Keen says: Property prices could plummet 70%

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by David Chau

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Transcription of Finance News Network interview with Professor Steve Keen (author of ‘Debunking Economics’ and economics professor at Kingston University, London)

Hello, I’m David Chau for the Finance News Network.

Joining me today is Professor Steve Keen – a professor of economics at Kingston University, London, and the author of the book ‘Debunking Economics’. We’ll be talking about why Australia is heading towards a recession, amongst other things.

Steve, welcome back to FNN.

Prof Steve Keen: Good to be here.

David Chau: Steve, let’s talk about Brexit. You’ve been a vocal supporter of the ‘Leave’ campaign. Do you think Britain will be better off leaving the European Union?

Prof Steve Keen: For Britain itself, it is certainly having financial disturbances now because the Finance sector is the first place in the economy to panic.

But ultimately, all Britain is leaving is a free trade zone because it wasn’t part of the Euro. That now means it’s on the outside of the tariff walls. How tall are they? The average tariff is 2%, 10% for cars, 30% for textiles. It’s trivial compared to the tariffs that used to exist back in the 1950s and 60s. So for me, it’s a fairly minor impact and of course, devaluation has more than made up for that.

I think, overall, British manufacturing will do better. The financial sector might suffer, but it’s about damn time the financial sector did suffer.

David Chau: Steve, let’s move onto your property predictions, which you’re quite famous for. Back in 2011, you predicted that (i) Australian property prices would fall by 10% to 15% over the next 5 years, and (ii) as much as 40% over the next 10 - 15 years. What happened to those predictions?

Prof Steve Keen: Well the first one has probably gone by the wayside because the Reserve Bank’s reduction of interest rates was done with the deliberate intent of dragging investors into the market. And the scale to which they did it took me by surprise.

I expected the household sector in Australia to start de-leveraging, as has happened in the rest of the world. What’s happened is we’ve gone from a household debt level of 20-25% of GDP (back in 1990) to 125% now. We’re now actually the world’s most indebted household sector. So that level of leverage Australians are willing to take on as rates fell took me by surprise.

What that means is we’re now starting with a level of private debt that is literally unprecedented in the history of capitalism at the household level. And that is what will cause de-leveraging in the future, because what actually drives housing demand is change in mortgage debt and mortgage credit. That’s actually going to go negative. It’s gone negative already. As that change in mortgage credit falls, so do house prices. The one thing keeping them up is foreign buying. But we’re now seeing enough pressure in China from Xi Jinping [President of China], trying to stop people taking money out of the Chinese economy as it’s going down. That may well impact the Chinese buying pressure here to become a selling pressure. So I think it’s a ‘gamble period’ for the Australian economy. We’ve followed the same mistakes as Ireland and Spain, going into housing bubbles – believing we were geniuses. I think it’s going to unravel on us, so I’ll stick to that prediction. Between 20% and 70%, which is the global range of what’s happened when a housing bubble is burst, when the mortgage debtors stop flowing.

David Chau: So recently, you said that Australia is heading towards a prolonged recession in 2017, no matter who won the recent Federal election. So why the negative outlook?

Prof Steve Keen: It’s because what’s actually kept us going (what’s now coming up to a quarter-century of not having had a recession) is that the household sector and the business sector, at different times, have continued borrowing money. And what mainstream economics misses completely (which clearly includes the Reserve Bank of Australia) is demand in the economy is not just the turnover of existing money. It’s the turnover of existing money, plus credit. And that means credit, with the level of private debt growing faster than GDP (as it has done for the last 25 years). Credit has been a substantial part of demand in the economy. At the moment it’s running at about 15% of GDP. All it has to do is fall to 0% and you will have a drop in demand in the order of 10% of GDP in one year. And I’m starting to see that happen right now.

So I think we’ve pushed the debt bubble as far as it can go, pushed it to 60% of GDP – past where the Americans got to when their Crisis hit. We have to stop increasing debt compared to GDP. That alone will be enough to cause a drop in our total demand in the economy. And that will give us a recession.

David Chau: At this late stage, do you think this recession can be avoided?

Prof Steve Keen: It can be avoided by doing everything the central banks around the world have been avoiding for decades – which is quantitative easing for the people. Injecting money into people’s personal bank accounts, much like in the way Kevin Rudd did back in 2008. I would use that to pay down debt as well because the main problem we have now is too much private debt. That could be done, but it won’t be done for ideological reasons.

David Chau: Finally, Steve. You previously predicted that China would crash in 2015 because of its enormous credit bubble. Now we’re in 2016 – are you still foreseeing a crash for China?

Prof Steve Keen: When you look at the numbers, you simply can’t trust Chinese published numbers. For example, the unemployment rate in China was 4.09% this year. It was also 4.09% the year before, the year before that ... and the year before that. The numbers are made up in many ways, but when you take a look behind the figure and see what’s happening in terms of demand for steel or energy, and so on – you can see it’s falling over in various ways right now. And they’re trying to pump up and keep the bubbles going.

But they’ve actually gone from about 100% of GDP to 210% of GDP as a private debt level since the Global Financial Crisis hit. That’s an enormous boost to demand. But just like we can’t keep doing it, they can’t either. They can switch across to government money creation much more easily than what we will do in the West. And that might keep them going for awhile. But they simply can’t sustain the growth we’ve seen in terms of real output. At the moment, when you look at it, most of their so-called real output is actually through deflation, not through actually increasing physical output. So I think they’ve already hit it. We just aren’t seeing it in the published figures.

David Chau: Professor Steve Keen. Thank you very much for your time.

Prof Steve Keen: You’re welcome.

Ends

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