Delever­ag­ing with a twist

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The lat­est Flow of Funds release by the US Fed­eral Reserve shows that the pri­vate sec­tor is con­tin­u­ing to delever. How­ever there are nuances in this process that to some extent explain why a recov­ery appeared fea­si­ble for a while.

The aggre­gate data is unam­bigu­ous: the US econ­omy is delev­er­ing in a way that it hasn’t done since the Great Depres­sion, from debt lev­els that are the high­est in its his­tory. The aggre­gate pri­vate debt to GDP ratio is now 267%,  ver­sus the peak level of 298% achieved back in Feb­ru­ary 2009–an absolute fall of 31 points and a per­cent­age fall of 10.3% from the peak.


This dwarfs any pre­vi­ous post-WWII experience–even the steep reces­sion of the mid-1970s.

US Debt Down­turns Now 1990s 1970s
Dura­tion in years 1.3 2.3 1.3
Peak Debt 298 169 114
Debt Trough 268 163 106
Fall in Debt 31 7 8
Per­cent Decline 10.3% 4.2% 6.7%
Rate of Decline p.a. 7.9% 1.8% 5.1%

The aggre­gate level of pri­vate debt now tow­ers over the econ­omy, putting into sharp relief the obses­sion that politi­cians of all per­sua­sions have had with the pub­lic debt. Rather like Nero fid­dling as Rome burnt, politi­cians have focused on the lesser prob­lem while the major one grew out of con­trol. Now they are obsess­ing about a rise in the pub­lic debt, when in a very large mea­sure that is occur­ring in response to the pri­vate sector’s delever­ag­ing.

If they had paid atten­tion to the level of pri­vate debt in the first place, then we wouldn’t be fac­ing explod­ing pub­lic debt today.

How­ever, though the decline in pri­vate debt is steep and con­tin­u­ing, the rate of decline has slowed. Because debt inter­acts with demand through its rate of change, this has given a stim­u­lus of sorts to the econ­omy in the midst of its delever­ag­ing.


This is obvi­ous when one con­sid­ers aggre­gate demand as I define it: the sum of GDP plus the change in debt (where this demand is spread across both goods & ser­vices and the asset mar­kets). Though debt lev­els are still falling, because they are falling less rapidly there has actu­ally been a boost to aggre­gate demand from debt from the fact that debt is declin­ing less rapidly in 2010 than in 2009:

This is dou­bly so when the con­tri­bu­tion to demand from the pub­lic sec­tor is included, as this shorter term graph shows more clearly.

How­ever while recent data shows a pos­i­tive con­tri­bu­tion to demand from debt falling more slowly, on an annu­alised basis, the change in debt is still sub­tract­ing from aggre­gate demand–and more so than in the pre­vi­ous year. So total demand (across all markets–commodity and assets) had to fall, even though GDP itself grew. Obvi­ously most of the fall in demand has been absorbed by the asset mar­kets, which have not recov­ered to the same level of turnover as in the boom years–and nor should they.

The next table, which uses the aggre­gate debt fig­ure (pub­lic and pri­vate debt com­bined) from the Flow of Funds, shows that aggre­gate demand fell across July 2008 to June 2009, even though debt was still ris­ing, because the rate of growth of debt fell from $3.7 tril­lion to $1.4 tril­lion. Across July 2009 to June 2010, the decline in aggre­gate demand was less than the pre­vi­ous year (a 9.7% fall ver­sus a 15.2% fall), even though the change in debt had turned neg­a­tive.

Variable\Year 2006.5 2007.5 2008.5 2009.5 2010.5
GDP 13,347,800 14,008,200 14,471,800 14,034,500 14,575,000
Change in Nom­i­nal GDP % 6.6% 4.9% 3.3% –3.0% 3.9%
Change in Real GDP % 3.0% 1.8% 1.2% –4.1% 3.0%
Infla­tion Rate % 4.1% 2.4% 5.6% –2.1% N/A
Total Debt 43,337,326 47,528,151 51,272,735 52,686,684 52,054,500
Debt Growth Rate % 10.0% 9.7% 7.9% 2.8% –1.2%
Change in Debt 3,934,348 4,190,825 3,744,584 1,413,949 –632,184
GDP + Change in Debt 17,282,148 18,199,025 18,216,384 15,448,449 13,942,816
Change in Aggre­gate Demand % 0.0% 5.3% 0.1% –15.2% –9.7%

