Briefing on the Fiscal Cliff at Congress

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This week’s post returns to the topic I dis­cussed just two weeks ago (Fis­cal cliff lessons from the ‘30s, Novem­ber 26). I wrote that last post after I had given Con­gress­man Den­nis Kucinich a pre­sen­ta­tion on the fis­cal cliff, and he asked me to return to Wash­ing­ton to give a pub­lic brief­ing in Con­gress. Today’s post is the doc­u­ment I spoke to at that brief­ing, and it’s sub­stan­tially more detailed than the draft pub­lished two weeks ago.

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Video of the talk:

Video of the slides:

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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17 Responses to Briefing on the Fiscal Cliff at Congress

  1. Lyonwiss says:


    Busi­ness Spec­ta­tor is now MSM. It has lost all cred­i­bil­ity. A cou­ple of my com­ments crit­i­cal or ques­tion­ing of posts of Robert Got­tlieb­sen and Stephen Kouk­oulas have sim­ply been cen­sored. They often haven’t got their facts right and they don’t want to be cor­rected. Stephen Kouk­oulas is sim­ply your ortho­dox econ­o­mist, apologing for the Reserve Bank and the FIRE sec­tor, totally lack­ing in orig­i­nal think­ing. He lat­est post is that low inter­est rates is good for savers and retirees! Amaz­ing ignorance:

  2. Steve Hummel says:


    Quite right in its analy­sis. How­ever, ulti­mately the whole pro­gres­sive ver­sus con­ser­v­a­tive par­a­digm is just an exten­sion of the Good cop, Bad cop game. We need trans­for­ma­tion and mat­u­ra­tion of the mon­e­tary and eco­nomic sys­tems not just reform. The way to get what we actu­ally need is to syn­the­size these two sys­tems with human wis­dom. That way we can leave the too eas­ily exploited and unnec­es­sar­ily restric­tive RE-distributive money sys­tem for a prop­erly reg­u­lated Dis­trib­u­tive one. And like­wise we can trans­form a piti­fully imma­ture, waste­ful and too often uneth­i­cal profit mak­ing eco­nomic sys­tem into a profit mak­ing sys­tem that is based on ade­quately uni­ver­sal, eth­i­cal and accu­rate human ideas that poli­cies can be crafted from and bound back to so as to enable and encour­age an evo­lu­tion of soci­ety and the peo­ple in it instead of inhibit­ing such. We need a Mon­e­tary and Eco­nomic Sapi­ent Syn­the­sis. No more timid and inad­e­quate reforms while planet earth burns and we hur­dle toward social chaos and likely war in an age of mod­ern weaponry. Time for Human­ity to grow up and live up to its species des­ig­na­tion of wise and dis­cern­ing man, not live down to the “real­i­ties” and “ide­alisms” of homo eco­nom­i­cus. Time for adult and wiz­ened poli­cies to throt­tle and then trans­form the bul­lies and the prof­li­gates and cre­ate a cul­ture wor­thy of what is best in us.

  3. centerline says:

    nicely said Steve. I read once, some­where, a hypoth­e­sis that the uni­verse may not be teem­ing with intel­li­gent life capa­ble of trav­el­ing long dis­tances (seri­ously advanced tech­nol­ogy) because many do not make it past their ado­les­cence. From the per­spec­tive of where we are today, it sure seems like a rea­son­able con­clu­sion. We are at a real cross­roads, glob­ally. Not just in terms of economics/finance, but in terms of resources, dis­tri­b­u­tion, energy, etc. The next few decades will be piv­otal, I think.

  4. centerline says:

    ado­les­cence” meant in terms of level of social matu­rity that is…

  5. Steve Hummel says:

    Thanks. Yes, and the key to the suc­cess of advanc­ing into adult­hood from that ado­les­cence is lead­er­ship. That is why it is so dis­heart­en­ing to see the finan­cial, eco­nomic and polit­i­cal lead­er­ship so con­fused and restrained by self inter­est and ortho­doxy. Our spiritual/religious lead­er­ship should be in the fore­front on this see­ings how the only real way that the direc­tion of indi­vid­u­als and sys­tems actu­ally change.….is with the ideas in one’s head and that our var­i­ous sys­tems are based upon. Find these best ideas, align them with poli­cies and then “hit the streets” with a mass move­ment that herds and hope­fully awak­ens lead­ers of all dif­fer­ent sec­tors of society.

