Will politi­cians cause a Roo­sevelt Reces­sion in 2013?

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Recent eco­nomic data from both the UK and US should have taken the wind out of the sails of those in the Anglos­phere who – despite clearly con­tra­dic­tory evi­dence from main­land Europe – con­tinue to argue that fis­cal tight­en­ing is needed for eco­nomic growth is to recover.

The UK, which has fol­lowed a fis­cal aus­ter­ity path right from the elec­tion of the Con­ser­v­a­tive-Lib­eral coali­tion gov­ern­ment in mid-2010, recorded a 0.3 per cent fall in the last quar­ter of 2012, while the US recorded a 0.1 per cent fall (mainly on the back of declin­ing gov­ern­ment expen­di­ture). Get­ting the gov­ern­ment sec­tor out of the way and let­ting the pri­vate sec­tor rip clearly isn’t going accord­ing to script, even when you can’t blame Brus­sels for the pol­icy.

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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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  • Steve Hum­mel

    If you notice all of the graphs show a con­tin­ual up trend of debt since WW II. Now con­tin­u­ous Fed/Gov injec­tion of monies has caused a buoy­ant MONETARY infla­tion and so obscured the fact that price infla­tion would have occurred any­way due to the account­ing sys­tem flaw that enforces such, and a much faster loss of indi­vid­ual and busi­ness pur­chas­ing power with­out such stimulus…without the FED as tol­er­a­ble scape­goat

    The Great Depres­sion occurred with­out the US actu­ally hav­ing a mid­dle class so a depres­sion does not require excess per­sonal indebt­ed­ness. Yes, both depres­sions were pre­ceded by an accel­er­a­tion of debt which utterly desta­bi­lized an already inher­ently unsta­ble sys­tem, its just that with the US emerg­ing from WW II as the only major power whose pro­duc­tive poten­tial was still intact plus Key­ne­sian stim­u­lus (which is really just a half assed and once removed form of div­i­dend to Banks and major cor­po­ra­tions) enabled the anom­alous mid­dle class and the inevitable string to be played out over a longer period of time. The Amer­i­can mid­dle class as we have come to think of it is actu­ally a Key­ne­sian cap­i­tal­is­tic-flawed account­ing sys­tem anom­aly not an actual effect of “free” mar­kets which are actu­ally inher­ently cen­tral­iz­ing of wealth and power. 

    Finance is undoubt­edly happy to play the idiot Tea Party/Austrian defla­tion is actu­ally good for the econ­omy school of “thought” off against the just as the­o­ret­i­cally shal­low and mis­taken Keynesian/Hyper Keynesian/ MMT “reform” move­ment. Why? Because at least a part of their post WWII lucra­tive con­sumer finan­cial mar­ket con­tin­ues and their monop­oly on credit cre­ation, power and “con­trol” remains either way. And if a war occurs or we sim­ply slump our way toward serfdom/Gommorah…who cares.…right? So long as we are on top.

    If we ever want to get out of The Divine Right of Finance stage of eco­nomic his­tory we will devise a sys­tem that ACTUALLY has the will to free­dom for the indi­vid­ual and poli­cies that will ACTUALLY cre­ate that effect.…instead of delud­ing our­selves that you can tin­ker with a sys­tem whose basic ideas ACTUALLY pre­vent such a thing from hap­pen­ing. Profit and employ­ment are per­fectly good sec­ondary or ter­tiary eco­nomic con­sid­er­a­tions but they are piss poor PRIMARY ones. You have to make Wis­dom and its con­den­sa­tions the pri­mary ideas and purposes.…unless of course you think that some inad­e­quate tool or lesser idea is just fine.

    Sys­tems were made for men, and not men for sys­tems, and the inter­est of man which is self-devel­op­ment, is above all sys­tems, whether the­o­log­i­cal, polit­i­cal or eco­nomic.” C. H. Dou­glas Eco­nomic Democ­racy pp18.

  • Dear Steve,
    In your opin­ion, where do you see Aus­tralian Real estate falling to, say in 4–5 years? 30% or 50% down in dol­lar terms?
    Thank you, kalman.

  • Maybe 20% down in dol­lar terms, more in real. But a slow melt given the impact of drop­ping rates on the desire to delever here, ver­sus how strong that desire/pressure was in the US given fixed rate mort­gages.

  • spike
  • Harry

    Global Finan­cial Alert

    Today is 5th Feb­ru­ary 2013, I pro­vide a Global Finan­cial Mar­ket Alert. You will notice in the next sev­eral weeks to see the result of the pred­i­ca­tion.