The rise in aggre­gate demand sup­ported a recov­ery in employ­ment, but the prospects of this con­tin­u­ing to the point at which eco­nomic activ­ity booms once more are remote: with debt lev­els as high as they are, the poten­tial for fur­ther delever­ag­ing still exceeds the worst that the US expe­ri­enced dur­ing the Great Depres­sion.

I have recently become aware of some other econ­o­mists using a sim­i­lar con­cept to my mea­sure of the debt con­tri­bu­tion to aggre­gate demand, which they call the “credit impulse” (Biggs, Mayer et al., http://ssrn.com/paper=1595980). They define this as the change in the change in debt, divided by GDP.

My def­i­n­i­tion empha­sises aggre­gate demand and cor­re­lates this with the level of employ­ment (or unem­ploy­ment, as above), whereas theirs empha­sises the change in aggre­gate demand and cor­re­lates with changes in the level of employ­ment. The logic is iden­ti­cal, but has the advan­tage of being able to cor­re­late the change in the change in debt with change in employ­ment. It high­lights an appar­ent para­dox: the econ­omy can receive a boost from debt, even though it is falling, if the rate of that decline slows.

The next few charts apply this con­cept using the recent Flow of Funds data, and shows why it is so impor­tant to con­sider the dynam­ics of debt when try­ing to under­stand why this down­turn has been so severe—and why it also seems to have eased. Firstly, change in employ­ment and change in real GDP are obvi­ously cor­re­lated, and on this basis this down­turn is bad, though not sig­nif­i­cantly worse than pre­vi­ous down­turns in 1958, 1975 and 1983.

How­ever when you con­sider the cor­re­la­tion between the “credit impulse” and the change in employ­ment, this cri­sis has no prece­dent in the post-WWII period:

Fur­ther­more, debt is the lead­ing fac­tor is this process. Though the cor­re­la­tion between changes in real GDP and changes in employ­ment are higher than those for the accel­er­a­tion in debt and changes in employ­ment, the “credit impulse” leads changes in employ­ment while GDP slightly lags changes in employ­ment: credit, which is ignored by con­ven­tional “neo­clas­si­cal” eco­nom­ics, is in the dri­ving seat.

This is some­thing that Keynes real­ized after writ­ing the Gen­eral The­ory (Keynes 1936), but which never made its way into the text­book ver­sion of Keynes that con­ven­tional econ­o­mists like Stiglitz and Krug­man learnt as Key­ne­sian­ism.

Planned investment—i.e. invest­ment ex-ante—may have to secure its “finan­cial pro­vi­sion” before the invest­ment takes place; that is to say, before the cor­re­spond­ing sav­ing has taken place. This ser­vice may be pro­vided either by the new issue mar­ket or by the banks ;—which it is, makes no dif­fer­ence… let us call this advance pro­vi­sion of cash the ‘finance’ required by the cur­rent deci­sions to invest. Invest­ment finance in this sense is, of course, only a spe­cial case of the finance required by any pro­duc­tive process; but since it is sub­ject to spe­cial fluc­tu­a­tions of its own, I should (I now think) have done well to have empha­sised it when I analysed the var­i­ous sources of the demand for money. (Keynes 1937, pp. 246–247)

The good news in the lat­est Flow of Funds data is there­fore that a slow­down in the rate of delever­ag­ing can impart a pos­i­tive impe­tus to employ­ment. How­ever the bad news is that the econ­omy is now hostage to changes in the rate of delever­ag­ing, from lev­els of debt that far exceed any­thing it has ever expe­ri­enced before­hand. Since much of this debt was taken on to finance spec­u­la­tion on asset prices rather than gen­uine invest­ment, it is highly likely that delever­ag­ing will accel­er­ate in the future, as spec­u­la­tors tire—literally as well as metaphorically—of car­ry­ing large debt loads that finance stag­nant or declin­ing asset prices.

