The Cri­sis in 1000 words—or less

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URPE–The Union for Rad­i­cal Polit­i­cal Economics–is hold­ing a Sum­mer School for the Occupy move­ment, and as part of that invited papers that explained the cri­sis in 1000 words or less (so that they can be printed on one dou­ble-sided sheet).  Here’s my effort in some­what less than 1,000 words (though with 2 fig­ures). In the inter­ests of URPE’s objec­tive in this exer­cise, here’s the PDF of this blog post for gen­eral down­load.

Both the cri­sis and the appar­ent boom before it were caused by the change in pri­vate debt. Ris­ing aggre­gate pri­vate debt adds to demand, and falling debt sub­tracts from it. This point is vehe­mently denied on con­ven­tional the­o­ret­i­cal grounds by econ­o­mists like Paul Krug­man, but it is obvi­ous in the empir­i­cal data. The cri­sis itself began in 2008, pre­cisely when the growth of pri­vate debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recov­ery, such as it was, began when the rate of decline of debt slowed. Across reces­sion, boom and bust between 1990 and 2012, the cor­re­la­tion between the annual change in pri­vate debt and the unem­ploy­ment rate was –0.92.

The cau­sa­tion behind this cor­re­la­tion is that money is cre­ated “endoge­nously” when the bank­ing sec­tor cre­ates loans, and this newly cre­ated money adds to aggre­gate demand—as argued by non-ortho­dox econ­o­mists from Schum­peter through to Min­sky. When this debt finances gen­uine invest­ment, it is a nec­es­sary part of a grow­ing cap­i­tal­ist econ­omy, it grows but shows no trend rel­a­tive to GDP, and leads to mod­est prof­its by the finan­cial sec­tor. But when it finances spec­u­la­tion on asset prices, it grows faster than GDP, leads obscene prof­its by the finan­cial sec­tor and gen­er­ates Ponzi Schemes which are to sus­tain­able eco­nomic growth as can­cer is to bio­log­i­cal growth.

When those Ponzi Schemes unravel, the rate of growth of debt col­lapses and the boost to demand from ris­ing debt becomes a drag on demand as debt falls. In all other post-WWII down­turns, growth resumed when debt began to rise rel­a­tive to GDP once more. How­ever the bub­ble we have just been through has pushed debt lev­els past any­thing in recorded his­tory, trig­ger­ing a delever­ag­ing process that is the hall­mark of a Depres­sion.

The last Depres­sion saw debt lev­els fall from 240% to 45% of GDP over a 13 year period, and the ensu­ing period of low debt led to the longest boom in America’s his­tory. We com­menced delever­ag­ing from 303% of GDP. After 3 years it is still 10% higher than the peak reached dur­ing the Great Depres­sion. On cur­rent trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when Amer­ica had already exited what Min­sky described as the “robust finan­cial soci­ety” that under­pinned the Golden Age that ended in 1966.

While we delever, invest­ment by Amer­i­can cor­po­ra­tions will be timid, and eco­nomic growth will be fal­ter­ing at best. The stim­u­lus imparted by gov­ern­ment deficits will atten­u­ate the downturn—and the much larger scale of gov­ern­ment spend­ing now than in the 1930s explains why this far greater delever­ag­ing process has not led to as severe a Depression—but deficits alone will not be enough. If Amer­ica is to avoid two “lost decades”, the level of pri­vate debt has to be reduced by delib­er­ate can­cel­la­tion, as well as by the slow processes of delever­ag­ing and bank­ruptcy.

In ancient times, this was done by a Jubilee, but the secu­ri­ti­za­tion of debt since the 1980s has com­pli­cated this enor­mously. Whereas only the money­len­ders lost under an ancient Jubilee, debt can­cel­la­tion today would bank­rupt many pen­sion funds, munic­i­pal­i­ties and the like who pur­chased secu­ri­tized debt instru­ments from banks. I have there­fore pro­posed that a “Mod­ern Debt Jubilee” should take the form of “Quan­ti­ta­tive Eas­ing for the Pub­lic”: mon­e­tary injec­tions by the Fed­eral Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on con­di­tion that its first func­tion must be to pay debts down. This would reduce debt directly, but not advan­tage debtors over savers, and would reduce the prof­itabil­ity of the finan­cial sec­tor while not affect­ing its sol­vency.

