Dude! Where’s My Recov­ery?

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I ini­tially planned to call this post “Eco­nomic Growth, Asset Mar­kets and the Credit Accel­er­a­tor”, but recent neg­a­tive data out of Amer­ica makes me think that this title is more in line with con­ver­sa­tions cur­rently tak­ing place in the White House.

(Click here for this post in PDF)

Accord­ing to the NBER, the “Great Reces­sion” is now two years behind us, but the recov­ery that nor­mally fol­lows a reces­sion has not occurred. While growth did rise for a while, it has been anaemic com­pared to the norm after a reces­sion, and it is already trend­ing down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be sub­stan­tially higher than this to make seri­ous inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trend­ing down.

Fig­ure 1

Unem­ploy­ment is there­fore ris­ing once more, and with it, Obama’s chances of re-elec­tion are rapidly fad­ing.

Fig­ure 2

Obama was assured by his advi­sors that this wouldn’t hap­pen. Right from the first Eco­nomic Report of the Pres­i­dent that he received from Bush’s out­go­ing Chair­man of the Coun­cil of Eco­nomic Advis­ers Ed Lazear in Jan­u­ary 2009, he was assured that “the deeper the down­turn, the stronger the recov­ery”. On the basis of the regres­sion shown in Chart 1–9 of that report (on page 54), I am sure that Obama was told that real growth would prob­a­bly exceed 5 per cent per annum—because this is what Ed Lazear told me after my ses­sion at the Aus­tralian Con­fer­ence of Econ­o­mists in Sep­tem­ber 2009.

Fig­ure 3

I dis­puted this analy­sis then (see “In the Dark on Cause and Effect, Debt­watch Octo­ber 2009”), and events have cer­tainly borne out my analy­sis rather than the con­ven­tional wis­dom. To give an idea of how wrong this guid­ance was, the peak to trough decline in the Great Recession—the x-axis in Lazear’s Chart—was over 6 per­cent. His regres­sion equa­tion there­fore pre­dicted that GDP growth in the 2 years after the reces­sion ended would have been over 12 per­cent. If this equa­tion had born fruit, US Real GDP would be $14.37 tril­lion in June 2011, ver­sus the recorded $13.44 tril­lion in March 2011.

Fig­ure 4

So why has the con­ven­tional wis­dom been so wrong? Largely because it has ignored the role of pri­vate debt—which brings me back to my orig­i­nal title.


Economic Growth, Asset Markets and the Credit Accelerator


Neo­clas­si­cal econ­o­mists ignore the level of pri­vate debt, on the basis of the a pri­ori argu­ment that “one man’s lia­bil­ity is another man’s asset”, so that the aggre­gate level of debt has no macro­eco­nomic impact. They rea­son that the increase in the debtor’s spend­ing power is off­set by the fall in the lender’s spend­ing power, and there is there­fore no change to aggre­gate demand.

Lest it be said that I’m par­o­dy­ing neo­clas­si­cal eco­nom­ics, or rely­ing on what lesser lights believe when the lead­ers of the pro­fes­sion know bet­ter, here are two appo­site quotes from Ben Bernanke and Paul Krug­man.

Bernanke in his Essays on the Great Depres­sion, explain­ing why neo­clas­si­cal econ­o­mists didn’t take Fisher’s Debt Defla­tion The­ory of Great Depres­sions (Irv­ing Fisher, 1933) seri­ously:

Fisher’s idea was less influ­en­tial in aca­d­e­mic cir­cles, though, because of the coun­ter­ar­gu­ment that debt-defla­tion rep­re­sented no more than a redis­tri­b­u­tion from one group (debtors) to another (cred­i­tors). Absent implau­si­bly large dif­fer­ences in mar­ginal spend­ing propen­si­ties among the groups, it was sug­gested, pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nomic effects… (Ben S. Bernanke, 2000, p. 24)

Krug­man in his most recent draft aca­d­e­mic paper on the cri­sis:

Given both the promi­nence of debt in pop­u­lar dis­cus­sion of our cur­rent eco­nomic dif­fi­cul­ties and the long tra­di­tion of invok­ing debt as a key fac­tor in major eco­nomic con­trac­tions, one might have expected debt to be at the heart of most main­stream macro­eco­nomic models—especially the analy­sis of mon­e­tary and fis­cal pol­icy. Per­haps some­what sur­pris­ingly, how­ever, it is quite com­mon to abstract alto­gether from this fea­ture of the econ­omy. Even econ­o­mists try­ing to ana­lyze the prob­lems of mon­e­tary and fis­cal pol­icy at the zero lower bound—and yes, that includes the authors—have often adopted rep­re­sen­ta­tive-agent mod­els in which every­one is alike, and in which the shock that pushes the econ­omy into a sit­u­a­tion in which even a zero inter­est rate isn’t low enough takes the form of a shift in everyone’s pref­er­ences…

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all level of debt makes no dif­fer­ence to aggre­gate net worth — one person’s lia­bil­ity is another person’s asset. (Paul Krug­man and Gauti B. Eggerts­son, 2010, pp. 2–3; empha­sis added)

They are pro­foundly wrong on this point because neo­clas­si­cal econ­o­mists do not under­stand how money is cre­ated by the pri­vate bank­ing system—despite decades of empir­i­cal research to the con­trary, they con­tinue to cling to the text­book vision of banks as mere inter­me­di­aries between savers and bor­row­ers.

This is bizarre, since as long as 4 decades ago, the actual sit­u­a­tion was put very sim­ply by the then Senior Vice Pres­i­dent, Fed­eral Reserve Bank of New York, Alan Holmes. Holmes explained why the then fad­dish Mon­e­tarist pol­icy of con­trol­ling infla­tion by con­trol­ling the growth of Base Money had failed, say­ing that it suf­fered from “a naive assump­tion” that:

the bank­ing sys­tem only expands loans after the [Fed­eral Reserve] Sys­tem (or mar­ket fac­tors) have put reserves in the bank­ing sys­tem. In the real world, banks extend credit, cre­at­ing deposits in the process, and look for the reserves later. The ques­tion then becomes one of whether and how the Fed­eral Reserve will accom­mo­date the demand for reserves. In the very short run, the Fed­eral Reserve has lit­tle or no choice about accom­mo­dat­ing that demand; over time, its influ­ence can obvi­ously be felt. (Alan R. Holmes, 1969, p. 73; empha­sis added)

The empir­i­cal fact that “loans cre­ate deposits” means that the change in the level of pri­vate debt is matched by a change in the level of money, which boosts aggre­gate demand. The level of pri­vate debt there­fore can­not be ignored—and the fact that neo­clas­si­cal econ­o­mists did ignore it (and, with the likes of Greenspan run­ning the Fed, actively pro­moted its growth) is why this is no “gar­den vari­ety” down­turn.

