Steve Keen's Debtwatch

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.

The Coun­cil on Eco­nom­ic Poli­cies and the Bank of Eng­land are organ­is­ing a work­shop on this top­ic to be held at the Bank on Novem­ber 14–15 2016. A call for papers has just been put out, with a dead­line of June 30th.

Back­ground

Cli­mate change and oth­er envi­ron­men­tal chal­lenges are mov­ing up pol­i­cy agen­das world­wide. Nonethe­less, the poten­tial impli­ca­tions of envi­ron­men­tal risks and scarci­ties for cen­tral bank­ing as well as the link­ages between finan­cial reg­u­la­tion, mon­e­tary pol­i­cy and envi­ron­men­tal sus­tain­abil­i­ty remain large­ly unex­plored.

For the last 25 years, Aus­tralian politi­cians of both Lib­er­al and Labor hue have been able to brag that, under their stew­ard­ship, Aus­tralia has avoid­ed a reces­sion. Those brag­ging rights are about to come to an end. Dur­ing the life of the next Par­lia­ment — and prob­a­bly by 2017 — Aus­tralia will fall into a pro­longed reces­sion.

Click here to read the rest of this post, and here to down­load the Excel file show­ing the link between a slow­down in the rate of growth of debt and a reces­sion.

I was recent­ly informed that a Span­ish trans­la­tion of Debunk­ing Eco­nom­ics is now avail­able via Ama­zon Spain, under the title “La Economía Desen­mas­cara­da”

There’s one review so far:

The main­stream eco­nom­ic idea that banks are just inter­me­di­aries between savers and investors is a fan­ta­sy, but giv­en that fan­ta­sy, their argu­ment that the lev­el and rate of change of pri­vate debt are not macro­eco­nom­i­cal­ly sig­nif­i­cant (except at the “Zero Low­er Bound”) is cor­rect. But in the real world, the role of the lev­el and rate of change of pri­vate debt is cru­cial. I illus­trate this by build­ing a Min­sky mod­el of Loan­able Funds and con­vert­ing it to the real world of Endoge­nous Mon­ey. Then I explain how cred­it growth plays an essen­tial role in aggre­gate demand and income, and how this is con­sis­tent with the tru­ism that Expen­di­ture equals Income.

Like many com­men­ta­tors, I regard August 9 2007 as the start of the “Glob­al Finan­cial Cri­sis”. On that day, BNP Paribas declared that sev­er­al of its funds were being closed because liq­uid­i­ty in those mar­kets had com­plete­ly evap­o­rat­ed:

So I was par­tic­u­lar­ly amused–in a sick sort of way–to see this bril­liant info-graph­ic on The Fed on Twit­ter today: it plots the amount of laugh­ter in FOMC meet­ings between 2000 and 2012. “Peak Laugh­ter” occurred lit­er­al­ly days before the cri­sis began:

PERG econ­o­mists are devel­op­ing a macro­econo­met­ric mod­el to track the evo­lu­tion of the US econ­o­my over the medi­um term, which is 3–5 years:

• KFBM Macro­eco­nom­ic Out­look Issue 1 Feb­ru­ary 2016

The mod­el belongs to the fam­i­ly of “finan­cial bal­ances mod­els”, an approach pio­neered by Wynne God­ley and col­lab­o­ra­tors at Cam­bridge Uni­ver­si­ty (UK) and then suc­cess­ful­ly devel­oped by the macro­eco­nom­ics team of the Levy Insti­tute — led by God­ley him­self.

At its heart, the KFBM (Kingston Finan­cial Bal­ances Mod­el) is char­ac­terised by a set of thor­ough account­ing matri­ces that gath­er the major stocks and flows of the US econ­o­my as well as their links across insti­tu­tion­al sec­tors. This results in three key strengths of the KFBM:

As I explained in my last post, banks can’t “lend out reserves” under any cir­cum­stances, which under­mines a major ratio­nale that Cen­tral Bank econ­o­mists gave for under­tak­ing Quan­ti­ta­tive Eas­ing in the first place. Con­se­quent­ly, the hope that Bernanke expressed in 2009 is “To Dream The Impos­si­ble Dream”:

To dream the impos­si­ble dream
To fight the unbeat­able foe
To bear with unbear­able sor­row
To run where the brave dare not go

For­mer Chair of the Fed­er­al Reserve Ben Bernanke lis­tens while US Sec­re­tary of the Trea­sury Jacob Lew speaks at the Brook­ings Insti­tu­tion July 8, 2015 in Wash­ing­ton, DC. AFP PHOTO/BRENDAN SMIALOWSKI (Pho­to cred­it should read BRENDAN SMIALOWSKI/AFP/Getty Images)

I began anoth­er post crit­i­cal of Joe Stiglitz’s analy­sis with the caveat that I like Joe. I’ll add to that that I respect his intel­lect too, both because he’s very bright—you don’t win a Nobel Prize (even in Eco­nom­ics!) with­out being very bright—and because com­pared to some oth­er win­ners, he is very capa­ble of think­ing beyond the lim­i­ta­tions of the main­stream.

But there are some main­stream con­cepts that are so deeply embed­ded in even high­ly intel­li­gent, flex­i­ble thinkers like Joe, that they con­tin­ue think­ing in terms of them, when a bit of real­ly seri­ous thought would show that the con­cepts are in fact non­sense.