With­out a pol­icy of this nature, Amer­ica is des­tined to spend up to two decades learn­ing the truth of Michael Hudson’s sim­ple apho­rism that “Debts that can’t be repaid, won’t be repaid”.

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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  • imper­ma­nence

    As was said, debt as a con­cept is not the prob­lem in itself.”

    Peter, debt IS the prob­lem, and this has been known since the begin­ning of human his­tory.

    Debt is not pri­mar­ily about money, but instead, con­trol­ling peo­ple.

    Debt is a bad idea made worse by adding three tons of greed, two pounds of treach­ery, a sprig stu­pid­ity; stir, cook for 5000 years, and force-feed to EVERYBODY.

  • Glenn Stehle

    @ LCTesla

    I fol­lowed your link and in the com­ments sec­tion of Brad DeLong’s post found a com­ment by one *Hen­drik* that does a great job of explain­ing the dif­fer­ence between Keen’s and Krugman’s posi­tion.

    Hendrik’s com­ment makes it abun­dantly clear that the writ­ings of folks like Krug­man and Delong, and I would add Phillip Pilk­ing­ton to this list, have lit­tle empir­i­cal, pre­dic­tive or explana­tory value. I would argue, how­ever, that what they do have is a great deal of polit­i­cal and paramoral­is­tic value. The intent seems to be to put forth a the­ory and an argu­ment that excul­pates the bankers.

    These writ­ers appeal to a strain of pas­sive nihilism that runs deep in Chris­tian­ity, and there­fore West­ern Civ­i­liza­tion, that Niet­zsche called “the devo­tion to the Cru­ci­fied.” The key Bib­li­cal pas­sage is that which Jesus uttered that day on Cal­vary upon his cru­ci­fix­ion: “Father, for­give them, for they know not what they do.” 

    Invari­ably what we find in the writ­ings and the­o­ries of Krug­man, DeLong and Pilk­ing­ton are banks who “know not what they do.” They are por­trayed as hap­less, pas­sive inter­me­di­aries who only respond to the needs and desires of savers and bor­row­ers, eco­nomic and mar­ket con­di­tions, or to incom­pe­tent gov­ern­ment reg­u­la­tors. There is no dri­ving force here, no will, and no mali­cious or delib­er­ate intent.

    Keen’s the­ory goes a long way in destroy­ing that illu­sion. As Hen­drik explains:

    The main dif­fer­ence is thus that Post-Key­ne­sians see the banks not as inter­me­di­ary (what your Neo-Wick­sel­lian model also does) but as the cre­ators and destruc­tors of the money sup­ply avail­able for the non-finan­cial sec­tor.

    But what Hen­drik says next is even more enlight­en­ing:

    The prime advan­tage of the Post-Key­ne­sian view is that they see the Cen­tral Banks not as the prime actor in expand­ing and shrink­ing the money sup­ply, which then works its way through the sys­tem, but as an organ­i­sa­tion that is respond­ing to the com­mer­cial banks deci­sions to expand or shrink the money sup­ply. [Empha­sis added.]

    Ah ha! So it begins to look like maybe the bankers do know what they do, and that they are the tail that wags the dog (the Fed­eral Reserve and the reg­u­la­tors).

    The dif­fer­ence between banks who know not what they do and banks who do know what they do, when it comes to mat­ters of morals and pol­i­tics, can­not be over­stated. For as Han­nah Arendt noted in The Human Con­di­tion, “The rea­son for the insis­tence on a duty to for­give is clearly ‘for they know not what they do’ and it does not apply to the extrem­ity of crime and willed evil.”

  • Steve Hum­mel

    It’s a BOTH/AND world. It is impor­tant BOTH for INDIVIDUALS to for­give FOR THEIR OWN INNER PROTECTION, AND for UBER cit­i­zens like Banks to be held account­able for their actual mis­deeds.

