Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s

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Outgoing Ohio Congressman Dennis Kucinich arranged for me to give a briefing at Congress today on the Fiscal Cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass.

I argue that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector–and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit.

Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that I call the “Rock of Damocles”.

Click here to download the paper I presented; Click here to download the Powerpoint slides.

Dennis Kucinich’s introduction:

Steve Keen's Debtwatch Podcast


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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66 Responses to Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s

  1. Pingback: Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s … | How To Reduce Debt Quickly

  2. Sandra Dee says:

    Debt-reset is inevitable at unstable debt levels.

  3. Steve Hummel says:

    Sandra Dee,

    Excellent paper. Jubilee is a necessary and wise course. The trade off of not allowing borrowing to increase debt and so GDP is not a viable option…..but supplementing incomes with a dividend and reducing any inflation with a discount to consumers is precisely the thing that will enable a stable progression of growth in the economy without the build up of personal debt which is so economically devastating.

  4. Steve Hummel says:

    Austerity when technological innovation enables all to lead prosperous lives is a misplaced and unnecessarily puritan sentiment. This in no way is a negation or denial of any perfectly relevant cultivation of virtues. One can be a virtuous person no matter whether they are wealthy or poor.

    If the current consumer Financial paradigm continually becomes a curse to individuals and hence to the entire system and society then the answer to that fact is to change the paradigm, not justify it, refuse to confront it or or wallow in it.

    The consumer financial paradigm must evolve, so that Humanity may also do the same.

    Wisdom is the highest possible evolution of thinking and acting. I suggest we affirm and embrace it.

  5. Steve Hummel says:

    Professor Keen,

    “The consumer financial paradigm must evolve, so that Humanity may also do the same.”


    Even if one does not necessarily believe that the empirical evidence actually supports the above need, in view of the inevitable advance of technological innovation which will make it true eventually anyway, would you not say that ADAPTING the current financial, economic, monetary and accounting systems to its more humane and progressive intentions…was the correct and wise thing to do for both the individual and the system?

  6. Steve Hummel says:

    Wisdom and practicality, which is simply the outward, temporal expression of wisdom, is realizing that finance while a legitimate business model, is a poor, domineering and inevitably destructive paradigm for the individual consumer, and eventually so also for the entirety of the economic system. Wisdom applies no matter whether one is wealthy or poor, but when technological innovation makes relative wealth for all a present possibility, what is the morality in denying such relative wealth, especially when doing so in no way prevents free enterprise or profit? …..and even more relevant, how IMMORAL is it to not do so, when such relative wealth corrects and prevents the historically verifiable negative effects of the current consumer financial paradigm of loan ONLY on both the individual and the system?

  7. Steve Hummel says:

    There is a nexus between wisdom and humanity, and if Man is of the cosmos, and he obviously is, then there is very likely a nexus between wisdom and the cosmos as well.

  8. Steve Hummel says:

    The cosmos is probably something you want to be aligned with.

  9. TruthIsThereIsNoTruth says:

    A human is just a vessel for the digestive nexus. Lest we be confused which end is used for what.

  10. Steve Hummel says:

    As inside, so outside. 🙂 Seriously though, and contemplating these things IS a legitimate, serious and significant thing, because ACTUALLY and COMPLETELY understanding BOTH personal AND systemic alignment from the microcosm to the macrocosm….is Wisdom itself.

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  13. mahaish says:

    hi dm,

    without wishing to verbal steve,

    i think he is focused on the horizontal end of the economy when he argues that private debt can grow exponentially regardless of what the government does.

    depending on prudential guidlines, banks leverage up to their eyeballs in the horizontal end of the economy.

    this does not contradict mmt, because in balance sheet terms all this activity netts to zero within the non government sector.

    government fiscal injections in terms of its own financial liabilities are also equally matched by non government financial assets. the government spending has to go somewhere, and it ends up in a bank or non bank balance sheet within the private sector, and the assets match the laibilities dollar for dollar.

    mmt believes in minsky and the problems that result in the leveraging activity of banks in the horizontal end of the economy.

    so a government deficit and the accumilation of debt can add to the nett worth or savings of the non government sector, but the government debt and the deficit can also be leveraged by the private sector.

    but i do think that while bank leveraging can occure independent of what the government does, when the government runs a budget surplus it withdraws savings from the private sector, so it may be a contributing factor towards some tipping point in terms of a delevaraging event.

    the rba data is very interesting on this point, since every recession or near recession in the last 20 odd years has been preceded by a series of fiscal contractions by the government. im not arguing causation here , but it sure as hell didnt help .

    i havent looked at the fed data, but i wouldnt be surprised of same were true of the yanks.

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