Steve Keen wwwdebtdeflationcomblogs wwwdebunkingeconomicscom Key insights Understanding banks debt amp money key to understanding crisis Economists didnt see the crisis coming because they ignore banks ID: 458250
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Slide1
The Fiscal Cliff—Lessons from the 1930s
Steve Keen
www.debtdeflation.com/blogs
www.debunkingeconomics.comSlide2
Key insightsUnderstanding banks, debt & money key to understanding crisisEconomists didn’t see the crisis coming because they ignore banks:“I’m all for including the banking sector in stories where it’s relevant; but why is it so crucial to a story about debt and leverage
?” (Paul
Krugman
, “
Minsky
& Methodology
”)
Banks crucial because lending increases cash flow in the economy
Effective demand is income plus the change in debt
Analysis of dynamics of debt
Explains the crisis
Gives guidance to what the future may hold…Slide3
Key data: Debt to GDP ratios since 1920Why now is comparable to The Great DepressionSlide4
The economic crisisA fall in GDP, but nothing like the Great Depression…Slide5
GDP and the levels of private & public debtPrivate debt far bigger than both GDP and public debt…Slide6
GDP and the change in private & public debtCrisis began when growth of private debt stopped…
2 years of heavy private
sector deleveragingSlide7
Effective demand as GDP plus change in debtNow the scale of the crisis is obvious…Slide8
Change in debt and unemploymentRising private debt causes falling unemployment;Rising unemployment causes rising public debtSlide9
Debt and asset pricesAccelerating debt causes rising asset pricesSlide10
The 1930s collapse in GDPMuch sharper falls in nominal and real GDP…Slide11
GDP and debt levelsMuch smaller debt bubble in the 1930s than today…Slide12
GDP and change in debtMuch longer period of private sector deleveragingMuch slower and smaller government deficit response
4 years of heavy private
sector deleveraging
2 more yearsSlide13
Effective demand: much longer plunge below incomeExtended deleveraging compared to todayRelatively minor government stimulus responseSlide14
The Fiscal Cliff of 1937Dip back into Depression as private sector deleveraging recommencedSlide15
Recovery in WWIIHuge increase in government stimulus drives GDP upPrivate sector delevers during WWII with minor impact on GDPSlide16
Private sector deleveraging during WWIIFall in private sector debt far greater during WWII than during Great Depression, but little impact on GDPStimulus, not austerity, ended Great DepressionSlide17
Private sector finishes deleveraging during WWIIPrivate debt 45% of GDP in 1945—down from 175% in 1930Slide18
Takeaway PointsPrivate debt and government debt are independentBut they affect each otherBoth boost demand in the economy when they
rise
and
reduce it when they fall.
Private debt is more important than public
debt because
it
is so much larger, and
it
drives the economy whereas government debt reacts to it
The crisis was caused by the growth of private debt collapsing
Government debt rose because the economy
collapsed
and
it reduced the severity of the crisis
A premature attempt to reduce government debt through “The Fiscal Cliff” could trigger a renewed bout of deleveraging by the private sector, which could push the economy back into a recession.
Main challenge of public policy is not reducing government debt
But managing the impact of the “Rock of Damocles” of private debt that hangs over the economy.