In all the post-WWII reces­sions on which Lazear’s regres­sion was based, the down­turn ended when the growth of pri­vate debt turned pos­i­tive again and boosted aggre­gate demand. This of itself is not a bad thing: as Schum­peter argued decades ago, in a well-func­tion­ing cap­i­tal­ist sys­tem, the main recip­i­ents of credit are entre­pre­neurs who have an idea, but not the money needed to put it into action:

[I]n so far as credit can­not be given out of the results of past enter­prise … it can only con­sist of credit means of pay­ment cre­ated ad hoc, which can be backed nei­ther by money in the strict sense nor by prod­ucts already in exis­tence…

It pro­vides us with the con­nec­tion between lend­ing and credit means of pay­ment, and leads us to what I regard as the nature of the credit phe­nom­e­non… credit is essen­tially the cre­ation of pur­chas­ing power for the pur­pose of trans­fer­ring it to the entre­pre­neur, but not sim­ply the trans­fer of exist­ing pur­chas­ing power.” (Joseph Alois Schum­peter, 1934, pp. 106–107)

It becomes a bad thing when this addi­tional credit goes, not to entre­pre­neurs, but to Ponzi mer­chants in the finance sec­tor, who use it not to inno­vate or add to pro­duc­tive capac­ity, but to gam­ble on asset prices. This adds to debt lev­els with­out adding to the economy’s capac­ity to ser­vice them, lead­ing to a blowout in the ratio of pri­vate debt to GDP. Ulti­mately, this process leads to a cri­sis like the one we are now in, where so much debt has been taken on that the growth of debt comes to an end. The econ­omy then enters not a reces­sion, but a Depres­sion.

For a while though, it looked like a recov­ery was afoot: growth did rebound from the depths of the Great Reces­sion, and very quickly com­pared to the Great Depres­sion (though slowly when com­pared to Post-WWII reces­sions).

Clearly the scale of gov­ern­ment spend­ing, and the enor­mous increase in Base Money by Bernanke, had some impact—but nowhere near as much as they were hop­ing for. How­ever the main fac­tor that caused the brief recovery—and will also cause the dreaded “dou­ble dip”—is the Credit Accel­er­a­tor.

I’ve pre­vi­ously called this the “Credit Impulse” (using the name bestowed by Michael Biggs et al., 2010), but I think “Credit Accel­er­a­tor” is both move evoca­tive and more accu­rate. The Credit Accel­er­a­tor at any point in time is the change in the change in debt over pre­vi­ous year, divided by the GDP fig­ure for that point in time. From first prin­ci­ples, here is why it mat­ters.

Firstly, and con­trary to the neo­clas­si­cal model, a cap­i­tal­ist econ­omy is char­ac­ter­ized by excess sup­ply at vir­tu­ally all times: there is nor­mally excess labor and excess pro­duc­tive capac­ity, even dur­ing booms. This is not per se a bad thing but merely an inher­ent char­ac­ter­is­tic of capitalism—and it is one of the rea­sons that cap­i­tal­ist economies gen­er­ate a much higher rate of inno­va­tion than did social­ist economies (Janos Kor­nai, 1980). The main con­straint fac­ing cap­i­tal­ist economies is there­fore not sup­ply, but demand.

Sec­ondly, all demand is mon­e­tary, and there are two sources of money: incomes, and the change in debt. The sec­ond fac­tor is ignored by neo­clas­si­cal eco­nom­ics, but is vital to under­stand­ing a cap­i­tal­ist econ­omy. Aggre­gate demand is there­fore equal to Aggre­gate Sup­ply plus the change in debt.

Thirdly, this Aggre­gate Demand is expended not merely on new goods and ser­vices, but also on net sales of exist­ing assets. Wal­ras’ Law, that main­stay of neo­clas­si­cal eco­nom­ics, is thus false in a credit-based economy—which hap­pens to be the type of econ­omy in which we live. Its replace­ment is the fol­low­ing expres­sion, where the left hand is mon­e­tary demand and the right hand is the mon­e­tary value of pro­duc­tion and asset sales:

Income + Change in Debt = Out­put + Net Asset Sales;

In sym­bols (where I’m using an arrow to indi­cate the direc­tion of cau­sa­tion rather than an equals sign), this is:


This means that it is impos­si­ble to sep­a­rate the study of “Finance”—largely, the behav­iour of asset markets—from the study of macro­eco­nom­ics. Income and new credit are expended on both newly pro­duced goods and ser­vices, and the two are as entwined as a scram­bled egg.

Net Asset Sales can be bro­ken down into three com­po­nents:

  • The asset price Level; times
  • The frac­tion of assets sold; times
  • The quan­tity of assets

Putting this in sym­bols:


That cov­ers the lev­els of aggre­gate demand, aggre­gate sup­ply and net asset sales. To con­sider eco­nomic growth—and asset price change—we have to look at the rate of change. That leads to the expres­sion:


There­fore the rate of change of asset prices is related to the accel­er­a­tion of debt. It’s not the only fac­tor obviously—change in incomes is also a fac­tor, and as Schum­peter argued, there will be a link between accel­er­at­ing debt and ris­ing income if that debt is used to finance entre­pre­neur­ial activ­ity. Our great mis­for­tune is that accel­er­at­ing debt hasn’t been pri­mar­ily used for that pur­pose, but has instead financed asset price bub­bles.

There isn’t a one-to-one link between accel­er­at­ing debt and asset price rises: some of the bor­rowed money dri­ves up pro­duc­tion (think SUVs dur­ing the boom), con­sumer prices, the frac­tion of exist­ing assets sold, and the pro­duc­tion of new assets (think McMan­sions dur­ing the boom). But the more the econ­omy becomes a dis­guised Ponzi Scheme, the more the accel­er­a­tion of debt turns up in ris­ing asset prices.

As Schumpeter’s analy­sis shows, accel­er­at­ing debt should lead change in out­put in a well-func­tion­ing econ­omy; we unfor­tu­nately live in a Ponzi econ­omy where accel­er­at­ing debt leads to asset price bub­bles.

In a well-func­tion­ing econ­omy, peri­ods of accel­er­a­tion of debt would be fol­lowed by peri­ods of decel­er­a­tion, so that the ratio of debt to GDP cycled but did not rise over time. In a Ponzi econ­omy, the accel­er­a­tion of debt remains pos­i­tive most of the time, lead­ing not merely to cycles in the debt to GDP ratio, but a sec­u­lar trend towards ris­ing debt. When that trend exhausts itself, a Depres­sion ensues—which is where we are now. Delever­ag­ing replaces ris­ing debt, the debt to GDP ratio falls, and debt starts to reduce aggre­gate demand rather than increase it as hap­pens dur­ing a boom.

Even in that sit­u­a­tion, how­ever, the accel­er­a­tion of debt can still give the econ­omy a tem­po­rary boost—as Biggs, Meyer and Pick pointed out. A slow­down in the rate of decline of debt means that debt is accel­er­at­ing: there­fore even when aggre­gate pri­vate debt is falling—as it has since 2009—a slow­down in that rate of decline can give the econ­omy a boost.

