Steve Keen discusses debt, housing, and the economy

Steve Keen is a professor at the University of Western Sydney and is the author of several great books on economics.  He also writes the fantastic economics blog, “Debt Deflation“.  If you aren’t familiar with his work, you owe it to yourself to get acquainted with it.

Keen recently gave a fantastic talk to the Mortgage Finance Association of Australia.  The audio of the talk as well as the slide show can be viewed at the following link:

Mortgage Finance Association of Australia Talk

Basically Keen is discussing the Australian housing bubble, which is far larger than our own and evidently larger even than the US housing bubble.  Keen’s insightful discussion has inspired me to attempt to recreate some of the great charts he referenced, but using comparable Canadian data.  Watch for this later in the week.

I will briefly comment on a couple of Keen’s main points with reference to our own situation here in Canada:

1)  Conventional economics suggests that an exponential rise in consumer debt levels is not necessarily problematic as it simply shifts the buying power from debtor to creditor.  Thus, a chart like this would not necessarily make a conventional economist nervous:

Theoretically, in the event of a consumer deleveraging (where people actually start paying off their debts rather than ratcheting them up) it doesn’t necessarily have to have harmful economic effects as the savers would hopefully step in to fill the spending void….at least according to some economists.

There are several problems with this line of thinking.  First off, history has shown us that this is overwhelmingly unlikely, as much as it is theoretically possible.  Second, and much more importantly, traditional economics does not take into consideration the significant stimulative effects of a wide swath of a population leveraging up simultaneously.  A deleveraging causes a collapse in aggregate demand which leads to rising unemployment, unserviceable debts, and even less consumer spending as the process that buoyed the economy on the way up now works in reverse.  So the creditors increasingly find that their loans are non-performing in a credit deleveraging cycle, particularly when they are non-secured loans.

It should be evident to us all that debt levels relative to disposable incomes cannot rise forever.  They currently sit at 150% on aggregate, though that average conceals the fact that there is a less than insignificant chunk of Canadians with debt levels three or four times this amount. Clearly this ratio cannot rise beyond the ability of Canadians to service those debt levels.  So let’s agree that the rise in consumer debt levels relative to income will not last indefinitely.

2)  A recession can be caused simply by a slowing in debt growth.  Keen demonstrates this in the video.

3)  House prices are directionally led by mortgage lending.  In other words, when credit is made readily available and people access it, the result is fairly predictable.  This is by far the best predictor of house price movement in Australia….a far better predictor than immigration or population expansion.  We’ll see how this stacks up here in Canada later this week hopefully.

I would add that mortgage lending which paces GDP/income growth is not what is of concern, but rather lending which outpaces it.  Clearly this is unsustainable.  This is our Canadian experience by the way…

Keen’s video is a must see, particularly as Australia is showing clear signs of a slowing housing market.  It certainly bears asking how similar our experiences are.  Check back in later in the week for that answer.



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4 Responses to Steve Keen discusses debt, housing, and the economy

  1. jesse says:

    As much as the Canada/US debt/disposable income graphs are striking, is that measuring the right thing? Canada’s was higher than the US’s through the ’90s. Just wondering if Canadians really do have higher debt levels than Americans or if there are other things to consider.

  2. What might those other things be? It’s worth remembering that the largest component of debt in the US is still mortgage debt which is tax deductible. By all measures, we are now equal to the US in our debt to PDI (by some measures we are substantially ahead). Even considering the ‘best-case’ scenario that I’ve seen where our debt levels are roughly equal, it’s still deceiving given that our mortgage debt is not tax-deductible and our total debt load should be less than our American neighbours.

  3. LRM says:

    That Keen presentation was the best one I have seen of his work.
    I look forward to a similar application to the Canadian data . Thanks for posting that as it had been a while since I had been to his site and it is much better than previous as he has done an upgrade.

  4. Brad says:


    Another great post; I really enjoy your blog, and check it regularly.

    Just a quick question: I find the stats on household debt (as a percent of disposable income) confusing. What does that translate into actual/total debt owed? For example, the ‘average’ debt for Canadians is 150% (approximately) of disposable income — but what does that mean? Is that per year? For example, if a household makes $100,000 per year, that means the household would ‘owe’ $150,000 — but if the figure was only for 6 months, the household would only ‘owe’ $75,000. Can you please clarify?…..I find this statistics of 150% average debt for Canadian households confusing, unless it’s attached with a timeline….or, it seems like a figure that simply shows the average debt per average household would be much more meaningful (particularly since the biggest debt seems to be mortages, and most households don’t keep accumulating more and more mortage debt for each passing year).



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