Category Archives: Debtwatch

For decades, main­stream econ­o­mists have react­ed to crit­i­cism of their method­ol­o­gy main­ly by dis­miss­ing it, rather than engag­ing with it. And the cus­tom­ary form that dis­missal has tak­en is to argue that crit­ics and pur­vey­ors of alter­na­tive approach­es to eco­nom­ics sim­ply aren’t capa­ble of under­stand­ing the math­e­mat­ics the main­stream uses. The lat­est instal­ment of this slant on non-main­stream eco­nom­ic the­o­ry appeared in Noah Smith’s col­umn in Bloomberg View: “Eco­nom­ics With­out Math Is Trendy, But It Does­n’t Add Up”.

Fig­ure 1: Noah’s tweet announc­ing his blog post

This was my keynote speech at the French Asso­ci­a­tion for Polit­i­cal Econ­o­my (AFEP) annu­al con­fer­ence in Mul­house, France (the oth­er keynote was given–in French–by my good friend Marc Lavoie, who is now based at the Uni­ver­si­ty de Paris 13). In this pre­sen­ta­tion, I:

• Dis­par­age the “sec­u­lar stag­na­tion” expla­na­tion that Lar­ry Sum­mers has regur­gi­tat­ed for the tepid lev­el of eco­nom­ic growth today. As did Hansen in the 1930s, Sum­mers pon­ders “why growth would remain anaemic in the absence of major finan­cial con­cerns?”, when finan­cial con­cerns are obvi­ous if you under­stand cred­it;

A cliché—“Expect the Unexpected”—has hap­pened. As I not­ed in “The Divi­sive Brex­it Vote”, though I favoured Brex­it, I took the opin­ion polls at face val­ue, and expect­ed that Britain as a whole would vote to remain in the EU. Instead, in the largest elec­toral turnout in twen­ty years, the UK vot­ed 52:48 in favour of leav­ing the EU.

I’ll leave a post-mortem of the vote itself for lat­er; the main inter­est now is what will hap­pen because of it. Many pun­dits from the Cen­ter, Left and Right opposed Brex­it in the belief that eco­nom­ic Armaged­don for Britain and the globe would flow from it; we’ll now see how real­is­tic their fears were. I regard them as seri­ous­ly overblown, for a num­ber of rea­sons.

Andrew Watt has writ­ten a pas­sion­ate cri­tique of my sup­port for Brex­it (“Pro­gres­sive econ­o­mists should sup­port Remain not Brex­it – a response to Steve Keen”), and it high­lights a key fea­ture of this pecu­liar ref­er­en­dum: peo­ple who nor­mal­ly find them­selves on the same side in most eco­nom­ic and polit­i­cal debates have been divid­ed by this ref­er­en­dum.

Andrew com­ments that he broad­ly agrees with my eco­nom­ic analy­sis on most issues, but vehe­ment­ly oppos­es me here. Like­wise, good friends like the het­ero­dox econ­o­mist Geof­frey Hogdg­son; Ann Pet­ti­for, who led the suc­cess­ful Jubilee 2000 cam­paign to can­cel the debt of the world’s poor­est nations; and Yanis Varo­ufakis, who knows a thing or two about the EU, all strong­ly sup­port Remain.

Note: This was published as my last column on Business Spectator on April 6th, but it’s now gone missing after News Ltd merged BS with its own in-house stable and changed all the URLs. Given the election and Elizabeth Farrelly’s excellent thought piece in the Sydney Morning Herald “The great tragedy of Malcolm Turnbull”, I thought it was a good time to revive it.

One of the dis­ad­van­tages of grow­ing up is find­ing in your old age that peo­ple you nev­er took seri­ous­ly in your youth are now run­ning your coun­try.

CERN has just announced the dis­cov­ery of a new par­ti­cle, called the “FERIR”.

This is not a fun­da­men­tal par­ti­cle of mat­ter like the Hig­gs Boson, but an inven­tion of econ­o­mists. CERN in this instance stands not for the famous par­ti­cle accel­er­a­tor strad­dling the French and Swiss bor­ders, but for an eco­nom­ic research lab at MIT—whose ini­tials are coin­ci­den­tal­ly the same as those of its far more famous cousin.

