Lifting the Lid on the GFC

Last Wednesday night’s symposium “Lifting the Lid on the GFC” at the Melbourne Town Hall – with Michael Hudson, Steve Keen and me – was an enjoyable and well-attended event.

The meeting  was chaired by the Henry George Foundation of Australia’s John Poulter, who provided nicely-researched comments, and provided Steve Keen with some jogging shoes for his upcoming ‘bet’ trek to Mount Koscuisko.

It was great to speak to people afterwards. Despite assertions of politicians and the media, people are increasingly sceptical about the ‘relatively healthy’ state of the Australian economy in comparison with those countries whose real estate prices have tanked . Many believe it’s a matter of timing and that it looks like we’re going to be one of the last cabs off the rank.

Click through my GFC presentation here.

Melbourne Town Hall
Melbourne Town Hall


The greatest problem confronting the world must surely be population growth? After all, look what we’re doing to the planet; look at the Global Financial Crisis; look at our overcrowded cities; look at the water shortages; look at global warming ….?

Although this is an intuitively appealing argument, in what way does limiting populating growth begin to answer the corruptions into which Western civilisation has degenerated, where finance, insurance and real estate have been mounted on an altar to which the poor and dispossessed and, increasingly, the middle class are required to genuflect before consideration is given to the needs of the citizenry and sustainable wealth creation?  Do not the 1.5 billion cattle that occupy 100 times more land than the 7 billion people on the planet pose a greater environmental threat?

Is the drift of population to the world’s great cities healthy? Is not the drift associated with the promotion of rent-seeking by errant tax regimes? Would the drift (in search of jobs?) be arrested if, instead of taxing people for working, we were to capture publicly-generated land rent, the annual value of locations? Would not the higher revenues drawn from cities act to reverse this drift and the rape of city hinterlands as Megapolis feeds upon itself at a terrible coast to rural and regional areas?

Although the Reverend Thomas Malthus was proven wrong and shown to have the cart before his horse, insofar as population growth has been found to decline with economic security, this hasn’t stopped the emergence a neo-Malthusianism which holds that populations must adapt to pathological environments before the health of the planet may be restored. This must be our starting point is their claim. But they are wrong.

I don’t know what constitutes a sustainable population but – like Bill of Rights advocates who fail to have peoples’ right to share equally in the rent that flows like oil from land and natural resources as priority one – zero population growth advocates are misguided. They’re akin to so-called  ‘Productivity Commissioners’ who refuse to see that taxation does indeed destroy, and that land-based revenues conserve.

Having dashed out these thoughts earlier today, I’ve subsequently found this from George Monbiot which expresses much the same sentiment about population.

(1) New US/Australia dollar ‘carry trade’ (2) DEPRESSION CONTINGENCY PLAN?


Move over Japanese yen! Alan Kohler describes the newly-developing USD/AUD borrowing-lending relationship in today’s “Business Spectator”. Of course, the thinking underpinning the USD/AUD ‘carry trade’ in the article relies on the premise that Australia has somehow or other managed to outsmart other nations by averting the property crash resulting from its bubble.  Apparently, the Australian government believes it has forestalled the real estate collapse by means of the ‘First Home Buyers’ Boost’, a handout never designed to assist first home buyers but to pump up the real estate market. It hasn’t obviated the crash. It has only delayed it and made it much worse. Given that its real estate bubble was actually 1.7 times America’s, might I suggest the new US/Australia dollar carry trade will be relatively short-lived as Australia’s chickens come home to roost?  Hmmm… on the other hand, as the downside prospects for the US dollar are also extremely threatening, maybe some sort of ignoble nexus may linger between the two doomed currencies?  🙂

There’s a remarkable ability for the human psyche to draw the line behind bad news and to conclude “Well, if this is as bad as it gets, it should be easy running from here”.  However, this will often ignore fairly obvious things called FACTS. We’ve become expert, for example, at overlooking the sheer extent of the debt leveraged off this worlwide land price bubble.  But I guess if newpapers don’t offer a new ray of hope each day amid the gloom, folks might get a little depressed?

