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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16 Responses to Will politicians cause a Roosevelt Recession in 2013?

  1. Steve Hummel says:

    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.

  2. kalman says:

    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.

  3. Steve Keen says:

    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.

  4. Harry says:

    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.

  5. drew priest says:

    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.

  6. Steve Hummel says:

    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.

  7. Lyonwiss says:

    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.

  8. Lord Keynes says:

    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.

  9. peterjb says:

    @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

  10. kreemie says:

    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!

  11. drew priest says:

    @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.

  12. Lyonwiss says:

    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.

  13. Andrew Rabbitt says:

    @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.

  14. Steve Hummel says:

    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.

  15. Steve Hummel says:

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

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