Drilling down into the debt data, it’s appar­ent that the sec­tor that caused the crisis—the finance sector—is the one that has delev­ered the most is also the one whose rate of delev­er­ing is slow­ing most rapidly.

This is not a good thing, nor is it likely to last. The finance sec­tor exists to cre­ate debt, and the only way it can do that is by encour­ag­ing the rest of the econ­omy to take it on. If they were fund­ing pro­duc­tive invest­ments with this money, there wouldn’t be a cri­sis in the first place—and debt lev­els would be much lower, com­pared to GDP, than they are today. Instead they have enticed us into debt to spec­u­late on ris­ing asset prices, and the only way they can expand debt again is to re-ignite bub­bles in the share and prop­erty mar­kets once more.

Here’s where the level of debt (when com­pared to income) mat­ters, as opposed to its rate of change: reignit­ing these bub­bles is easy when debt to GDP lev­els are low. But reignit­ing them when debt to income lev­els are astro­nom­i­cal is next to impos­si­ble. Spec­u­la­tors have to be encour­aged to take on a level of debt whose ser­vic­ing con­sumes a dan­ger­ously high pro­por­tion of their income, in the belief that ris­ing asset prices will let them repay that debt with a profit in the near future.

With the debt to GDP lev­els for all non-gov­ern­ment sec­tors of the Amer­i­can econ­omy at unprece­dented lev­els, the prospect that any sec­tor can be enticed to take on yet more debt is remote. Delever­ag­ing is America’s future.

Biggs, M., T. Mayer, et al. “Credit and Eco­nomic Recov­ery: Demys­ti­fy­ing Phoenix Mir­a­cles.” SSRN eLi­brary.

Keynes, J. M. (1936). The gen­eral the­ory of employ­ment, inter­est and money. Lon­don, Macmil­lan.

Keynes, J. M. (1937). “Alter­na­tive the­o­ries of the rate of inter­est.” Eco­nomic Jour­nal
47: 241–252.

Click here for this post in PDF for­mat

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.
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  • Jason Mur­phy

    Bret­t123, with regards the gen­eral eco­nomic law that the propen­sity to delever is directly related to the level debt, do you have an issue with the appli­ca­tion of that law to indi­vud­ual economies for prac­ti­cal pur­poses, or do you reject it out­right.

    That is, if we were talk­ing about the world econ­omy as a whole would you still reject it?

  • bret­t123

    No. I don’t reject it if we are talk­ing about the world econ­omy as a whole. 

    If we are talk­ing about the world econ­omy, you are essen­tially remov­ing exter­nal influ­ences. You are also reduc­ing the pos­si­bil­ity of gov­ern­ments influ­enc­ing out­come because they are then lim­ited on how much they can bor­row exter­nally with­out impact­ing other coun­tries.

    If we are talk­ing about Aus­tralia though (which I am) exter­nal influ­ences (eg China and other economies) and gov­ern­ment stim­u­lus can have a large impact. This Do you agree with this Jason?

  • Jason Mur­phy

    And finally, when I took a look at the list of Exter­nal Debt to GDP ratios the other day I couldn’t help but notice Ire­land at 1008% and think­ing “that’s mag­ni­tude up the scale”.

    It is inter­est­ing then to see this:

    http://www.guardian.co.uk/commentisfree/2010/sep/24/recession-ireland-spain-recovery

    Lux­em­bourg must be an inter­est­ing story given it lists with 3854%?

  • Jason Mur­phy

    Re Brett @ 100 and 102

    @ 100 is a fairly easy ques­tion answer, and I can see you see the point, as it estab­lishes accep­tance that the once the inter­nal dimen­sions of an econ­omy are analysed, includ­ing any actions of gov­ern­ment, that exter­nal influ­ences super­im­poase over it.

    We agree.

    [Sounds like City­doc has a dif­fer­ent view to your­self with regards same].

    With regards @102 we are very close to agree­ment.