That’s the major fac­tor that gen­er­ated the appar­ent recov­ery from the Great Reces­sion: a slow­down in the rate of decline of pri­vate debt gave the econ­omy a tem­po­rary boost. The same force caused the appar­ent boom of the Great Mod­er­a­tion: it wasn’t “improved mon­e­tary pol­icy” that caused the Great Mod­er­a­tion, as Bernanke once argued (Ben S. Bernanke, 2004), but bad mon­e­tary pol­icy that wrongly ignored the impact of ris­ing pri­vate debt upon the econ­omy.

Fig­ure 5

The fac­tor that makes the recent recov­ery phase dif­fer­ent to all pre­vi­ous ones—save the Great Depres­sion itself—is that this strong boost from the Credit Accel­er­a­tor has occurred while the change in pri­vate debt is still mas­sively neg­a­tive. I return to this point later when con­sid­er­ing why the recov­ery is now peter­ing out.

The last 20 years of eco­nomic data shows the impact that the Credit Accel­er­a­tor has on the econ­omy. The recent recov­ery in unem­ploy­ment was largely caused by the dra­matic rever­sal of the Credit Accelerator—from strongly neg­a­tive to strongly positive—since late 2009:

Fig­ure 6

The Credit Accel­er­a­tor also caused the tem­po­rary recov­ery in house prices:

Fig­ure 7

And it was the pri­mary fac­tor dri­ving the Bear Mar­ket rally in the stock mar­ket:

Fig­ure 8


Leads and Lags


I use the change in the change in debt over a year because the monthly and quar­terly data is sim­ply too volatile; the annual change data smooths out much of the noise. Con­se­quently the data shown for change in unem­ploy­ment, house prices and the stock mar­ket are also for the change the pre­vi­ous year.

How­ever the change in the change in debt oper­ates can impact rapidly on some markets—notably the Stock Mar­ket. So though the cor­re­la­tions in the above graphs are already high, they are higher still when we con­sider the causal role of the debt accel­er­a­tor in chang­ing the level of aggre­gate demand by lag­ging the data.

This shows that the annual Credit Accel­er­a­tor leads annual changes in unem­ploy­ment by roughly 5 months, and its max­i­mum cor­re­la­tion is a stag­ger­ing –0.85 (neg­a­tive because an accel­er­a­tion in debt causes a fall in unem­ploy­ment by boost­ing aggre­gate demand, while a decel­er­a­tion in debt causes a rise in unem­ploy­ment by reduc­ing aggre­gate demand).

Fig­ure 9

The cor­re­la­tion between the annual Credit Accel­er­a­tor and annual change in real house prices peaks at about 0.7 roughly 9 months ahead:

Fig­ure 10

And the Stock Mar­ket is also a crea­ture of the Credit Impulse, where the lead is about 10 months and the cor­re­la­tion peaks at just under 0.6:

Fig­ure 11

The causal rela­tion­ship between the accel­er­a­tion of debt and change in stock prices is more obvi­ous when the 10 month lag is taken into account:

Fig­ure 12

These cor­re­la­tions, which con­firm the causal argu­ment made between the accel­er­a­tion of debt and the change in asset prices, expose the dan­ger­ous pos­i­tive feed­back loop in which the econ­omy has been trapped. This is sim­i­lar to what George Soros calls a reflex­ive process: we bor­row money to gam­ble on ris­ing asset prices, and the accel­er­a­tion of debt causes asset prices to rise.

This is the basis of a Ponzi Scheme, and it is also why the Scheme must even­tu­ally fail. Because it relies not merely on grow­ing debt, but accel­er­at­ing debt, ulti­mately that accel­er­a­tion must end—because oth­er­wise debt would become infi­nite. When the accel­er­a­tion of debt ceases, asset prices col­lapse.

The annual Credit Accel­er­a­tor is still very strong right now—so why is unem­ploy­ment ris­ing and both hous­ing and stocks falling? Here we have to look at the more recent quar­terly changes in the Credit Accelerator—even though there is too much noise in the data to use it as a decent indi­ca­tor (the quar­terly lev­els show in Fig­ure 13 are from month to month—so that the bar for March 2011 indi­cates the accel­er­a­tion of debt between Jan­u­ary and March 2011). It’s appar­ent that the strong accel­er­a­tion of debt in mid to late 2010 is peter­ing out. Another quar­ter of that low a rate of accel­er­a­tion in debt—or a return to more deceleration—will drive the annual Credit Accel­er­a­tor down or even neg­a­tive again. The lead between the annual Credit Accel­er­a­tor and the annu­al­ized rates of change of unem­ploy­ment and asset prices means that this dimin­ished stim­u­lus from accel­er­at­ing debt is turn­ing up in the data now.

Fig­ure 13

This ten­dency for the Credit Accel­er­a­tor to turn neg­a­tive after a brief bout of being pos­i­tive is likely to be with us for some time. In a well-func­tion­ing econ­omy, the Credit Accel­er­a­tor would fluc­tu­ate around slightly above zero. It would be above zero when a Schum­peter­ian boom was in progress, below dur­ing a slump, and tend to exceed zero slightly over time because pos­i­tive credit growth is needed to sus­tain eco­nomic growth. This would result in a pri­vate debt to GDP level that fluc­tu­ated around a pos­i­tive level, as out­put grew cycli­cally in pro­por­tion to the ris­ing debt.

Instead, it has been kept pos­i­tive over an unprece­dented period by a Ponzi-ori­ented finan­cial sec­tor, which was allowed to get away with it by naïve neo­clas­si­cal econ­o­mists in posi­tions of author­ity. The con­se­quence was a sec­u­lar ten­dency for the debt to GDP ratio to rise. This was the dan­ger Min­sky tried to raise aware­ness of in his Finan­cial Insta­bil­ity Hypoth­e­sis (Hyman P. Min­sky, 1972)—which neo­clas­si­cal econ­o­mists like Bernanke ignored.

The false pros­per­ity this accel­er­at­ing debt caused led to the fan­tasy of “The Great Mod­er­a­tion” tak­ing hold amongst neo­clas­si­cal econ­o­mists. Ulti­mately, in 2008, this fan­tasy came crash­ing down when the impos­si­bil­ity of main­tain­ing a pos­i­tive accel­er­a­tion in debt for­ever hit—and the Great Reces­sion began.

Fig­ure 14

From now on, unless we do the sen­si­ble thing of abol­ish­ing debt that should never have been cre­ated in the first place, we are likely to be sub­ject to wild gyra­tions in the Credit Accel­er­a­tor, and a gen­eral ten­dency for it to be neg­a­tive rather than pos­i­tive. With debt still at lev­els that dwarf pre­vi­ous spec­u­la­tive peaks, the pos­i­tive feed­back between accel­er­at­ing debt and ris­ing asset prices can only last for a short time, since it if were to per­sist, debt lev­els would ulti­mately have to rise once more. Instead, what is likely to hap­pen is a a period of strong accel­er­a­tion in debt (caused by a slow­down in the rate of decline of debt) and ris­ing asset prices—followed by a decline in the accel­er­a­tion as the veloc­ity of debt approaches zero.

