Did No-one “see this com­ing” too?

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Today’s 4.78% fall on the S&P could eas­ily be reversed tomor­row if the BLS unem­ploy­ment num­ber is bet­ter than expected; equally today’s fall could turn out to be just the starters if it is worse. But beyond the volatil­ity of the stock mar­ket, it is becom­ing obvi­ous to every­one now that the cri­sis that began in 2007 is still with us.

When the cri­sis first hit, many of those whose behav­ior (or delu­sional eco­nomic mod­els) helped cause this cri­sis claimed when it hit that “No-one saw this coming”–that it was an unpre­dictable event. Dirk Beze­mer gave the lie to that with his paper of the same name, iden­ti­fy­ing the hand­ful of aca­d­e­mic econ­o­mists and mar­ket com­men­ta­tors who had antic­i­pated this cri­sis because they focused on the explo­sion in pri­vate debt that had occurred since the 1987 stock mar­ket crash.

The same group–myself included–argued that this cri­sis would not end until that debt was sub­stan­tially reduced, and that the process of debt reduc­tion would usher in a sec­ond Great Depres­sion.

I’ll write more on this process next week, but given that the minds of mar­ket spec­u­la­tors and politi­cians are now refo­cused on yet another eco­nomic down­turn, I thought it pru­dent to note that this down­turn was also some­thing that was obvi­ously going to hap­pen, given the pri­vate sector’s process of delever­ag­ing. Below are some rel­e­vant blog posts on this topic:

June 13, 2010: Empir­i­cal and the­o­ret­i­cal rea­sons why the GFC is not behind us

Sep­tem­ber 20, 2010: Delever­ag­ing with a twist

Octo­ber 19, 2010: Delever­ag­ing, Decel­er­a­tion and the Dou­ble Dip

June 11, 2011: Dude! Where’s My Recov­ery?

Mish Shed­lock also has a very good piece today, chal­leng­ing the peo­ple who expected hyper­in­fla­tion to occur because of the Fed’s money print­ing:

When was Hyper­in­fla­tion Sup­posed to Start?

As Mish notes there:

Hyper­in­fla­tion­ists sim­ply do not under­stand the role of credit in a global econ­omy. China has a huge infla­tion prob­lem and var­i­ous prop­erty bub­bles because credit growth is soar­ing 30% annu­ally.

In the US, banks want credit-wor­thy bor­row­ers. How­ever, credit-wor­thy bor­row­ers are park­ing cash, not ask­ing for more of it.

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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  • fox­bat101

    The rea­son im park­ing cash is because any­thing i look at i fear may drop in value.
    Also i am get­ting 6% p.a. on any money on deposit. So if assets are drop­ping and i get a lit­tle money from a T.D. then i am in front for tak­ing lit­tle risk.
    House in Amer­ica?

  • spike

    Steve, I was won­der­ing if you’ve looked into Bit­Coin at all?

    Bit­Coin solves a num­ber of prob­lems any dig­i­tal cur­rency must face;
    — cryp­to­graph­i­cally secure trans­fer of own­er­ship
    — since bits are so easy to copy, a log of his­tory to pre­vent dou­ble spend­ing
    — pseudo-anonymity. Trans­fers can be traced, but iden­ti­fi­ca­tion may not be pos­si­ble

    But as a replace­ment cur­rency it has a num­ber of issues;
    — since coins are cre­ated only by CPU power, the sys­tem as a whole doesn’t behave much like other cur­ren­cies.
    — The cur­rent exchanges for trad­ing in other cur­ren­cies encour­age ponzi spec­u­la­tion
    — with­out a sta­ble value, coins are cur­rently use­less for trade
    — with­out trade they may never have a sta­ble value
    — huge amount of wasted energy in their cre­ation and log gen­er­a­tion (cur­rently about 10^16 hashes per sec­ond) that could be bet­ter spent

    I’m hop­ing to build a sim­i­lar solu­tion for a global scale micro­pay­ment sys­tem. Obvi­ously I’d like to build some­thing that is bet­ter suited as a cur­rency replace­ment. A sys­tem that may also be employed at a local level with the poten­tial to replace local cur­ren­cies.

