Transcript Misunderstanding the Great Depression, making the

Private debt to GDP ratios
Debt-financed demand percent of aggregate demand
300
275
USA
Australia
20
15
225
200
10
175
5
P ercent
Years (percent of GDP)
250
25
150
125
0
0
 5
100
Great Depression
 10
75
50
 15
including Government
Great Recession
25
 20
including Government
0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Flow of Funds Table L1+Census Data; RBA Table D02
 25
0
1
2
3
4
5
6
7
8
9
10
Years since peak rate of growth of debt (mid-1928 & Dec. 2007 resp.)
The Global Financial Crisis is far from over...
Steve Keen
University of Western Sydney
Debunking Economics
www.debtdeflation.com/blogs
www.debunkingeconomics.com
11
12
13
The New Macroeconomic Puzzle
• How did we go from this…
• To this?
• A Minskian explanation: debt-deflation
Great
Moderation
to Great Recession
US Inflation
and Unemployment
since 1970
16
15
Inflation
Inflation
Unemployment
Unemployment
14
12
U-6 Measure
P ercent
P ercent p .a.
10
10
8
5
6
4
0
Inflation
Unemployment
0
U-6 Measure
2
 52
70
0
72 10
74
76 2078
803082
0
8440 86
88
92
50 90 60
Year
Year
94 70
96
98 80
100 10290104 106
110
100108 110
First Principles
• Debt has macroeconomic impact; contra Bernanke:
– “Fisher’s idea was less influential in academic circles,
though, because of the counterargument that debtdeflation represented no more than a redistribution
from one group (debtors) to another (creditors).”
(Bernanke 2000, p. 24)
• Minority of economists who predicted crisis displayed:
– “a further concern, that growth in financial wealth and
the attendant growth in debt can become a
determinant (instead of an outcome) of economic
growth …” (Bezemer (2009, p. 10))
• Basic mechanisms:
– Debt expands aggregate demand
– Endogenous money creation
– Financial instability
Rising debt increases aggregate demand
• Schumpeter: growing debt adds demand beyond that
generated by sales of goods & services
• Debt essential for entrepreneurial function
– Entrepreneur often has idea but no money
– Needs purchasing power before has goods to sell
– Gets purchasing power via loan from bank
– Entrepreneurial demand thus not financed by “circular
flow of commodities” but by new bank credit
– Since entrepreneurial activities essential feature of
growing economy, in real life “total credit must be
greater than it could be if there were only fully
covered credit. The credit structure projects not only
beyond the existing gold basis, but also beyond the
existing commodity basis.” (Schumpeter 1934, p. 101)
Endogenous money: “Loans create deposits”
• “In the real world banks extend credit, creating deposits
in the process, and look for the reserves later” (Moore
(1979, p. 539)—quoting Fed economist)
• “There is no evidence that … the monetary base … leads
the cycle, although some economists still believe this
monetary myth…, if anything, the monetary base lags the
cycle slightly…
– The difference of M2-M1 leads the cycle by even
more than M2 with the lead being about three
quarters." (Kydland & Prescott, 1990, p. 14)
Financial instability
• “Stable growth is inconsistent with the manner in which
investment is determined in an economy in which debtfinanced ownership of capital assets exists, and the
extent to which such debt financing can be carried is
market determined.
• It follows that the fundamental instability of a capitalist
economy is upward.
• The tendency to transform doing well into a speculative
investment boom is the basic instability in a capitalist
economy.” (Minsky 1982, p. 67)
