Movement at the Station”: Canadian Central Bank Governor Carney on the Age of Deleveraging

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There was movement at the station,
for the word had passed around
That the colt from old Regret had got away…
(“Banjo” Patterson, “The Man from Snowy River”)

Click here for this post in PDF format: Debtwatch members; CfESI members

Click here for the data used in this post: Debtwatch members; CfESI members

Before I make any critical remarks, I’ll start by saying that I’m delighted to see the Governor of a Central Bank even refer to Hyman Minsky, let alone acknowledge that we are in a “Minsky Moment” (p. 4: “The global Minsky moment has arrived”—or should that be Millennium?), to acknowledge that we are now in an Age of Deleveraging (the speech’s title was “Growth in the age of deleveraging“), to focus upon the impact of changes in the aggregate level of debt rather than merely on its distribution (p. 1: “Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation”), and to countenance that debt writeoffs may have a role to play in escaping from this never-ending crisis (Carney 2011, p. 6: “Whether we like it or not, debt restructuring may happen”).

By way of contrast, so far as I am aware, the word “Minsky” has yet to pass from Ben Bernanke’s lips since this crisis began, and his discussion of Minsky prior to this crisis was, to put it politely, asinine. Bernanke devoted precisely 2 sentences to Hyman Minsky in his Essays on the Great Depression (Bernanke 2000):

Hyman Minsky (1977) and Charles Kindleberger (1978) have in several places argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.. [A footnote adds] I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go. (Bernanke 2000, p. 43)

I expect that sheer embarrassment may be one reason that Hyman’s name is taboo in Bernanke’s presence.

Figure 1: Result of search for “Minsky” in Federal Reserve Speeches

Similarly, the impact of deleveraging on aggregate demand doesn’t even fit in Bernanke’s doggedly Neoclassical mindset: from that point of view, only the distribution of debt matters, and not his aggregate level. Despite his popularly-believed status as an expert on the Great Depression, he simply refused to countenance any explanation of that event that didn’t fit into the Neoclassical basket—as evidenced by his dismissal of Irving Fisher’s “Debt Deflation Theory of Great Depressions” (Fisher 1933):

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… (Bernanke 2000, p. 24; emphasis added)

The highlighted section of the above quote also shows how little thought Bernanke gave to the actual process of debt-deflation: during such a crisis, many debtors can’t repay their debts and therefore there is no zero-sum “redistribution from debtors to creditors”, but widespread debt defaults. As Carney emphasises, defaults are inevitable and policy makers may make things worse if they simply try to avoid debt write-offs:

Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit. (p. 6)

So bravo to Governor Mark Carney for being probably the first OECD Central Bank Governor to acknowledge Minsky, deleveraging, and the inevitability of debt defaults (though not the first Central Bank Governor in the world; that honour almost certainly belongs to Mercedes Marcó del Pont, Governor of the Central Bank of Argentina).

That said, there are several points on which I’ll quibble with Carney’s analysis.

Private debt is different

Carney lumps private sector and public sector debt together, and excludes financial sector debt from his statistics—clearly in the belief that finance sector debt doesn’t matter, presumably (since he doesn’t provide his reasoning for doing so) in the belief that finance sector debt to the finance sector is a “zero sum game”.

Figure 2: Carney’s key debt to GDP ratio chart

From the perspectives of Minsky’s theory, the empirical record, and the process of private money and debt creation, both these decisions—lumping government and private sector debt together, and ignoring finance sector debt—are in error.

Minsky’s “Financial Instability Hypothesis” focused upon the dynamics of private debt, with the core concept being that leveraged speculation would rise during a period of tranquil growth in a capitalist economy because tranquillity was the exception rather than the rule:

Stability—or tranquillity—in a world with a cyclical past and capitalist financial institutions is destabilizing. (Minsky 1982, p. 101)

Minsky saw properly-managed public spending—and hence public debt—as a potential “homeostatic stabilizer” to this dynamic of private debt. Rising taxation and declining social security payments during a boom made a public sector surplus likely, which would take money out of circulation and reduce the scale of private speculation, while declining taxation and rising social security payments during a slump would give private businesses a cash flow they wouldn’t otherwise have, making it easier to repay debts. I modelled this aspect of his hypothesis in my first papers on Minsky (Keen 1995; Keen 1996; Keen 2000), and got the outcome that Minsky predicted: a private system that was prone to a debt-deflation could be stabilized by counter-cyclical government spending.

