Let’s go “Back, to the Future!”

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If you were told the fol­low­ing graph showed two indi­ca­tors of Australia’s eco­nomic health, and one of them had to be addressed urgently, which one would you expect politi­cians and econ­o­mists to try to bring under con­trol first?

If you picked the blue line, you’ve obvi­ously not a politi­cian. The blue is the ratio of pri­vate debt to GDP in Aus­tralia; the red line is the ratio of gov­ern­ment debt to GDP (debt to the bank­ing sec­tor only; both series come from RBA table D02). The red line is the one that both sides of pol­i­tics in Can­berra are obsessed about; the blue one they both ignore.

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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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19 Responses to Let’s go “Back, to the Future!”

  1. ken says:

    Gov­ern­ment debt is at least dou­ble that. Total gov­ern­ment bonds on issue less the future fund is about $350 bil­lion, GDP about $1400 bil­lion, so pub­lic debt about 25% of GDP. Assum­ing that it was about 0 in 2008, thanks to the future fund, we have a total debt growth from about 160% in 2008 to 170% now, so total debt is still growing.

    I actu­ally think that total debt is more impor­tant than look­ing at pub­lic and pri­vate sep­a­rately. The rea­son is that it is always easy to con­vert from one to the other,unless the total is huge. Extremely easy to con­vert pri­vate into pub­lic, the gov­ern­ment just bor­rows lots of money and hands it out. To con­vert pub­lic into pri­vate just cre­ate an asset bubble.

  2. Lyonwiss says:

    Agreed, clearly the gov­ern­ment can con­verted pri­vate debt to pub­lic debt by bail­ing out banks with gov­ern­ment debt and printed money, exactly what the US gov­er­ment has been doing. All debt, pri­vate or pub­lic, is delu­sional money. OK in good times, but dis­as­ter­ous in bad times.

    Only in bad times do we know what money really is. Keen’s endoge­nous money is not money, but credit which acts as a “medium of exchange” in good times seem­ingly like money, Schumpeter’s “pur­chas­ing power”.

    JP Mor­gan said, “Gold and sil­ver is money. All else is credit”. This will be proven true again. Bank deposits (arbi­trar­ily cre­ated) are not money but credit which is proven to be such when liq­ui­dated by depos­i­tors in a bank run.

    Even sov­er­eign cur­rency or reserve cur­rency such as the USD is only credit which will be liq­ui­dated into gold in bad times when peo­ple want a real “store of value”, unadul­ter­ated by money print­ing. More bad times and crises are com­ing, unfor­tu­nately. Exces­sive debt is not the cause but the effect of eco­nomic mismanagement.

  3. Steve Keen says:

    Yes, includ­ing gov­ern­ment bonds it is 28% of GDP. But that is still well below pri­vate debt to the bank­ing sec­tor, which is vir­tu­ally six times that. And if I included pri­vate sec­tor bond debt, that would rise sub­stan­tially as well.

    The two have to be con­sid­ered sep­a­rately because the dynam­ics behind them are very different–even if those con­ver­sions can occur dur­ing a crisis.

  4. Philip says:

    Don’t for­get that the pri­vate debt to GDP ratio listed above in the graph doesn’t include the non-banking finan­cial debt to GDP ratio, which a Mor­gan Stan­ley report sug­gests is equiv­a­lent to house­hold debt — 100% of GDP.


    You’ve pre­vi­ously men­tioned that inter­ests rates should be much lower, but they can’t be low­ered to far because Aus­tralia is run­ning a cur­rent account deficit, we need rel­a­tively higher inter­est rates com­pared to our cred­i­tor nations in order to keep bor­row­ing and rolling over for­eign debt.