    And when nei­ther indi­vid­u­als nor busi­ness enti­ties are aware of an actual under­ly­ing cause of eco­nomic and mon­e­tary insta­bil­ity like the enforced con­ven­tions of cost account­ing, the best thing that can be done is cor­rect the imme­di­ate and ongo­ing effects of that cause while insur­ing that such cor­rec­tion is in the inter­ests of INDIVIDUALS more so than col­lec­tives or syn­thetic indi­vid­u­als like corporations.….which are com­posed of indi­vid­u­als who are enti­tled to their share of com­pen­sa­tion BUT NOT THE UBER CITIZEN OF THE CORPORATION ITSELF.

  • Bankster

    Thanks Steve,

    I have trou­ble under­stand­ing a lot of your posts (espe­cially those log equa­tions) but this is a very under­stand­able and con­cise piece.


  • imper­ma­nence

    The dif­fer­ence between banks who know not what they do and banks who do know what they do, when it comes to mat­ters of morals and pol­i­tics, can­not be over­stated.”

    Glenn, there is ZERO dif­fer­ence, or if there is any dif­fer­ence, it is only in the degree of ratio­nal­iza­tion.

    ALL pro­fes­sion­als fic­tion­al­ize their role as a cog in the GREAT MACHINE, one designed to grind the com­mon man down to sub­sis­tence-fod­der.

    Is the physi­cian, the attor­ney, the accoun­tant, or the teacher any less cul­pa­ble in this era of moral deprav­ity?

    I think not.

    At least bankers know they are bot­tom-dwellers and bal­ance their eth­i­cal degra­da­tion with equal amounts of drug-like induced escapism, but how about the rest who thumb their noses at the same, direct­ing these poor souls down the same road to perdi­tion.

  • Peter Jadinge

    @Impermanence, I under­stand your sen­ti­ment. I’m also up to my eye­brows in debt. Still, debt minus the excesses is needed. In an advanced soci­ety peo­ple work together. When dig­ging a well one per­son man­u­fac­tures a spade, another dowses for water, and yet another digs, and as col­lab­o­ra­tions of all kinds are sep­a­rated by time some way has to be found to account for dif­fer­ent con­tri­bu­tions, which requires some debt sys­tem.

  • Glenn Stehle

    imper­ma­nence said:

    Glenn, there is ZERO dif­fer­ence, or if there is any dif­fer­ence, it is only in the degree of ratio­nal­iza­tion.

    Which calls into ques­tion the role of ratio­nal­ism (its real­ist ontol­ogy and syl­lo­gis­tic logic), as opposed to other forms of know­ing we employ in West­ern Civ­i­liza­tion, such as empiri­cism, rev­e­la­tion, art, etc.

    The his­to­rian Carol Quigley argued that ratio­nal­ism has always been pre­ferred by those with an elit­ist bent:

    We have already men­tioned that these Pythagorean ideas held and prop­a­gated by Socrates, Plato, Xenophon, and oth­ers were not ten­able because long before, while Pythago­ras was yet alive, one of his dis­ci­ples had used the master’s own Pythagorean the­o­rem to prove that space was irra­tional (because it was a con­tin­uum). This means that it was pos­si­ble to prove the irra­tional­ity of real­ity by purely ratio­nal (math­e­mat­i­cal) argu­ments and that, accord­ingly, the fun­da­men­tal assump­tion of this school about the ratio­nal­ity and logic of real­ity was false. Such a dis­cov­ery should have led any hon­est seek­ers after truth to aban­don this fun­da­men­tal assump­tion about real­ity and to fall back on some other assump­tion (such as the sci­en­tists’ assump­tion that the senses do give us infor­ma­tion about real­ity).