    In the world econ­omy sce­nario, with regards gov­ern­ment we agree [with the rider that the gov­ern­ment story we have cho­sen so far is incom­plete and con­sol­i­da­tion to world view also con­sol­i­dates gov­ern­ment role — we bith know that]

    With regards your final point — I agree as well — with the only addi­tional com­ment being that because of the rel­a­tive scale of eco­nomic activ­i­ties, and our level of engage­ment with the inter­na­tional econ­omy, exter­nal influ­ence hits us with more bang for our buck.

    And that’s my key point.

    Steve the­o­ries appear to be log­i­cal and hold true. We should not dis­miss the bil­lions desire to build with our coal and iron ore as a mjor impact on our state of affairs to lightly.

    So on the whole — agreed.

    As for your mate City­doc, with his 10 –5 + 5 = 5 cam­paign he cer­tainly shows him­self as a per­son un-afraid of a chal­lenge!

  • @Citydoc 94

    Regard­ing: How can Steve pre­dict the geo-polit­i­cal dance?

    He can’t and nor can any­one else.”

    You didn’t qual­ify that answer. Is there a truth that there is a geo-polit­i­cal dance? If there is such a thing, they on the inside would surely make it very unpre­dictable.

    Any­way, the def­i­n­i­tion of pre­dict is ‘to declare or tell in advance; proph­esy; fore­tell: to pre­dict the weather; to pre­dict the fall of a civ­i­liza­tion.’ Steve is a the­o­rist, not a prophet.

    In fact, a per­son who is knowl­edge­able about a par­tic­u­lar topic or issue can still have a major blindspot in their think­ing.”

    True, this is hav­ing blink­ers on (either of two leather flaps on a bri­dle, to pre­vent a horse from see­ing side­ways; a blinder). This is why I am crit­i­cal of Steve some­times. I pre­sume Steve is a spe­cial­ist in eco­nomic the­ory, math­e­mat­ics and maybe a few other things. This is why I was aston­ished when he said a few months ago that his blog was not for poe­ple that knew only a lit­tle math­e­mat­ics. I myself would be delighted to learn such math­e­mat­ics. I do have some text­books for the future since I choose to self learn­ing.

    BC (com­ment 74) has this. “If Y=y(x) and y’=dy/dx then the scalar cur­va­ture is C=y”/sqrt(1+y’**2).” Seems like alge­bra, which I was the best in my math class at. I failed to do my HSC since I was con­demned to be in a Eng­lish class that was 7th out of 8 grades. Regard­less, I do under­stand part of the maths above since it uses x and y coor­di­nates and has a scaler curve. I could the­o­ret­i­cally be able to mapped the for­mula in my mind with­out know­ing the maths.

    It hap­pens to you, hap­pens to me and hap­pens to every­one else at var­i­ous times.”

    You have made an assump­tion above about a col­lec­tive sum of poe­ple. That in itself in being blink­ered. Please let me stress this point. 20 years ago, I though peo­ple were open to what I knew. Now I know that this is far from the truth.

    And despite the best laid plans, the­o­ries or strate­gies, you can still be stopped in your tracks by an unfore­seen event or series of events.”

    How com­mon that phrase is. I have seen it used many times. Even by those who sup­port MMT. Is that a phrase you learned or just picked up along your jour­ney in life?

    Peo­ple need to focus on what is impor­tant and know­able.”

    No, this is why human civ­i­liza­tion is has repeated his­tory, over and over. What is impor­tant for many poe­ple in the world today. The answer is per­ceived wealth and mate­r­ial pos­ses­sions.

    Because there is cer­tainly no guar­an­tee that the Chi­nese will let the Yuan appre­ci­ate 20% to 40%.”

    The Chi­nese would be wise the offload as many US secu­ri­ties denom­i­nated in USD before they allowed there cur­rency to appre­ci­ate. Now from a strate­gic view­point, the Chi­nese would also be wise to cut the peg once they have offloaded enough US secu­ri­ties since Tim­o­thy Geit­ner doesn’t sug­gest (either from being a fool or psy­chotic) the true con­se­quences of the USD depre­ci­at­ing against the Yuan by 40% to 80%. Tim­o­thy Geit­ner sug­gest that it will make Amer­ica more com­pet­i­tive but I myself have said that this would hurt the Amer­ica con­sumers since imports from China would pos­si­bly dou­ble in terms of USD. This would cause the destruc­tion of Amer­ica since price infla­tion in nec­es­saries in a cli­mate of price defla­tion in assets and would allow the con­di­tions for greater trans­fer of wealth (per­ceived ?) to the very rich and pow­er­ful.