Helicopter Ben
Helicopter Ben

But how long can governments continue to ‘stimulate’ the economy to keep things moving, while unemployment continues to rise and people cut their real spending.  Forever?  Not likely!  Can governments really be ‘stimulating’ the economy with one hand while they tax (read fine) labour and capital for working with the other, anyway? They’ve got to get out of the way; they’re meant to be helping us!

Now, let’s get down to basics.  What’s the bottom line in the US, for example?  What if their real estate prices haven’t finished declining?  What if the share market recovery IS a ‘dead cat bounce’?  What if they ARE moving into a depression?


Does President Obama, or Congress, have a contingency plan of ‘last resort’ for this situation? I think not.  Why not? So let me offer one. How about we keep this shot in our locker …. just in case stimulus gets to the point it isn’t working any longer, unemployment is still skyrocketing and depression has set in:-


  • 1)  Eliminate EVERY tax on productive effort – in order to encourage employment and production.  (We may even discover that we’re not ‘post-industrial’ after all!, and that finance, insurance and real estate [the ‘FIRE’ sector] is relegated from its ‘leading’ role within the economy to where it more properly belongs – as part of the ‘service sector’.)
  • 3)  The combination of these two measures, AS A DISASTER CONTINGENCY will, at least while the contingency is being exercised, eliminate tax write offs and other advantages given to real estate, so that land is stimulated into USE for labour and capital (rather than held out of the market, dog-in-the-manger-like, for capital gain by monopolists and speculators).

Sir Thomas Stamford Raffles
Sir Thomas Stamford Raffles

On any analysis, it can be seen that this contingency measure works.  No quibbles.  Just do it.  After all, isn’t it preferable to another lengthy economic depression which ends in war?

But it mightn’t get that bad?  Hey! It’s a CONTINGENCY remember!  THE ONE WE FAILED TO EXERCISE LAST TIME!

Has this ever been done before?  Yes.  Thomas (later Sir Thomas) Stamford Raffles  brought about the  Dutch East Indies (“The Spice Islands”, now Indonesia) emergence from a depression, by introducing a land rent system and eliminating a multiplicity of Dutch-imposed taxes.  Raffles then went on to found Singapore, now one of the world’s greatest ports, on the same basis.

Not a bad ‘contingency’!

Michael Hudson touring Australia in October

Michael Hudson
Michael Hudson

Steve Keen
Steve Keen

How great to have been invited to speak on the same platform as renowned US professor of economics Michael Hudson and Australia’s own Steve Keen at the Melbourne Town Hall on 14 October!

I’m sure our approaches to “Lifting the Lid on the GFC” will differ, but I’m just as certain we’ll be united in asserting the need for a new economics for the remainder of the 21st century. The monstrously repetitive bubble-burst perversion that has become neo-classical economics has to be replaced by a saner economics.

If you take a peep at these Michael Hudson YouTubes here and here (after setting them to HD!) you’ll get a taste of this economic historian’s background – including his time as a former Wall Street balance of payments expert – and of the common sense approach that has seen him invited to advise several European nations how to extricate themselves from the GFC, intact and in fact.

Michael Hudson has seen all this nonsense before, from the inside, and Keen has challenged the weaknesses in the economic system since the 1970s. For that matter, none of us are exactly ‘fly-by-nights’, and each of us called this financial meltdown quite independently.

Learning the lessons of history?

