If we can look at property. Everyone always loves to hear your property views - So, are we going to see you buying property in Australia any time soon?
 
Steve Keen: I’ll buy property for somewhere to live at some point. And, I’ll be basically ignoring the bubble and buying in cash. Because, I’m not doing it for a levered speculation I am doing it for somewhere to live, which is how we should treat housing. Making it into a speculative product is part of the massive distortion of capitalism we’ve allowed to happen over the last 25 years. 
 
Lelde Smits: And for investors, people wanting to make some money in Australia, where do you think they should be looking for value if it is not the property sector?
 
Steve Keen: I’d be taking advantage of declining rates and the impact on bonds and if you wanted to lever up that way you might find some way of getting a gain out of it. But, this whole search for gain, whole search for a yield that exceeds 1 per cent -which frankly is the long term sustainable rate of growth of assets in the capitalist economy - Trying to get rates at 3 and 4 and 5 per cent is a recipe for a crash at some point in one of those markets. 
 
Lelde Smits: And Steve, finally if we can just take a step back, look at the global economy, what will you really be paying attention to in the coming months – Where are the hotspots?
 
Steve Keen: Well basically China, China has to be the next one with a big crash. And then after that what happens in Europe, and the potential political breakdown in Europe. I don’t think that we are going to see the rise of the military coup or a fascist takeover in Greece this year, but I wouldn’t rule it out for 2016. 
 
Lelde Smits: Thank you so much for your insights today. 
 
Steve Keen: Thank you. 
 
 
Ends