• Current debt-assets price dual bubble biggest in history…
Rising debt increases aggregate demand
• Asset bubbles & rising debt to GDP
50
300
45
270
40
240
35
210
30
180
25
150
20
120
15
90
10
60
5
30
0
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Year
Shiller Lagging 10 Year P/E Ratio
Case-Shiller Real House Price Index
US Private Debt to GDP
R eal house price index; D ebt to G D P
P rice to 10 year lagged earnings ra tio
Asset price indices & Debt to GDP
Rising debt increases aggregate demand
• Aggregate demand: Income + change in debt
• “Great Moderation” and “Great Recession” debt-driven
30
12
20
10
10
8
0
6
 10
4
 20
 30
1970
2
Debt contribution to aggregate demand
Unemployment
1975
1980
1985
1990
Year
1995
2000
• As is current apparent recovery…
2005
2010
0
2015
U nem ploym ent P ercent
C hange in D ebt p.a./ (G D P + C ha nge in D ebt)
Debt financed demand and unemployment
Rising debt increases aggregate demand
• Change in AD: Change in GDP + acceleration in debt
30
75
20
50
10
25
0
0 0
 10
 25
 20
 50
 30
1970
1975
1980
1985
1990
Year
Debt Acceleration
Change in Unemployment
1995
2000
2005
2010
 75
2015
• Debt &
disequilibriumaware model
needed to
capture these
processes
• Minsky’s
Financial
Instability
Hypothesis
C hange in U nem ploym ent P erce nt p.a.
C hange in C hange in D ebt p.a./ G D P
Debt financed demand and unemployment
Minsky’s “Financial Instability Hypothesis”
Economy in historical time
Debt-induced recession in recent past
Firms and banks conservative re debt/equity, assets
Only conservative projects are funded
– Recovery means most projects succeed
• Firms and banks revise risk premiums
– Accepted debt/equity ratio rises
– Assets revalued upwards…
• “Stability is destabilising”
– Period of tranquility causes expectations to rise…
• Self-fulfilling expectations
– Decline in risk aversion causes increase in investment
– Investment expansion causes economy to grow faster
•
•
•
•
The Euphoric Economy
• Asset prices rise: speculation on assets profitable
• Increased willingness to lend increases money supply
– Money supply endogenous , not under RBA control
• Riskier investments enabled, asset speculation rises
• The emergence of “Ponzi” (Bond, Skase…) financiers
– Cash flow less than debt servicing costs
– Profit by selling assets on rising market
– Interest-rate insensitive demand for finance
• Rising debt levels & interest rates lead to crisis
– Rising rates make conservative projects speculative
– Non-Ponzi investors sell assets to service debts
– Entry of new sellers floods asset markets
– Rising trend of asset prices falters or reverses
The Assets Boom and Bust
• Ponzi financiers go bankrupt:
– Can no longer sell assets for a profit
– Debt servicing on assets far exceeds cash flows
• Asset prices collapse, increasing debt/equity ratios
• Endogenous expansion of money supply reverses
• Investment evaporates; economic growth slows
• Economy enters a debt-induced recession
– Back where we started...
• Process repeats once debt levels fall
– But starts from higher debt to GDP level
• Eventually final crisis where debt burden overwhelms
economy
A Strictly Monetary Minsky Model
• Foundations
– Goodwin (1967) growth cycle model (Keen 1995)
– Pure credit economy model (Graziani 1989)
• Built using tabular system of ODEs (Keen 2008)
Symbolic sum of columns
• See blog www.debtdeflation.com/blogs for details
• Especially Roving Cavaliers of Credit post
Modelling Minsky: The full system
Financial Sector
• In equations…
d
dt
d
dt
d
dt
d
dt
d
dt
BC( t)
B PL ( t )
F L( t )
FD( t)
W D( t)
F L( t )