  5. mahaish says:

    Gov­ern­ment debt is at least dou­ble that. Total gov­ern­ment bonds on issue less the future fund is about $350 bil­lion, GDP about $1400 bil­lion, so pub­lic debt about 25% of GDP

    so what hangs on it,

    not much,

    its all positve i think,

    the gov­ern­ment debt is a pri­vate sec­tor and bank­ing assett that earns income for the pri­vate sector.

    it also ensures that in any future bank­ing cri­sis, the cen­tral bank has a mighty war chest in terms of the liq­uid­ity swaps it can under­take to shore up the bank­ing system.

    the size of the goern­ment debt only becomes an issue if infla­tion is a problem.

    all this harp­ing on about money print­ing being delusional,

    well where is the cur­rency cri­sis for the japs and the yanks,

    right now US trea­sury secu­ri­ties at the short end of the mar­ket have neg­a­tive yields,

    expalin that

  6. mahaish says:

    good to hear from you phil,

    the rba tar­get rate would be lower than it is at present , if the rba board stayed out mak­ing the decision ,


    due to the gov­ern­ment deficit and debt.


    the gov­ern­ment deficit and accumi­lated debt will actu­ally force mar­ket rates down, and not the oppo­site as some would beleive due to over sup­ply in the inter bank money mar­ket, if the mar­ket was allowed to make the deci­sion rather than the rba board.

    gov­ern­ment deficits, with­out rba board inter­ven­tion force inter­est rates down not up.

  7. mahaish says:

    I actu­ally think that total debt is more impor­tant than look­ing at pub­lic and pri­vate separately”

    well we cant look at it that way,

    the gov­ern­ment debt is qual­i­ta­tively dif­fer­ent in that it rep­re­sents a pri­vate sec­tor assett.

    the bal­ance sheett effects in the econ­omy are different.

  8. mahaish says:

    Extremely easy to con­vert pri­vate into pub­lic, the gov­ern­ment just bor­rows lots of money and hands it out”

    the gov­ern­ment doesnt need to bor­row any­thing. trea­sury can just instruct the cen­tral bank by legal author­ity to cre­ate a deposit in its bank accounts.

    the gov­ern­ment doesnt take the money from the pri­vate sec­tor, it injects the money into the pri­vate sector.

  9. Steve Hummel says:

    the gov­ern­ment doesnt need to bor­row any­thing. trea­sury can just instruct the cen­tral bank by legal author­ity to cre­ate a deposit in its bank accounts.
    the gov­ern­ment doesnt take the money from the pri­vate sec­tor, it injects the money into the pri­vate sector.”

    This is cor­rect, but if it is injected into com­merce via busi­nesses you’ll get a pal­try effect as far as debt elim­i­na­tion is con­cerned. The injec­tion needs to go directly to indi­vid­u­als via a pre-programmed debit card which enforces its usage for debt elim­i­na­tion along the lines of the mod­ern debt jubilee Steve has sug­gested. This is really just a nascent (big) one off of the citizen’s div­i­dend con­sumer finan­cial par­a­digm which is nec­es­sary in an ongo­ing way if we are going to vir­tu­ally elim­i­nate the busi­ness cycle and keep profit mak­ing sys­tems viable. The com­bi­na­tion of the real­ity of the inher­ent scarcity of indi­vid­ual incomes in com­par­i­son to prices plus the ever increas­ing effect of tech­no­log­i­cal inno­va­tion lead­ing to the decreas­ing ratio­nal need for employ­ment in profit mak­ing sys­tems makes the div­i­dend the LOGICAL sup­ple­ment and even­tual replace­ment of the wage.

    To avoid con­fronting these inex­orable and uni­ver­sally ben­e­fi­cial changes is quite frankly.…stupid.

  10. TruthIsThereIsNoTruth says:

    gov­ern­ment deficits, with­out rba board inter­ven­tion force inter­est rates down not up.”

    This is pretty counter intu­itive, so I’m try­ing to see how you arrive at this understanding.

    So you’re say­ing gov­ern­ment deficit is caus­ing an over­sup­ply in the inter­bank market.

    Ok so over­sup­ply in the inter­bank mar­ket — how does that force down rates? Over­sup­ply gen­er­ally means more peo­ple want to short, so if you’re speak­ing to peo­ple in the inter­est rate mar­ket, over­sup­ply is trans­lated to higher rates to attract more peo­ple want­ing to go long. You must mean more demand for yield, forc­ing yield down.

