fiscal cliff lessons from 1930 s

7/30/2019 Fiscal Cliff Lessons From 1930 s

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The Fiscal CliffLessons from the 1930s

Steve Keen

www.debtdeflation.com/blogswww.debunkingeconomics.com
http://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLUhttp://www.youtube.com/watch?v=28I0JK0byLU


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Key insights

Understanding banks, debt & money key to understanding crisis

Economists didnt see the crisis coming because they ignore banks:

Im all for including the banking sector in stories where itsrelevant; but why is it so crucial to a story about debt and leverage?(Paul Krugman, Minsky & Methodology)

Banks crucial because lending increases cash flow in the economy

Effective demand is income plus the change in debt

Analysis of dynamics of debt

Explains the crisis

Gives guidance to what the future may hold
http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/


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Key data: Debt to GDP ratios since 1920

Why now is comparable to The Great Depression

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

0

26.7

53.3

80

106.7

133.3

160

186.7

213.3

240

266.7

293.3

320

Private

Public

Long Term Debt to GDP

PercentofGDP


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The economic crisis

A fall in GDP, but nothing like the Great Depression

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20149 10

6

1 107

1.1 107

1.2 107

1.3 107

1.4 107

1.5 107

1.6 10

7

Nominal GDP

Inflation-adjusted GDP (2005 dollars)

Nominal and Inflation-adjusted GDP

Source: BEA

US$millio

n

Begin


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GDP and the change in private & public debt

Crisis began when growth of private debt stopped

2000 2001 20022003 20042005 2006 2007 20082009 2010 20112012 2013 20143 10

6

2 106

1 106

0

1 106

2 106

3 106

4 106

5 106

6 106

7 106

8 106

9 106

1 107

1.1 107

1.2 107

1.3 107

1.4 107

1.5 107

1.6 107

1.7 107

1.8 107

1.9 107

Private Change

Government Change

GDP

Annual Change in Debt and Nominal GDP

US Flow of Funds Table L 1

US$million

0

Begin

2 years of heavy privatesector deleveraging


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Effective demand as GDP plus change in debt

Now the scale of the crisis is obvious

2000 200120022003 20042005 20062007 200820092010 20112012 2013 20149 10

6

1 107

1.1 107

1.2 107

1.3 107

1.4 107

1.5 107

1.6 107

1.7 107

1.8 107

1.9 107

2 107

GDP

+ Private Change

+ Government Change

Aggregate demand 2000 till Now


US$million

Begin


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Change in debt and unemployment

Rising private debt causes falling unemployment;

Rising unemployment causes rising public debt

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1

2

34

5

6

7

8

9

10

11

12

20

15

10

50

5

10

15

20

25

30

35

40

Unemployment

Private Debt

Government Debt

Unemployment & Change in Debt

Unem

ploymentratepercent

AnnualchangeindebtaspercentofGDP

0

Begin


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Debt and asset prices

Accelerating debt causes rising asset prices

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201310

8

6

4

2

0

2

4

6

8

10

100

110

120

130

140

150

160

170

180

190

200

Mortgage Debt Change

Real House Price Index

House Prices & Change in Mortgage Debt

PercentofGDP

p.a.

Case-Shiller

RealHousePrice

Index(1890=100)

0


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The 1930s collapse in GDP

Much sharper falls in nominal and real GDP

1926 19271928 19291930 19311932 19331934 1935 1936 193719381939 194050000

60000

70000

80000

90000

100000

110000

500000

600000

700000

800000

900000

1 106

1.1 106

Nominal GDP

Inflation-adjusted

Nominal and Inflation-adjusted GDP


N

ominalGDP$m

illion

Infla

tion-adjusted(20

05dollars)

End


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GDP and debt levels

Much smaller debt bubble in the 1930s than today

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 19390

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000110000

120000

130000

140000

150000

160000

170000180000

Private Debt

Government Debt

GDP

USA Debt Levels and Nominal GDP

US Census

US$millio

n


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GDP and change in debt

Much longer period of private sector deleveraging

Much slower and smaller government deficit response

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 193920000

10000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

110000

120000

130000

Private Change

Government Change

GDP


US Census

US$million

0

4 years of heavy privatesector deleveraging 2 more years


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Effective demand: much longer plunge below income

Extended deleveraging compared to today

Relatively minor government stimulus response

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 193940000

50000

60000

70000

80000

90000

100000

110000

120000

GDP

+ Private Change

+ Government Change

Aggregate Demand 1925 till 1939

US Census

US$million


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The Fiscal Cliff of 1937

Dip back into Depression as private sector deleveraging recommenced

19251926192719281929193019311932193319341935193619371938 19390

2.5

5

7.5

10

12.5

15

17.5

20

22.5

25

27.5

30

20

15

10

5

0

5

10

15

20

25

30

35

40

Unemployment

Private Debt

Government Debt

Unemployment & Change in Debt

Une

mploymentrate

percent

AnnualchangeindebtaspercentofGDP

0


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Recovery in WWII

Huge increase in government stimulus drives GDP up

Private sector delevers during WWII with minor impact on GDP

1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 19450

30000

60000

90000

120000

150000

180000

210000

240000

270000

300000

Private Debt

Government Debt

GDP

USA Debt Levels and Nominal GDP

US Census

US$million


16/18

Private sector deleveraging during WWII

Fall in private sector debt far greater during WWII than during GreatDepression, but little impact on GDP

Stimulus, not austerity, ended Great Depression

1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 194550000

30000

10000

10000

30000

50000

70000

90000

110000

130000

150000

170000

190000

210000

230000

Private Change

Government Change

GDP


US Census

US$million

0


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Private sector finishes deleveraging during WWII

Private debt 45% of GDP in 1945down from 175% in 1930

1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 194540000

60000

80000

100000

120000

140000

160000

180000

200000

220000

240000

260000

280000

GDP

+ Private Change

+ Government Change


US Census

US$million


18/18

Takeaway Points

Private debt and government debt are independent

But they affect each other

Both boost demand in the economy when they rise and reduce it when they fall.

Private debt is more important than public debt because

it is so much larger, and

it drives the economy whereas government debt reacts to it

The crisis was caused by the growth of private debt collapsing

Government debt rose because the economy collapsed

and it reduced the severity of the crisis

A premature attempt to reduce government debt through The Fiscal

Cliff could trigger a renewed bout of deleveraging by the privatesector, which could push the economy back into a recession.

Main challenge of public policy is not reducing government debt

But managing the impact of the Rock of Damocles of private debtthat hangs over the economy.

fiscal cliff lessons from 1930 s

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