The Crisis in 1000 words—or less

flattr this!

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 a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

47 Responses to The Crisis in 1000 words—or less

  1. impermanence says:

    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.

  2. Glenn Stehle says:

    @ 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.”

  3. Steve Hummel says:

    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.

  4. Bankster says:

    Thanks Steve,

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


  5. impermanence says:

    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.

  6. Peter Jadinge says:

    @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.

  7. Glenn Stehle says:

    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.

  8. Claudio Leon says:

    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.


  9. Glenn Stehle says:

    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”

  10. Derek R says:


    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.

  11. john swabey says:

    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.

  12. Derek R says:

    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.

  13. Pingback: Two stories about the crisis « Emergent Economics

  14. Draco T Bastard says:

    “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.

  15. glubilee says:

    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.…

  16. Pingback: Are We In A Depression? « OVER LEVERED

  17. Pingback: Jubilee! | Economic Undertow

  18. Pingback: The Cantillon Effect « azizonomics

  19. Pingback: Guest Post: The Cantillon Effect |

  20. Pingback: The Cantillon Effect » Bullion Insiders

  21. Bill Reiswig says:

    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.

  22. Pingback: Debt jubilee: Revolutionary change or reform to stabilize capitalism? « Systemic Disorder

Leave a Reply