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… 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…’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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