Despite its rel­a­tive anonymi­ty, MIT’s CERN is far more impor­tant than its phys­i­cal name­sake. The lat­ter mere­ly informs us about the fun­da­men­tal nature of the uni­verse. MIT’s CERN, on the oth­er hand, shapes our lives today, because the dis­cov­er­ies it makes dra­mat­i­cal­ly affect eco­nom­ic pol­i­cy.

Using the dynam­ics of credit–which most oth­er econ­o­mists ignore–I explain why Japan, the USA and UK are among the “Walk­ing Dead of Debt” and why Chi­na, Cana­da, Aus­tralia and South Korea are on their way to join­ing the Debt Zom­bies. This pre­sen­ta­tion is based on work I’m doing for a new 25000 word book for Poli­ty Press enti­tled “Can we avoid anoth­er finan­cial cri­sis?”, which should be pub­lished lat­er this year.

The Lucas Cri­tique has ruled eco­nom­ics for the last 40 years, and led it into a dead-end as well. In this talk to the Eco­nom­ics for Every­one con­fer­ence run by the Post Crash Eco­nom­ics Soci­ety in Man­ches­ter, I argue that micro-found­ed mod­els fail because of the emer­gent prop­er­ties that char­ac­terise com­plex sys­tems. An alter­na­tive approach that tran­scends Lucas’s well-found­ed objec­tion to ad-hoc mod­el-build­ing is to build mod­els from strict­ly true macro­eco­nom­ic iden­ti­ties. I show that three sim­ple identities–the employ­ment rate, the wages share of income, and the pri­vate-debt-to-GDP ratio–are suf­fi­cient to build a sim­ple dynam­ic mod­el that gen­er­ates the pos­si­bil­i­ty of a finan­cial cri­sis. I also give a high-speed but I think com­pre­hen­si­ble tuto­r­i­al on using Min­sky, the Open Source mon­e­tary mod­el­ling pro­gram.

This is an invit­ed paper by the Pri­vate Debt Project, an ini­tia­tive of the phil­an­thropic orga­ni­za­tion the Governor’s Woods Foun­da­tion to raise aware­ness about the eco­nom­ic impor­tance and dan­gers of pri­vate debt.

The era of low growth known as Japan’s “Lost Decade” com­menced in 1990, and per­sists to this day.  While most authors acknowl­edge that the seeds for the Lost Decade were sown by exces­sive cred­it growth in the pre­ced­ing Bub­ble Econ­o­my years, only Richard Koo (Koo, 2009, Koo, 2011, Koo, 2003, Koo, 2014) and Richard Wern­er (Voutsi­nas and Wern­er, 2011, Wern­er, 2002) have sys­tem­at­i­cal­ly argued that insuf­fi­cient cred­it growth dur­ing the “Lost Decade” explains Japan’s now quar­ter-cen­tu­ry long slump. Yet these argu­ments tell us more about the dilem­mas fac­ing today’s world econ­o­my than many more com­mon­ly accept­ed expla­na­tions of the cur­rent slow­down.

For decades, some of the most impor­tant data about mar­ket economies was sim­ply unavail­able: the lev­el of pri­vate debt. You could get gov­ern­ment debt data eas­i­ly, but (with the out­stand­ing excep­tion of the USA—and also Aus­tralia) it was hard to come by.

That has been reme­died by the Bank of Inter­na­tion­al Set­tle­ments, which now pub­lish­es a quar­ter­ly series on debt—government & private—for over 40 coun­tries. This data lets me iden­ti­fy the sev­en coun­tries that, on my analy­sis, are most like­ly to suf­fer a debt cri­sis in the next 1–3 years. They are, in order of like­ly sever­i­ty: Chi­na, Aus­tralia, Swe­den, Hong Kong (though it might deserve first billing), Korea, Cana­da, and Nor­way.