Steve Keen's Debtwatch

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.

Many ele­ments of the recent­ly announced pack­age are jus­ti­fied. When the econ­o­my is about to go into a debt-induced reces­sion, gov­ern­ment spend­ing both boosts demand, and pro­vides the pri­vate sec­tor with cash flow need­ed to meet its debt repay­ment com­mit­ments.

Equal­ly vital was the guar­an­tee of all bank deposits. A run on the banks would be dis­as­trous, and this guar­an­tee ensures that this will not hap­pen.

This week, finan­cial mar­kets tru­ly suc­cumbed to The Pan­ic. The US Dow Jones and S&P500 Indices lost 21%; Aus­trali­a’s All Ordi­nar­ies fell 16%. “Buy and Hold” gave way to “Get Out At All Costs”.

When we look back with the eyes of his­to­ry, the ninth day of the tenth month of 2008 will be the Black Thurs­day on which the world’s biggest ever spec­u­la­tive bub­ble final­ly burst.

The Stock Mar­ket Crash of 2008