ALAN Kohler’s Theatre of the Absurd in today’s Business Spectator is worth the read. While politicians around the world are congratulating themselves on their stimulus packages, they’ve not put anything in place that’s going to stop financial collapses from happening in future! That’s been a problem for a long time now. Maybe they’re too scared to offend powerful landed interests who ‘cruel the pitch’ for the rest of us?
Maybe we need to sack weak-kneed neo-classical economists and put scientists on the case? They’d soon understand the implications of  P – R = W + I. They wouldn’t bury it, or turn absurdly ad hominem against Henry George.
People understood the principle centuries before Henry George came on the scene. They’d seen the collapse of Ancients Rome and Greece due to taxation and land speculation and, under the inspiration of William the Conqueror, tried something else.
Professor Thorold Rogers says they eventually got it working pretty well, too:-
“I have stated more than once that the fifteenth century and the first quarter of the sixteenth were the golden age of the English labourer, if we are to interpret the wages which he earned by the cost of the necessaries of life. At no time were wages, relatively speaking, so high, and at no time was food so cheap. Attempts were constantly made to reduce these wages by Act of Parliament, the legislature  insisting that the Statute of Labourers should be kept.
But these efforts were futile; the rate keep steadily high, and finally becomes customary, and was recognized by Parliament.
It is possible, that as the distribution of land became more general, and the tenancy of land for terms of years became habitual, the phenomenon which has often been noted as characteristic of peasant proprietorship, a high rate of wages paid to free labour, may have been exhibited in the period on which I am commenting. …..
[Rogers goes on to provide the daily wage of artisans, agricultural labourers, skilled craftsmen, carpenters, plumbers and joiners.]  ….
Nor, as I have already observed, were the hours long. It is plain the day was one of eight hours.”
Six Centuries of Work and Wages – The History of English Labour, James E. Thorold Rogers, T. Fisher Unwin, 12th edition, London, 1912, pp. 326-327.
Bliss chart
It’s too sweeping and glib to ascribe the peak in the above chart by the Reverend WPD Bliss (constructed from Thorold Rogers’ painstaking examination of Manor Rolls over six centuries) to the labour shortage resulting from the Black Death. This would sell Rogers short as an economic historian. The Black Death peaked in 1350 and this accounts for the large uptick appearing in the latter half of the fourteenth century.
So, when land rent was collected and there were few taxes, workers were actually more prosperous than they are today!  And they were debt free!
Maybe this key aspect of feudalism still carries an important lesson for our current brigade of smug and self-congratulatory ‘ploticians’ and ‘conomists’? The chart below demonstrates that under their policy-making, we continue to have the sort of retrogressions shown in Bliss’ graph.
Wage decline


 Phil Anderson
Phil Anderson

I admit to not understanding the niceties of stock markets. At times this has been a source of frustration to my friend, Phil Anderson, whose knowledge of its workings are unparalleled.

I’ve struggled to ingest the detail as Phil has patiently explained some technical aspect or other of the ASX to me. His subscribers obviously derive great value from Phil’s incredible share market skills.

Still, my more real estate-oriented mind does occasionally seize upon certain of his insights; such as that the share market has already factored real estate market happenings into its prices well before the real estate market itself will. And I’m sure that’s usually correct, because that was the sequence of events when the US ‘subprime crisis’ hit. Although share market prices dived, residential real estate was first characterised by a drop in turnover before, after a short delay, prices reacted.

At least in the low to middle ranges of the Australian real estate market, we are currently in a somewhat longer hiatus between a fall in turnover and the price drop. The more limited, prestigious end of market has already experienced price declines at several top addresses, and margin calls against highly-leveraged property will account for more than a handful of these.

Similarly, my investigations into real estate sales in the early to mid 1920s in Australia and the US led me to conclude that it was not the 1929 United States stock market collapse that brought about the Great Depression, but rather the real estate boom that had preceded it. This isn’t widely understood, because it was October 1929 that grabbed all the headlines.

Phil Anderson’s excellent new book “The Secret Life of Real Estate” confirms this thesis. His foray into real estate cycles in the US over the last two centuries had me sitting up and paying attention, so I can recommend a read of “Secret Life” for anyone wishing to lay bare the workings of the real estate market and to understand how it impacts both upon the share market and the economy. Phil’s research into US real estate market cycles is painstaking, illuminating and enjoyable. I wonder whether you would differ from my layman’s approach to the following, Phil?

Last week I came across this “Chart of the Day” measuring the US stock market in terms of the S&P 500 price to earnings ratio. The recent spike leapt off the screen at me. It suggests that the P/E got as high as 144 in what I have assumed to be the recent ‘dead cat bounce’. The text accompanying the chart says that it still stood at 129 at the end of the June quarter. The poor profits reporting season obviously played a large part in these incredibly high ratios. By comparison Australian P/Es are far more modest as they struggle to break the 20 barrier.

