Saturday, October 25, 2008

Which economist do you believe?

It seems to me that your approach to the current economic crisis is going to depend on which economist you are going to have faith in.

Steve Keen from the University of Western Sydney is at one end of the spectrum. He is saying that a consumer-fuelled retail-spending contraction will lead to increased unemployment and a substantial fall in real estate values. This fall is also accelerated by the high level of household debt ( against their houses) and credit cards.

He is putting his mouth where his money is and getting out of debt.

Then there is Chris Richardson from Access Economics and Philip Ruthven from IBIS.

Richardson has great faith in the bail-out packages and their capacity to stimulate the economy and keep retail sales moving. In the Great Depression it took a number of years for the US and other governments to inject liquidity into the systems. But Richardson is adamant that the speedy response of monetary authorities around the world will work.

That is not to say that things wont tighten up and get tougher. But he does highlight the impact of migration and population increase. Last year Australia's population increased by roughly 350000---of these 150000 were new births and the remainder was inbound migration.

You can understand that migration is one of the factors under-pinning house prices. We cant build sufficient houses to keep up with the demand.Whereas in the US the housing market was in over-supply when the sub-prime mortgages were being sold to thankful consumers.

Philip Ruthven reckons that we are one of the most recession-proof economies in the western world. We only go into recession when businesses stop buying. He has faith that consumers will keep spending.

Obviously there are many views and economists have never been renowned for their level of agreement on such matters.

But Richardson does suggest that when pressure is on people tend to make worse decisions than when there is none.

Going forward requires careful consideration---not panic!

1 comment:

  1. Anonymous1:43 pm

    What I believe is that, whatever is the theory, we are just going through yet another process of reestablishing a new equilibrium in the economy.

    The question is - how long does it take this time?

    Once that is reestablished (at a lower spectrum) we will go through another phase of expansion and hopefully, learning from history, sustain it and avoid excesses. But do we really learn?

    Ask Mr. Greed.