 RL  r ( t )


BC( t)

 LC  r ( t )
B C ( 0)

B PL ( t )
rL F L( t )  rD  F D ( t )  rD  W D ( t ) 
BC( t)

 LC  r ( t )


F L( t )

 RL  r ( t )
rD  F D ( t )  rL F L( t ) 
rD  W D ( t ) 
W D( t)
W

 P C ( t )  Yr ( t )  Inv  r ( t )

BC( t)

 LC  r ( t )

B PL ( 0 )
B


F L( t )

 RL  r ( t )



B PL ( t )
B

W D( t)
W


 P C ( t )  Yr ( t )  Inv  r ( t ) 
W ( t )  Yr ( t )
a( t)
W ( t )  Yr ( t )
B PL0
F L( 0 )
F L0
F D ( 0)
F D0
W D ( 0)
a( t)
W D0
Physical output, labour and price systems
Level of output
K r( t )
Yr ( t )
Employm ent
Yr ( 0 )
L( 0 )
a( t)

P C ( t )  Yr ( t )  W ( t )  L ( t )  r L  F L ( t )  r D  F D ( t )
 r( t )
Rate of Profit
d
Rate of employment

 r( 0 )
v  P C ( t )  Yr ( t )
 ( t)
 ( t)  [ g ( t)  (    ) ]

g ( t)
Inv  r ( t )

 
d
W ( t)
dt
Rate of change of prices

W ( ( t ) )  Ph (  ( t ) )    [ [ g ( t )  (    ) ] ] 

d
dt
Rate of change of capital stock
d
dt
Rates of growth of population and productivity
PC( t)
K r( t )
1
 Pc


 P C ( t ) 
W ( t)
W ( t)
  1  1 




a
(
t
)

(
1
 s )  PC( t)
 Pc 



g ( 0)
g0
dt
a( t)
W ( 0)
W0
P C ( 0)
P C0
K r( 0 )
K r0
a( t)  ( 1  s ) 
K r( t )  g ( t )
d
 r0
0
v
Rate of change of w ages
L0
 ( 0)
dt
Rate of real economic growth
Yr0
v
Yr ( t )
L( t )
 a( t)
d
dt
N ( t)
  N ( t ) N ( 0)
N0
• Nonlinear
functions for
investment,
wage change,
loan repayment,
lending from
capital
• 3 factor
Phillips curve:
employment,
rate of change
of employment,
inflation
B C0
a ( 0)
a0
Modelling Minsky: The full system
• In new program QED
QED
Modelling Minsky: The outcome
• Monetary factors
Modelling Minsky: The outcome
• Production, employment, wages and inflation
References
•
•
•
•
•
•
•
Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, Princeton
University Press.
Bezemer, D. J. (2009). “No One Saw This Coming”: Understanding Financial
Crisis Through Accounting Models. Groningen, The Netherlands, Faculty of
Economics University of Groningen.
Blatt, J.M., Dynamic Economic Systems: A Post Keynesian Approach, ME
Sharpe, Armonk.
Goodwin, R. (1967). “A growth cycle” in C. H. Feinstein (ed.), Socialism,
Capitalism and Economic Growth. Cambridge, Cambridge University Press:
54-58.
Graziani, A. (1989). "The Theory of the Monetary Circuit." Thames Papers in
Political Economy Spring: 1-26.
Keen, S. (1995). "Finance and Economic Breakdown: Modeling Minsky's
'Financial Instability Hypothesis.'." Journal of Post Keynesian Economics
17(4): 607-635.
Keen, S. (2008). Keynes’s ‘revolving fund of finance’ and transactions in the
circuit. Keynes and Macroeconomics after 70 Years. R. Wray and M.
Forstater. Cheltenham, Edward Elgar: 259-278.
References
•
•
•
•
Kydland, F. E. and E. C. Prescott (1990). "Business Cycles: Real Facts and a
Monetary Myth." Federal Reserve Bank of Minneapolis Quarterly Review
14(2): 3-18.
Minsky, H. P. (1982). Can "it" happen again? : essays on instability and
finance. Armonk, N.Y., M.E. Sharpe.
Moore, B. J. (1979). "The Endogenous Money Stock." Journal of Post
Keynesian Economics 2(1): 49-70.
Schumpeter, J. A. (1934). The theory of economic development : an inquiry
into profits, capital, credit, interest and the business cycle. Cambridge,
Massachusetts, Harvard University Press.