    The con­tin­ued adher­ence by the ratio­nal­ist school to beliefs they knew were false can only be explained on the ground that they had an inter­est in these beliefs beyond their devo­tion to truth. Nat­u­rally this inter­est was not stated by these peo­ple pub­licly. At least, no such state­ment appears in the ancient evi­dence; so once again we must rely on infer­ence: the key to the think­ing of the Pythagorean ratio­nal­ists lies in their fear of change and hatred of change. Beyond the ordi­nary change of the phys­i­cal world they saw the social change that, for cen­turies, had been spread­ing polit­i­cal power and eco­nomic ben­e­fits wider and wider. There can be no doubt that the Pythagorean ratio­nal­ists resented these polit­i­cal and social changes and wished to deny the pos­si­bil­ity and real­ity of change. Pythago­ras him­self was the founder of an inter­na­tional oli­garchic con­spir­acy, the Pythagorean Broth­er­hood, which oper­ated out of Cro­ton, in south­ern Italy, until it was forced to flee from that city by a demo­c­ra­tic upris­ing about 510 B.C. There­after this orga­ni­za­tion cen­tered in Thebes in Boeo­tia. In inter­na­tional affairs it oper­ated in sup­port of the oli­garchic states and in oppo­si­tion to the demo­c­ra­tic states, like Athens. In intel­lec­tual mat­ters it attacked Ion­ian Sci­ence, the sophists, the philo­sophic nom­i­nal­ists, and the uphold­ers of democ­racy and of human equal­ity.

    –Car­rol Quigley, The Evo­lu­tion of Civ­i­liza­tions

    Lib­eral the­olo­gians, such as Rein­hold Niebuhr, are of course very much aware of this his­tory and con­sider rationalism’s influ­cence to be the bane of Chris­tian­ity:

    Unfor­tu­nately, as this reli­gion was philo­soph­i­cally elab­o­rated in Greco-Roman thought, it bor­rowed some­thing from and was cor­rupted by Neo-Pla­tonic dual­ism. Rea­son always has dif­fi­culty with an ade­quate view of tran­scen­dence and imma­nence. It inclines either to reduce it to a com­plete dual­ism or to a com­plete monism. As a result it expresses a world view which is either too pes­simistic or too opti­mistic to do jus­tice to all the facts of life.

  • Clau­dio Leon

    Def­i­nitely a ‘rad­i­cal’ idea, can I clar­ify what will hap­pen to savers with lit­tle or no debt? Will they also receive a hand­out, if so with any con­di­tions attached?

    Now with a con­fi­dent, debt-free pub­lic, what will be the impli­ca­tions on infla­tion and asset prices?

    Thank you.


  • Glenn Stehle

    The above quote by Niebuhr was from his essay “Opti­mism, Pes­simism, and Reli­gious Faith.”

    In other places Niebuhr elab­o­rated on why he is dis­trust­ful of intel­lec­tu­als:

    Since inequal­i­ties of priv­i­lege are greater than could pos­si­bly be defended ratio­nally, the intel­li­gence of priv­i­leged groups is usu­ally applied to the task of invent­ing spe­cious proofs for the the­ory that uni­ver­sal val­ues spring from, and that gen­eral inter­ests are served by, the spe­cial priv­i­leges which they hold.

    –Rein­hold Niebuhr, Moral Man and Immoral Soci­ety

    There is noth­ing par­tic­u­larly “Chris­t­ian” about this lat­ter insight, how­ever. Lead­ing non-believ­ers, such as George Orwell, have come to sim­i­lar insights:

    The intel­li­gen­s­tia are the peo­ple who sqeal loud­est against fas­cism, and yet a respectable pro­por­tion of them col­lapse into defeatism when the pinch comes. They are far-sighted enough to see the odds against them, and more­over they can be bribed—-for it is evi­dent that the Nazis think it worth while to bribe intel­lec­tu­als. With the work­ing class it is the other way about. Too igno­rant to see through the trick being played on them, they eas­ily swal­low the promises of fas­cism, yet sooner or later they always take up the strug­gle again. They must do so, because in their own bod­ies they always dis­cover the promises of fas­cism can­not be ful­filled.

