Who’d a thought it? Unemployment leaps 0.5% in a month

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As usu­al, the lat­est set of data from the ABS on the econ­o­my was “unex­pect­ed­ly worse” than (neo­clas­si­cal) econ­o­mists had been expect­ing. The con­sen­sus was for a 0.2% increase over the month of March, from 5.2 to 5.4 per­cent. In fact, it leapt by two and a half times as much, to 5.7%.

This was right in line with what I was expect­ing from a non-ortho­dox, “Hyman Min­sky” point of view. As I have argued in numer­ous blogs, aggre­gate demand is the sum of GDP plus the change in debt. Now that our econ­o­my is utter­ly debt-depen­dent, the debt-financed asset-price bub­bles have burst, and debt de-lever­ag­ing has begun in earnest, the econ­o­my will tank and unem­ploy­ment will explode as debt-financed spend­ing evap­o­rates.

The key chart I’ve pub­lished on this a num­ber of times is the fol­low­ing: it shows the cor­re­la­tion between the con­tri­bu­tion the change in pri­vate debt makes to aggre­gate demand and the unem­ploy­ment rate (the red line is the change in debt, divid­ed by the sum of the change in debt plus GDP; the blue line is unem­ploy­ment, invert­ed and plot­ted on the right hand axis).

As the econ­o­my has become more and more debt-dependent–as the ratio of Debt to GDP has risen–this cor­re­la­tion has gone from being triv­ial to explain­ing 95% of the lev­el of unem­ploy­ment.

For those who believe that “Aus­tralia is dif­fer­ent”, here’s the match­ing chart for the USA. The only dif­fer­ence is one of time: they began their decline in this Depres­sion about a year before we did. But we are rapid­ly catch­ing up.

The dra­mat­ic dete­ri­o­ra­tion in the econ­o­my comes as a sur­prise to con­ven­tion­al “neo­clas­si­cal” econ­o­mists because they exclude debt (and mon­ey) from their mod­el of how the econ­o­my works. This failed mod­el of the oper­a­tions of a mar­ket econ­o­my is why they are inca­pable of explain­ing the econ­o­my’s behav­iour today.

With the debt con­tri­bu­tion to demand now plum­met­ing, unem­ploy­ment will rise to lev­els that are unprece­dent­ed in the post WWII period–and they may even rival the Great Depres­sion.

Attempts to inflate our way out of this via either gov­ern­ment spend­ing or quan­ti­ta­tive eas­ing will also fail.

The sheer scale of pri­vate debt de-lever­ag­ing swamps the gov­ern­men­t’s pump prim­ing, while there is so much debt rel­a­tive to gov­ern­ment cre­at­ed mon­ey that the lat­ter will have to be increased by astro­nom­i­cal amounts–and giv­en to those in debt, rather than to the banks–to counter the col­lapse in demand caused by pri­vate delever­ag­ing.

To labour a com­par­i­son I’ve made numer­ous times, Rud­d’s stim­u­lus pack­age will inject $42 bil­lion into the econ­o­my, but a 5% reduc­tion in debt by the pri­vate sec­tor will remove $100 bil­lion from it.

Even the slow­down in debt accu­mu­la­tion will swamp the gov­ern­men­t’s stim­u­lus. In 2007-08, the last year of our debt bub­ble, pri­vate debt rose by $259 billion–adding 20% to aggre­gate demand. The fall of this to zero–a sim­ple sta­bil­i­sa­tion of pri­vate debt–will remove 20% of demand from the econ­o­my. This is what is caus­ing unem­ploy­ment to explode now.

On the mon­e­tary front, Bernanke has lit­er­al­ly dou­bled gov­ern­ment-cre­at­ed mon­ey in the USA in a mat­ter of months, but even so the ratio of pri­vate debt to this is close to 30 to 1. He’d need to cre­ate twen­ty times as much  (and give it to the debtors to can­cel their debts, rather than to the banks in a futile attempt to main­tain their facade of sol­ven­cy) before there would be any chance of a mon­e­tary stim­u­lus work­ing. I sim­ply can’t see him try­ing it.

Even if he did (and our local RBA fol­lowed suit), and even if gov­ern­ments main­tained the scale of fis­cal stim­u­lus they are now impart­ing, there would still be the real­i­ty (for the USA, the UK and Aus­tralia, and some Euro­pean nations) that, cour­tesy of the  glob­al­i­sa­tion of pro­duc­tion, they no longer have the pro­duc­tive capac­i­ty to employ those who are going to be thrown into unem­ploy­ment via this debt-dri­ven col­lapse.

The prob­lems caused by the neo­clas­si­cal eco­nom­ic phi­los­o­phy of the last 40 years were papered over by debt. To steal a phrase from War­ren Buf­fett, now that debt is collapsing–and debt-finance can no longer be used to pur­chase cheap Asian goods–the naked­ness of that phi­los­o­phy will be exposed by the out­go­ing tide.

Aus­tralia, which has for some time delud­ed itself that it is dif­fer­ent to the rest of the world, and will there­fore come through this cri­sis rel­a­tive­ly unscathed, may in fact be the most naked of all.

For those who might like to repub­lish this else­where, here’s a link to an RTF file that should make it eas­i­er to grab the graph­ics. It is best viewed in “Nor­mal” rather than “Print” lay­out since Math­cad stuffs up the lay­out some­what.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.