Don’t Do the Math

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Eight years ago, in Decem­ber 2005, I began warn­ing of an impend­ing eco­nom­ic cri­sis that would com­mence when the rate of growth of pri­vate debt start­ed to fall. My warn­ings hit a pop­u­lar chord: jour­nal­ists through­out the world picked it up and pub­li­cised my views – as well as sim­i­lar argu­ments from Nouriel Roubi­niDean Bak­erAnn Pet­ti­forMichael Hud­sonWynne God­ley, and a few oth­ers.

But our argu­ments were ignored by the eco­nom­ics pro­fes­sion because, accord­ing to main­stream eco­nom­ic the­o­ry, pri­vate debt should have no impact on aggre­gate demand. As Bernanke put it, lend­ing sim­ply trans­fers spend­ing pow­er from lender to bor­row­er, and “pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nom­ic effects” (Bernanke, Essays on the Great Depres­sion, p. 24).

Yet the empir­i­cal evi­dence that change in debt does have “sig­nif­i­cant macro-eco­nom­ic effects” is com­pelling: the cor­re­la­tions of change in debt to the lev­el of employ­ment (Fig­ure 1), and of accel­er­a­tion in debt to changes in employ­ment (Fig­ure 2), are over­whelm­ing.

Fig­ure 1: Com­pelling visu­al evi­dence? Not to a main­stream econ­o­mist
Graph for When economic theory fails the maths exam,

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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.