How ris­ing debt causes inequal­ity and cri­sis

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In a (for me!) brief pre­sen­ta­tion with 7 slides, I explain why ris­ing pri­vate debt nec­es­sar­ily causes increased inequal­ity, and leads to an eco­nomic cri­sis when the rate of growth of debt exceeds the rate of decline of wages as a share of national income. Cru­cially, the actual break­down is pre­ceded by an appar­ent period of tranquility–a “Great Mod­er­a­tion”.

This was a short talk to a pub­lic audi­ence at ESCP Europe in Paris, which was pre­sented in Eng­lish and also trans­lated into French by Gael Giraud, Chief Econ­o­mist of the French Devel­op­ment Agency and the trans­la­tor of Debunk­ing Eco­nom­ics (so the sound­track is in both Eng­lish and French).

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Right-click here to down­load a Min­sky file that has con­trols for (a) lin­ear or non­lin­ear func­tions; (b) Exis­tence or not of debt; ( c ) Prices or a non-price model; (d) Exis­tence of gov­ern­ment; and (e) the capac­ity to con­trol the level of employ­ment of the pop­u­la­tion that the gov­ern­ment is happy with (set at 65% ini­tially).

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Here’s a sam­ple sim­u­la­tion of the debt-inequal­ity-cri­sis process from the Min­sky file linked above:

Minsky

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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  • Julian Wil­son

    Doesn’t this graph sim­ply express the rel­a­tive dif­fi­culty of the pri­vate agent rais­ing pri­vate debt for con­sump­tion vs pro­duc­tive endeav­ours?

    When it is ^eas­ier* to raise debt for con­sump­tion than raise pro­duc­tiv­ity, the pri­vate agent will increase debt for con­sump­tion with a neg­a­tive impact in debt/GDP ratio.

    When it is *harder* to raise debt for con­sump­tion than raise pro­duc­tiv­ity, the pri­vate agent will increase debt for pro­duc­tive endeav­ours (invest) with a pos­i­tive impact in debt/GDP ratio.

    Thus pri­vate debt has either a neg­a­tive or pos­i­tive feed­back on GDP/private debt ratio depend­ing upon the rel­a­tive dif­fi­culty of rais­ing debt vs rais­ing pro­duc­tiv­ity.

  • Willy2

    Didn’t read the arti­cle (yet).

    I see another rea­son that inceases inequal­ity.

    In the 1960s & 1970s workers/employees received wage increases at or above infla­tion.

    From the (early) 1980s workers/employees received wage increases BELOW infa­tion. It meant that wage earn­ers con­sis­tently saw their pur­chas­ing power erode over the last ~ 35 years.

    To make up for those short­fall in income peo­ple took on more and more debt.

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  • Your charts of change in pri­vate debt and unem­ploy­ment seem, at least to a non-econ­o­mist, to show the oppo­site of your the­sis: ris­ing pri­vate debt cor­re­lates with falling unem­ploy­ment. I assume the unem­ploy­ment mea­sure is actu­ally the per­cent of the work­force employed, rather than unem­ployed. If so, bet­ter label­ing would be help­ful.

  • That is pre­cisely what I am argu­ing. You need to read more care­fully.