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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48 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.

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  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….

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  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.

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