  6. Vic Jones says:

    I like this analy­sis, but I have a seri­ous con­cern about some­thing it lacks: in com­par­ing the 1930’s with the cur­rent sit­u­a­tion, Steve appar­ently assumes that the gov­ern­ment now will be able to pro­duce the same GDP growth from addi­tional debt that it did then. Unfor­tu­nately, when the gov­ern­ment began to engage in heavy deficit spend­ing at the begin­ning of WWII, the U.S. debt-to-GDP ratio was only around 50%. Cur­rent U.S. debt-to-GDP is around 100%. There is a body of evi­dence which sug­gests that, as debt/GDP ratios rise, the stim­u­la­tive effect of each dol­lar bor­rowed is less and less, to the point where each dol­lar bor­rowed cre­ates less than a dol­lar of GDP growth. It’s my under­stand­ing that we’re already at this point of inflec­tion, where each dol­lar of addi­tional debt cre­ates some­thing like $0.83 of GDP growth. At any­thing less than a 1-to-1 ratio, the results of addi­tional bor­row­ing become destruc­tive, not con­struc­tive. Nowhere in his analy­sis does he take this into consideration.

  7. Lyonwiss says:

    This is one of the most sig­nif­i­cant speeches by a cen­tral banker since the GFC:

  8. koonyeow says:

    Title: A Response to Vic Jones

    Agree with your analy­sis. But I think Steve’s main con­cern is the “Rock of Damo­cles”, namely pri­vate debt. I think Steve’s main con­cern is delever­ag­ing of pub­lic debt induc­ing delever­ag­ing of pri­vate debt, induc­ing reces­sion. Since debt jubilee is unlikely, we are left with least bad solu­tion, namely pub­lic spend­ing (deficit) to cush­ion the reces­sion­ary effect of pri­vate debt delever­ag­ing. With­out debt jubilee, economies sad­dled with high level of Ponzi debt are likely to be Japanized.

  9. Steve Hummel says:

    Inten­tion is the strongest force in the uni­verse. There­fore if one hon­estly con­fronts the pri­mary inten­tions of a group and/or a society.….you’re going to see the direc­tion that group/society is going. Then of course you have to ask your­self whether that direc­tion is the proper one.

    The pri­mary inten­tion of the eco­nomic sys­tem is cur­rently profit.
    The pri­mary inten­tion of the eco­nomic, finan­cial and polit­i­cal enti­ties in the world’s soci­eties is the will to power of themselves.

    These are wholly unsat­is­fac­tory and inad­e­quate inten­tions. Why?

    Because sys­tems were made for Man, not Man for systems.

    The inten­tion of the will to free­dom for the indi­vid­ual is the best and proper one for a truly humane soci­ety. If the pri­mary inten­tion of the eco­nomic sys­tem were under­stood and made to be the mate­r­ial free­dom and secu­rity of the indi­vid­ual accord­ing to the level of pro­duc­tive capac­ity of the nation.…then profit and employ­ment could be intel­li­gently placed within and beneath that new pri­mary inten­tion. Of course the eco­nomic, finan­cial and polit­i­cal enti­ties’ being a part of that soci­ety would be sub­ject to that same inten­tion. This inver­sion of the cur­rent inten­tions from the will to power of the sys­tems to the will to free­dom for the indi­vid­ual must take place before the tyranny of the for­mer brings destruc­tion to itself and every­one and every­thing around it.

    Power is a super­fi­cial, inad­e­quate, inhu­mane and a non-self reflec­tive intention.

    Free­dom is deeper, more sat­is­fy­ing, humane and self reflective.

