Steve Keen's Debtwatch

Reports that the USA gov­ern­men­t’s total finan­cial com­mit­ments from the finan­cial cri­sis now top US$5 tril­lion raise the obvi­ous ques­tion “Can they afford it?”.

The answer isn’t obvi­ous. Some econ­o­mists, from a range of schools of eco­nom­ic thought, argue that the gov­ern­ment sec­tor (lump­ing the Trea­sury and the Fed­er­al Reserve togeth­er) has a lim­it­less capac­i­ty to pay debt as a con­se­quence of its sta­tus (espe­cial­ly since the US dol­lar is still the world’s reserve cur­ren­cy).

I don’t dis­pute the capac­i­ty of the gov­ern­ment sec­tor to issue debt. But if it is to ser­vice that debt then there are finan­cial issues for both the gov­ern­ment and tax­pay­ers if the debt it takes on is huge.

And now for some­thing com­plete­ly dif­fer­ent…

A cor­re­spon­dent has just passed this beau­ti­ful piece of wit along to me: a song about the finan­cial cri­sis to the tune of the old “Mon­ster Mash” song from the 50s (you know, back when they had banks).

Today’s CPI data from the US Bureau of Labor Sta­tis­tics reveals that con­sumer prices fell by 1 per­cent in the month of Sep­tem­ber. This is the steep­est month­ly fall in the index since Jan­u­ary 1938, and comes after two pre­vi­ous month­ly falls (of 0.4 and 0.14 per­cent). It is there­fore pos­si­ble that a debt-defla­tion­ary process is under­way.

Month­ly Change in US CPI since 1924

There is no doubt that we are in a debt-induced eco­nom­ic cri­sis; Amer­i­ca may now have entered a defla­tion­ary cri­sis as well. The com­bi­na­tion of the two is the motive force that sets in train a Depres­sion, as Irv­ing Fish­er explained in 1933, in his aca­d­e­m­ic paper “The Debt-Defla­tion The­o­ry of Great Depres­sions” (Econo­met­ri­ca, 1933, Vol­ume 1, pp. 337–357).

The sug­ges­tion that the Fed­er­al Gov­ern­ment might extend its guar­an­tee to man­aged funds in return for the funds becom­ing banks is, as Glenn Dyer has observed for Crikey, sheer bunkum.

On the lender side, this sec­tor of the finance indus­try large­ly arose to make mon­ey out of lend­ing prac­tices or finan­cial prod­ucts that were too adven­tur­ous for banks them­selves.

On the “depos­i­tor” side, investors in these com­pa­nies knew full well that they weren’t mak­ing deposits that can be with­drawn at call—as with a bank—but invest­ments.

There’s an excel­lent arti­cle in The Age today on the mad meth­ods of neo­clas­si­cal econ­o­mists. The author is Mar­tin Feil, who was once a direc­tor of the Indus­tries Assis­tance Commission–a pre­vi­ous incar­na­tion of what is now called the Pro­duc­tiv­i­ty Com­mis­sion:

The arti­cle is enti­tled We can’t live on moon­beams and air.

I plan to tack­le sim­i­lar issues in my next two Debt­watch Reports. Novem­ber’s (the 28th, which is also the sec­ond anniver­sary issue–I start­ed the report in Novem­ber 2006) focus­es on the data that neo­clas­si­cal the­o­ry directs the atten­tion of econ­o­mists to, and the data that the the­o­ry caus­es them to ignore. Cru­cial­ly, the lat­ter includes pri­vate debt–and Feil makes a sim­i­lar set of obser­va­tions. On the data that the RBA’s neo­clas­si­cal econ­o­mists con­sid­er impor­tant:

The import of Ger­ard Hen­der­son­’s dia­tribe in today’s SMH is that the media has done a “soft” job on  my views, which have only gained noto­ri­ety because of the extreme pre­dic­tion I have made—about the forth­com­ing eco­nom­ic down­turn qual­i­fy­ing as not mere­ly a reces­sion, but a Depres­sion. It seems I’ve only got atten­tion because of my extreme views, while the media has let the side down by doing a “tabloid” job only and not sub­ject­ing my views to scruti­ny.