    Last alert on 21 Decem­ber 2012 was not accu­rate due to few key coun­tries have issued some major finan­cial poli­cies after­wards.

  • drew priest

    But what about Japan? I didn’t see that major eco­nomic nation’s data plot­ted in the arti­cle.

    For the past 15 years the Japan­ese have fol­lowed this counter cycle spend­ing pre­scrip­tion. Pub­lic debt increase almost exactly counter matches pri­vate debt reduc­tions (per GDP). This tac­tic may have been anes­thetic for the worst parts of the pri­vate debt con­trac­tion, but it has hardly been a win­ning strat­egy.

    Now Japan is past 230% pub­lic debt/gdp, which is clearly on an unsus­tain­able path, just as much as 350% pri­vate debt to gdp in the US was unsus­tain­able.

    Pub­lic sec­tor spend­ing seems to have a pretty poor track record for actu­ally revers­ing depres­sions; from 1930s US, to 1990-2000s Japan, and 2009 US.

    From Keen’s analy­sis, it seems its not the size of the gov’t spend­ing, but the size of the deficit any­way. So why not pur­sue tax year hol­i­day, rather than gov’t largess. Once gov’t has the pro­gram, it never goes away, even if it is no longer needed. But a tax hol­i­day, that is cer­tain to be tem­po­rary.

    But in total, going whole hog and deliv­er­ing a jubilee kind of sys­tem seems more likely to be a win­ning tac­tic. Direct cash injec­tion from the cen­tral bank to all tax pay­ers of record. Counter infla­tion with ris­ing fed funds rate. Bal­ance the size of each (direct cash & fed funds rate) so that infla­tion is con­trolled, and debt con­tin­ues to reduce back to tar­get lev­els.

  • Steve Hum­mel

    Tech­nol­ogy is increas­ingly reduc­ing the need for human effort and even human input. Instead of con­sid­er­ing this a prob­lem of lack of employ­ment why not make it an inher­i­tance of our cul­tural and tech­no­log­i­cal progress by giv­ing every­one a gift, a citizen’s div­i­dend in addi­tion to their pay for work and as a means of elim­i­nat­ing the need to bor­row in order to have a mid­dle class lifestyle? Treat it as an oppor­tu­nity for more leisure and self deter­mined con­struc­tive pur­pose.

    Oh, then Finance would not be able force us to con­tin­u­ally re-invent the wheel of our accu­mu­lated Tech­no­log­i­cal Progress (which if you think about it for a cou­ple of nano sec­onds is obvi­ously a com­mu­nal asset and THE most dom­i­nant fac­tor in pro­duc­tion in exis­tence today and so able to be mon­e­tized) and totally usurp the value thereof. They’d have to share that value. We mustn’t have that!

    Inter­est rates are inef­fi­cient and inef­fec­tive ways for huge dom­i­nat­ing finan­cial insti­tu­tions to main­tain power and “con­trol” of the gov­ern­ment and the mass of indi­vid­u­als. Gift­ing the indi­vid­ual with a con­tin­u­ous div­i­dend would be a much more effec­tive way to pay down exces­sive indi­vid­ual indebt­ed­ness and simul­ta­ne­ously down­size the power and influ­ence of Finance.

    A div­i­dend would imme­di­ately make wel­fare and unem­ploy­ment taxes a redun­dancy so we could just elim­i­nate them, return­ing pur­chas­ing power to indi­vid­u­als and down­siz­ing gov­ern­ment bureau­cracy. Social Secu­rity taxes could even­tu­ally be fazed out the same way.

    Break­ing up the monop­oly on credit cre­ation by Finance and their lap dog gov­ern­ments has many pos­i­tive alter­na­tives.

  • Lyon­wiss

    While Steve Keen does a good job of expos­ing neo­clas­si­cal non­sense, he does a poor job of espous­ing Key­ne­sian non­sense. The gov­ern­ments talk about fis­cal aus­ter­ity to pla­cate crit­ics, while con­tinue to run fis­cal deficits, ease mon­e­tary pol­icy, print money etc. every­thing that hard-line Key­ne­sians and MMT loudly shout­ing they should do. 

    Aus­ter­ity is talk, some­thing to be car­ried out in the next ten years in the US. Hence the lack of eco­nomic growth shows the futil­ity of Key­ne­sian poli­cies. The lack of pri­vate credit growth comes from the lack of pri­vate sec­tor demand for credit, not the lack of sup­ply, with cash being hoarded in US and Euro­pean banks. The gov­ern­ment can­not force peo­ple to bor­row or to con­sume. Aus­ter­ity would be unwise at the moment, but there is no aus­ter­ity now.