Fig­ure 15

Here Soros’s reflex­iv­ity starts to work in reverse. With the Credit Accel­er­a­tor going into reverse, asset prices plunge—which fur­ther reduces the public’s will­ing­ness to take on debt, which causes asset prices to fall even fur­ther.

The process even­tu­ally exhausts itself as the debt to GDP ratio falls. But given that the cur­rent pri­vate debt level is per­haps 170% of GDP above where it should be (the level that finances entre­pre­neur­ial invest­ment rather than Ponzi Schemes), the end game here will be many years in the future. The only sure road to recov­ery is debt abolition—but that will require defeat­ing the polit­i­cal power of the finance sec­tor, and end­ing the influ­ence of neo­clas­si­cal econ­o­mists on eco­nomic pol­icy. That day is still a long way off.

Fig­ure 16

Bernanke, Ben S. 2000. Essays on the Great Depres­sion. Prince­ton: Prince­ton Uni­ver­sity Press.

____. 2004. “The Great Mod­er­a­tion: Remarks by Gov­er­nor Ben S. Bernanke at the Meet­ings of the East­ern Eco­nomic Asso­ci­a­tion, Wash­ing­ton, Dc Feb­ru­ary 20, 2004,” East­ern Eco­nomic Asso­ci­a­tion. Wash­ing­ton, DC: Fed­eral Reserve Board,

Biggs, Michael; Thomas Mayer and Andreas Pick. 2010. “Credit and Eco­nomic Recov­ery: Demys­ti­fy­ing Phoenix Mir­a­cles.” SSRN eLi­brary.

Fisher, Irv­ing. 1933. “The Debt-Defla­tion The­ory of Great Depres­sions.” Econo­met­rica, 1(4), 337–57.

Holmes, Alan R. 1969. “Oper­a­tional Con­straints on the Sta­bi­liza­tion of Money Sup­ply Growth,” F. E. Mor­ris, Con­trol­ling Mon­e­tary Aggre­gates. Nan­tucket Island: The Fed­eral Reserve Bank of Boston, 65–77.

Kor­nai, Janos. 1980. “‘Hard’ and ‘Soft’ Bud­get Con­straint.” Acta Oeco­nom­ica, 25(3–4), 231–45.

Krug­man, Paul and Gauti B. Eggerts­son. 2010. “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo Approach [2nd Draft 2/14/2011],” New York: Fed­eral Reserve Bank of New York & Prince­ton Uni­ver­sity,

Min­sky, Hyman P. 1972. “Finan­cial Insta­bil­ity Revis­ited: The Eco­nom­ics of Dis­as­ter,” Board of Gov­er­nors of the Fed­eral Reserve Sys­tem, Reap­praisal of the Fed­eral Reserve Dis­count Mech­a­nism. Wash­ing­ton, D.C.: Board of Gov­er­nors of the Fed­eral Reserve Sys­tem,

Schum­peter, Joseph Alois. 1934. The The­ory of Eco­nomic Devel­op­ment : An Inquiry into Prof­its, Cap­i­tal, Credit, Inter­est and the Busi­ness Cycle. Cam­bridge, Mass­a­chu­setts: Har­vard Uni­ver­sity Press.



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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  • Great! It seems that Word hasn’t exported its own equa­tions to the Web!

    For­tu­nately they are in the PDF for those that are inter­ested. I’ll see if I can update the web page in the mean­time.

  • gor­don

    Best post yet, Steve. Crys­tal clear. Thanks.

  • nem­naisa

    I must con­grat­u­late you on this lat­est post. It suc­cinctly explains and sum­ma­rizes many of your ideas, and how money and debt have affected the cur­rent econ­omy. I am look­ing for­ward to your revised book and hop­ing that it would be on sim­i­lar explana­tory level (ie, for those of us who is too busy to try to trans­late the math into ver­bal con­cepts most of us can eas­ily under­stand).

  • nem­naisa

    By the way Steve, my under­stand­ing is that your model is based on a pure credit econ­omy. What about fiat money by the gov­ern­ment? How does it come into play? Also, what needs to be adjusted in your cur­rent model for econ­omy like China?

  • ken

    One prob­lem is the polit­i­cal aspect. Telling the vot­ers that their asset prices are going to drop is not the best way to be elected. Any­one who has worked with or for the pub­lic ser­vice knows that unpop­u­lar ideas are not good for career advance­ment.

    I was reminded of the prob­lem while read­ing a finance col­umn recently. Cou­ple has 2.1 mil­lion in assets com­pris­ing own prop­erty and 2 rentals but 1.5 mil­lion in lia­bil­i­ties rep­re­sented by the mort­gages. Try telling them that its not a good idea. As they were in their fifties it is quite pos­si­ble they will retire with noth­ing but super­an­nu­a­tion.

  • mahaish

    The process even­tu­ally exhausts itself as the debt to GDP ratio falls. But given that the cur­rent pri­vate debt level is per­haps 170% of GDP above where it should be (the level that finances entre­pre­neur­ial invest­ment rather than Ponzi Schemes), the end game here will be many years in the future”

    could be decades steve,

    look at japan, nearly 20 years and count­ing , and the bank­ing sys­tem still not fixed,

    break­ing the power of the finan­cial sec­tor, means restruc­tur­ing the bank­ing sys­tem, and the ide­ol­ogy based around the banks abil­ity to creat cur­rency.

    because of this power banks enjoy priv­iledges akin to the gov­ern­ment,

    noth­ing short of a polit­i­cal rev­o­lu­tion is going to change this

  • Thanks nem­naisa,

    And yes I do need to incor­po­rate fiat money cre­ation into my model. I have already drafted a basic exten­sion to include a gov­ern­ment sec­tor with a cen­tral bank, but have yet to have a chance to step its through its paces. That will all be in the next book–which I’ll try to keep at the same explana­tory level as this blog, even though it will nec­es­sar­ily have more tech­ni­cal detail in it as well.

  • Agreed Mahaish–which is what it took in the Great Depres­sion too. The over­throw of the banks began with the Pec­ora Com­mis­sion, and Roo­sevelt fol­low­ing its lead.

  • Rein­ing in of the polit­i­cal power of the finance sec­tor would take time and have a defla­tion­ary effect dur­ing that time. Isn’t the ideal to fund deficits with new money rather than with debt, and chan­nel the new money to those most in debt, i.e. house­holds, AT THE SAME TIME as rein­ing in the finance sec­tor? That would get rid of debt in a non defla­tion­ary way.

  • bar­ry­thomp­son

    My ques­tion for Steve is this:

    Why does pri­vate debt:GDP change so much? Is it sim­ply the will­ing­ness of indi­vid­u­als and busi­ness to take on more debt rel­a­tive to their income? If so, this does not explain why the addi­tional credit cre­ated does not flow through the econ­omy as increased income that is counted in GDP.