    I loath the idea of build­ing a sys­tem that encour­ages 3rd party cre­ation of credit, so I was think­ing of mod­el­ling the sys­tem based on a pri­vate bank mint­ing an ini­tial fixed size bun­dle of dig­i­tal notes. The cur­rent owner of a note bun­dle would cre­ate a trans­ac­tion to trans­fer own­er­ship, almost iden­ti­cal to trans­ac­tions in Bit­Coin, a trans­ac­tion can split or join bun­dles of notes. Trans­ac­tions can be cre­ated offline, but would need to be uploaded by either party to the bank they were issued from. The bank would check for dou­ble spend­ing, per­haps extract­ing a tiny fee for the ser­vice. A log of all trans­ac­tions would be made pub­licly avail­able for audit­ing pur­poses.

    Per­haps the bank would start the sys­tem by trad­ing these notes in exchange for other assets / cur­ren­cies to seed the dig­i­tal econ­omy. Offer­ing to buy them back again at the same fixed price to give the cur­rency sta­bil­ity and help to define the value of each note. Per­haps the value could be based on the bank’s assets, a kind of “gold stan­dard”. Or just declared by fiat. Though if any­one has any bet­ter ideas, I’d like to hear them as it would be impor­tant to get this right from the out­set.

    While I might endeav­our to cre­ate a sin­gle global bank for inter­na­tional trade, this would be an open sys­tem that allows oth­ers to cre­ate, issue and ver­ify notes with dif­fer­ent val­ues. With the end user soft­ware choos­ing which types of notes they trust and accept, either man­u­ally accepted by the user, or ver­i­fied by some audit­ing entity, like browsers do with SSL certs. 

    Another poten­tial use for such a sys­tem could be for track­ing own­er­ship of com­pany shares, or other sim­i­lar finan­cial instru­ments. Since the bank would know the pub­lic key of each owner, you could pay div­i­dends in some other cur­rency by issu­ing them to the same key. Or accept votes for AGM style deci­sions as you could ver­ify that they were signed by the owner of the shares, with­out need­ing to know their iden­tity.

  • bamokato

    I think also that pro­fes­sor Richard Werner (http://en.wikipedia.org/wiki/Richard_Werner) pre­dicted the cri­sis (or per­haps was only the Japan cri­sis). He is the author of “Princes of Yen” and “New Par­a­digm in Macro­eco­nom­ics: Solv­ing the Rid­dle of Japan­ese Macro­eco­nomic Per­for­mance”. His work is also cen­tered around credit creation/credit bub­bles. With Steve Keen, he is my favorite econ­o­mist. I won­der if Mr. Keen knows about his works and, also, if Mr. Keen and Mr. Werner ideas (which are quite oppo­site of the other lead­ing expert in the japan­ese bub­ble, Mr. Richard Koo from Nomura Secu­ri­ties) are com­pat­i­ble

    Best regards,


  • RickW

    Plac­ing a cost on hold­ing cash will con­tinue to under­mine con­fi­dence in the USD. It is actu­ally con­firm­ing that the cur­rency is worth­less — no longer desir­able. Savers will be dri­ven to gold in hordes. 

    The USD is fac­ing a loss in con­fi­dence. That is the cause of hyper­in­fla­tion. My view on the cur­rent DJI fall is that it fol­lows wide press cov­er­age of the IMF MD’s com­ment on the USD:
    The prob­lem for the US is that there is so much of its cur­rency out­side of its con­trol. The “exor­bi­tant priv­i­lege” of USD being world reserve has been won­der­ful for the illu­sion of pros­per­ity on the rise but it has poten­tial to lit­er­ally fall off a cliff when it loses that priv­i­lege — that is hap­pen­ing now.

    I expect Ben Bernanke is now firmly stuck between a rock and a hard place. QE3 will drive con­fi­dence in the cur­rency lower. Tar­get­ing GDP growth in the US is incon­sis­tent with a sta­ble USD. They even use fraud­u­lent mea­sures for infla­tion in the US that under­state actual infla­tion. The US is the global reserve cur­rency. For cur­rency sta­bil­ity they need to mon­i­tor and adjust to what is hap­pen­ing across the globe not what is hap­pen­ing in the US

    It is evi­dent that the world econ­omy requires a new sta­ble store of value for its medium of exchange — money. That is no longer the USD. I saw some cal­cu­la­tions show­ing gold needs to be exchanged for USD84k/oz for gold to form the cur­rent role of USD in global phys­i­cal econ­omy — excludes the large gam­bling com­po­nent.