    Show­ing charts of cor­re­la­tions does not tell you how the econ­omy actu­ally works. The rea­son why “eco­nomic fore­casts no bet­ter than a ran­dom walk” is the math­e­mat­i­cal mod­els do not cap­ture any real under­stand­ing of how the econ­omy works. The mod­els are dri­ven by eco­nomic rela­tion­ships (eg Phillips Curve) which are sta­tis­ti­cally insignif­i­cant. They have absolutely no power of pre­dic­tion, unlike mod­els in physics.

  • Lord Keynes

    drew priest@February 5, 2013 at 8:09 am

    (1) You say:

    But what about Japan? I didn’t see that major eco­nomic nation’s data plot­ted in the arti­cle.

    For the past 15 years the Japan­ese have fol­lowed this counter cycle spend­ing pre­scrip­tion.”

    That is not true. Japan­ese coun­ter­cycli­cal pol­icy in the early 1990s was only mild to mod­er­ate. It was enough to stop reces­sion, and when in 1996, they imple­mented a pretty good fis­cal stim­u­lus they got an an impres­sive 3.49% growth rate – much higher than any­one pre­dicted.

    But then from 1997 Prime Min­is­ter Ryu­taro Hashimoto imposed sharp fis­cal con­trac­tion and aus­ter­ity, and a reces­sion resulted.

    A major con­se­quence of the reces­sion induced by fis­cal con­trac­tion was that the Japan­ese bud­get deficit soared by 68% as tax rev­enue col­lapsed. This must be counted as one fun­da­men­tal rea­son why Japan­ese pub­lic debt soared so badly. When fis­cal expan­sion was applied again on a large enough scale in 1998 the reces­sion ended and growth resumed.

    The data is quite clear:


    (2) You say:

    From Keen’s analy­sis, it seems its not the size of the gov’t spend­ing, but the size of the deficit any­way … etc.”

    Key­ne­sian stim­u­lus is about either tax cuts and deficit spend­ing or both, so what you pro­pose (in terms of tax cuts at any rate) would be a Key­ne­sian stim­u­lus.

  • @Lyonwiss Feb­ru­ary 5, 2013 at 7:15 pm | #

    The mod­els are dri­ven by eco­nomic rela­tion­ships (eg Phillips Curve) which are sta­tis­ti­cally insignif­i­cant. They have absolutely no power of pre­dic­tion, unlike mod­els in physics.”

    Economist’s pre­dic­tions are akin to ‘witch doc­tors’ cast­ing bones into the fire with some salt­peter (potas­sium nitrate) to cause a burst of flame which (hope­fully) results in lots of rolling of the eyes, arch­ing bod­ies and low moan­ing and gyra­tions from the ador­ing pub­lic and ‘true believ­ers’. A tep­pa­nyaki meal for the dimin­ished mind and hun­gry hands. Oh, Lordy!
    (Its cheaper than buy­ing booze for all the boys)

    Of those 6 blind econ­o­mists seek­ing the God­head (Amen) of Eco­nomic The­ory which you sup­plied in out­stand­ing imagery in exam­in­ing the ele­phant, one, I sus­pect, if not all, or most, is sure to have his/her head rightly embed­ded firmly into the dark tun­nel of the rear end of that ele­phant, where no doubt, new great rev­e­la­tions are in great eso­teric abun­dance to the de-light of those ador­ing dis­ci­ples. But what of the one that found that dan­gling trunk? 

    Hello, hello, hello,^^.

    Well, we may yet even soon learn of the dis­cov­ery of credit accel­er­a­tion (and indeed, de-accel­er­a­tion) from abun­dances (and craven short­ages) for pub­lic spend­ing, value increases — or, was that price infla­tion?, and maybe, vice versa, and all such things that even lit­tle pup­pies are aware of… and have been for some ~5,000 years or more. Where and more par­tic­u­larly, when, will the won­ders of Econ­o­mist rev­e­la­tion ever stop; the mind bog­gles.

    Hal­lelu­jah… indeed, inshal­lalah (no dis­re­spect to the pre­vail­ing Gods).

    Oh my, the dung heaps and dried up and wasted spoor of the fools’ jour­ney lack no num­bers for ana­lyt­i­cal insan­ity and intro­spec­tion of the paths gone trod­den; any­thing for a Nobel Prize in Eco­nom­ics; just look at Krug­man — and also, the won­ders of the new amount of neo-Moses types, descend­ing from the heights with their won­drous rev­e­la­tions cast in stone.

    Oh, what won­ders… we live in ever hap­pi­ness of the blessed Great Econ­o­mist of the Heav­ens and his blessed sons and daugh­ter of this day.