    It is as if, over the years, increas­ing amounts of money has stopped flow­ing prop­erly in the econ­omy. Is it being trapped in the finan­cial sec­tor, cor­po­rate cof­fers, or bank accounts of the increas­ing num­bers of super-wealthy?

    Could it be that re-dis­trib­ut­ing wealth to debtors is part of the solu­tion? This would mean rais­ing incomes of house­holds either by increas­ing taxes on the finan­cial sector/corporations/super-wealthy indi­vid­u­als or by increas­ing gov­ern­ment bor­row­ing and spend­ing. Note that these solu­tions are the exact oppo­site of the polit­i­cal trends since WWII, dur­ing which time pri­vate debt:GDP has been ris­ing.

  • Fran­cis X. Gen­tile

    His­tor­i­cally and gen­er­ally Inter­est paid is tax expen­si­ble, Div­i­dends paid are not tax expen­si­ble. Inter­est and div­i­dends recieved are tax­able. Hence there has been a long term struc­tural bias to bor­row more from the finan­cial sec­tor.

    The dif­fer­ence between debt own­er­ship and equity own­er­ship has been the sub­ject of dis­pute and con­gres­sional clar­i­fi­ca­tion, that was espe­cially high­lighted in the Michial Milken-Junk Bond crash era in the US. It should be noted that he was the son of a tax accoun­tant, and noted that he could cre­ate a merry-go-round of com­pa­nies who could own each other by debt thereby increas­ing after tax cash flow.

    There could be some argu­ment that hous­ing debt to a bank or for­eign owned debt is means the asset buyer is biased to pay more for prop­erty and reciepi­ent is per­haps an unreal semi-gov­ern­men­tal per­son who is not here in the the local econ­omy choos­ing to invest in pro­duc­tiv­ity and or is able to avoid tax con­se­quenses of inter­est income, or is unique in not legally being able to invest through equity own­er­ship. A straw man dump­ing ground for a tax lia­bil­ity.

    The debt abo­li­tion you speak of is often part of bank­ruptcy or alter­na­tive to bank­ruptcy type nego­ci­a­tions where the debt con­verts to a part equity stake in the under­ly­ing asset, and per­haps leav­ing the financier’s book value above mar­ket and wait­ing a long time. If the asset is pro­duc­tive or can be more pro­duc­tive, the financier has to do what he did not want to do, which is to become a pro­duc­tive per­son. Put them to work so to speak.

    The growth of LLCs and LLPs in US state law can be traced to avoid­ing div­i­dend tax­a­tion, and I believe there has been some fed­eral cor­po­rate tax changes that allow intra cor­po­rate div­i­dends to escape tax­a­tion. Either allow­ing the payor of div­i­dends to indi­vid­u­als to deduct the div­i­dend, or allow­ing to recip­i­ent of the div­i­dend to be untaxed would allow the struc­tural bias between equity own­er­ship in pro­duc­tive assets and lenders to be more equal. Like­wise allow­ing finan­cial lenders to con­vert debt to equity in law and tax­a­tion in some favor­able way (not tax on for­giv­ness of debt etc). The gov­ern­ment took this role in the auto bailouts etc. so as to not destroy pro­duc­tive enter­prises. Some actions of law which would allow debt to equity con­ver­sions to occur rou­tinely with­out bank­ruptcy or legal bills could go a long way to reduc­ing debt to GNP ratios.

    Lawyers and invest­ment bankers would have to give up fees, Gov­ern­ment would have to give up tax income. US Con­gress is mostly lawyers sup­ported by invest­ment bankers and unions so .….

    A debt to equity con­ver­sion for sin­gle fam­ily homes while the pur­chasers remain in the home is harder for me rekon. The asset is not a tra­di­tional con­cept of pro­duc­tive, but peo­ple do work at home and in the garage, and we dont want our work­ers to live in card­board boxes do we? State law con­cepts of mort­gage law and for­clo­sure process that would shep­erd res­o­lu­tion of under­wa­ter loans to equity con­ver­sion would require real artistry.

    Mean­while the Under­ground Econ­omy avoids all of this dis­tor­tion, and as I observe is more and more com­mon among edu­cated proffe­sion­als. Here in the US we may be depend­ing on it to tread water. Gov­ern­men­tal pol­icy seems to awkno­lage this with the recent aban­don­ment of econ­omy wide ‘1099’ report­ing of inde­pen­dant con­trac­tor income, and the Gov­er­ments bla­tant dis­ohnesty in the enforce­ment of immi­gra­tion law.

    Steve, Should I be under­stand­ing here with you, or am I wast­ing time where I should be try­ing to get a good deal on a nice place to live for whats left of my life? Or should I live misrably and work on my inven­tions that I can’t seem to sell? I have never been needy enough to join the under­ground econ­omy, but I know plenty of peo­ple who have.

  • Fran­cis X. Gen­tile

    A tax on elec­tronic mar­ket trans­ac­tions could elim­i­nate mar­gin buyers/hedge funds abil­ity to bor­row money to bet both sides of a mar­ket and thereby inflate the whole mar­ket over time, which can occur quickly in com­mod­ity and stock mar­kets and more slowly in hous­ing debt orig­i­na­tion to equity mar­kets. This could off­set tax losses from div­i­dent and debt to equity changes in law. Gold­man Sachs would dis­agree i sus­pect.

  • ak


    But it is not about fix­ing the bank bal­ance sheets. This is just a result of the decay of the West­ern democ­racy based on cer­tain prin­ci­ples like absolute pri­vate prop­erty rights, sep­a­ra­tion of pow­ers, free­dom to brain­wash peo­ple what leads to indi­vid­ual inter­ests almost always tak­ing prece­dence over the inter­ests of the soci­ety.

    We are in a ter­mi­nal polit­i­cal cri­sis affect­ing the West­ern state insti­tu­tions man­i­fest­ing itself by its grave eco­nomic side-effects. In the­ory the sys­tem is the best ever invented but recently it catches much fewer mice than the Chi­nese cat of unde­fined colour. So what’s wrong — did Oskar Lange finally won the dis­pute with Hayek?

    The sense of pub­lic pur­pose has been lost, replaced by mum­blings of lib­er­tar­ian sabo­teurs and trai­tors bent on destroy­ing the West­ern states in the inter­est of the bank­ing class, finan­cial tycoons and inter­na­tional cor­po­ra­tions. Our states. 

    This is a slow and grad­ual process and it may take next 10–20 years but if not stopped soon, may be inevitable and it may either lead to the rise of fas­cism or to com­mon decay. 

    If noth­ing dra­mat­i­cally changes there will be no debt abo­li­tion and there will be no deficit spend­ing to replace debt with fiat cur­rency and debt secu­ri­ties. The over­lords of debt have every rea­son to hold their serfs enslaved for­ever. Why? Let’s scroll a few com­ments up to one of the pre­vi­ous threads. Because the inter­ests of the ren­tiers-savers are sacro­sanct. “[We] should con­cen­trate on what peo­ple are freely and will­ingly do for their mutual ben­e­fit: an inter-tem­po­ral con­tract. Should a hous­ing loan have zero real inter­est rate? Let’s stick to the real world.”