  • Hi Bamokato, I wasn’t aware of Werner’s work so I will get a copy of his book and see what I make of it.

  • Pingback: Links 08/05/2011 | Credit Writedowns()

  • Matthew K

    Quick point I like to make is that the inflation/deflation debate is usu­ally a prob­lem of def­i­n­i­tions- most would agree the result will be a kind of stagflationary/bi-flation col­lapse once we clar­ify our def­i­n­i­tions.

  • Lyon­wiss

    Matthew K August 5, 2011 at 5:24 pm

    You said: “the inflation/deflation debate is usu­ally a prob­lem of def­i­n­i­tions”. Totally agree. The qual­ity of debate on such an impor­tant issue is very poor and mud­dled, even among pro­fes­sional econ­o­mists and cen­tral banks, as they rarely define clearly what they referred to as infla­tion in their dis­cus­sion.

    For exam­ple, the orig­i­nal Phillips Curve was a rela­tion­ship between the change in money wage rates and the rate of unem­ploy­ment. From causal rea­sons, it is not sur­pris­ing to find some rea­son­able sta­tis­ti­cal rela­tion­ship between the two vari­ables. Over time, the mean­ing of infla­tion has shifted from wage rate infla­tion to con­sumer price infla­tion (and its expec­ta­tion). This may be jus­ti­fi­able, but only if there is a close rela­tion­ship between unit labor cost and con­sumer prices, which is not always the case.

    My inter­pre­ta­tion of Phillips Curve is that if unem­ploy­ment rate is low, then work­ers can demand greater wage rises. Clearly the reverse is false: infla­tion of money wage rates does not lower unem­ploy­ment or increase employ­ment.

    With Mil­ton Friedman’s mon­e­tarism, where increased money sup­ply leads to price infla­tion, the chain of flawed rea­son­ing (of Bernanke) is com­plete: pump­ing money into the econ­omy will cre­ate employ­ment. There is never any detailed expla­na­tion of the eco­nomic process of how this (more money => more employ­ment) would occur. 

    The events of the last two years have com­pre­hen­sively dis­cred­ited the idea that increas­ing the money sup­ply can cre­ate employ­ment. With global finan­cial mar­kets tank­ing sharply, will we see still more money pump­ing to prop up mar­kets?

  • Dear RickW,
    Gold is Worth­less, it is with­out doubt the new Ponzi scheme in town.
    West­ern cash is the only real com­mod­ity of value, not because it should but because it is. Think about it, all assets are cal­cu­lated and traded in money not a barter sys­tem that oper­ates in Gold or other intrin­sic ves­sels, even the value of gold is cal­cu­lated and pur­chased with money. For the finan­cial sys­tem to oper­ate it need a fraud­u­lent cur­rency like Fiat money, how else could the pow­er­ful get rich with­out work? You are cor­rect gold should be 100,000/ounce but that would indi­cate that the world is fair, also it would mean that the only way to cre­ate wealth was to find Gold. Peo­ple will always find a way to enslave oth­ers just by being smarter than them.
    Kind regards, kalman

  • Matthew K

    Lyon­wiss thanks for the com­ment, your state­ment re money print­ing reminded me of some­thing FOFOA said — they can only print vol­ume, not value. As to your final ques­tion my thoughts are ‘Of course we will!’ The sys­tem will be pre­served at all costs.

    Kalman, I sug­gest you read some FOFOA — cur­ren­cies are for trans­act­ing, gold is for wealth preser­va­tion.

    See­ing as Steve added a link to Mish, I will counter with some links to FOFOA





  • Robert K

    Dear Matthew K:
    Thank you for beat­ing me to the rel­e­vant FOFOA posts. I know that the many
    voices on this blog hold strong (and they believe well rea­soned) opin­ions on the
    sub­ject of this deflation/inflation debate. I will say cat­e­gor­i­cally that, until you have
    given your­self the oppor­tu­nity to read, digest, and come to under­stand the logic
    of FOFOA’s pre­sen­ta­tion on this sub­ject (and it takes a lot of real effort and time)
    you will never have truly chal­lenged the deep­est argu­ments against YOUR the­sis.
    You may still come away uncon­vinced, as many do, but like a fighter who has only
    had to beat “pat­sies” you will never know how good you are until you can log­i­cally
    refute HIS the­sis. So may the best thoughts win!

