Transcript Misunderstanding the Great Depression, making the next one

The GFC: Scale, Causes, Consequences
Steve Keen
University of Western Sydney
Debunking Economics
www.debtdeflation.com/blogs
www.debunkingeconomics.com
The Scale: Biggest Bubbles in History
Deflating US Asset Prices
250
Lagging 10 Year Price-Earnings Ratio
Shiller Lagging PE Ratio
Case-Shiller Housing
40
200
30
150
20
100
10
0
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
50
2010
CPI Deflated Housing Index (Average 103)
50
The Scale: Greatest Debt Level in History
US Debt to GDP Ratios
450
Household
400
Total Private
Government
350
Total
Percent of GDP
300
250
200
150
100
50
0
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
The Scale: Greatest Debt Level in History
• But Australia’s different, right?...
Australia's Private Debt to GDP Ratio
175
100
50
25
1930s Depression
75
1890s Depression
Percent of GDP
125
Let’s
zoom in
here
Our “Crisis? What Crisis?”
150
0
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
The Ponzi Economy
• 72-74 & 84-92: debt-induced boom, bust, & recovery…
Australia's Debt Ratio: What would have hap p ened if?...
200
Actual Ratio (P eak=165 %)
T rend 64-08
T rend 72-74 (2009=102 50%)
T rend 84-91 (2009=372 %)
Unemployment (RHS)
150
100
30
• What odds
on a third
20 upward
trend?
• Versus
1890/1930
10
style deleveraging?
Sustained recoveries only when
Debt/GDP ratio rose again
50
0
1950
1960
1970
1980
1990
2000
0
2010
Back in the USA…
• Deleveraging-driven downturn…
Private Deleveraging and Unemployment (USA)
30
0
20
3
10
6
0
9
 10
 20
1980
• Correlation 1980-Now: -61%
• Correlation 1990-Now: -83%
1990
2000
12
2010
Unemployment (Inverted)
Percent of Aggregate Demand
P rivate Debt Contribution to Demand
Unemployment (RHS)
Why hasn’t it happened here?
• Give it time…
20
0
15
2
10
4
5
6
0
8
5
 10
1960
• Correlation 1980-Now: -84%
• Correlation 1990-Now: -94%
Debt-driven Demand
Unemployment (RHS)
1965
1970
1975
1980
1985
1990
1995
2000
2005
10
2010
Unemployment Rate (Inverted)
Percent of Aggregate Demand
Debt Contribution to Demand & Unemp loy ment (Australia)
Did neoclassical economists see this coming?
• “the current economic situation is in many ways better
than what we have experienced in years…
• Our central forecast remains indeed quite benign:
– a soft landing in the United States,
– a strong and sustained recovery in Europe,
– a solid trajectory in Japan
– and buoyant activity in China and India.
– In line with recent trends, sustained growth in OECD
economies would be underpinned by strong job
creation and falling unemployment.” (p. 9)
• OECD Chief Economist Jean-Philippe Cotis
– in OECD Economic Outlook June 2007
• Why so ignorant?
– Static modelling (equilibrium-assuming “dynamics”)
– Ignore role of credit & debt
Better dynamic, credit-aware modelling needed…
+
• Click on the
icon below to
run this
simulation
after
installing the
Vissim Viewer
Capital
Output
Plot
Speculative to Productive Debt
Output
6
5
Cyclical Growth
2000
Click here to
download Vissim
viewer program
4
1000
3
2
0
0
10
20
30 40 50
Time (Years)
60
70
1
0
WageShare
Output
0
10
20
30
40
Time (Years)
50
60
70
Cyclical Growth
Debt
Ratios
Wages share of output
Employment Rate
1.0
.5
0
On
DebtInModel
On
Off
Ponzi
InitialBoom
Plot
Debt to Output Ratios
0
10
20
30
40
50
Time (Years)
60
70
6
Total Debt
Productive
Speculative
5
Cyclical Growth
4
1.1
Employment
• Minsky’s
“Financial
Instability
Hypothesis”
more
realistic…
Investment
3
.9
2
.7
1
.5
.3
.5
EmploymentRate
+
Profit
+
.7
.9
Wages
*
1.1
Employment
InterestRate
TotalDebt
0
0
10
+
+
20
30
40
Time (Years)
Productive
Debt
Speculative
Debt
50
60
Profit
Investment
RateOfGrowth
70
Better dynamic, credit-aware modelling needed…
rl
• Which
gives more
“bang for
buck”—
rescuing
bankers or
debtors?
• Click on icons
below to run
this (after
installing the
Vissim Viewer)
Bank Assets
1500
Bank Liabilities (Deposits)
Loans
Unlent Reserves
1250
1500
1000
1000
750
750
500
500
250
250
0
0
10
20
Firms
Households
Banks
1250
30
Time (Years)
40
50
60
URate
0
0
10
InfRate
20
B_D
H_D
Unemployment
25
40
50
60
40
50
60
F_D
Inflation
No Stimulus
Bank Injection
Borrowers Injection
20
30
Time (Years)
10.0
7.5
No Stimulus
Bank Injection
Borrowers Injection
5.0
2.5
15
0
10
-2.5
-5.0
5
-7.5
0
0
10
20
30
Time (Years)
40
50
Parameters &
Initial Conditions
Financial
System
NoStimulus
Production
System
StimBank
0
60
-10.0
0
10
20
3
Debt to Output Ratio
Magnitude of Crunch
25
30
Time (Years)
25
No Stimulus
Bank Injection
Borrowers Injection
20
C_size
tCC
15
StimFirm
StimFirm
F_L
Y
l
r
/
100
10
1.
5
D:0 S:1
60.
0
0
10
20
30
40
Time (Years)
50
60
Prognosis & Remedies?
• Deleveraging-induced downturn inevitable
– Deleveraging outweighs government stimulus
• E.g. 1st Rudd stimulus A$42bn (4% GDP)
• Aggregate private debt A$2 trillion
– 5% deleveraging—A$100 billion cut in demand
– Can’t solve debt-induced crisis with more debt
• Alternative policies…
– Across-the-board debt reduction
– Redefine capital assets to reduce Ponzi behaviour
• Time-limited Shares (like bonds)
• House valuation on imputed rent
– Maximum secured mortgage debt say 10 times
annual rental
• Or we’ll be here again in 2070…