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.

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About Steve Keen

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