    Ok where does this “over­sup­ply” come from? You’re say­ing gov­ern­ment deficit. Gov­ern­ment deficit will force yield up to attract demand for gov­ern­ment bonds, and you’re say­ing that it some­how forces yields down in the inter­bank mar­ket. How? Can’t see it, maybe a men­tal block, but I’m strug­gling with this one.

  11. mahaish says:

    hi titint,

    a gov­ern­ment deficit is basi­cally a reserve add into the com­mer­cial bank­ing system.

    basi­cally cre­at­ing excess reserves in the clear­ing accounts held by com­mer­cial banks at the cen­tral bank.

    a sys­tem wide sur­plus, since indi­vid­ual banks may be able to divest them­selves of sur­plus funds at prof­itable trades, but the mar­ket as a whole is unable to divest itself of these sur­plus funds.

    remem­ber hor­i­zon­tal money includ­ing inter­bank fund­ing , nets to zero in bal­ance sheet terms.

    ver­ti­cal gov­ern­ment money in terms of a deficit, cre­ates a reserve add or net money .

    in oz, the cen­tral bank pays a sup­port rate on the reserves held at around 25 basis points below the offi­cial cash rate.

    the rea­son this is done is that the rba can set the off­i­cal cash rate by decree , with­out hav­ing to man­age inter bank liq­uid­ity with open mar­ket ops, since the cash rate can only be bid down to the sup­port rate paid on reserves

    in the absence of this rba man­dated sup­port rate on these excess reserves, inter bank com­pe­ti­tion will mean the inter­est rate would be bid down­wards due to a mar­ket demand for funds being less than the avail­able sup­ply due to the gov­ern­ment deficit.

    so the­o­ret­i­cally bid down to zero perhaps

    excess inter­bank fund­ing liq­uid­ity in the absense of trea­sury or cen­tral bank inter­ven­tion, can the­o­ret­i­cally lead to zero inter­est rate at zero bid.

  12. Bret Carpenter says:

    Mark 7:28 …yet the dogs under the table eat of the children’s crumbs.

    I have asked before (on this forum) and have been com­pletely ignored.
    I am bark­ing a lit­tle bit louder this time.

    Why is pub­lic debt not as bad as pri­vate debt? Isn’t a tril­lion dol­lars pub­lic debt exactly the same harm­ful as a tril­lion in pri­vate debt?

    I am a layper­son con­cern­ing eco­nom­ics BUT I WANT TO LEARN.

    What does it take to get you guys to throw me a bone?

    For over a year I have taken an inter­est in eco­nom­ics and have not found the answer to this question.

    This is the clos­est post I have seen address­ing this issue.
    ”… because the dynam­ics behind them are very dif­fer­ent” Steven Keen.

    Si no me respon­des por mi insis­ten­cia por lo menos me puedes con­tes­tar porque vivo en SAN LUIS POTOSI.

  13. Derek R says:

    Bret asked, “Why is pub­lic debt not as bad as pri­vate debt?

    It’s more accu­rate to say that “some types of pub­lic debt are not as bad as pri­vate debt but oth­ers are worse”.

    Lets look at some scenarios.

    1) The pub­lic debt of a gov­ern­ment owed to its own cit­i­zens is not a prob­lem because the peo­ple who have to be repaid are also the peo­ple who have to be taxed to pay the debt. So the money just goes round in a cir­cle. Sure, the cit­i­zens who own more than the aver­age amount of the debt will end net win­ners and those who own less than aver­age will end up net losers and that will cause poverty in some cases but on aver­age, no prob­lem. The gov­ern­ment will never become bank­rupt, and it need not print money to cover the debt since tax­a­tion can always cover it.

    The pub­lic debt of a gov­ern­ment owed to for­eign­ers is a bit more of an issue. How much of an issue depends upon whether the gov­ern­ment has its own cur­rency and on whether it owes the debt in its own cur­rency or in a for­eign cur­rency. Here are three scenarios.

    2) If the gov­ern­ment owes a debt in its own cur­rency, then it can always repay the debt since it can print the money to pay the for­eign­ers if it is unable to raise enough via tax­a­tion of its cit­i­zens. How­ever if it does so, infla­tion is a pos­si­ble (but not inevitable) con­se­quence, since more money may enter cir­cu­la­tion than is being removed.