  10. mahaish says:

    inter­est­ing speech by glen stevens,

    all this talk of cen­tral banks expand­ing their bal­ance sheets,

    what he doesnt dis­cuss, is the ele­phant in the room,

    the bank­ing sys­tem try­ing to by-pass its bal­ance sheet con­straints through finan­cial engi­neer­ing through the cre­ation der­av­i­tive products

    and the inabil­ity or un will­ing­ness of cen­tral banks to super­vise such arrangements.

    the pay­ment sys­tem fail­ure that occurred when lehmans went down didnt hap­pen in the tra­di­tional bank­ing sys­tem. it hap­pened when the pay­ment sys­tem failed in the der­a­tives mar­kets, and due to shonky enron style account­ing prac­tices had a spill over effect on the , on bal­ance sheet of the bank­ing system.

    and by the time the fed started going through the books, the rot had well and tru­ely set in, and all trust had disappeared.

    and guess what cen­tral banks around the world had to expand their bal­ance sheets to make a mar­ket and restore trust.

    fun­nily enough you dont find too many cen­tral bankers talk­ing about this stuff 😉

  11. Steve Hummel says:

    What Lietaer is speak­ing about with the Swiss Weir is actu­ally just an incom­plete and prob­a­bly an insuf­fi­cient Social Credit. He even says the same thing as Dou­glas said which is that the real prob­lem is the monop­oly on credit cre­ation that the Pri­vate and Cen­tral Banks and their var­i­ous cap­tured gov­ern­ments have. Some one can refresh my mem­ory about whether the Swiss Weir is actu­ally earned or not. That will deter­mine whether or not it is ade­quate to do the job because if it has to be earned its inad­e­quate by cost account­ing con­ven­tion. Social Credit has been so sup­pressed and inval­i­dated for var­i­ous rea­sons that Lietaer is prob­a­bly not even aware that he is dupli­cat­ing Dou­glas in what he says.

    Grace, a mon­e­tary pol­icy of grace, is nec­es­sary. A sense of Grace in human rela­tions is nec­es­sary or we’d all end up at each other’s throats. Because the is a canon to human life, and there IS a human canon for any­one but psy­chopaths and sociopoaths, there NEEDS to be a human canon for human systems.…otherwise they are not humane. Grace has its coun­ter­parts in the eco­nomic sys­tem and they are either miss­ing and/or ind­e­quate. Grace, the will­ing­ness to for­give, (bank­ruptcy, inad­e­quate and recently biased in favor of Cred­i­tors), Grace, as unmer­ited favor, (the idea of a cul­tural inher­i­tance of tech­no­log­i­cal inno­va­tion, whose value is cur­rently usurped entirely by the finan­cial tri­opoly men­tioned above and so forces us all to con­tin­u­ally “re-invent the wheel” of that value instead of mon­e­tiz­ing it, and Grace, the free gift, the citizen’s div­i­dend which redresses that usurpa­tion and enables indi­vid­ual eco­nomic free­dom and sov­er­eignty for the indi­vid­ual as well.

    As inside so should it be out­side. As above, so should it be below. This is Wis­dom. This is the human canon. Sys­tems must adapt to IT, not FORCE Man to adapt to systems.

    Money and Wis­dom, The Way Out, The Way Home.

  12. Steve Hummel says:

    Sorry, that was a repost of mine on Ellen Brown’s Pub­lic Bank­ing forum.

  13. Lyonwiss says:

    Mahaish Decem­ber 14, 2012 at 9:00 am | #

    What cen­tral bankers say mat­ters much more than what aca­d­e­mics and oth­ers say, because eco­nomic pol­icy and reg­u­la­tion have imme­di­ate impact on our lives. But pub­lic opin­ions do have influ­ence if they are lis­tened to by author­ity. It is a hope­ful sign that Glen Stevens’ speech is evi­dence of “new thinking”.

    Refer­ring to the Great Mod­er­a­tion, he said, “The suc­cess in less­en­ing volatil­ity in eco­nomic activ­ity, infla­tion and inter­est rates over quite a lengthy period made it fea­si­ble for firms and indi­vid­u­als to think that a degree of increased lever­age was safe.” This is a rare acknowl­edge­ment of Minsky’s hypoth­e­sis: “sta­bil­ity is destabilizing”.

    Stevens noted, “a big role in caus­ing the cri­sis – the major role in fact – for poor lend­ing stan­dards, even fraud in some cases, fed by dis­torted incen­tives and com­pounded by super­vi­sory weak­nesses and inabil­ity to see through the com­plex­ity of var­i­ous finan­cial instru­ments”. This is admit­ting a lot (for a cen­tral banker), includ­ing fraud, dis­torted incen­tives and not under­stand­ing derivatives.