    Yes mod­ern serf­dom in the form of these inter-tem­po­ral con­tracts “for a small fee” is vol­un­tary. How­ever nobody asks young peo­ple who are look­ing for a place to live whether they like the cur­rent house prices in Syd­ney. Should they keep sav­ing until they are 45 years old? Then they have to pay the land­lords who pay their inter­ests on the loans to the banks — there’s no escape. 

    It is exactly the insti­tu­tion of usury what drains the blood from the veins of our economies and redis­trib­utes the real income from the shrink­ing work­ing class to these who do not have to work but pre­fer to live in lux­ury.

    Not stick­ing to the strict aus­ter­ity mea­sures imposed in the EU and else­where could dilute the real value of the sav­ings and would inevitably wreck the best wealth “cre­ation” sys­tem ever made. Marx was right — it is class con­scious­ness what dri­ves the peo­ple. Every­one has a super account so every­one frets about that dilu­tion. We are pulling the noose which has been placed on our necks because we are both — the serfs and the over­lords.

    Dur­ing the upris­ing in 1831 the moronic Pol­ish aris­to­crats who led the upris­ing against Rus­sia refused to give serfs free­dom what resulted in the Russ­ian army crush­ing the Poles. Who lost in the end? The aris­to­crats lost the most. The peas­ants did not care that much, they were given free­dom and some land in 1864 after yet another failed upris­ing.

    Many mil­i­tary crit­ics, among them the fore­most Russ­ian writer, Gen­eral Puzyrevsky, main­tained that in spite of the inequal­ity of resources of the two coun­tries, Poland had had every chance of hold­ing her own against Rus­sia, had the cam­paign been man­aged skill­fully.

    It had long been argued in Poland that anar­chy and lack of con­sen­sus were the causes of national down­fall. Thus, when the ris­ing finally began, peo­ple demanded absolute power for their lead­ers and tol­er­ated no crit­i­cism, afraid that dis­cord would again prove ruinous. The men cho­sen to lead because of their past achieve­ments proved unable to per­form the great task expected of them. More­over, many appar­ently had lit­tle faith that their effort could suc­ceed.”


    Doesn’t the last sen­tence equally apply to the lead­ing Amer­i­can and Aus­tralian econ­o­mists and politi­cians?

  • alain­ton

    Great stuff steve 

    A good tip for not los­ing equa­tions, tables etc in Word­Press is to upload the draft to Google Docs, or draft in Google Docs, then export out as HTML, open in word and paste into the Word­Press HTML view. That will be a pretty much flaw­less con­ver­sion. You can also email from google docs straight into a word­press blog if you set it up. The google docs word­proces­sor is also much less painful to use than word­press.

  • Did the trans­fer direct from Word ALain­ton, and didn’t check the equa­tions; the graphs were con­verted to PNG, but not the equa­tions. Will fol­low your advice in future.

  • Lyon­wiss

    We have already expe­ri­enced a sys­tem where sav­ing is evil and pri­vate prop­erty is evil. There was a gov­ern­ment which con­trolled its cur­rency, spent what­ever it liked with­out wor­ry­ing about deficits and pro­vided full employ­ment. It achieved high stan­dards of liv­ing for a few and serf­dom for the rest. The sys­tem is called Soviet com­mu­nism, which “worked only in the inter­est of soci­ety”.

    Today, cor­rupt gov­ern­ments with fiat cur­ren­cies and bud­get deficits are trans­fer­ring wealth to the few, from the rest, who are or will be equally poor in a serf­dom which is being achieved by mon­e­tary means, rather than by direct vio­lence and coer­cion of the past. Stu­pid macro­eco­nomic the­o­ries pro­vide the excuses for those cor­rupt gov­ern­ments to con­tinue to steal wealth from hon­est work­ers through taxes and infla­tion from money print­ing.

    Clock­work macro­eco­nomic the­o­ries for a per­fect world is a pre­tense of knowl­edge. Only resis­tance through free­dom of speech and protests could halt or delay this mad­ness.

  • alain­ton

    Dude what’s the pol­icy?

    Steve, read it prop­erly now. Great stuff all com­ing together

    A few ques­tions.

    You quote Schum­peter on credit, then later ques­tion Wal­ras’ Law.

    But doesn’t Schumpters con­cept of credit derive from his famous/infamous ‘Zero Prof­its Assump­tion’ based on the idea that Wal­ras Law assumes zero prof­its — so some exter­nal fac­tor is needed to cre­ate it.

    Is this con­sis­tent?

    How does this relate to (and this might pro­vide an answer) Patink­ins ideas and crit­i­cism of Walras’s sep­a­rate treat­ment of the ‘real’ and ‘mon­e­tary’ economies and attempt to refor­mu­late the Wal­rasian treat­ment of money

    His 1987 stock-flow treat­ment of the issue seems very sim­i­lar to your ideas in some key respects


    Also Kurtz here

    Shows that if you plug in Schum­peters ideas into a ricar­dian model instead of con­ver­gence to an aver­age rate of profit you get con­ver­gence to a zero rate of profit. But his model is money­less.

    Does credit make the dif­fer­ence?

    Finally to take your anal­ogy a pres­i­dent might ask — dude whats the pol­icy — what do we do?

    I agree with you that some form of debt for­bear­ance is the answer but how to do it seems a great unsolved ques­tion.

    For exam­ple given so much debt is owned by pen­sion funds directly (as gilts secu­ri­ties) and indi­rectly (as equity in banks) for­bear­ance could eas­ily be seen as a tax on pen­sion­ers.

    Also how do we ensure that for­bear­ance doesn’t creak a liq­uid­ity shock in banks and another credit crunch. The great worry at the moment is that Greek deflault (inevitable) will cause this in Euro­pean banks.

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  • sir­ius

    The Nature of Man — A Dark Side ?

    Ok. That seems a bit of a “sus­pense thriller build up” but it has been a while since I took a look at Argentina and hap­pened across the fol­low­ing link…

    http://ferfal.blogspot.com/search/label/Argentine Col­lapse

    It is mak­ing for very inter­est­ing read­ing — I present two excerpts here …

    Once all the assets in the coun­try had been dis­counted a min­i­mum of 73%, the insid­ers then repa­tri­ated their money and bought their neighbor’s for­tunes for pen­nies on the dol­lar, find­ing cheap, hun­gry, com­pet­i­tive labor, ready to com­pete with even 3rd world wages. The pru­dent, hard-work­ing, and savers (the wrong peo­ple) were wiped out, and the money was trans­ferred to the spec­u­la­tors and insid­ers (the right peo­ple). Mas­sive cap­i­tal like land and fac­to­ries can not be expa­tri­ated, but are always worth their USE value and did not fall as much, or even rose after­wards as with falling debt ratios and low wages these work­ing assets became com­pet­i­tive again. It’s not so much a “col­lapse” as a redis­tri­b­u­tion, from the mid­dle class and the work­ing to the cap­i­tal class and the con­nected. …And the genius is, they could blame it all on for­eign­ers, “incom­pe­tent” lead­ers, and care­less, debt-happy cit­i­zens them­selves.

