The Reserve Bank of Australia has at least 60 years of detailed statistics that can tell us a good deal about modern economic cycles. In this post I analyse this data to estimate the likelihood of recession in 2018.

In the above graph I have compared the rate of price-inflation and the rate of M3 monetary expansion from 1960 till now. Since M3 in Australia consists of about 3% currency and 97% credit, it closely approximates the rate of credit expansion (mortgages, business loans, personal loans and card debt). M3 correlates reasonably well with the rate of price inflation.

We are currently way down the downward slope of the credit cycle: the rate of credit-growth is slowing down and has been doing so since the GFC. The number of cycles that the available data-set contains is hardly a solid basis to draw any precise conclusions, but considering that the last major recession occurred at roughly the same point in the cycle where we find ourselves today, this is perhaps as explicit warning as anyone in the discipline of economics is ever likely to get. There is certainly more vulnerability in the system now than what we had in the late 1980s, suggesting that a major recession could be just around the corner. In Australia, the grossly inflated real-estate market that accounts for much of M3 money supply (consisting primarily of private debt to the banking sector) is a major risk-factor. This mountain of unproductive, paper-wealth built on barely serviceable debt could rapidly deflate and amplify the monetary contraction, leading to serious economic hardship.

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