  • Robert K

    Dear Pro­fes­sor Keen:
    I am gen­er­ally an infre­quent com­menter here, first, being an Amer­i­can, and
    sec­ond because I have no edu­ca­tion in eco­nom­ics beyond the read­ing of many
    arti­cles and papers. You may recall the Alan Kir­man link, re: SMD, and the
    “Wal­ras unfor­tu­nate lagacy” papers. If you ever have the free time to read
    what in my view is the best work to date on the deflation/hyperinflation debate,
    I can give no bet­ter sug­ges­tion than the links pro­vided by com­menter Matthew K.
    This work has fun­da­men­tally changed my think­ing.

  • Derek

    Matthew K may be right to say that print­ing increases the vol­ume of fiat money tokens and reduces the value of the exist­ing ones but that’s only half the story. The other half is that tax­ing reduces the vol­ume of fiat money tokens and increases the value of the remain­ing ones. 

    So the gov­ern­ment can pro­vide a stim­u­lus with­out caus­ing infla­tion by print­ing money tokens and issu­ing them to each cit­i­zen, pro­vided that it also takes back the same num­ber of tokens via taxes. That way just as much money is being destroyed as is being cre­ated.

    How­ever you need to use the right tax. If you just give every­one $1000 in Jan­u­ary and tax it back from them in Decem­ber, you shouldn’t expect much of a stim­u­lus, since sen­si­ble peo­ple will just put the cash in a sav­ings account and wait 12 months. If you want eco­nomic activ­ity you have to ensure that the peo­ple being given the tokens are not the same as those who have to return them. That way exchanges have to hap­pen to swap the tokens around. So say you gave the $1000 to each woman but taxed each man the same amount, that would be a more effec­tive stim­u­lus than just giv­ing every­one $1000 and tax­ing it back from them.

    Even that’s not enough to make a strong stim­u­lus. Peo­ple swap money tokens for goods and ser­vices. So for a strong stim­u­lus you need to give the mon­e­tary tokens to peo­ple who need goods and ser­vices and tax peo­ple who have more goods and ser­vices than they need if you want some swap­ping (aka eco­nomic activ­ity) to hap­pen. Doing it the other way round won’t cre­ate so much of a stim­u­lus.

    So for a strong stim­u­lus with­out infla­tion­ary con­se­quences, the gov­ern­ment needs to imple­ment a cash give­away to all cit­i­zens com­bined with a match­ing asset tax like land value tax or a car­bon tax. That’s not to say that other tax+spend com­bos like VAT/GST plus a cash rebate won’t work. It’s just that they will likely be less effec­tive.

  • myopia

    Werner was also one of the peo­ple behind the “Pos­i­tive Money” guys sub­mis­sion to the UK Inde­pen­dent Bank­ing Com­mis­sion http://www.positivemoney.org.uk/our-proposals/submission-independent-banking-commission/

  • Matthew K

    Hi Robert, I had known of FOFOA for some­time and read bits here and there with­out get­ting the big pic­ture but upon com­mit­ting some real time to his writ­ings I have to admit that my views on money changed sig­nif­i­cantly.

    Derek, I have to say that I dis­agree with you on your view. I don’t believe that tax­ing reduces the vol­ume of fiat notes, just moves them. Even if the gov­ern­ment ran a sur­plus, it’s invest­ment pro­gram of the sur­plus funds would be putting them to work back in the econ­omy.

  • Robert K

    Hi Matthew:
    Since all fiat is cre­ated either by bank lend­ing or by gov­ern­ment, whether by bor­row­ing or print­ing, the only was tax­ing would reduce the vol­ume of fiat would be if it were used to can­cel debt, either gov­ern­ment or pri­vate. Cur­rency is merely
    zero inter­est debt of unlim­ited dura­tion. So, in short, I agree with you.

  • Matthew K

    Hi Rob, this is my favourite of FOFOA’s posts, I’m sure you know it


    In this post he breaks down the mon­e­tary defla­tion argu­ment by point­ing out that eco­nomic defla­tion and mon­e­tary infla­tion are com­pletely com­pat­able and why the col­lapse of credit money is the col­lapse of mon­e­tary assets but not money in use — incred­i­ble insights.