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Steve Keen - Lessons On The Fiscal Cliff From The 1930S

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http://www.zerohedge.com/news/2012-12-10/steve-keen-lessons-fiscal-cliff-1930s

Steve's Takeaway Points:

Private debt and government debt are independent, but 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 private sector, which could push the economy back into a recession.

For the foreseeable future, the main challenge of public policy will be not reducing government debt, but managing the impact of the much larger “Rock of Damocles” of private debt that hangs over the economy.

The Fiscal Cliff—Lessons from the 1930s - paper

The Rock of Damocles

Still nothing that a bit of debt can't fix.

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Not having read the article, I may be being a bit unfair, but why is the issue reduced to debt without specifying what the money is being spent on? It seems to be a common feature of modern economics and I don't understand why it's not seen as relevant.

I'm not an economist but I would say that in recent history debt has almost always been inflated away by governments. What it is spent on becomes immaterial as long as "growth" has been created and the population got what they wanted (and voted in the government again).

This brings us back to why we are constantly fixated by growth. It reminds me of the story in the Guardian recently on secretive manufacturer of Ferrero Rocher chocolates. They had never given an interview or a tour of their factories to anyone. Apparently, the sons of the founder were looking to bid for Cadburys goaded on by investment bankers who would make a fat fee if the deal went through. The founder had to return to his business and tell them all to stand down. The sons argued for growth and the founder understood that uncontrolled growth brought headaches, risk and excessive debt!

Sadly the old guard of business don't seem to be around any more and the new economics worshippers who run our economy are only interested in a short term return

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I'm not an economist but I would say that in recent history debt has almost always been inflated away by governments. What it is spent on becomes immaterial as long as "growth" has been created and the population got what they wanted (and voted in the government again).

This brings us back to why we are constantly fixated by growth. It reminds me of the story in the Guardian recently on secretive manufacturer of Ferrero Rocher chocolates. They had never given an interview or a tour of their factories to anyone. Apparently, the sons of the founder were looking to bid for Cadburys goaded on by investment bankers who would make a fat fee if the deal went through. The founder had to return to his business and tell them all to stand down. The sons argued for growth and the founder understood that uncontrolled growth brought headaches, risk and excessive debt!

Sadly the old guard of business don't seem to be around any more and the new economics worshippers who run our economy are only interested in a short term return

Just perhaps the daddy actually lived through the 1930, the WW2 and the pain in the 50s while the kids live thorough the booming 60,70,80,90,2000.

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Not having read the article, I may be being a bit unfair, but why is the issue reduced to debt without specifying what the money is being spent on? It seems to be a common feature of modern economics and I don't understand why it's not seen as relevant.

80% of Bank lending is residential mortgages.

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Does Steve suggest a big debt jubilee is the answer?

Bless him; it's lovely and warm in academia, never having to put your own money on your predictions.

The nearest he came to having some skin in the game involved a big walk for charidee.

Edited by Paddles

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I have a lot of respect for Steve Keen's analysis on debt, however the only point I disagree on is the idea that a correction in prices and subsequent reorgranisation of economic activity (Steve Keen would say fall in GDP and/or recession) can be avoided if when the private sector stops accumulating debt the state steps in to fill the gap.

Prices seem to guide economic activity, and debt tends to skew prices. The blow off at the top of a cycle of monetary expansion caused by the accumulation of debt I believe is just the realisation that debt has skewed prices, and at the same time our economic activies in the wrong direction, as well as depleted our savings (the correction seems to start when interest rates rise and debts can no longer be serviced, in other words the price of money increases because savings are scarce). From thereon changes in prices and write down of debt seem to be the natural consequence of people refocusing their efforts where they are most needed, and to also replenish savings to fund future investment.

I therefore believe that when the government step in to arrest falls in lending, and/or to maintain prices, they are almost trying to ossify economic activity, such that it remains focused in those areas, prior to the realisation that they were no longer productive (for example housing and financial services).

Edited by GradualCringe

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80% of Bank lending is residential mortgages.

Well, I was largely thinking of public debt, but that aside, let's assume that a well-run economy will have higher interest rates. I won't be silly and suggest anything like - shock horror - 15%. I'll go for a more modest 8%.