    Ho hum

  • kreemie

    I’m very inter­ested by Steve’s the­ory, but won­der­ing if it’s really so straight­for­ward that the UK is in the biggest trou­ble, based on the data which sug­gest UK gross debt is the high­est out of devel­oped nations.

    Firstly, what does this UK ‘gross debt’ include? Is it really UK house­hold debt or just a func­tion of the fact that Lon­don is a mas­sive global finan­cial cen­tre — no doubt big­ger than the US in rela­tion to its GDP. If a lot of the gross debt com­prises lever­age from (say) Lon­don-based Invest­ment Bank Prime Bro­ker­age arms…which lend to hedge funds which spec­u­late in European/Global assets.…surely it was never right to con­sider this ever-ris­ing gross debt was prop­ping up UK aggre­gate demand through­out the last four decades? 

    Sec­ondly, even if the data does purely reflect house­hold debt.…why are we study­ing gross debt rather than net debt? And by net debt, I don’t just mean cash but also hard assets like hous­ing.

    Ok this is an extreme hypo­thet­i­cal exam­ple for illus­tra­tive purposes.….BUT.…if a UK per­son has a mort­gage of £200k, and income of £20k and a house cur­rently val­ued at £400k.…his ‘per­sonal gross debt:GDP’ ratio will be 1000%.
    Then take (say) a Ger­man with a mort­gage of only £60k, income of £20k but a house cur­rently val­ued at £40k.…his ‘per­sonal debt:GDP’ ratio will be only 300%.

    So, based on this ratio you might say the Ger­man faces far fewer chal­lenges. But I would say his debt is backed by fewer assets (he is in ‘net debt’ whereas the UK per­son still has ‘net assets’.…at cur­rent prices). The UK person’s house is prob­a­bly more expen­sive because he lives in an econ­omy where ever higher lev­els of mort­gages (gross debt) caused house prices to rise faster than in Ger­many. Now all that hap­pens is the UK hous­ing mar­ket goes into reverse. So yes UK house prices prob­a­bly need to fall some­what (people’s net wealth might fall) but why should this nec­es­sar­ily trig­ger cri­sis in UK aggre­gate demand/economic growth?

    (obvi­ously I appre­ci­ate falling house prices are never good for con­sumer con­fi­dence etc.…but do you see the the­o­ret­i­cal angle I’m com­ing from?)

    No doubt some­body will have a very good answer to this. I am new and just inter­ested to learn more, so please don’t jump on me!

  • drew priest

    @Lord Keynes

    But then from 1997 Prime Min­is­ter Ryu­taro Hashimoto imposed sharp fis­cal con­trac­tion and aus­ter­ity, and a reces­sion resulted.

    Look­ing at the data…

    From these plots, it looks like gross expen­di­tures stayed flat in ’97 (well above expected tax receipts), GDP dipped, and taxes con­tin­ued an unmit­i­gated trend down, that started before “aus­ter­ity” and con­tin­ued well after.

    Yield­ing a debt/gdp that rock­ets up…

    I would hardly agree tar­get­ing a con­stant level of deficit is “sharp fis­cal con­trac­tion and aus­ter­ity”. But obvi­ously the fol­low up gov­ern­ment was much more intense with the so called Key­ne­sian stim­u­lus. Even so, tax rev­enues still con­tin­ued to fall with only mod­est GDP growth after­wards.

    On the whole, I think the plots still sup­port my inter­pre­ta­tion. Dur­ing the whole period of the 90s to mid 2000s, gen­er­ally speak­ing pri­vate debt was slowly declin­ing while gov’t debt was grow­ing rapidly so that total debt was mostly flat!

    All this counter cycle spend­ing, and it has basi­cally tread water. Not exactly a ring­ing endorse­ment.

    Yes, I agree it is another Key­ne­sian style stim­u­lus. My point is that if Key­ne­sian and/or Keen­sian style stim­u­lus is to be fol­lowed, my pref­er­ence is for tax hol­i­day rather extra spend­ing due to the long term base­line bud­get­ing. I think Key­ne­sians are more con­cerned about gross gov’t spend­ing, to flush as much cash as pos­si­ble through liq­uid­ity traps. If I under­stand Keen­sian­ism, then its not the gross gov’t spend­ing that mat­ters at all, but the deficit; change in debt that mat­ters.

  • Lyon­wiss

    Drew Priest Feb­ru­ary 7, 2013 at 3:11pm

    Macro­eco­nomic rela­tion­ships are erro­neous sta­tis­ti­cal arte­facts which do not reflect any under­stand­ing of eco­nomic processes. Regres­sion analy­ses which led to mul­ti­pli­ers and cor­re­la­tions assume equi­lib­rium fluc­tu­a­tions, which are sym­met­ri­cal. In other words, the dis­tri­b­u­tion of sta­tis­ti­cal errors are assumed (never proven) to be sym­met­ri­cal, in fact assumed nor­mal.

