Is Capitalism Doomed to have Crises?
Steve Keen
Kingston University London
IDEAeconomics
Minsky Open Source System Dynamics
www.debtdeflation.com/blogs
Is Capitalism Stable or Unstable?
• The (Ultra)-Orthodox Perspective
– Edward Prescott (Nobel Prize 2004 for Real Business Cycle Theory)
• “Some Observations on the Great Depression” (1999)
– “The Marxian view is that capitalistic economies are
inherently unstable
– and that excessive accumulation of capital will lead to
increasingly severe economic crises.
– Growth theory, which has proved to be empirically
successful, says this is not true.
– The capitalistic economy is stable, and absent some
change in technology or the rules of the economic
game,
– the economy converges to a constant growth path
– with the standard of living doubling every 40 years.”
Is Capitalism Stable or Unstable?
• The heterodox “Minskian” Alternative: Hyman Minsky (1969)
– “In this "Chicago" view there exists a financial system, different
from that which ruled at the time of crisis but nonetheless
consistent with capitalism, which would make serious financial
disturbances impossible
– The alternative polar view, which I call unreconstructed Keynesian,
– is that capitalism is inherently flawed, being prone to booms, crises
and depressions.
– This instability, in my view, is due to characteristics the financial
system must possess if it is to be consistent with full-blown
capitalism.
– Such a financial system will be capable of both generating signals
that induce an accelerating desire to invest and of financing that
accelerating investment.” (Minsky 1969 [1982, p. 224])
A contest of ideologies, or logic?
• A logically incontestable starting point: working from identities
EmploymentRate
Output
Employment 

LabourPr oductivity
Population
Wages
WagesShare 
Output • Can’t be disputed—just definitions
• Can only dispute relevance
Debt
rd definition
•
Neoclassicals
dispute
relevance
of
3
DebtRatio 
Output
?
• “Fisher's idea was less influential … because of the counterargument
that debt-deflation represented no more than a redistribution from one
group (debtors) to another (creditors).
• Absent implausibly large differences in marginal spending propensities
among the groups, it was suggested, pure redistributions should have
no significant macro-economic effects…”)
• But is this valid?
A contest of ideologies or logic?
• Minsky asserts a key role for private debt:
– “The natural starting place for analyzing the relation between debt
and income is to take an economy with a cyclical past that is now
doing well…”
• Let’s consider. Putting those 3 identities into dynamic form yields:
– The employment rate will rise if economic growth exceeds the sum of
growth in labor productivity and population growth;
– The wages share of output will rise if wage demands exceed the
growth in labor productivity; and
– The private debt to GDP ratio will rise if private debt growth exceeds
the rate of economic growth
• In equations…
ˆ  YˆR     
ˆ  wˆ R  
dˆ  Dˆ  YˆR
A contest of ideologies or logic?
• Simplest possible model of this:
– Output YR a linear function of capital KR
– Investment IR a linear function of profit rate r (& depreciation)
– Employment a linear function of output
– Wage change a linear function of employment rate
– Change in debt equal to investment minus profits