Question - you are a bank. Would you rather:

  • Lend £100 to 100 people at 2% (and have a lot of defaulters)

  • Lend £53.50 to 107 people at 8% (and have few defaulters)

Hint. The profit on the first is less than half the profit on the second... even at 4% it's better...

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Keen seems to completely understand socialism doesnt work, but is either too cowardly or too 'hip' to just allow capitalism to take its course and ends up with some typically difficult and problem addled solution. If the problem is too much debt, too high living costs and asset prices, all you need to is allow defaults. A debt jubilee does nothing whatsoever to get peoples wages in line with living costs.

I like that he pays attention to the role of private debt, but why oh why does he think that 10% governmental increases in the money supply are any more sustainable than 10% increases in private money supply, when growth offsetting that is 1 maybe 2%. They might be able to tread water that way in the US, but Its even less applicable in the UK, where there is no deleveraging overall.

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Well, I was largely thinking of public debt, but that aside, let's assume that a well-run economy will have higher interest rates. I won't be silly and suggest anything like - shock horror - 15%. I'll go for a more modest 8%.

Question - you are a bank. Would you rather:

  • Lend £100 to 100 people at 2% (and have a lot of defaulters)

  • Lend £53.50 to 107 people at 8% (and have few defaulters)

Hint. The profit on the first is less than half the profit on the second... even at 4% it's better...

I'd rather lend £100 to 100 at 8%, collect my mega-bonuses for a few years, then enjoy my gains when the bank collapses and the gov lowers base rates to 0.5%.

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I'd rather lend £100 to 100 at 8%, collect my mega-bonuses for a few years, then enjoy my gains when the bank collapses and the gov lowers base rates to 0.5%.

Good plan - you should suggest it to... oh, wait...

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I think what we are doing is better than what Steve Keen is suggesting.

If we were to do a debt jubilee Who would get the money?

A baby born yesterday?

An immigrant that just landed in dover?

does a guy with two bank accounts get double?

Makes more sense to throw extra money out into the economy and just let people work for it. as they are doing now. QE and deficit spending is like over stocking a lake. and tell people to catch their own fish.

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Makes more sense to throw extra money out into the economy and just let people work for it. as they are doing now. QE and deficit spending is like over stocking a lake. and tell people to catch their own fish.

The bankers got there first and took all the fish.

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I have a lot of time for Steve Keen. But the dilemma he describes is compounded and made insoluble by the fact in practice and in the majority we use credit as money. If debt were a smaller proportion of the money in use, the effects of a credit bubble would be mitigated. Available money at a given point of time being a function of private and public borrowing behaviour is incredibly unstable as its so out of proportion - as he points out the only real counterbalance to the crisis is government debt, but government debt is still our debt, just one which can be taken from us by force.

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I think what we are doing is better than what Steve Keen is suggesting.

If we were to do a debt jubilee Who would get the money?

A baby born yesterday?

An immigrant that just landed in dover?

does a guy with two bank accounts get double?

Makes more sense to throw extra money out into the economy and just let people work for it. as they are doing now. QE and deficit spending is like over stocking a lake. and tell people to catch their own fish.

What you suggest is what Bernanke, King et al believed QE would accomplish. In fact the opposite occurred. The QE cash has helped maintain asset prices and bank profits but done little for the economy proper. Indeed, its significant side-effect has been persistently troublesome core inflation.

The theoretical underpinning for QE is something called the Money Multiplier. In his book Keen provides a compelling demolition of the concept and argues persuasively that giving money directly to households would be more effective than giving it to bankers.

.

Edited by zugzwang

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What you suggest is what Bernanke, King et al believed QE would accomplish. In fact the opposite occurred. The QE cash has helped maintain asset prices and bank profits but done little for the economy proper. Indeed, its significant side-effect has been persistently troublesome core inflation.

The theoretical underpinning for QE is something called the Money Multiplier. In his book Keen provides a compelling demolition of the concept and argues persuasively that giving money directly to households would be more effective than giving it to bankers.

.

I agree with Keen the money must go to the people and not the banks. At the moment we the people are being under taxed ie we need to be taxed more to cover what the government is spending. That under taxation is a modern day jubilee.

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  • 293 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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