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Macro Musings Blog: The Balance Sheet Recession That Never Happened: Australia
too had a housing boom and debt "bubble". It too had a housing correction in 2008 that affected household balance sheets. This can be seen in the figures below:




Despite the balance sheet pains of 2008, Australia never had a Great Recession. In fact, it sailed through this period as one the few countries to experience solid growth. And, as Scott Sumner notes, it was also buffeted by a collapse in commodity exports during this time. If any country should have experienced a sharp recession in 2008 it should have been Australia.

So why did Australia's balance sheet recession never happen? The answer is that the Reserve Bank of Australia (RBA), unlike the Fed, got out in front of the 2008 crisis. It cut rates early and signaled an expansionary future path for monetary policy. It also helped that the policy rate in Australia was at 7.25 percent when it began to cut interest rates. This meant the central bank could do a lot of interest rate cutting before hitting the zero lower bound (ZLB). So between being more aggressive than the Fed and having more room to work, the RBA staved off the Great Recession.
economics  macro  monetary  beckworth  australia 
2 days ago by gimber
Roots of the 2008 Crisis | National Review
It is the ZLB problem, then, rather than the debt deleveraging, that is the deeper reason for the Great Recession. Mian and Sufi do not acknowledge this point, but their evidence actually is consistent with it. Their findings that the most indebted, low-net-worth areas were hit hard while the less indebted, higher-net-worth areas were relatively unscathed up through the end of 2008 fits well with the fact that the recession was mild until the last quarter of 2008. From this period on, all households were adversely affected — and it was during this subsequent period that the ZLB became a problem.

Moreover, research by Luigia Pistaferri and Itay Sporta Eksten of Stanford University shows that most of the actual decline in consumption from late 2008 to mid 2009 occurred in higher-wealth groups. Consistent with this finding, they also show, using survey data, that the top income groups became the most pessimistic during the crisis. Consequently, the Mian and Sufi account makes sense only for the mild stage of the recession.
economics  macro  monetary  beckworth 
2 days ago by gimber
Worthwhile Canadian Initiative: The 1 vs 3 Model of Quick Recessions vs Slow Recoveries
A simple model of a monetary exchange economy is the Wicksellian Triangle. The apple producer wants to consume bananas; the banana producer wants to consume cherries; the cherry producer wants to consume apples. But it's hard to coordinate 3 people meeting in the same place at the same time so they can do a 3-way swap in the central Walrasian market. They can only meet pairwise, so they have to use money. And let's suppose they use some 4th good as money (because my story is simpler that way). So we have a circular flow of money clockwise around the Wicksellian triangle; and a flow of fruit counterclockwise.

It only takes 1 person to reduce the circular flow of money. If the apple producer decides he wants to hold more money, he can unilaterally decide to slow down or stop spending his money. He does not need anyone else's consent to do this; because exchange requires mutual consent. Quantity traded is whichever is less: quantity demanded; or quantity supplied. The change in his stock of money equals the flow in minus the flow out; he needs the cherry producer's consent to increase his flow in, but can reduce his flow out to the banana producer unilaterally. And if the apple producer decides to slow down or stop his spending, the whole circular flow of money and fruit slows down or stops too.



It takes all 3 people to increase the circular flow of money. The apple producer needs to spend more quickly, the banana producer needs to spend more quickly, the cherry producer needs to spend more quickly. (And each of those 3 decisions requires the mutual consent of both parties to the trade of money for fruit, because the apple producer cannot buy more bananas unless the banana producer agrees to sell more bananas. And only if all 3 have an excess supply of fruit matched by an excess demand for money will that consent be readily forthcoming. [Update: But I put that bit in brackets because I'm thinking of a demand-side model here, and the supply-side will usually not be a constraint in a recession, or if the economy is monopolistically competitive, which it mostly is.])

The circular flow of money is like 3 cars circling a one-lane roundabout, they all need to go faster for any one of them to go faster.



The rate of deceleration of cars on the Wicksellian roundabout is determined by the rate of deceleration of the car whose driver wants to decelerate the most; the rate of acceleration of cars on the Wicksellian roundabout is determined by the rate of acceleration of the car whose driver wants to accelerate the least. (That's not exactly true of course, because drivers leave an adjustable buffer zone of space between themselves and the car in front; just like they hold an adjustable buffer stock inventory of money so their flows in and out don't have to match exactly. But it's good enough for this post.) If we take two sets of 3 random numbers, the biggest number in the first set will usually be bigger than the smallest number in the second set. So recessions are usually quicker than recoveries.

And you get Friedman's "Plucking Model" because something going wrong and performing worse than normal has bigger effects than something going right (unless it's the same thing that had previously gone wrong, which it probably won't be).
economics  macro  monetary  businesscycles 
11 days ago by gimber
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Kahneman's biases are key to understand if you want to be the best trader yo…
trading  investing  psychology  macro  from twitter
11 days ago by rhyndes

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