If the “Chart of the Day” is accurate, it has similarity to the sub-3% yields experienced in the Australian residential market over recent years. Most people know that for the sake of commercial reality these anomalies must ‘correct’ back towards the long term mean – and if it happened to be 8 years after S11, or 80 years after the 1920s crash, I guess there’d be some sort of symmetry.

Stirring times!


 Mason Gaffney


Like a beacon, Mason Gaffney has stood for decades above the ruck of world economists, because he dared to express a great truth that offends views held by his profession.

As the world slips into a new economic depression, here are three distinct, but interlinked, examples of Gaffney’s work:-

The bonus that comes with reading Gaffney’s insightful papers is a brilliant turn of phrase, honed presumably during his time as a journalist with TIME magazine:-

*”There were two leading charlatans: Arthur Laffer Jr and Robert Barro. Laffer drew his famous curve on Dick Cheney’s cocktail napkin in 1974 and changed the course of history ………  Our ‘new’ President Obama has not radically changed the tenor of his economic advisors. Dick Cheney the person has been relegated to Darth Vader emeritus, but the malady lingers on.”

[Don’t miss Mason Gaffney’s new book, “After the Crash”!]

WE’RE LAUNCHED! (Yes, today – but see earlier posts)

Melbourne fireworks

THE DEPRESSION blogsite is up and running today – 26 August 2009!

I’ve included earlier posts sent by e-mail to all of Australia’s federal politicians on the dates shown.  Some of these have been amended.

I thank Karl Williams (K1) and Karl Fitzgerald (K2), recently-retired editor of “PROGRESS” and Prosper Australia’s webmaster, respectively, for having published some of these thoughts.

Additional to the blog are separate pages relating to a forecast I made in 2001, a 2007 report showing the influence of the tax system on Australian real estate bubbles, and five published newspaper articles.

So, it’s all ‘go’!



It’s an understatement to say that the US rating agencies’ sins of omission proved to be costly. They’d been given respect they didn’t deserve, so economists and policy makers were blindsided to the financial collapse that has settled across America.

The agencies failed to get their heads around the central fact that so obviously mocks them now; that the real estate bubble on which much US debt was leveraged didn’t represent real wealth at all. It was a chimera. That treasuries and central banks also missed the point clearly indicts the study of economics. Something is horribly amiss!

The same mindset that levied counterproductive taxes on industry yet gave benefits to negatively geared properties, in addition to depreciation allowances, also tended to hide the reality of the real estate bubble.

We’ve designed tax systems to mollify incredibly selfish landed interests, but it’s only at the bursting of real estate bubbles that the complicity of revenue regimes becomes exposed. Incredibly, even at these times most analysis becomes diverted from recognising that pathological tax regimes are directly responsible for the creation of recession and depression: and so we repeat them, again and again. 

Given that the economy leverages off and is directed by real estate, there’s also a stunning absence of analysis of the Australian real estate market by federal government authorities. Privately-held real estate sales data is purposefully misinterpreted by the real estate industry to spread self-serving disinformation. Christopher Joye of RP Data-Rismark goes so far as to say that Australia has experienced no real estate bubble at all. The RP Data-Rismark National Dwelling Value Index which rose by 1.6% in the first quarter of 2009 is used to validate the point.

Haven’t other economic experts reassured us also that Australian banks have been more circumspect in their lending practises than the US, anyway, so any recession we have can’t be as bad? They certainly have, but these are the same people who failed to see the recession coming, and they continue to accept, even disseminate, false information about the extent of our real estate bubble.


Updates the chart in "Unlocking the Riches of Oz"
Updates the chart in "Unlocking the Riches of Oz"


The chart displays the overpowering size of Australia’s recent real estate bubble against GDP. During the period of the bubble, from 1999 and 2008, we spent $2.4 trillion in real estate transactions. Of that amount the $675 billion above the ‘bubble line’, will need to be liquidated. In terms of a $1.1 trillion dollar economy, it may be seen that a write-down of $675 billion portends an enormous meltdown of the Australian financial system; one to which our big four banks are exposed in extremis.

The University of Western Sydney’s dogged and brilliant associate professor Steve Keen has replicated a ‘Long Term Real House Price Index’ for Australia similar to the US Case-Shiller Index, linking house prices to consumer prices from the late 19th century. It suggests the Australian index has actually peaked at some 1.7 times the US index!

