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Steve Keen’s forecast for Australia

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Published on: Friday, July 30, 2010

Associate Professor Steve Keen has received international recognition for predicting the debt that we all had could create the global financial crisis. He also walked over 200 kilometres after losing a bet about the resilience of Australian house prices and he joins Peter Switzer on his Sky News Business Channel program – SWITZER.

So what is he forecasting now for the Australian economy?

We have got out of the crisis by getting back to what caused it in the first place – rising debt levels,” says Keen. “So the government spending combined with the encouragement for people to get in the mortgage debt meant that rather than deleveraging hitting our economy, we’ve continued having debt adding to demand, it’s adding about 3.5 per cent to aggregate demand on my figures.”

Compared with America, he says aggregate private debt level here is not as bad. America’s aggregate private debt level reached around 300 per cent of GDP where as Australia got to 160 per cent. He says that’s flat lining – “Once it starts to flatline, you’re no longer adding to demand by additional debt and I think we’re starting to see a downturn”. The consumer price index rose 0.6 per cent in the June quarter – Keen says the less aggressive figures weren’t a surprise.

Government spending cuts not a priority

So, does he think Tony Abbott has the better policy of wanting to cut spending?

Keen says a market economy is driven by cash flow and if the private sector is trying to reduce cash flow – “spending less than it earns by deleveraging”, the last thing that’s needed is the government deleveraging at the same time. This is what’s happening in Europe at the moment, Keen says, and is the reason it’s facing a serious downturn.

“I’m not a fan of what’s called Chartalist economics that argues the government can run any size deficit it likes, “ he says.

“I believe there are limits there, but nonetheless if you have private sector deleveraging, then the last thing you want to have there is the government doing exactly the same thing – it will just take cash flow out of the economy and push it down.”

Reducing debt now is not a high priority for the government, he argues.

“The crazy thing is both parties are rabbiting on about the level of government debt, when if you look at the level of government debt, it's slightly more than credit card debt, whereas compared to mortgage debt, mortgage debt is far higher, far more dangerous than government debt is,” he says. “We do have room in the government to run a deficit and fund it for some substantial time before we’re anything near the situation that applies in America or Europe or Japan in particular.”

Check out Peter Switzer’s SWITZER on Sky News Business Channel, Monday to Thursday from 7pm.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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