Figure 3: A Minsky model without government spending

Figure 4: A Minsky model with government spending

In my model, the government sector was “resolute”—increasing spending if unemployment exceeded 5% and reducing it below that level. In the real world, governments have accepted rising unemployment, and accumulated debt in pursuit of follies (like the war in Iraq) as well as in pursuit of economic stability. But even so, the counter-cyclical role of government debt can be seen when one compares private sector debt—including financial sector debt—to government (see Figure 5).

Figure 5: Separating out private sector and public sector debt in the USA

This is more apparent when we look just at the change in debt: private and public debt move in opposite directions.

Figure 6: Private and public debt move in opposite directions

Finance sector debt matters

Ignoring finance sector debt is a mistake. Firstly, it’s huge: by far the largest component of debt, private or public, in the USA (see Figure 7).

Figure 7

Secondly, finance sector debt is not a “zero sum game”. Though lending by a non-bank financial company to another entity doesn’t create money, it does create debt; and the initial lending by a bank to a non-bank creates both credit money and debt. Since the finance sector was the source of most of the speculative debt that fuelled the bubble, and it is by far the major force in deleveraging now, leaving it out of the analysis exempts a major causal factor in both the pre-2008 boom and the post-2008 debacle.

Thirdly, by lumping together private and government debt and ignoring finance sector debt, Carney’s aggregation obscures the comparison of today with the Great Depression, understates the growth of debt since the end of WWII, mis-identifies the start of the Age of Deleveraging, and understates the degree of deleveraging to date.

With Carney’s aggregation, “Peak Debt” during the Great Depression was 285% of GDP versus 254% today, the buildup in debt only began in 1980, “Peak Debt” occurred in August 2009, and deleveraging has been relatively mild since then.

However, considering just private sector debt and including the finance sector, Peak Debt in the Great Depression was 238% versus 303% today, the build-up in debt began right from 1945, “Peak Debt” occurred in February 2009, and deleveraging since then has been stark.

Considering all private and public debt together, the situation today is worse than the Great Depression (307% then versus 373% today), the debt build-up dates to 1950, “Peak Debt” was in March 2009, and deleveraging—despite a huge increase in government debt—has been marked.

Figure 8: Comparing debt ratios

Which aggregation is better? This is best answered by looking at why aggregate debt matters, which is the role of changing debt levels in aggregate demand.

Aggregate Demand is Income + Change in Debt

I’m beginning to feel a bit like Cato the Elder here, who ended every speech with “Furthermore, it is my opinion that Carthage must be destroyed“: in the credit-based economy in which we live, aggregate demand is the sum of incomes plus the change in debt. This monetary demand is then expended on both goods and services and claims on financial assets.

This is a case that is made well by both Schumpeter and Minsky, but has been ignored by neoclassical economics (and forgotten even by some modern non-neoclassical economists):

From this it follows, therefore, that in real life total credit must be greater than it could be if there were only fully covered credit. The credit structure projects not only beyond the existing gold basis, but also beyond the existing commodity basis. (Schumpeter 1934, p. 101)

If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1982, p. 6; emphasis added)

We can use this to show that Carney’s aggregation is misleading, because using his aggregation, there has been no deleveraging. The change in debt, on his measure, remained positive right through the crisis.

Figure 9: Change in debt in US$ million

But when the financial sector is included and government sector excluded, there has been a huge turnaround from rising debt adding almost 30% to aggregate demand at the peak of the bubble, and then subtracting 20% from aggregate demand at its trough.

Figure 10: Change in debt as percent of GDP

The final clincher is the correlation of these measures to unemployment. There is a strong negative correlation between change in debt and the level of unemployment, since increasing debt increases aggregate demand and reduces unemployment. Carney’s mixed private-public-minus-finance measure has a reasonable correlation to unemployment of -0.45, but the private-only-including-finance has a correlation of -0.94.

Figure 11: Far stronger correlation of change in Private debt to Unemployment

What’s “old Regret” got to do with it?

The three lines at the beginning of this post are from the famous poem/bush balled “The Man from Snowy River”. For two reasons, I couldn’t resist linking it to this story because it reminded me of the cliché “shutting the fence after the horse has bolted”.