    And whilst Peter Schiff (Euro Pacific Cap­i­tal) reck­ons gold can get to $5000 or higher, oth­ers (e.g George Soros) have sug­gested that gold is cur­rently a bub­ble.”

    No, gold is a metal that has an intrin­sic value. The bub­ble is the spec­u­la­tive gam­ble of it’s per­ceive value.

    http://en.wikipedia.org/wiki/George_Soros

    Soros is chair­man of Soros Fund Man­age­ment and the Open Soci­ety Insti­tute and a for­mer mem­ber of the Board of Direc­tors of the Coun­cil on For­eign Rela­tions.”

    Now gold could get to USD 5,000 (note the cur­rency). Since Peter Schiff was believ­ing (advo­cat­ing) that the USD was going to fall of the edge of a cliff due to hyper­in­fla­tion. Gold at USD 10,000 is not to be seen as shock­ing. I would say that gold in terms of it’s price by the trade weighted index would be quite even if there was no inter­ven­tions by cen­tral banks or other vested inter­est.

    But in rela­tion to Steve’s sit­u­a­tion, and to speak quite frankly, I am not sure whether his the­o­ries will ideas, beliefs and the­o­ries will come to fruition at this point in time.”

    http://www.smh.com.au/business/wealth-drops-to-oneyear-low-point-20100924-15qjf.html

    So my per­sonal feel­ing at the present time, is that there is too much uncer­tainty in the even­tual out­come for longer term invest­ment deci­sions to be made.”

    I do not have any money to invest. I believe that invest­ments in human nec­es­saries is a crime. I believe that invest­ment in human poten­tial and inven­tion is good.

    But if you like to gam­ble with your cap­i­tal, then that’s dif­fer­ent.”

    I read at dictionary.com that cap­i­tal is the wealth, whether in money or prop­erty, owned or employed in busi­ness by an indi­vid­ual, firm, cor­po­ra­tion, etc. Since I see that true wealth is knowl­edge, then surely true intrin­sic wealth is noth­ing to be gam­ble with.

    To leave you per­plex.

    In July 2008, I knew that Sep­tem­ber was the month when the cri­sis (now GFC) would begin. When Lehman Bros fell I knew to the point of com­mit­ting carer sui­cide (web design, etc) that the biggest cri­sis for a long time was to unfold.

    http://www.molly.com/2008/09/14/why-do-some-people-stay-in-harms-way/comment-page-1/#comment-1940995

    So apart from those other things I men­tion, did I pre­dict a future event or did I just guess?

  • mahaish

    [Would the equity trans­fer you describe effect exter­nal debt? Were their any asso­ci­ated cash­flows?]”

    hi jason,

    its the size of the deficit and on who’s bal­ance sheet it ends up that deter­mines whether the non bank sec­tor of the econ­omy improves nett worth.

    and yes, i think if you have a cur­rency monopolist(the gov­ern­ment) issues too lit­tle cur­rency so there isnt enough to pay some of that cur­rency back in taxes, and spend, whether it be for invest­ment or con­sump­tion, the pri­vate sec­tor will have to find those funds from some­where else, and thats from the bank­ing sys­tem, which may source some of its fund­ing over­seas, increas­ing the for­eign debt.

    so yes a deficit would be asso­ci­ated with ris­ing pri­vate sec­tor sav­ing. the ques­tion is would this addi­tional sav­ing by the pri­vate sec­tor even­tu­ally be lever­aged through the pri­vate bank­ing sys­tem.

    so we may be damned if we do and damned if we dont

    one things for cer­tain, bud­get sur­pluses do not help the pri­vate sec­tor. if you look at the data, the last two reces­sions or near reces­sions, have been pre­ceded by a series of bud­get sur­pluses.

