Top 10 at 10: Australia's house price bubble; Worse than the Depression; US$4 trln toxic asset pile

Here's my top 10 links from around the Internet at 10 pm. I welcome your suggestions in the comments below. Here's a link that every observer of Australian house prices should read. It is an exhaustive analysis of all the data over there and a response to a recent Reserve Bank of Australia comment that Australian house prices were not overvalued because of a supply shortage. The author of this analysis, Steve Keen, is now famous in Australia as the madman shouting from the corner about how everyone is wrong and that house prices are over valued and likely to fall. H/T Hugh Pavletich. This is well worth a read. So what might happen after the global economy recovers? John Thornhill at the FT.com takes a stab after a talk fest with some economists including Nouriel Roubini. He says (and I agree) that the Global Financial Crisis won't end until the toxic debt problem is dealt with and governments start repaying all the debt they will build up in the next couple of years. Here's a taste.

Many policymakers still seem to believe the global economy will revert to its previous pattern. One glorious morning US consumers will begin borrowing and spending again while the Chinese will continue to manufacture and save. But with US households having lost an estimated $12,000bn of wealth, the world is desperately in need of a new consumer. "The only region that is mathematically capable of replacing US consumer demand [Europe] is the least likely to do so," grumbled one participant. Fiscal stimuli "“ even on a huge scale "“ would also be limited in effectiveness until toxic assets had been thoroughly cleansed from the banking system. The four options to redress public finances "“ default, inflation, increased taxes, or decreased spending "“ are also economically unpalatable and, in political terms, potentially lethal. For the moment, labour militancy has been relatively restrained as many employees fear losing their jobs. But as economic prospects brighten so will employees' demands for higher pay and greater protection. The danger is that things will grow worse politically just as they improve economically.

Here's a fascinating chart showing that New Zealand electricity consumption in 2009 is running around 5% below what it was last year, stripping out the ups and downs for weather and holidays. This is reasonable proxy for GDP and begs the question: why aren't retail electricity prices falling now that demand has dropped? Maybe our market is fundamentally not competitive. The Global Great Recession is already worse than at the same time in the Great Depression of the 1930s, say two serious academic economists in this Tale of Two Depressions. HT TVHE The picture for global trade now vs then is just frightening.  

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event. That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline.

The piece goes on to point out that the fiscal and monetary responses this time around are much more aggressive than those in the 1930s, but that the jury is out on whether a full scale depression can be avoided. Martin Wolf at FT.com has a thoughtful piece here on why the real work to fix the global economy has to be done by America and China. He looks ahead to the next crisis.

The Organisation for Economic Co-operation and Development forecasts a jump in US public debt of almost 40 per cent of gross domestic product over three years. It is quite likely, therefore, that the next crisis will be triggered by what markets see as excessive fiscal debt in countries with large structural current account deficits, notably the US. If so, that could prove a critical moment for the international economic system.

Here's the other side of the story. John Gapper at the FT.com says bank nationalisation is no panacea because governments are bad owners of banks and the necessary recapitalisations would be enormous. John Taplin points out that the Baltic Dry Index, an early indicator of trade in bulk goods, has bounced and is another sign of a recovery in the global economy. Here's the chart. The great US consumer deleveraging has only just started, Rolfe Winkler at Option ARMageddon points out in noting figures overnight showing a 3.5% fall in consumer credit in February. He says the consumer slowdown has much further to run, as the chart shows given the enormous growth from 2003 to 2007.

For the economy to recover, consumers need to repair their balance sheets, which means debt has to be paid down or written off.  The ride up the credit mountain sure was fun.  The ride down won't be.

Ireland is in deep trouble, announcing big tax increases and spending cuts overnight to reduce a budget deficit that is well over 10% of GDP, Bloomberg reported. This followed a credit rating downgrade because of a budget deficit and debt track that was unacceptable to Ireland's lenders. Sound familiar? TimesOnline says the IMF is set to revise its global toxic debts forecast to US$4 trillion from its previous forecast of US$2.2 trillion. So far banks globally have written off US$1.29 trillion of assets. Even Nouriel Roubini, Dr Doom, is only forecasting US$3.6 trillion. And most people think the worst is over. I don't think so.