    But it is not accu­rate to say that there is an “inabil­ity or unwill­ing­ness of cen­tral banks to super­vise such arrange­ments” (ie deriv­a­tives). And you are right in say­ing that “you dont find too many cen­tral bankers talk­ing about this stuff”, because they sim­ply don’t under­stand the stuff.

    Reg­u­la­tors do not under­stand deriv­a­tives, because OTC deriv­a­tives are not reg­u­lated. Few peo­ple appre­ci­ate the rigid­ity of gov­ern­ment: reg­u­la­tors can­not get infor­ma­tion or data on things they do not reg­u­late. They can­not spend scarce resources on mat­ters out­side their juris­dic­tion. More­over, even if they did know some­thing (eg Mad­off tip-off by Harry Markopo­los), they can do lit­tle legally if deriv­a­tives are involved.

    For this setup you have to thank Sum­mers, Greenspan and oth­ers for the “Over-the-Counter Deriv­a­tives Mar­kets and the Com­mod­ity Exchange Act”, Novem­ber 1999, which effec­tively allowed the cre­ation of the unreg­u­lated deriv­a­tives bub­ble which is still inflat­ing to this day:

    The doc­u­ment for­mally removed any CFTC threat of OTC deriv­a­tives reg­u­la­tion, which “could dis­cour­age inno­va­tion and growth of these impor­tant mar­kets and dam­age U.S. lead­er­ship in these are­nas by dri­ving trans­ac­tions off-shore.” The CFTC is restricted to reg­u­late stan­dard­ized deriv­a­tives on “orga­nized exchanges”.

    It is a mat­ter of time before we have the final denoue­ment of the cri­sis induced by deriv­a­tives implo­sion. Super cheap money from ZIRP and QE merely pro­vides stronger lever­age, by swap­ping “good” gov­ern­ment debt for toxic pri­vate debt, to pre­vent imme­di­ate sys­temic col­lapse. But what is fun­da­men­tally unsound and unsus­tain­able can­not con­tinue indef­i­nitely. One thing to watch is gold and sil­ver deriv­a­tives which may be manip­u­lated to shore up con­fi­dence in fiat cur­ren­cies, which are being widely debased.

  14. Steve Hummel says:

    Here’s what I actu­ally meant to post in response to Mahaish:

    Derivaties should prob­a­bly be wisely unwound and then banned. Money can­not be rehy­poth­e­cated into infin­ity with any sense of secu­rity or respon­si­bil­ity. Nor­mal spec­u­la­tive means are prob­lem­atic enough with­out invit­ing the chaos of these “finan­cial weapons of mass destruc­tion.”
    Wis­dom, the intu­itive sci­ence whose 8000–10,000 year old obser­va­tions are really just the coun­ter­part to the purely abstract sci­ence of math­e­mat­ics, CAN be trusted to point at humanly inte­grated solu­tions. Wis­dom that is in its ulti­mate and most rel­e­vant condensations.

    All you really need is Faith….as in Con­fi­dence, that this is so, and which con­tin­ued over time becomes Hope, both of which are con­ducive of a secure envi­ron­ment which would undoubt­edly enable more of the human capa­bil­ity for Love which in turn makes the abun­dant expe­ri­ence of Grace within one’s self more real, and also the aware­ness of the out­ward poten­tial abun­dance for all due to technology…..if the nec­es­sary mon­e­tary pol­icy of Grace was wisely applied.

  15. Harry Smith says:

    Today is 21 Decem­ber 2012, 1am Syd­ney time. I pro­vide a 5.5 degree Global Finan­cial Mar­ket Alert. Please check the result in the next sev­eral weeks.

  16. John Colr says:

    The sec­ond com­par­i­son lets us decide the “smaller cri­sis” ver­sus “some­thing hap­pened” issue: even though the fall in GDP was much worse then than now, the level of pri­vate was much lower in the 1920s (com­pare Fig­ure 8 on page 9 with Fig­ure 2 on page 3), … ”

    A word miss­ing after ‘private’?

  17. Steve Keen says:

    Yes: it is debt. I will amend…

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