  • Con­jure Bag

    Stella D, his data comes from the Flow of Funds report, Table L.1, “Credit Mar­ket Debt Out­stand­ing,” so he’s using lev­els, not flows. You must com­pute “pri­vate debt.” Here is one way to do it, using quar­terly data back to the early 1950s from St. Louis Fed­eral Reserve FRED time series data­base at the fol­low site 

    http://research.stlouisfed.org/fred2/

    Line 1, Total credit mar­ket debt = Series TCMDO

    Less:
    Line 7, State and Local Gov­ern­ments = Series SLGTCMDODNS

    Less:
    Line 8, Fed­eral Gov­ern­ment = Series FGTCMDODNS

    Less:
    Line 9, Rest of The World = Series WCMITCMFODNS

    Equals:
    Pri­vate Debt

    The GDP data is St Louis Fed FRED time series GDP

    You can now com­pute the ratio, but be aware the credit mar­ket data is not sea­son­ally adjusted. Also, the GDP data is sea­son­ally adjusted, but not “real.”

    Hav­ing answered your ques­tion, per­haps Pro­fes­sor Keen would answer mine:

    Pro­fes­sor, how do you com­pute your pri­vate debt/GDP ratio “per cent per annum growth rate?” I’ve used most of the meth­ods I know and have given up.

    Thanks in advance for your reply.

  • City­doc

    Jason,

    It’s get­ting bor­ing now. I believe it is the abil­ity of the Aus­tralian Gov­ern­ment to con­vince its cit­i­zens and res­i­dents (includ­ing immigrants)to take on more and more debt which is the pri­mary cause of our cur­rent eco­nomic buoy­ancy. I also believe that over­seas fac­tors that you allude have less of an eco­nomic impact than increas­ing local debt lev­els. You think it is the other way around. Let’s agree to dis­agree.

    Also Brett @ 97 made a per­ti­nent point.
    “This is exactly what Steve believes. He believes that too much debt to GDP means that an econ­omy will even­tu­ally start delever­ag­ing – and enter a depres­sion (or long term reces­sion). He regurlary states that noth­ing can stop the delever­ag­ing (includ­ing exter­nal influ­ences or increas­ing gov­ern­ment debt). He’s tem­pered his state­ments recently say­ing that these things can have a short term influ­ence, but even­tu­ally delever­ag­ing must resume. I think we need greater clar­ity on what the “even­tu­ally” time period is.”

  • City­doc

    Alan Gres­ley @ 105,

    Mate, I’ll try and sum up your long post suc­cinctly from what I believe.

    1. There has and always will be a geo-polit­i­cal dance.

    2. Some­times peo­ple have an over­re­aliance on math­e­mat­ics.

    3. His­tory does not tell us the prob­a­bil­ity of future finan­cial things hap­pen­ing.

    4. In rela­tion to life gen­er­ally, peo­ple waste too much time focus­ing on what is unim­por­tant and/or unknow­able.

    5. I have made mis­takes along my jour­ney in life. Some of my mis­takes how­ever have set me up for sub­stan­tially greater future ben­e­fit. How­ever, I would rather learn the lessons from other people’s mis­takes.

    6. I have no idea what the USD and gold price will do in the future. Nor do I still have any idea when Steve’s fore­casts will come true.

    7. Whilst I can’t give too much away, I am a fund man­ager who looks after OPM as well as my own. 

    8. There were numer­ous red flags with Lehman’s busi­ness model well before it col­lapsed.

    9. Rightly or wrongly, one of the most prized assets in today’s soci­ety is the abil­ity to earn an income. The pur­suit of knowl­edge alone does not always pay the bills.

  • Jason Mur­phy

    City­doc, it is obvi­ous your only inter­est here is to poor crap on Steve for rea­sons only known to your­self.

    If you are bored don’t bother pop­ping by.

  • scep­ti­cus

    I think its entirely rea­son­able to sug­gest that pre­dic­tion of future eco­nomic out­comes can­not be cred­i­ble unless they incor­po­rate the cru­cial geo-polit­i­cal, demo­graphic and social mood fac­tors.

