fiscal cliff lessons from 1930 s
TRANSCRIPT
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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 Flow of Funds Table L 1
US$million
Begin
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Change in debt and unemployment
Rising private debt causes falling unemployment;
Rising unemployment causes rising public debt
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
1
2
34
5
6
7
8
9
10
11
12
20
15
10
50
5
10
15
20
25
30
35
40
Unemployment
Private Debt
Government Debt
Unemployment & Change in Debt
Unem
ploymentratepercent
AnnualchangeindebtaspercentofGDP
0
Begin
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Debt and asset prices
Accelerating debt causes rising asset prices
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201310
8
6
4
2
0
2
4
6
8
10
100
110
120
130
140
150
160
170
180
190
200
Mortgage Debt Change
Real House Price Index
House Prices & Change in Mortgage Debt
PercentofGDP
p.a.
Case-Shiller
RealHousePrice
Index(1890=100)
0
-
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The 1930s collapse in GDP
Much sharper falls in nominal and real GDP
1926 19271928 19291930 19311932 19331934 1935 1936 193719381939 194050000
60000
70000
80000
90000
100000
110000
500000
600000
700000
800000
900000
1 106
1.1 106
Nominal GDP
Inflation-adjusted
Nominal and Inflation-adjusted GDP
US Flow of Funds Table L 1
N
ominalGDP$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$millio
n
-
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GDP and change in debt
Much longer period of private sector deleveraging
Much slower and smaller government deficit response
1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 193920000
10000
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
110000
120000
130000
Private Change
Government Change
GDP
Annual Change in Debt and Nominal GDP
US Census
US$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
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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
Annual Change in Debt and Nominal GDP
US Census
US$million
0
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Private sector finishes deleveraging during WWII
Private debt 45% of GDP in 1945down from 175% in 1930
1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 194540000
60000
80000
100000
120000
140000
160000
180000
200000
220000
240000
260000
280000
GDP
+ Private Change
+ Government Change
Annual Change in Debt and Nominal GDP
US Census
US$million
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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.