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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65 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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  15. Pingback: Fiscal Cliff Deal: “I’m Not Crazy; My Mother Had Me Tested.” « Vaguely Radical

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