Steve Keen's Debtwatch

Eight years ago, in Decem­ber 2005, I began warn­ing of an impend­ing eco­nom­ic cri­sis that would com­mence when the rate of growth of pri­vate debt start­ed to fall. My warn­ings hit a pop­u­lar chord: jour­nal­ists through­out the world picked it up and pub­li­cised my views – as well as sim­i­lar argu­ments from Nouriel Roubi­ni, Dean Bak­er, Ann Pet­ti­for, Michael Hud­son, Wynne God­ley, and a few oth­ers.

But our argu­ments were ignored by the eco­nom­ics pro­fes­sion because, accord­ing to main­stream eco­nom­ic the­o­ry, pri­vate debt should have no impact on aggre­gate demand. As Bernanke put it, lend­ing sim­ply trans­fers spend­ing pow­er from lender to bor­row­er, and “pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nom­ic effects” (Bernanke, Essays on the Great Depres­sion, p. 24).

In the intro­duc­tion to last week’s post on my blog I append­ed the state­ment “Health warn­ing: con­tains sub­stan­tial por­tions of irony. May exceed your dai­ly allowance”. Judg­ing from the com­ments onBusi­ness Spec­ta­tor, that was indeed the case for some read­ers. So I’ve eschewed irony in this week’s post.

Much of the irony last week was in this sen­tence – and the links gave the clue that my tongue was plant­ed firm­ly in my cheek:

“Now, as any well trained econ­o­mist knows, it’s a mat­ter of sim­ple log­ic that what hap­pens to pri­vate debt is irrel­e­vant to macro­eco­nom­ics most of the time, because “debt is one per­son­’s lia­bil­i­ty, but anoth­er per­son­’s asset.”

Guest post by Geoff Davies*

Read­ers of this blog will have encoun­tered the idea that near-equi­lib­ri­um neo­clas­si­cal eco­nom­ic the­o­ry is irrel­e­vant to dynam­ic, far-from-equi­lib­ri­um, real mod­ern economies, and that the body of the­o­ry built around the neo­clas­si­cal assump­tions is full of incon­sis­ten­cies.  You will also be famil­iar with the idea that mon­ey and debt play cen­tral, dynam­ic roles in mod­ern economies.

I was invit­ed to give a speech on that top­ic to the Sec­ond Meet­ing of Min­is­ters of Finance of the CELAC in Quito, Ecuador today (Novem­ber 29 2013). In it I out­lined Key­nes’s Ban­cor pro­pos­al from Bret­ton Woods, explained why White’s plan was adopt­ed instead, sup­port­ed the pro­pos­al by Zhou Xiaochuan, the Gov­er­nor of the Cen­tral Bank of Chi­na, to insti­tute Key­nes’s scheme, and pro­posed that Latin Amer­i­ca could try a region­al ver­sion of the same via the Bank of the South.

Recent­ly Krug­man has been defend­ing text­book eco­nom­ics, argu­ing that if pol­i­cy mak­ers had sim­ply fol­lowed their advice, the cri­sis would have been far less severe.

It is deeply unfair to blame text­book eco­nom­ics either for the cri­sis or for the poor response to the cri­sis.  (Krug­man, The Trou­ble with Eco­nom­ics is Econ­o­mists)

I don’t dis­pute that aus­ter­i­ty has made the cri­sis far worse, and that con­ven­tion­al IS-LM analy­sis argues for gov­ern­ment stim­u­lus, not aus­ter­i­ty, in a severe reces­sion. But the extrap­o­la­tion that there­fore main­stream eco­nom­ics text­books are fonts of wis­dom is non­sense. They are instead enor­mous exer­cis­es in often unin­ten­tion­al mendacity–omitting huge swathes of eco­nom­ic research or empir­i­cal data when that research or data con­tra­dict main­stream beliefs.

The “Mun” iter­a­tion of Min­sky, the Open Source sys­tem dynam­ics pro­gram with spe­cial fea­tures to han­dle mon­e­tary mod­el­ing, is now avail­able at Source­Forge:

The Min­sky Home Page at Source­Forge

The pro­gram now sup­ports the basic fea­tures need­ed for sys­tem dynam­ics in gen­er­al, and has the added capa­bil­i­ty of mod­el­ing finan­cial flows using “God­ley Tables”, which are based on the dou­ble-entry book­keep­ing stan­dards of accoun­tants and make it easy to gen­er­ate dynam­ic (ordi­nary dif­fer­en­tial) equa­tions of finan­cial flows.

The Finance News Net­work’s Lelde Smits inter­viewed me just before I left Aus­tralia last week: Link to the Inter­view.

I’ll also be giv­ing a num­ber of talks in Europe in the next few weeks. Fol­low the links below for more details:

Thurs­day Decem­ber 5th, 5pm the Oxford PPE Soci­ety

Fri­day Decem­ber 6th, 5pm, the Post Crash Eco­nom­ics soci­ety in Man­ches­ter Uni­ver­si­ty (Roscoe Build­ing — Lec­ture The­atre A). See this Face­book page for more details.

Tues­day Decem­ber 10th, 8pm: “Why the Cri­sis is not over”, the Uni­ver­si­ty of Gronin­gen

Fri­day Decem­ber 13th, 3.15pm: “Why the Cri­sis is not over”, Duisen­berg school of finance in Ams­ter­dam

Lar­ry Sum­mers’ speech at the IMF has pro­voked a flur­ry of respons­es from New Key­ne­sian econ­o­mists that imply that Sum­mers has locat­ed the “Holy Grail of Macro­eco­nom­ics” – and that it was a poi­soned chal­ice.

“Sec­u­lar stag­na­tion”, Sum­mers sug­gest­ed, was the real expla­na­tion for the con­tin­u­ing slump, and it had been with us for long before this cri­sis began. Its vis­i­bil­i­ty was obscured by the sub­prime bub­ble, but once that burst, it was evi­dent.

So the cri­sis itself was a sideshow. The real sto­ry is about inad­e­quate pri­vate sec­tor demand, which may have exist­ed for decades. Gen­er­at­ing ade­quate demand in the future may require a per­ma­nent stim­u­lus from the gov­ern­ment – mean­ing both the Con­gress and the Fed.

Com­pare the fol­low­ing two state­ments, and see if you can guess who the speak­ers are, when they made these speech­es, and what they announced in them:

“[We are] con­cerned about the rate at which house prices are increas­ing and the poten­tial risks this pos­es to the finan­cial sys­tem and the broad­er econ­o­my. Rapid­ly increas­ing house prices increase the like­li­hood and the poten­tial impact of a sig­nif­i­cant fall in house prices at some point in the future. This is par­tic­u­lar­ly the case in a mar­ket that is already wide­ly con­sid­ered to be over-val­ued.” (Speak­er One).

When the hot air final­ly leaves this new hous­ing bub­ble, its defla­tion will be too slow to result in a 40 per cent fall from June 2010 to June 2025…

Right up until the ear­ly 20th cen­tu­ry, tak­ing an inno­cent stroll on the fore­shores of the US West Coast was haz­ardous for your health: you might sud­den­ly fall uncon­scious, and wake up to find your­self an unfree sea­man aboard a US clip­per bound for Chi­na. That’s where the term “Shang­hai­ing” orig­i­nat­ed: not because the crime hap­pened in Shang­hai, but because Shang­hai was nor­mal­ly the victim’s first port of call as a ship­ping slave.