Firstly, Carney’s measure makes it very hard to identify when the crisis began: the change in debt in his measure remains positive, and all that can be identified is a slight slowdown in the rate of growth of debt (from 14% of GDP p.a. to 7%, after which it “recovers” back to about 10%). Peak Debt occurs in August 2009—two years after the crisis began.

The private-including-finance measure however clearly identifies the end of 2007 as the beginning of the crisis—when the change in debt plunged from almost 30% of GDP p.a. down to minus 20% at its nadir in early 2010. So “the colt from old Regret” got away two years before the first Central Banker noticed.

Secondly, while I’m again very thankful that Governor Carney has put Minsky into the vocabulary of Western central bankers, we would have been far better off had Minsky’s wisdom been heeded decades ago, rather than after the event.

This was possible because knowledge of Minsky wasn’t limited to a few obscure non-orthodox economists like myself: the head of the BIS’s research department from 1995 till 2008 was another Canadian, Bill White, and he was an out and out Minsky fan whose warnings of a potential crisis were ignored.

That said, it’s good to see that sensible economics, rather than the fantasy that is neoclassical economics, is finally being considered in the realms of Central Banks.


I was doubly bemused to see the title of Governor Carney’s paper because I was working on a paper with almost exactly the same title:

Academic precedence being what it is, I’m happy to cede invention of the term “The Age of Deleveraging” to Governor Carney, and I’ll cite him whenever I refer to this term in future.

Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, Princeton University Press.

Carney, M. (2011). Growth in the age of deleveraging. Empire Club of Canada/Canadian Club of Toronto. Toronto, Bank of International Settlements.

Fisher, I. (1933). “The Debt-Deflation Theory of Great Depressions.” Econometrica
1(4): 337-357.

Keen, S. (1995). “Finance and Economic Breakdown: Modeling Minsky’s ‘Financial Instability Hypothesis.’.” Journal of Post Keynesian Economics
17(4): 607-635.

Keen, S. (1996). “The Chaos of Finance: The Chaotic and Marxian Foundations of Minsky’s ‘Financial Instability Hypothesis.’.” Economies et Societes
30(2-3): 55-82.

Keen, S. (2000). The Nonlinear Economics of Debt Deflation. Commerce, complexity, and evolution: Topics in economics, finance, marketing, and management: Proceedings of the Twelfth International Symposium in Economic Theory and Econometrics. W. A. Barnett, C. Chiarella, S. Keen, R. Marks and H. Schnabl. New York, Cambridge University Press: 83-110.

Minsky, H. P. (1982). Can “it” happen again? : essays on instability and finance. Armonk, N.Y., M.E. Sharpe.

Schumpeter, J. A. (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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25 Responses to Movement at the Station”: Canadian Central Bank Governor Carney on the Age of Deleveraging

  1. LCTesla says:

    Gary Shilling beat both of you to claiming the invention of that term, Steve:
    That might solve a mystery regarding what subconscious wellspring you had both been drawing from when coming up with it like this in parallel. 😛

    It seems to me that neo-classical economists ignore the boost to demand from debt growth on account of how the expect a kind of Ricardian Equivalence to hold in the private sector like they presume it does in the public sector. Any increases in demand given rise to by debt growth is, by their logic, offset by decreases in demand from expectations to delever at a later stage. Monetary policy complicates this somewhat, though, because the leveraging happens at a higher interest rate than the deleveraging. I would expect someone to make the argument that the rationality principle is not in question and the excessive leveraging is simply given rise to by monetary policy that rewards leveraging on a system-wide level for this reason. The only question this would leave unanswered is how the private sector as a whole coordinates it’s actions so as to give rise to this “system wide leveraging”…

  2. cliffy says:

    If I lend myself $20,000, clearly their is little likely difference in the economic expression of the before and after state of that transaction.

    However, If a guy in Sydney lends a guy in Thailand $20,000, clearly something in the economic nature of things has changed.

    This for me this is the reason why though on paper a loan from one entity to another has an element of squaring off, it is the expression of that transaction in the real world that makes rising debt have effect outside of any increase in money supply associated with financial sector activity.

    An interesting study would be the correlation between the characteristic distinctions between Creditor and Debtor and the extent of presence of Minsky markets.

    For example, if the Debtors and Creditors are in the same city as opposed to the Debtors being in one city and the Creditors in another is there a material change in the likelihood that markets go Minsky?

