Last month I countered positive remarks from Market Monetarists on the success of the Swiss central bank (SNB) in placing a currency floor against the euro with claims that the SNB was being forced to defend its action by purchasing large sums of euros. A few days later it was revealed that SNB Foreign-Currency Holdings Hit Record On Intervention. Over the past month the SNB has continued to protect its currency floor by purchasing foreign-currency, which signals the expectations channel of monetary policy (in this instance) is much weaker than some had presumed.
Today, I think Marcus Nunes (another Market Monetarist) is making a similar mistake in highlighting Australia's consistent growth as a success of monetary policy. There are many charts in Marcus' post, but I presume an important one to highlight is Australia's NGDP during the past two decades (the post compares the relative success of Australia to New Zealand):Chart 8 is intended to depict how monetary policy maintained NGDP growth near trend through the Asia Crisis and above trend throughout the global financial crisis. A concern of many non-Market Monetarists is what portion of NGDP growth will be derived from inflation versus real growth. To address that question, Marcus offers the following chart and notes:
Chart 11 shows that generally, inflation has not been an 'issue' in either country.
If I knew little about the Australian economy, Marcus' display of graphs and explanation might prove very convincing. However, having long been a fan of Steve Keen (an Australian economist), I was surprised at the lack of discussion regarding Australia's housing market. Keen, a highly regarded Post-Keynesian, has for years been pointing out the positive and negative effects of private credit on growth. Regarding this topic, Keen frequently points out similarities between the US and Australia. Here's a chart from Steve's blog comparing Australian and US real house prices:
After nearly doubling between the mid-1990's to 2005, US house prices have now given back most of the gains. Meanwhile, in Australia, house prices nearly tripled from the late-1980's to the recent peak in 2010. Currently house prices remain at levels double those witnessed in the mid-1990's. Similar to the US, the rise in home values is not well accounted for in national inflation data. As Keen regularly notes, a major factor in both housing bubbles and macroeconomic cycles (frequently overlooked by mainstream economists and monetarists) is private debt. Below is a chart comparing the levels of private debt in Australia and the US:
During the extended period of growth in Australia, private debt to GDP has been growing consistently. The rise in private debt and housing prices, which supported Australian growth for two decades, have now turned south. Similar, more exaggerated, drops in the US were at the heart of the US crisis and continuing economic malaise. As the housing bubble in Australia busts and private sector deleveraging speeds up, the Australian central bank (NYSE:RBA) will be unable to overcome the deflationary momentum. GDP growth in Australia has been slowing of late and the most recent unemployment report showed a surprise uptick. If Keen is right, monetary policy is likely to prove inept in the coming years as NGDP falls below trend without large fiscal stimulus.
The US experienced a great-run of economic growth on the back of a staggering rise in private debt that ultimately caused the subsequent crash and stagnation. Australia appears to have built its remarkable run on the same principles and will soon find out if the optimism was equally misplaced. Market Monetarists are claiming Australia a success, while the Post-Keynesians are warning of impending trouble. My bet is on Steve Keen and the Post-K's. Where's yours?