    3) If the gov­ern­ment owes a debt in a for­eign cur­rency but has its own cur­rency, then it can gen­er­ally repay the debt since it can print the money to buy the for­eign cur­rency to pay the for­eign­ers if it does not earn enough through exports. How­ever once again, infla­tion is a pos­si­ble con­se­quence, since more money may enter cir­cu­la­tion than is being removed. In fact this is a sce­nario which may cause hyper­in­fla­tion, if the cur­rency of the debt is in short sup­ply. This was the basic cause of the Ger­man hyper­in­fla­tion of the 1920s where the for­eign debt was owed in gold which had to be bought from for­eign­ers using Marks.

    4) If the gov­ern­ment owes a debt in a for­eign cur­rency and does not have its own cur­rency. In this case there is no essen­tial dif­fer­ence between pub­lic debt and pri­vate debt. The for­eign cur­rency has to be earned by exports to for­eign­ers and then trans­ferred by tax­a­tion from cit­i­zens to the gov­ern­ment so that it can be paid back to for­eign­ers. If the coun­try does not have a bal­ance of trade sur­plus (or a sub­sidy from the cur­rency issuer), it will sooner or later become bankrupt.

    So in sce­nario 1 (Japan) or sce­nario 2 (USA), a tril­lion dol­lars in pub­lic debt is basi­cally harm­less to the gov­ern­ment but causes an increase in poverty among many of its citizens.

    In sce­nario 3 (1920s Ger­many or 1990s Zim­babwe), there may be extremely severe infla­tion­ary con­se­quences which, in many ways, make this type of pub­lic debt more dan­ger­ous than pri­vate debt.

    in sce­nario 4 (Greece, Ire­land), a tril­lion dol­lars in pub­lic debt is just as harm­ful as a tril­lion in pri­vate debt.

    So in con­clu­sion, I would say that the good­ness or bad­ness of a debt depends much more on the abil­i­ties of the debtor than on the debt itself. If the debtor has the abil­ity to make the things that it owes, it is in a far bet­ter posi­tion to repay the debt than a debtor who can’t.

    That’s my under­stand­ing anyway.

  14. Bret Carpenter says:

    Derek R, thank you for tak­ing the time to respond to my ques­tion. I have read sev­eral times through your post but I still don’t understand.

    Steve Keen is propos­ing a “debt jubilee“ as a pos­si­ble solu­tion to the finan­cial cri­sis that faces the U.S.

    If I under­stand cor­rectly, the gov­ern­ment would essen­tially elim­i­nate the pri­vate debt by deposit­ing money into the bank accounts of all the cit­i­zens with the stip­u­la­tion that it could only be used to pay down debt. Those with­out debt would actu­ally be receiv­ing a bonus.

    So the pub­lic debt would increase in pro­por­tion to the decrease in pri­vate debt.

    Under this sce­nario what would hap­pen to home prices? Would we now have infla­tion­ary pres­sure and not defla­tion­ary pressure?

    If the U.S. did do some­thing like this how would it affect the rest of the world?

  15. mahaish says:

    hey brett,

    the prob­lem with the debt jubillee idea , is that banks have bal­ance sheets that they like to gear up to there eyeballs.

    banks are his­tor­i­cally highly lever­aged entities,

    the greater the lever­age on their bal­ance sheet, the greater the profit.

    so a pay down of the debt just free’s up their bal­ance sheet to re lever­age up to their eyeballs.

    so with­out changes to the pru­den­tial guid­lines that bank oper­ate under, we will be back to square one in short order.

    ulti­mately whether we have infla­tion or not through gov­ern­ment spend­ing really comes down to on which pri­vate sec­tor bal­ance sheet the gov­ern­ment deposit ends up on.

    its no coin­ci­dence the unem­ploy­ment rate shot up and house prices fell in the US. where as in oz, the unem­ploy­ment rate stayed sta­ble and no house price crash.

    ask any ceo of any bank , and he or she will tell you, the unem­ploy­ment rate has a sig­inif­i­cant bear­ing on the sta­bil­ity of the hous­ing market.

