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

Flattr this!

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.



Bookmark the permalink.

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.