The Fiscal Cliff—Lessons from the 1930s

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Steve Keen. www.debtdeflation.com/blogs. www.debunkingeconomics.com. Key insights. Understanding banks, debt & money key to understanding crisis. Economists didn’t see the . crisis coming because they ignore banks:. ID: 458250 Download Presentation

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The Fiscal Cliff—Lessons from the 1930s




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Presentations text content in The Fiscal Cliff—Lessons from the 1930s

Slide1

The Fiscal Cliff—Lessons from the 1930s

Steve Keen

www.debtdeflation.com/blogs

www.debunkingeconomics.com

Slide2

Key insights

Understanding banks, debt & money key to understanding crisis

Economists 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 1920

Why now is comparable to The Great Depression

Slide4

The economic crisis

A fall in GDP, but nothing like the Great Depression…

Slide5

GDP and the levels of private & public debt

Private debt far bigger than both GDP and public debt…

Slide6

GDP and the change in private & public debt

Crisis began when growth of private debt stopped…

2 years of heavy private

sector deleveraging

Slide7

Effective demand as GDP plus change in debt

Now the scale of the crisis is obvious…

Slide8

Change in debt and unemployment

Rising private debt causes falling unemployment;Rising unemployment causes rising public debt

Slide9

Debt and asset prices

Accelerating debt causes rising asset prices

Slide10

The 1930s collapse in GDP

Much sharper falls in nominal and real GDP…

Slide11

GDP and debt levels

Much smaller debt bubble in the 1930s than today…

Slide12

GDP and change in debt

Much longer period of private sector deleveragingMuch slower and smaller government deficit response

4 years of heavy private

sector deleveraging

2 more years

Slide13

Effective demand: much longer plunge below income

Extended deleveraging compared to todayRelatively minor government stimulus response

Slide14

The Fiscal Cliff of 1937

Dip back into Depression as private sector deleveraging recommenced

Slide15

Recovery in WWII

Huge increase in government stimulus drives GDP upPrivate sector delevers during WWII with minor impact on GDP

Slide16

Private sector deleveraging during WWII

Fall in private sector debt far greater during WWII than during Great Depression, but little impact on GDPStimulus, not austerity, ended Great Depression

Slide17

Private sector finishes deleveraging during WWII

Private debt 45% of GDP in 1945—down from 175% in 1930

Slide18

Takeaway Points

Private debt and government debt are

independent

B

ut they affect

each other

Both 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

.

Slide19


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