    –George Orwell, “Look­ing Back on the Span­ish War”

  • Derek R


    Steve has said repeat­edly that savers with lit­tle or no debt will receive exactly the same hand­out as debtors with lit­tle or no sav­ings. He has also noted that once the recip­i­ents have cleared any debts that they may have out­stand­ing, they are free to use the remain­der of the hand­out (if any) for what­ever pur­pose they may wish.

    That is why Steve’s sug­ges­tion has less moral haz­ard asso­ci­ated with it than the cur­rent prac­tice of using bank­ruptcy to nul­lify debts.

  • john swabey

    How would a Jubilee be funded? A gov­er­ment would have to run up its debt to issue the checks. Granted gov­ern­ments can bor­row at lower rates but the banks hold much of the debt, and hold this debt and inter­est on their books as assets. 

    My bet is if the banks are made whole with gov­ern­ment money you will get a lot of bankster sup­port! And then what, step up the taxes even more to cover the new posi­tions from the gov­ern­ment bor­row­ing with the new inter­est added on. Bankers dou­ble dream part two?

    I am a big fan of the debt based mod­el­ing you are doing Steve, but feel you need to get a wider effort in place to build out some tools. Apolo­gies up front for not work­ing through your pub­li­ca­tions and per­haps not plac­ing the con­densed 1000 words more accu­rately in con­text.

    I am still a fan find­ing a way to get NIRP (neg­a­tive inter­est rate pol­icy) to func­tion as a debt reduc­tion mech­a­nism.

    To me the poniz is clear when debt growth is above GDP but I am not see­ing this as a pol­icy con­trol point.

  • Derek R

    John Swabey asked How would a Jubilee be funded?

    How about this? Just print money. Don’t issue match­ing bonds. With­out the bonds you won’t need to raise taxes. Of course there might be infla­tion but since most of the money cre­ated just can­cels debts to the banks (and thus ends up as bank reserves just like cur­rent QE) the infla­tion prob­a­bly won’t be as bad as you think.

    If you don’t want any infla­tion what­so­ever you can go fur­ther and imple­ment a tax on bank assets of appro­pri­ate size to bal­ance the money issued to the gen­eral pub­lic. That way the money goes out to the pub­lic, gets used to reduce their bank debt (or increase their sav­ings) and then gets pulled from the bank vaults by the gov and destroyed. Thus com­plet­ing the cir­cuit.

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  • Draco T Bas­tard

    “Debts that can’t be repaid, won’t be repaid”.

    The one I use is: When you loan some­one money you’re tak­ing the risk that you’re not going get it back.

  • glu­bilee

    Prob­a­bly com­pletely inap­propi­ate for this blog and espe­cially this com­ment string but as this seems and dying thread, hope no ine will mind much, becuase I have this on my mind.

    I keep think­ing of the bib­li­cal con­cepts of debt and for­give­ness as entwined, I keep won­der­ing what is the truly moral right and won­der of past reli­gious thinkers and philoso­phers on these top­ics.

    I remem­ber my childhood’s Eng­lish trans­la­tion of Lord’s pray was “for­give us our debts as we for­give our debtors” 

    Christ seemed to err way on the side of for­give­ness, advo­cat­ing it for it much more often than pass­ing strict judge­ment. But He also talked abut ret­ri­bu­tion in sheep and goats story where peo­ple who did not do onto the least of these, (hun­gry, naked etc) would be pun­ished on the other side.

    It seems to me a soci­ety with­out for­give­ness is as stuck and toxic as a soci­ety with­out jubilees ‚bank­rupt­cies, and debt can­cel­la­tions. With no for­give­ness, ret­ri­bu­tion and stuck grudges will build expo­nen­tially til there is con­stant ten­sion, lack of trust, ret­ri­bu­tional vio­lence.

    With­out debt can­cel­la­tions, an econ­omy is sim­i­larly, if not as bit­terly and vio­lently, stuck. In both cases, it leads to a break down in agreed upon jus­tice sys­tems, a break in rule of law or com­mu­nity norms and a return to indi­vid­u­als act­ing only in self inter­est, unre­strained by for­mer com­mu­nity rules. Those indebted beyond all repay­ment pos­si­b­li­ties see no hope. They revolt, steal as they feel stolen from, just a vig­i­lante ret­ri­bu­tion becomes the norm with no for­give­ness.