This acts to highlight the extraordinary disinformation spread about by real estate industry bubble-deniers. We’re not simply experiencing collateral damage from the bursting of the US residential property bubble, as claimed by federal politicians and exoneration-seeking economists within the RBA and Treasury, but have inflated our very own real-estate bubble that dwarfs  that of the US in relative terms.

It is becoming clearer by the day that the only other difference between the US and Australian bubbles is the timing of their bursting. That the relatively larger Australian bubble extended as long as it did in comparison with the US and UK was mainly because of Queensland and Western Australia’s booming mineral sales; but that has slowed for now.

The latest RP Data-Rismark real estate commentary is mysteriously silent about Australian real estate sales turnover falling 30% over the second half of calendar year 2008. This bursting of the Australian bubble was reported in April on “Crikey” and the ABC’s “Lateline Business” by Gavin Putland, director of the Land Values Research Group.  The First Home Owners’ Boost, the Australian government’s very own version of US subprime loans, has inflated the lower end of the residential property market and helps explain the 1.6% uptick in prices so far this year.

But as the economic downturn deepens, people will have to say goodbye to forlorn hopes of obtaining a better price for the properties they need to sell in a stronger ‘late-2009 recovery’. So, just as happened in the US, the superheated Australian real estate market will become glutted with unsold properties.

We’re at the turning point of the nefarious boom-bust cycle. The chart below demonstrates that our land prices have a long way to drop before they approach their historical average relationship of 1.1 times GDP. If they don’t overshoot on the way down, this will represent an average decline of 60% in site values, or a drop of some 50% in improved real estate values.

The GFC 


Dealing emotionally with an economic depression may be likened to Elisabeth Kubler-Ross’ five stages through which grief-stricken people pass. We may expect to respectively experience:

  • 1 Denial
  • 2 Anger
  • 3 Bargaining
  • 4 Depression, and
  • 5 Acceptance.

Due to the lack of official information in connection with real estate, many Australians remain in Stage 1: ‘Nothing has really happened here; some prices are going up; Australia is different.’

Policy makers are faced, however, with an increasing amount of evidence as to “where we’re at” as outcomes from Australia’s speculative real estate excesses are starting to loom large. So that our politicians may avoid the numerous stumbling blocks that are likely to be met at each stage of the process (this might include trying to bail out banks rather than insisting they quickly write down their mortgages to market reality), they need to acknowledge the inevitability of Stage 4, move quickly to ‘Stage 5’, then urgently address the necessary structural revenue reforms.

That our bubble didn’t burst until recently (in terms of turnover, if not price) could be used to our advantage if we want to avoid some of the financial and social distress that has struck the US and Europe. Should we fail to do this, we’ll mindlessly ape their mistakes.


For Australians to ensure a quick-exit from the economic depression, the Rudd government could not have positioned Ken Henry’s “Australia’s Future Revenue System” (AFTS) more opportunely.

Unfortunately, however, the history of previously sorties into ‘tax reform’ demonstrates that the exercise inevitably degenerates into a simple switching of emphasis between income and sales taxes, hopelessly alternating on each occasion from one back to the other.

There is great risk that AFTS will fall into such sham ‘reform’ again, but, if the Henry inquiry is to encourage confidence and productivity, it is clear that the country desperately needs to slash taxes savagely in favour of greater land value capture – via municipal rates and reformed ‘all-in’, flat rate State land taxes.

“Unlocking the Riches of Oz”, my 2007 study of recurrent real estate bubbles promoted by an errant tax system, demonstrates that greater emphasis on land-based revenues could double Australia’s GDP in short order. The measure also has positive implications for decentralisation, the rejuvenation of our regional areas where land values are cheaper, and for creating a more sustainable economy.  

It would be far easier on the national coffers, moreover, than putting future generations of Australians into hock through the sort of costly and questionable government interventions we’ve not only witnessed overseas but also increasingly at home. Freeing up labour and capital from taxation is a major initiative, but the writing on the wall suggests that it needs to be done urgently.