Transcription of Finance News Network Interview with author of Debunking Economics, Steve Keen. Lelde Smits: Hello, I'm Lelde Smits for the Finance News Network and joining me is the author of Debunking Economics, Dr Steve Keen. Steve, welcome back to FNN.
Steve Keen: Delighted to be here.
Lelde Smits: You have quite the reputation for your “doomsday predictions” but here in the lucky country Australians are feeling pretty good right now – the S&P/ASX 200 is at five-year highs and interest rates are at record lows. What is there to worry about?
Steve Keen: Well in Australia, even though we have had those two features, we’ve also had rising unemployment. The trend has been up from 5 per cent, heading towards 6 per cent. So, happiness is largely isolated to the asset markets here. It's not so happy out where you have to get a job.
This is the long slow grind, that was the alternative, that what could have happened, which would have been which occurred first in America then in certainly Europe. So we’re happier than the rest of the world, but the world is not a happy place.
Lelde Smits: So you’re saying it’s not as good as it looks?
Steve Keen: We are now in a long running global financial crisis which I called back in 2005. Not just for Australia, but for the entire planet. But Australia is the one country that dived in very rapidly, with first of all, sensible rapid anti-recessionary policies, but then also re-starting its property bubble.
Lelde Smits: Australia’s key cash rate was cut to a record low of 2.5 per cent this year, increasing borrowing capacity. Where do you see it heading next year and how will this impact property?
Steve Keen: I think they’ll start raising rates.
Lelde Smits: When?
Steve Keen: Probably I’d say around March to June they’re most likely to start putting rates up to try to control the bubble because the bubble will actually stimulate the economy a bit. Borrowed money, spend it in the economy, will force unemployment to fall a bit, they’ll think its recovery time – usual pattern, rising house prices falling, falling unemployment - Start putting rates up and the whole thing will start fall over.
Lelde Smits: The property sector is of course intrinsically linked to the lenders of debt which you’ve blasted in the past for their irresponsible lending practices. When and how does lending become dangerous?
Steve Keen: When you start having lending driving up asset prices and therefore causing people to borrow more money at higher and higher levels of leverage. And we’ve allowed ourselves to get back into this situation again.
Lelde Smits: Has the risk stabilised or is in increasing?
Steve Keen: It’s increasing. It always happens (as) they start competing for market share.
Lelde Smits: Turning to the US – Quantitative easing may be coming to an end with stronger than expected US data fuelling speculation the US Federal Reserve may start to taper its economic stimulus soon. How long do you think the US central bank will continue to spike the punch?
Steve Keen: For a start, it’s actually spiking the punch with a placebo. It’s not actually real alcohol. Because if you actually wanted to print money, as people paraphrase what they think QE is, that’d mean putting money into people’s bank accounts directly, which QE doesn’t do.
So it’s spiking the wrong side of the punch if you like. It’s a placebo but it does drive down yields in long term bonds, so it encourages people to speculate in shares and property instead. That’s why the asset markets have taken off so much.
Lelde Smits: And when do you see it coming to an end?
Steve Keen: I’d say it will come to an end next year. It will start the year after, come to an end the year after that, start the year after. This is what the Japanese have been doing for two decades.
Lelde Smits: And what repercussions could we see on our markets?
Steve Keen: Volatility, up and down. Whenever they stop it then the markets will come down. But, the result will be similar to Japan, maybe not the same scale of fallen asset prices there, because share prices fell about 80 per cent in Japan and house prices have fallen about 70 per cent. But simply, doing the wrong thing and when it doesn’t work doing it more often and harder.
Lelde Smits: You mention Japan a lot as far as a comparison. Why do you think the nation is the best comparison for global nations such as the US and Australia?
Steve Keen: Really because it gave us 25 years of warning what we shouldn’t do and we did it anyway. If you look at what happened in Japan they had a gigantic property bubble and a gigantic share market bubble.
Lelde Smits: Finally Steve in 2009 you told FNN we're going into a depression and you're putting your money into cash. Are there any sound investments out there at the moment or should we still be putting money under the mattress?
Steve Keen: The sound investments are the ones that preserve the capital you gained during the bubble. That’s the most important thing. So the trouble is, when you have a bubble and it bursts people then say, ‘How can I get the same returns as before during the bubble?’. You’ll say, ‘Not reliably’. If you wanted to get those gains you’d be taking a risk.
What you can read, and you do read this myself, is the ups and downs of the acceleration of debt. When you see it accelerating again it’s time to get into the market, when it’s decelerating get out. That can give you a guide.
But generally speaking the best thing you can do right now is avoid black swans, because there are going to be lots of them out there.
Lelde Smits: Steve Keen, thanks as always for the insights.
Steve Keen: You’re welcome.
Ends
