Home > The Economy > On the problems facing the world in 2012

On the problems facing the world in 2012

Steve Keen

Every year, The Age publishes a survey of economists’ opinions on the year ahead. Most of these are “market economists” rather than academics—working for banks, insurance companies and the like. Three academics are surveyed—myself, Jacob Marsden of Monash and Neville Norman of the University of Melbourne—and one economist working for a trade union, Brad Crofts of the AWU.

Peter Martin does an overview of the results each year, as well as providing snippets of the answers given to supplementary questions. He made one slip-up this year when he summarised views on achieving a surplus as:

“All think a return to surplus matters, although most think it is not crucial that it happens in 2012-13.”

That is decidedly not the opinion I gave, so I’m publishing the answers that I gave to the supplementary questions below.


As usual, we would like to canvass your thoughts on a number of issues. (Please feel free to use a separate sheet for your answers).

Is it important for the Commonwealth government to aim for a budget surplus in 2012-13?  Why?  Should it continue to aim for surplus even if international conditions worsen?

NO! It’s a nonsense neoclassical fantasy to blame this crisis on government debt, when its underlying cause has always been a private sector debt bubble that has now burst. Now that the private sector is finally deleveraging in Australia (after the First Home Vendors Boost delayed the process), the last thing we need is for the public sector to also be pulling money out of circulation, which is what a government surplus would do.

Where are the weak points in the economy (eg: lack of skilled workers, low productivity, imbalances due to the mining boom)

None of the above. The key weakness is the credit system that lent too much for speculative purposes in the last 2 decades, and will now lend too little for productive purposes while the public attempts to delever, which will reduce aggregate demand. Decelerating debt—and ultimately falling private debt—will put us in the same camp as the rest of the Western OECD, with only exports to China helping us keep relatively afloat.

If the US and Europe go into recession what would that do to China’s demand for commodities and commodity prices? Will Australia be able to withstand a developed-world recession?

They will both fall. China’s GDP is still well under half the US’s, and with over 50% of that being investment driven, it is very susceptible to a downturn in export demand. Though China aims to shift to a more domestic, consumption driven economy, and I have more confidence in their ability to make such a shift than I would have for any Western economy, the scale of the shift required is huge and certainly couldn’t be done as rapidly as exports would fall during a global recession. So we will experience a fall in our export volumes to China and prices

What do you think will be the key drivers of interest rates over the next year?

Slow realisation that this is not a transitory economic crisis but a long term one driven by private sector deleveraging. Decelerating private debt will drive unemployment up and asset prices down, and the RBA will be forced to reduce rates against its expectations—back in early 2011—that rising inflation and falling unemployment would require rates to rise.

Lastly, one danger of being in the public eye is that one sometimes cops an earful from the public. Below is my favourite from last year’s survey, when Jacob and I were the only ones to expect the stock market to fall from its end-2010 level of 4970: we both punted for an end of year level of 4000, versus the consensus prediction of 5169. The market has just closed for the year at 4056.6. Somehow, I don’t expect an apology for the tirade below…

Good morning Steve,

I perused the above survey with great interest and note your economic forecasts stand out. You are way off the mark. – ASX-200 (31 Dec 2011) = 4000. Another outrageous statement following the Housing Bubble fiasco. You cannot help yourself – you don’t know how to keep your mouth shut   You have NOT learnt from you previous stunt. Aren’t you embarrassed ? Every economist in the country is laughing at you. You are so far off the mark – it only illustrate your lack of knowledge and fundamental reasoning. UNLESS – your forecast are motivated by political bias and a fundamental desire to see the capitalist system fail. Are you a “communist” ? or at the least – a socialist / Marxist ? There must be a reason for your extreme views –  an unhealthy perspective for a person in your position to influence the young students. I suggest they will see you for what you are – a pitiful, frail and twisted academic peddling an agenda that has already proved you WRONG – The Walk of Shame” You are making a fool of yourself.? The system that rewards you – you are intent on proving is no good. If you disagree with our system – why not go to CUBA and scratch out a living in that Marxist state. Maybe then you will appreciate the Capitalist system that allows you to sponge off the taxpayers with your ridiculous forecasts. People will see you for what you are and lose total respect. I suspect they have already done so.

  1. Keith Wilde
    December 30, 2011 at 11:42 am

    It would add to the entertainment value the critic’s rant if you expanded just a little on “the Housing Bubble fiasco”?

  2. david glover
    December 30, 2011 at 10:46 pm

    well done steve

    somehow i can’t see murdock (sky) news highlighting who was right

    the vested interests hate being wrong

  3. david glover
    December 30, 2011 at 10:49 pm

    and that “critic” has obviously forgotten about the revere award

    short memories some people

  4. December 31, 2011 at 5:28 am

    Well said Steve & allies. All I would add is that there are causes and contributing factors not fully revealed nor fully examined — at the level of fundamental principle, governing dynamics, and ethics. If that omission were rectified with a truly holistic assessment of the subject subscam (“Aussie Plutonomy”) with global perspective, then absurd post-adolescent rants could be mostly, if not entirely avoided. Then again, some folk are not only short on memory, but short on cognitive intellectual resources.

  5. December 31, 2011 at 3:06 pm

    Thought I don’t like your way of giving self-praise (a bit naive when you refer us to a prospective report which doesn’t favor you very much), but certainly some of your critics are completely negligible.
    This just demonstrates the nonsense that is “the enemy of my enemy is my friend.”

    I’m with Keith Wilde, and i think all this would be more clear if you tell us about that “Housing Bubble fiasco” that your critics reproach to you.

  6. December 31, 2011 at 7:47 pm

    Hi Steve,
    I think your critic was looking for someone to shoot at. You happened to fit the bill, in his eyes.

    I’m having a hard time correlating two graphs above: “Change and acceleration of private debt” and “Change and acceleration of private debt (% of GDP)”, assuming that the GDP has not changed in a significant way since 2008?

  7. apj
    January 3, 2012 at 2:18 am

    that wouldn’t have been Chris “I’m always right, and the economy is booming beyond belief like me and my mate Carr say” Joye would it?

    Now there is an embarrassment.

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