  3. mahaish says:

    what beggars belief,

    is that as a central banker,

    he hasnt come out and attacked the single currency union idea itself

    central bankers are obsessed with the composition of the monetary base,

    and i would have thought one of the many important reasons why you have a floating exchange rate as oppossed to a currency union or peg, is that currency imbalances can be compensated for through exchange rate movements, which helps to minimise the impact on the monetary base

    perhaps he thought mentioning minsky was controvertial enough without adding fuel to the fire and condeming the very idea of a euro

  4. alainton says:

    Steve you are right to keep public and private sector debt separate

    1. An expansion in government debt through Tbills or bonds is a sectoral transfer payment in the short term and a commitment to monetary expansion over term – hence it has much less impact on AD in the short term compared to bank created credit which has an immediate expansionary effect.

    2. Changes to government debt are steady and predictable and signalled through the ‘risk free’ rate (cough cough) – changes to private sector debt can be much more rapid – especially where balance sheets go into negative

    3. The velocity multiplier of government debt is likely to be much lower than private sector debt – indeed if funded by poorly designed taxes and funding non investment spending it can be negative.

    4. The key effect of public sector debt reduction is on the liquidity of banks – tbills at 2.5% are a straight no-brain liquidity equivalent to cash, the combination of less government debt and enhanced capital adequacy requirements is a private sector deleveraging. A post-keynsian ‘crowding out’ effect.

  5. alainton says:

    Oh Steve, reminded by reading some Stephen Kinsella that if you are correcting national accounting to national income as well as change in debt and net expenditure on assets you also need to include net depreciation

    Dont know if you have caught his recent paper on the ‘state of the art’ of monetary circuit modelling – a must read

    Im sure you would raise a wry smile at the following

    ‘The role of prices in stock flow models is not well understood at the basic
    levels.It takes Godley and Lavoie nearly 250 pages to allow prices
    to move’

  6. Christopher Dobbie says:

    I’m thinking the MF Global debacle should be a clear indicator to investors of how the financial sector plans to deleverage.

  7. Steve Keen says:

    Thanks Andrew, that is a good little paper.

  8. Lyonwiss says:

    Back when I first started in financial markets, there was a “paradigm shift” in
    the perception of Australia’s current account deficit, from the Pitchford thesis:

    Pitchford J (1989), ‘A Sceptical View of Australia’s Current Account and Debt
    problem’, The Australian Economic Review, 86, pp 5–14.

    The deficit was largely due to private sector debt, not government debt.
    The Pitchford view was that private sector debt is private sector problem between
    consenting adults. The underlying assumption is the efficient market hypothesis,
    ie the lenders knew what they were doing and they could handling the consequences of their decisions. The government has no role:

    The GFC has proved this view to be false. All the bailouts (and any debt
    jubilees) effectively converted private debt to public debt, substantially
    causing the sovereign debt crises we are seeing. Unless governments refrain from monetary interference, which is virtually impossible, the distinction between
    private money (debt) and public money (debt) can only be temporary.

    Under Keynesian (or socialist) economics, with a fiat money system, the distinction between private and public money is even less clear. As the current crisis develops, the risk that private savings in pension accounts will be “stolen” for public purpose will increase.

  9. glubilee says:

    Maybe there are some cracks in the orthodoxy, let’s hope. they are starting to get there, but are still blind to many of their assumptions.

    I think the Central Bankers are in shock, they, like well-educated doctors of the 1700s, they are still trying to bleed the patient to heal them, and the patients keep dying.. Of course, the patients are all ghetto dwelling worthless humanity in their minds anyways, so no big loss if they kill a few economies, as long as the banks are okay. But when their friends and family bankers are effected, will they keep bleeding or wake up to the errors of their ways?


    Interesting view 3 charts at Of Two Minds blog

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  14. Bhaskara II says:

    Steve, you mentioned in a previous post your interest in getting a 3D printing machine to make a physical representation of the results of your model with government spending, such as in figure 4.

    Bent wire would be an excellent way to create a 3D physical representation of a parametric plot.

    Bending wire can be done by an artistic hand or by computer controlled industrial machine. A wire forming machine could form your plots, possibly from the inside out to keep from getting tangled. Or, the wire could be formed in a few pieces and then connected.

    There are custom manufacturing companies that bend wire to order based on a command file. Their service is known as “wire forming” or “wire bending”.

    In Australia,

    There are videos of the machines working on

  15. Steve Keen says:

    Hmmm. It was a partly frivolous idea, but one worth pursuing. Thanks for that link.

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