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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