    First, know­ing this will hap­pen, you suck in your own peo­ple by demanding—straight from the top—that bankers loosen lend­ing stan­dards so low even the dumb­est financier couldn’t believe it was pru­dent, then refuse to pros­e­cute even the most bla­tant cor­rup­tions by mort­gage orig­i­na­tors, fraud­u­lent bor­row­ers, and other “out­siders”. Sus­pect­ing this will all blow up, pay your­self today in bonuses instead of later in invest­ments.

  • sir­ius

    A ques­tion.

    Clearly the banking/financial sys­tem devel­oped and under­went a “Meta­mor­pho­sis”.

    My ques­tion (open to all) is…

    Do banks need depos­i­tors?

    To make the nature of my ques­tion crys­tal clear. Can banks now func­tion solely with enti­ties who will accept credit from the banks?

    (notice the use of the word “enti­ties” and not just sim­ply peo­ple — entity can refer to peo­ple, busi­ness, gov­ern­ment …)

  • ak


    I totally dis­agree with your def­i­n­i­tion of igno­rance. To me igno­rance means the inabil­ity or lack of inter­ests in study­ing the facts not the fac­toids and learn­ing from the human his­tory. Peo­ple who refuse to derive their opin­ions from the “first axioms” are not nec­es­sar­ily igno­rant. Peo­ple who fail to under­stand the fal­lacy of com­po­si­tion often are. It really doesn’t mat­ter what’s good for me or you if this rule applied to every­one makes the sys­tem unsta­ble or not viable in the long term.

    Please give me one exam­ple of a coun­try which was organ­ised accord­ing to the lib­er­tar­ian prin­ci­ples and was not destroyed by its neigh­bours, did not col­lapse on its own or (what was the most com­mon sce­nario) did not quickly evolve into a bloody dic­ta­tor­ship (like France in the 1790-ties). 

    Whether the cur­rency was strong or weak, fiat of based on pre­cious met­als really didnt’ mat­ter. Spain had a glut of gold in the 17th cen­tury and this wasn’t good for them.

    Clock­work macro­eco­nomic the­o­ries for a per­fect world is a pre­tense of knowl­edge. Only resis­tance through free­dom of speech and protests could halt or delay this mad­ness.”

    The resis­tance to acknowl­edg­ing the facts does not make any­one a hero.

    The mad­ness is to be still blind­folded by the anti-com­mu­nist pro­pa­ganda from the Cold War. How much do aver­age peo­ple edu­cated in the West under­stand about the Soviet sys­tem? I can claim that I under­stand some­thing because I lived there. 

    Please take as a fact that the “cor­rupt gov­ern­ments with fiat cur­ren­cies and bud­get deficits” are not nec­es­sar­ily com­mu­nist. Fiat cur­ren­cies are not an attribute of com­mu­nism at all. They are an attribute of a mod­ern state. The pre­con­di­tion to have a com­mu­nist sys­tem is to have a com­mu­nist party in power and the com­mand econ­omy with full own­er­ship of the means of pro­duc­tion in the hands of the state act­ing as an agent for the “work­ing class”. Social­ists are not com­mu­nists. Cen­tral plan­ning is not the same as a com­mand sys­tem. Com­mu­nism in China in 2011 has very lit­tle to do with Stal­in­ism (which was evil) or with the Soviet sys­tem from the 1970-ties. 

    You have applied a label “clock­work macro­eco­nomic the­o­ries” but the last thing which can be said about the lead­er­ship in China after the death of Chair­man Mao is that they are dri­ven by any ide­o­log­i­cal dog­mas. We are dri­ven by our West­ern dog­mas about the objec­tive and uni­ver­sal value of “global democ­racy” which is just a fetish — the exper­i­ment with the anti-neg­a­tive gear­ing GetUp cam­paign has just shown how the global democ­racy works in our case. Ordi­nary peo­ple have the same influ­ence here as in China, we may have more lib­erty to say what­ever we want but this is about it, nobody lis­tens to us any­way.

    The prob­lem with absolute prop­erty right is that they lead to the con­cen­tra­tion of wealth or claims on future wealth into hands of very few peo­ple and even­tu­ally to a self-destruc­tion. There is not enough nat­ural resources and prod­ucts to sat­isfy the greed of every­one.

    Claim­ing that who­ever wants to restrict sacro­sanct prop­erty rights is a com­mu­nist is plainly incor­rect. Restrict­ing does not mean abol­ish­ing. Do I want the state to take away your car or your house? No. Do I want the state to tax away your (and mine) cap­i­tal gains? Yes and I think that this is right. Do I want to abol­ish soft­ware patents? Yes and I think this is right. 

    Next time you go to a shop please check how much of (often very tech­no­log­i­cally advanced) stuff you buy is made in China and other devel­op­ing coun­tries. Do they wor­ship the intel­lec­tual prop­erty rights as we do? No, they don’t care. They are smart because they share the knowl­edge and we are stu­pid because we want to extend prop­erty rights to infor­ma­tion and throt­tle our­selves.

    In the end what can we offer them? Coal, iron ore and sheep? Our “enter­tain­ment ser­vices”… Or another Inter­net bub­ble — Groupons and Face­books — the great­est and most cre­ative inven­tion of the 21st cen­tury.

    The rise of China is a real fact glar­ing into your eyes not a vague idea obtained by apply­ing the rules of logic to some axioms. We have failed to see the change because the rise of the new global order is grad­ual but the frog will soon be boiled alive. We have failed to see the change because we believed in the “new eco­nomic par­a­digm” — a cargo cult where the cargo arrives from over­seas and unem­ploy­ment is a nat­ural state where peo­ple choose leisure over the mun­dane work. We are still wealthy but we fail to pro­duce any­thing new — and we feel good about it because we are still enter­tained by the clowns who are the politi­cians and who run our mass media.

    We have already dein­dus­tri­alised our­selves and we are con­demn­ing our­selves to years in a reces­sion because it is assumed to be bad if the gov­ern­ments run bud­get deficits or to defend the local man­u­fac­tur­ing. In China they are doing the oppo­site and it is absolutely irrel­e­vant that the rul­ing oli­garchy is com­mu­nist. I have as much sym­pa­thy to them as to the plu­toc­racy from the Wall Street. What really mat­ters are the results they deliver. 

    They deliver good results and our oli­garchy don’t.

    To me to believe in the aus­ter­ity mania or destruc­tion of the mod­ern mon­e­tary sys­tem and claim that “she’ll be all right” is the pin­na­cle of igno­rance.