    Steve has made some very key con­tri­bu­tions (for me at least) to under­t­sand­ing how credit dynam­ics affect future out­comes — what we need now to com­plete the pic­ture is indi­vid­u­als of sim­i­lar capa­bil­ity and far-sight­ed­ness in the realms of geo pol­i­tics, demo­graph­ics and social trend analy­sis.

    In an age where money is in fact a kind of social credit to be expanded and con­tracted at (at leastin the­ory) our col­lec­tive will, these lat­ter fac­tors are nec­es­sar­ily key.

  • Michael Hoex­ter

    Steve,
    I think this is excel­lent work. I am still trou­bled by the lack of atten­tion your analy­sis is get­ting in the US. For instance, I would like to see you and Paul Krug­man engag­ing in a blog “dia­logue”. He claims to hold Min­sky in high regard and your work is in part an exten­sion of Minsky’s.

    Do you think your work touches on “taboos” that make it “out­side the pale”. If so, what makes it extra-con­tro­ver­sial for crit­i­cal econ­o­mists?

    That being said, I think the idea that the finan­cial sec­tor exists to “cre­ate debt” is an over­sim­pli­fi­ca­tion. It also exists for other pur­poses but appar­ently, at least in the endoge­nous the­ory, cre­at­ing debt is an impor­tant step on the way to the cre­ation of money. I believe you’re col­laps­ing ontol­ogy into tele­ol­ogy in that state­ment.

  • City­doc

    Jason @ 110,

    Please re-read mes­sage 108. Thanks.

  • Thanks for that expla­na­tion Con­jure Bag.

    I cal­cu­late the per­cent per annum growth rate very simply–it’s the change in debt over a year divided by GDP–but I am using two inter­po­lated rolling time series to do so; I also have a sec­ond mea­sure (the debt con­tri­bu­tion to aggre­gate demand) which is some­what dif­fer­ent, and that might be the rea­son for some con­fu­sion.

    Firstly you’re right that I’m work­ing from the level tables to derive the flow, rather than work­ing from the flow data itself–this is just for rea­sons of sim­plic­ity, since I’m doing all this with­out research assis­tance.

    Sec­ondly I inter­po­late monthly fig­ures for both credit and GDP in Amer­ica (Australia’s RBA actu­ally pub­lishes monthly credit fig­ures, so I use raw level data in Aus­tralia but inter­po­lated monthly level data in the USA).

    Then I take the change in debt over 12 months, and divide that by the rel­e­vant monthly fig­ure at each step.

    Each data series is stored as a two col­umn vector–the first con­tain­ing the date (in dec­i­mal for­mat), the sec­ond the data. Series to be worked on are aligned on the first col­umn and then oper­a­tions applied to the match­ing rows.

    The actual oper­a­tion that derives that data in Math­cad is expressed as:

    ToPercent(Divide(Change.Period(USA.DebtPrivate,12),USA.GDP)).

  • If I can inter­cede in the Jason-City­Doc debate, CityDoc’s sur­mise that “it is the abil­ity of the Aus­tralian Gov­ern­ment to con­vince its cit­i­zens and res­i­dents (includ­ing immigrants)to take on more and more debt which is the pri­mary cause of our cur­rent eco­nomic buoy­ancy. I also believe that over­seas fac­tors that you allude have less of an eco­nomic impact than increas­ing local debt lev­els.” is the one that I find is sup­ported by the data.

    When I write that “Where did I go wrong?” post, that’s one of the major points I’ll be mak­ing: empir­i­cally, we avoided a down­turn by re-ignit­ing pri­vate sec­tor lever­ag­ing. Empir­i­cally speak­ing, the Chi­nese fac­tor only became dom­i­nant in March of this year, well after the man­i­fes­ta­tion of the cri­sis had been avoided here.

    I won’t have time for that post for quite some time–I have a ridicu­lous level of work right now till early December–but I will post it before the end of the year.

  • Thanks Michael,

    The rea­son that Krug­man and co don’t fol­low up on my work is that they don’t recog­nise any­thing out­side the neo­clas­si­cal school as eco­nom­ics. There’s no dif­fi­culty in them spot­ting works by me and oth­ers in the Post Key­ne­sian tradition–the online data­base Econ­lit lists my works as agnos­ti­cally as it does Krugman’s–but they would all be utterly unfa­mil­iar to him (both in the method of analy­sis and the authors) and he wouldn’t bother read­ing them.