    There is the con­stant tug of the moral haz­ard, between ensur­ing peo­ple are respon­si­ble for their own actions, not reward­ing bad behav­ior, rather pun­ish­ing it, and the other call to clear the slate so we can move on, get unstuck. Where do you draw the line? That seems our never end­ing argu­ment.

    It seems at least Jesus drew that line much fur­ther toward for­give­ness than many of his cur­rent fol­low­ers would be com­fort­able with. Jesus was most will­ing to draw the line and pass judg­ment and talk of pun­ish­ment in regard to holier than thou priests of his day and in regard to those who did not help “the least of these” than towards, say the adul­ter­ous woman at the well.

    I feel, eco­nom­i­cally, things that Steve Keen is propos­ing , like QE to people’s bal­ance sheets rahter than banks, are more aligned with spir­i­tual wis­dom of the ages.…yes, there is a time and place for judg­ment, but that is mostly reserved for those eco­nomic priests who have lorded over oth­ers with their spe­cial rites while ignor­ing the needs of those with the least, while major­ity of reg­u­lar folks, we should for­give, and show kind­ness and mercy and move on.

    One of the few moments of rage Jesus is recorded exhibit­ing is at the money chang­ers at the tem­ple and his most judg­men­tal fire and brim­stone edicts were directed at pompous priests and toward peopel who claimed ot be religous and worn­sio God but were unkind, uncom­pas­sion­ate peo­ple. He seems to worry lit­tle about moral haz­ards of for­give­ness but rather advoactes pri­mar­ily for com­pas­siin, the golden rule, being hum­ble, being a kind neigh­bor to even a wounded for­eigner found on the road, car­ing for the least of these.

    Our eco­nom­ics maybe built, jus­ti­fied and argued based on math­e­mat­ics and data, but ulti­mately our economies sim­ply reflect our col­lec­tive morals and cul­ture.

    Right now the aca­d­e­mic priests are dom­i­nat­ing and those who have com­mit­ted great eco­nomic sins them­selves are throw­ing the stones at the lowli­est, most eas­ily vil­i­fied finan­cial sin­ners, reg­u­lar work­ing peo­ple in debt to their ears or unem­ployed and tak­ing aid to sur­vive. Our economies do not reflect the morals of great spir­i­tual tra­di­tions but rather seem like near as pos­si­ble as the oppo­site from them. 

    For­give us our sins as we for­give those who sin against us.…

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  • Bill Reiswig

    Mr. Keen:

    I really appre­ci­ate you con­tin­u­ing to spread this idea, and I have brought it up fre­quently when I talk with oth­ers about eco­nom­ics.

    I heard you inter­viewed on the extraen­vi­ron­men­tal­ist and there you seemed to inte­grate in some answers the long term effects of resource deple­tion (peak oil) and cli­mate change with the long term prog­no­sis for cap­i­tal­ism and growth.

    My ques­tion is whether you have con­nec­tions with eco­log­i­cal econ­o­mists or forsee inte­grat­ing your think­ing on debt with these long-term prob­lems for human­ity. By this I mean, can­not we com­bine this mod­ern “debt-jubilee” with cer­tain eco­nomic arrange­ments post-jubilee that would fos­ter an econ­omy that met human needs, de-empha­sized the need for growth, debt, and con­spicous con­sump­tion and refo­cused the econ­omy on the goals of sus­tain­abil­ity, work, and hap­pi­ness? Poli­cies like reduc­ing the work week to 30 weeks ( to allow for more work­ers ), tax­ing fos­sil fuel use, fos­ter­ing local­ized economies, and stop­ping frac­tional reserve bank­ing might be added in a “grand” bar­gain with a debt jubilee such that the result after would an econ­omy more in step with our nat­ural sys­tems.

    I’m just curi­ous if you think this way at all. As long as we pro­mote the idea of “debt-jubilee” we should be will­ing to dis­cuss our eco­nomic arrange­ments after the jubilee itself.

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