Uni­ver­si­ty of Texas Eco­nom­ics Pro­fes­sor James Gal­braith is a son of the great US Insti­tu­tion­al econ­o­mist John Ken­neth Gal­braith, and a lead­ing non-ortho­dox econ­o­mist in his own right. He has devel­oped high­ly inno­v­a­tive meth­ods to mea­sure eco­nom­ic inequal­i­ty that are well doc­u­ment­ed here; he is a stri­dent crit­ic of con­ven­tion­al eco­nom­ics; and he has been as active in the USA as an ana­lyst of and com­men­ta­tor on this finan­cial cri­sis as I have in Aus­tralia. His many inter­views on the top­ic are linked from this site.

Ross Git­tins final­ly comes aboard the debt-defla­tion train, with an arti­cle in today’s (Decem­ber 8 2008) Syd­ney Morn­ing Her­ald enti­tled “It’s not infla­tion that did us in, it’s the bor­row­ing”. For non-Aus­tralian read­ers, Ross has been a reg­u­lar eco­nom­ic com­men­ta­tor for Syd­ney’s lead­ing news­pa­per for about forty years.

His eco­nom­ic posi­tion in the past could be described as pre­dom­i­nant­ly neo­clas­si­cal, with occa­sion­al dash­es of Key­ne­sian­ism, the odd infre­quent jibe at the unre­al­is­tic assump­tions under neo­clas­si­cal eco­nom­ics, and a social­ly con­cerned ori­en­ta­tion that was crit­i­cal of both income inequal­i­ty and exces­sive con­sumerism.

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There is some tech­ni­cal glitch affect­ing the blog at present that delays approval of new posts, and often results in mul­ti­ple post­ings from the same post. I know these would be irri­tat­ing to receive, but they are the fault of either the under­ly­ing soft­ware (Word­Press) or my ISP host, or both.

Once I have time to get to the bot­tom of this, I will repair it. In the mean­time, please accept my apolo­gies for the blog’s ten­den­cy to crowd your email inbox with spu­ri­ous mul­ti­ple posts.

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).