    gov­ern­ments are bet­ter of spend­ing money on things that need to be done, keep­ing the unem­ploy­ment rate low, and rais­ing the min­i­mum wages in coun­tries like the US, to keep these prob­lems at bay.

    its not as if the yanks are liv­ing in par­adise. i am sure we could all think of list as long as our arm that needs pub­lic invest­ment in to make our soci­ety a bet­ter place to live in.

    the prob­lem is , try telling this to con­gress, with there obses­sion about the pub­lic debt, and their ridicu­lous debt ceiling.

    if it wasnt for the debt ceil­ing, and the no over­daraft pro­vi­sions gov­ern­ing trea­sury , the yanks could have come out of reces­sion a lot faster and a lot stronger, instead of look­ing like fal­ter­ing again.

  16. Bankster says:

    This graph indi­cates the gov­ern­ment was in debt in the years lead­ing up to 2008. Wasn’t there a sur­plus then?

  17. ferb says:

    Here is back to the future.

    we r in a clay­tons reces­sion” and “The joke — which like most jokes is just a reflec­tion of real­ity — goes that the bar­be­cue con­ver­sa­tion has moved from talk­ing about how much we paid for our houses to how small our mort­gages are”

    Really, Aus­tralia is no longer suf­fer­ing from mas­sive mort­gages cause we’ve all paid them off in the “last 5 yrs of deleveraging”

    Where have i been!

    Read more: http://www.theage.com.au/business/motley-fool/the-coming-boom-20121113-299t3.html#ixzz2C5EtDDig

  18. Rich Shapero says:

    Keen’s focus on pri­vate debt seems very right to me. Any­one who is involved in sell­ing stock or sell­ing homes knows that debt enables a hot mar­ket by allow­ing buy­ers to bid prices up, and it’s clear that this is a big part of what has cre­ated asset bub­bles in the recent past.

    But I think Keen is too blithe about sov­er­eign debt, prob­a­bly because he lives in Aus­tralia. As an Amer­i­can, I can tell you what it’s like when every pub­lic entity is insol­vent and tee­ter­ing on the edge of col­lapse. My local county is buried in unfunded lia­bil­i­ties, my state issues IOUs in the place of tax refunds, and my fed­eral gov­ern­ment con­tin­ues to bury the coun­try in debt. I applaud the out­look of Aus­tralian politi­cians. Gov­ern­ment spend­ing is one of the things politi­cians are DIRECTLY respon­si­ble for.

    I also think Keen goes too far in lay­ing the blame solely on the banks for asset bub­bles. In the US, the gov­ern­ment gets a lot of the credit, lay­ing the ground­work through Fan­nie and Fred­die, and pass­ing leg­is­la­tion that forced banks to make bad loans. But even with the cor­rupt prac­tices of banks and gov­ern­ment, I would lay the chief blame on the dete­ri­o­rat­ing char­ac­ter of the peo­ple. What kind of per­son bor­rows money to gam­ble in an asset bub­ble? That’s the real dri­ver of our recent eco­nomic misfortunes.

  19. glubilee says:

    A lot of pub­lic debt can sim­ple be printed away. Debt to for­eign­ers and and pen­sions no, debt in U.S. to Fed is debt in name only…Fed prints, lends to govt, govt pays inter­est, Fed rebates inter­est to govt minus small admin fee. Right now I believe Fed owns at least 30ercent of uS debt, or maybe just financ­ing per­cent of deficit spend­ing… So Fed is print­ing money, govt is spend­ing it, and govt is pay­ing no inter­est on it. And yet US has lit­tle infla­tion out­side school tuition and med­ical costs. Hous­ing prices down or level, food and gas pop around but over sev­eral years of Fed print­ing have been bot up and down in cots…services/labor costs steady etc.…So US debt to Fed free money sup­ply. Of course as Steve points out, pri­vate debt swamps pub­lic debt, so govt debt even­tho huge by his­toric stan­dard small com­pared to money cre­ated by pri­vate bank lend­ing to pri­vate busi­nesses and consumers.

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