    Please imag­ine what will hap­pen if we man­age to destroy the states we live in by demand­ing less gov­ern­ment, even more power to cor­po­ra­tions (stronger prop­erty rights in the “Dig­i­tal Age”) and — ulti­mately — gold money. Some­body will come and take away (or buy for cheap) every­thing real what’s left — do exactly the same thing the British did in Aus­tralia 200 years ago.

    The only solu­tion in my opin­ion is to fight the reces­sion and imped­ing col­lapse by increas­ing the gov­ern­ment spend­ing in devel­op­ing new tech­nolo­gies and in the infra­struc­ture in gen­eral. The debt level of the pri­vate sec­tor or the gov­ern­ment is irrel­e­vant because it can­not stop the gov­ern­ment from spend­ing and pur­chas­ing real resources. We are not doomed at all and here I strongly dis­agree with the debt-defla­tion­ist story. War­ren Mosler got it almost right.

    How­ever we are rac­ing with the Chi­nese and the oth­ers for the share of lim­ited and often non-renew­able nat­ural resources. If we lose the race then the nom­i­nal value of our sav­ings com­pared with the mon­e­tary base will not mat­ter much. We can­not have a cake and eat a cake I am afraid.

  • Thanks ALain­ton,

    I dis­agree with Schumpeter’s accep­tance of the zero profit sit­u­a­tion in Wal­ras’ Law, and showed in this paper:


    that there will be pos­i­tive prof­its (and wages and inter­est pay­ments) in a zero growth econ­omy. On that regard I see Marx’s for­mu­la­tion from his Cir­cuits of Cap­i­tal approach as far supe­rior to Wal­ras, because unlike Wal­ras Marx worked out that prof­its emanated from pro­duc­tion and the gen­er­a­tion of a sur­plus there.

    It’s pos­si­ble then to add Schumpeter’s vision of how growth comes about to a Marx view of what would hap­pen in a zero growth world–which I again do in my mod­el­ling. Grow­ing credit explains grow­ing prof­its, not prof­its in the first instance.

    So the neo­clas­si­cal approaches you note–which I’ll read on the plane–make the neo­clas­si­cal mis­take of start­ing from zero prof­its.

    Pol­icy… The dras­tic approach would be debt abo­li­tion, allied to insti­tu­tional changes to make another Ponzi Scheme much less likely; the “softly” approach would involve engi­neer­ing inflation–effectively, by for exam­ple increas­ing wages by 20%, rather than pussy-foot­ing around with try­ing to boost base money as Bernanke is doing–while wash­ing the sys­tem in fiat money to dras­ti­cally reduce the debt burden–and try­ing to do it in a way that didn’t overly dis­ad­van­tage non-debtors. Either approach is still years away from even being con­sid­ered, so I think I’ve got some years yet to pre­pare a more nuanced set of ideas!

  • ak

    Do banks need depos­i­tors?”

    Deposits do not fund loans. But they are one source of funds that the bank has avail­able to ensure that its role in the set­tle­ment process is not com­pro­mised which would require bor­row­ing from the cen­tral bank.

    Banks have no oper­a­tional con­straints on their lend­ing which is not the same thing as say­ing they do not face con­straints that arise from prof­itabil­ity con­sid­er­a­tions. ”


  • yre­brac

    Steve, a request. Can we sort the com­ments in your blog in reverse so they can be read chrono­log­i­cally? This seems to be a fairly stan­dard way to do things, though I am sure per­sonal pref­er­ences vary. But it makes sense par­tic­u­larly when a series of com­ments ends up over sev­eral pages and one has to nav­i­gate in reverse to com­pre­hend them.

  • @ Ak June 12, 2011 at 10:15 am | #

    I must say that I totally agree with that which you have penned here except that, I believe that we are indeed doomed:

    The only solu­tion in my opin­ion is to fight the reces­sion and imped­ing col­lapse by increas­ing the gov­ern­ment spend­ing in devel­op­ing new tech­nolo­gies and in the infra­struc­ture in gen­eral. The debt level of the pri­vate sec­tor or the gov­ern­ment is irrel­e­vant because it can­not stop the gov­ern­ment from spend­ing and pur­chas­ing real resources. We are not doomed at all and here I strongly dis­agree with the debt-defla­tion­ist story. 

    Absolutely cor­rect but:

    The Aus­tralian “gov­ern­ment” which is Party ori­ented is only, a pri­ori, pri­or­i­tized and ori­ented in one issue, which is re-elec­tion, and as such fol­low­ing such a “com­mon-sense” approach that would indeed launch Aus­tralia into a growth model equalled only in recent his­tory by Sin­ga­pore — would attract the loud and pejo­ra­tive adverse and destruc­tive crit­i­cism from the igno­ra­muses of the Oppo­si­tion Par­ties, the MSM and the True-believ­ers of the “if ya don’t love it mate, then leave it” masses of his­terea cri­sis. Thus this risk of being re-elected becomes too great to bear of the nar­row shoul­ders of the Bogan that infest the halls of power.

    There are other forces at work here as well: our Colo­nial Mas­ter, the Crown, or the Queen, which rep­re­sents the mer­can­tile power base of those of the United King­dom, that is Great Britain, would never even allow dis­cus­sion along such line and such a Pol­icy would not even get drafted, let alone, be pre­sented for dis­cus­sion in Com­mit­tee or Cau­cus — which means in would never even reach the floor of the Par­lia­ment: “God for­bid.” Aus­tralia, and all in it is owned, in Mind, body, soul plus the fur­ni­ture and the land­scapes!

    The Aus­tralian Bureau­cracy is in itself being a com­pos­ite or amal­ga­mated con­glom­er­a­tion of non-think­ing risk free advo­cates for British rule (I speak gen­er­ally) through Crown and Queen and hence any move to even pub­li­cally con­sider a ground based move to National inde­pen­dent thought, would be imme­di­ately white-anted by the Juda­sis­mi­cally report­ing to the Embassy staff of For­eign Nations with great haste, eager­ness and great urgency. Their OMG moment.

    And then there are the other owner forces of the for­eign share­hold­ers which pri­mar­ily come in the USA vari­ety. They too would be opposed and with the grow­ing mil­i­tary occu­pa­tional force upon the ground I am sure that there will be boots and armed drones enough to sate any level appetite of rev­o­lu­tion..

    So, it would be polit­i­cal sui­cide to even con­sider such a solu­tion — even if those of Aus­tralian “lead­er­ship” had the cog­ni­tive abil­i­ties to frame such a vision and as Aus­tralian “lead­er­ship” is totally devoid of the thought that could see Aus­tralia and Aus­tralians as a totally inde­pen­dent Nation with the pos­si­bil­ity to gov­ern its own affairs.

    That cake you speak of is not a cake at all, in real­ity, it has always just crumbs on the prison floor.

    But we are doomed by our own “igno­rance, as per your def­i­n­i­tion. We just “pre­tend” oth­er­wise.