    And yes there is a bit of an ontol­ogy-tele­ol­ogy over­load there–though as you note it’s not pos­si­ble for the finan­cial sec­tor to cre­ate money with­out also cre­at­ing debt in a pure credit econ­omy.

  • Jason Mur­phy

    I will regard the mat­ter as inter­ceded!

    Let me pro­pose this as I take the gloves off and respec­tively walk to the pavil­ion :):

    A term in the func­tion of the abil­ity to “con­vince” is the exis­tence of pre­set per­cep­tions in the mind of the “con­vincee” upon which to lever­age stim­u­lus pro­vided by the “con­vin­cer”

    That is not con­tro­ver­sial.

    For exam­ple [with­out epress­ing a view either way on the intia­tives mer­its] with regards the recent resource tax the gov­ern­ment punted that “Greedy bil­lion­aires have no right to all the cash” had plenty. The min­ers view was that “China’s desire for our Coal and Iron Ore is the source of our wealth and this will dis­turb that” was more potent.

    It’s plain for all to see in that most recent national test of macro per­cep­tions of the Aus­tralian com­mu­nity what was proven to hold true.

    The sec­ond point I would make is that tak­ing out a loan to buy a house is an effi­cient proxy for “debt growth” in the con­text of our con­sid­er­a­tion.

    Let me reflect on per­sonal expe­ri­ence. If I run through in my mind the peo­ple in my cir­cle who have pur­chased a house dur­ing the period being con­sid­ered there would be 9 peo­ple, and of those 9 there were 2 that had access to the FHOG. The major dri­vers I observed for all 9 [though to vary­ing degrees] was:

    1. A sense of urgency of oppor­tu­nity related to per­cep­tions around con­tin­ued price increase, or a sense of no risk to future price growth.

    2. A sense of urgency around per­cep­tions of not hav­ing a house to live in full stop if they don’t secure a house now.

    3. Assess­ment of par­tic­u­lar areas being, and/or about to be with great cer­tainty, majorly influ­enced by par­tic­u­lar and gen­eral pop­u­la­tion demo­graph­ics, and/or majorly influ­enced by par­tic­u­lar cur­rent and medium term infra­struc­ture projects.

    The ques­tion becomes is 1 and 2 dri­ven by the con­vinc­ing of gov­ern­ment or by the “they are jump­ing all over us to get a piece of us and this is going to roll on and on” mes­sage com­ing from else­where.

    [In the 2 who took up the FHOG one was an after­thought (wasn’t aware that they were eli­gi­ble) and the other was rel­e­vant only to the deter­mi­na­tion of the price limit set for their pur­chase (though I accept that lever­age into total debt argu­ment of the FHOG and cer­tainly the FHOG must have fed into the urgency com­po­nent on the national level to some extent)].

    The third point I would make is that the exchange rate is a very rough broad proxy for per­cep­tions of oth­ers about whether those same oth­ers want a piece of us into the future.

    A look at the exchange rate 1 jan 99 to now:

    http://au.finance.yahoo.com/echarts?s=AUDUSD=X#chart4:symbol=AUDUSD=X;range=19990101,20100920;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=

    shows that those per­cep­tions were estab­lished strongly in the build up to the GFC, strong enough to bridge the crevasse of July 2008 to Nov 2009.

    In con­clu­sion, the gov­ern­ment has tested it’s abil­ity to con­vince in the face of “China, Coal, and Iron Ore” recently and failed. Are we so sure it’s con­vinc­ing power in the face of that was dif­fer­ent with this issue?

  • One can only hope for a gen­eral col­lapse in wages and prices.

  • Oth­er­wise, it’s the great plunge into the abyss.

  • sean­brose­ley

    There are inter­est­ing things com­ing out of the Bank of Eng­land cur­rently:

    http://bit.ly/d7AC0Q

    http://t.co/Y49DSc7

    But also note: 

    http://www.bbc.co.uk/news/business-11418652

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