    If fis­cal con­trac­tion and aus­ter­ity cause a reces­sion (as in Japan), then it is assumed that fis­cal expan­sion and mon­e­tary stim­u­lus will cause eco­nomic growth. Totally wrong, because of asym­me­try. Eco­nomic growth can be slowed by apply­ing con­straints, e.g. credit rationing. But hav­ing abun­dant credit capac­ity, by quan­ti­ta­tive eas­ing etc. does not nec­es­sar­ily lead to eco­nomic growth, because credit sup­ply is only one of sev­eral fac­tors needed for eco­nomic expan­sion.

    That is, ade­quate fis­cal and mon­e­tary accom­mo­da­tion, rather than restric­tion, is nec­es­sary, but not suf­fi­cient for eco­nomic growth. This is one of many flaws of Key­ne­sian eco­nom­ics. No amount of flawed econo­met­ric analy­sis by Bernanke (of the Great Depres­sion) can teach him such sim­ple truths.

  • Andrew Rab­bitt

    @Lord Keynes, the Japan­ese GDP growth rate of the decade begin­ning 1993 was less than a third of that expe­ri­enced in the nearly two decades prior — this is despite gov­ern­ment counter-cyclic poli­cies. I would not, like Drew Priest, call that a roar­ing suc­cess for so-called Key­ne­sian think­ing.

    In my opin­ion, gov­ern­ment “counter-cyclic poli­cies” only cause indu­trial out­put to adapt to a false and unsus­tain­able eco­nomic demand sig­nal. What the gov­ern­ment is buy­ing with its “counter-cyclic poli­icies” is not what would be bought oth­er­wise. Far be it for me to sug­gest it buys graft, cor­rup­tion and favouritism, amongst other things. The end result when the plug is pulled is, of course, a sharp con­trac­tion in eco­nomic activ­ity as all of the “easy money” sup­ported enter­prises fail.

    We will see this in spades in the solar PV indus­try when instal­la­tion sub­si­dies and extreme feed-in tar­ifs begin to evap­o­rate through unaf­ford­abil­ity. You can’t rede­ploy all those gov­ern­ment-spon­sored resources overnight. A con­trac­tion is inevitable.

  • Steve Hum­mel

    What if a citizen’s div­i­dend REPLACED pri­vate bor­row­ing and a gen­eral retail dis­count was insti­tuted that equated the cost of pro­duc­tion with the cost of what we con­sumed for a given period of time? (and retail mer­chants were com­pen­sated by a sep­a­rate cen­tral­ized mon­e­tary author­ity based solely on com­mer­cial and retail sta­tis­tics)

    If we want to end the inevitable dom­i­nance of Finance and their cap­tured enti­ties the var­i­ous gov­ern­ments of the world, we must break up their monop­oly on the cre­ation of credit and Dis­trib­ute it directly to indi­vid­u­als. We must be unafraid to ques­tion “free” mar­ket theory’s dog­mas about the the dead­li­ness of the Quan­tity and veloc­ity the­o­ries of money, focus on ever present com­mer­cial real­i­ties which under­lie them. We must also be unafraid to chal­lenge the fact that our cur­rent mon­e­tary sys­tem is not con­trolled in any adult, respon­si­ble or demo­c­ra­tic way. We must make the inten­tion of our eco­nomic, finan­cial and mon­e­tary sys­tems THE WILL TO INDIVIDUAL ECONOMIC FREEDOM INSTEAD OF THE WILL TO POWER OF THE CURRENT SELF INTERESTED FINANCIAL, ECONOMIC/CORPORATE AND POLITICAL ENTITIES

    New and truly dif­fer­ent inten­tions, ideas and hence poli­cies are needed. Reform is inad­e­quate. It merely adds reg­u­la­tions to the cur­rent actual ideas and inten­tions. Only a change of ideas/intentions enables an ACTUAL change of vector.…and if those ideas are truly uni­ver­sal and deep enough they will encom­pass and prop­erly align the for­mer ideas and trans­form the effects of the for­mer struc­tures. As above, so below. As within, so with­out. Sym­me­try is valid, true and nec­es­sary for indi­vid­ual humans AND human sys­tems. This is sci­ence. This is Wis­dom.

  • Steve Hum­mel

    In the above con­cep­tion the CONSUMER finan­cial par­a­digm need only be changed. The com­mer­cial par­a­digm should remain loan only of course.