Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s

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Out­go­ing Ohio Con­gress­man Den­nis Kucinich arranged for me to give a brief­ing at Con­gress today on the Fis­cal Cliff, and how the down­turn of 1937 could be a fore­taste of what will hap­pen if the Cliff comes to pass.

I argue that an attempt by the gov­ern­ment to reduce its debt now may trig­ger a renewed bout of delever­ag­ing by the pri­vate sector–and this is what appeared to hap­pen in 1937, when con­fi­dence that the worst of the Depres­sion was over led to the gov­ern­ment reduc­ing its deficit.

Pri­vate sec­tor delever­ag­ing, which had stopped in 1934–35, began once more and unem­ploy­ment rapid­ly rose from about 10 to almost 20 per­cent. The main dan­ger with the Fis­cal Cliff is there­fore not what the reduc­tion of gov­ern­ment spend­ing will do on its own, but that it might trig­ger a renewed bout of delever­ag­ing from the $40 tril­lion over­hang of pri­vate debt that I call the “Rock of Damo­cles”.

Click here to down­load the paper I pre­sent­ed; Click here to down­load the Pow­er­point slides.

Den­nis Kucinich’s intro­duc­tion:

Steve Keen’s Debt­watch Pod­cast