 1  r d





N
 S 

v


   
      KR  
v






     S     N    
Some fundamental
nonlinearities apply…


 1  r d

S 
N 



1



r

d

v




d   S 
  N   1    r  d   d  
  KR 
v
v










A contest of ideologies or logic?
• A model of capitalism without “bankers behaving badly”:
– Pure free-market system
– No government sector, no Ponzi Finance, no bankruptcy
– Nothing to “reform away” if there are problems
• Model has two main equilibria:
– “Good” equilibrium:
• Positive employment rate & wages share of output
• Finite debt ratio
– “Bad” equilibrium:
• Zero employment rate & wages share of output
• Infinite debt ratio
Two possible outcomes
• (1) Convergence to “good” equilibrium
Stable system
(Linear
functions)
Wages
Employment
Private
Share
Debt
of Rate
Ratio
Output
Percent
of GDP
peremployed
year
Percent
of GDP
Percent
of population
100
66
80
64
90
60
62
80
40
60
70
20
58
60
0
56
54
50
20
00
0
50
50
50
100
100
100
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Stable
150
150
150
200
200
200
Two possible outcomes
• (2) Convergence to “bad” equilibrium after apparent “moderation”
Unstable system (Linear functions)
Wages
Employment
Private
Share
Debt
of Rate
Ratio
Output
Percent
of GDP
Percent
of GDP
peremployed
year
Percent
of population
120
400
70
300
100
65
200
60
80
100
55
60
0
 100
50
40
000
Unstable
20
20
20
40
40
40
60
60
60
www.debtdeflation.com/blogs
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www.debtdeflation.com/blogs
80
80
80
100
100
100
We’ve seen this before—in complex systems
• Property of Lorenz “chaotic” model of fluid flow
• This
behaviour
cannot be
generated by
standard
equilibriumoriented
“linear”
model
• Inherent
nonlinearity
& nonequilibrium
dynamics are
essential
800
• Decreasing followed by
increasing turbulence
600
400
200
• Convergence to
laminar flow…
0
 200
0
5
10
15
20
Genesis of the Keen/Minsky/Goodwin model
• Objective of my
1995 JPKE paper
was to model
Minsky’s “Financial
Instability
Hypothesis”
• Original paper
written in August
1992
• Well before
Neoclassicals
discovered (and
misinterpreted)
the “Great
Moderation”…
Emergent Phenomena: Diminishing cycles then crisis
• Model had completely
unexpected dynamics
0.7
– Debt crisis, as expected
0.2
– But apparent tranquillity
beforehand
0.15
– Pure free-market capitalism
trapped in a vortex of rising
Bank Share
0.1
debt?…
• Inspired what I thought at the 0.05
time was a nice rhetorical flourish
• “The chaotic dynamics explored in 0
this paper should warn us against
accepting a period of relative
tranquility in a capitalist economy
as anything other than a lull
before the storm.” (Keen 1995)
Wages
Instability at 4.6%
0.9
0.8
0.9
0.8
Employment
0.7
Economic implications of model
• Real-world implications of the model:
– If there was decreasing volatility in inflation & employment
– And the private debt to GDP ratio was stabilizing
• Then Prescott was right
– Economy is bound for equilibrium & stable growth
– If there was decreasing volatility in inflation & employment
– And the private debt to GDP ratio was increasing
• Then Minsky was right
– Economy is bound for systemic breakdown; and…
– Crisis will be preceded by period of apparent stability in
employment & inflation
• What does the data show?
• There were two boom-bust crises in capitalism in last century
– 1920-40, 1980-Now…
Emergent Phenomena 1: Diminishing cycles then crisis
• Both had declining volatility before the crisis
1980-Now:
1920-40: Diminishing
Diminishingcycles,
cycles,then
thenBreakdown
Breakdown
16
30
Crisis
Crisis
14
25
12
20
Percent
Percent
10
15
8
10
6
5
4
0
2
0
5
0
0
10
2
Inflation
Unemployment
Inflation
Unemployment
15
4
1980
1920 19821922
1984 19861924
1988 1990
1926
1992 1994
19281996 1998
1930 20001932
2002 2004
1934
2006 2008
1936
2010 2012
19382014 1940
2016
www.debtdeflation.com/blogs
Emergent Phenomena 1: Diminishing cycles then crisis
• Both also had rising private debt, followed by deleveraging
1920-40: Rising
1980-Now:
RisingDebt,
Debt,then
thenDeleveraging
Deleveraging
Percent of GDP
140
160
Debt Ratio
Debt Change
Crisis
Crisis
80
80
70
70
130
150
60
60
120
140
50
50
110
130
40
40
100
120
30
30
90
110
20
20
80
100
10
10
70
90 0
00
60
80
10
 10
50
20
70
 20
1920
1926
19281996 1998
1930 2000 1932
1934
1936
19382014 2016
1940
1980 19821922
1984 19861924
1988 1990
1992 1994
2002 2004
2006 2008
2010 2012
www.debtdeflation.com/blogs
Percent of GDP change per year
150
170
Emergent Phenomena 1: Diminishing cycles then crisis
• Linear, equilibrium framework of mainstream economists led them to
– (1) Dismiss “Great Depression” as due to policy mistakes
• “Let me end my talk by abusing slightly my status as an official
representative of the Federal Reserve.
• I would like to say to Milton and Anna:
– Regarding the Great Depression.
– You're right, we did it.
– We're very sorry.
– But thanks to you, we won't do it again.” (Bernanke 2002)
– (2) Interpret “Great Moderation” as due to their good management
• “The sources of the Great Moderation remain somewhat
controversial, but as I have argued elsewhere,
• there is evidence for the view that improved control of inflation
has contributed in important measure to this welcome change in
the economy.” (Bernanke 2004)
• From Keen-Minsky model perspective, “The Great Moderation” & “The
Great Recession” were simply phases in same dynamic process…
Emergent Phenomena 2: Rising inequality
• Other emergent aspects of model
• Model’s “system states” are
– Employment rate ()
– Debt ratio (d)





0
– Wages share of output ()
e
N
S
• Model’s equilibria are
 S  v           S   N

de  v 
 0
– Employment rate ()






 S
– Debt ratio (d)
v2
– Profit share of output ()
 se          v   N  0
S
• Wages share directly negatively
e  1   se  r  d e
related to debt ratio
• Relationship persists in model dynamics
– If model converges to good equilibrium, then inequality stabilizes
– If model diverges to bad equilibrium, then inequality rises
• Falling workers’ share offsets rising bankers’ share
• Profit share cycles around equilibrium (before final crisis)
• Rising inequality is a prelude to crisis…
Simple rules, complex behaviour
• Best seen in full price model with nonlinear behavioural functions
• Generated by generalizing earlier identities to include inflation:
– The employment rate will rise if real economic growth exceeds the
sum of population growth and growth in labor productivity;
– The wages share of output will rise if money wage demands exceed
the sum of inflation and growth in labor productivity; and
– The private debt to GDP ratio will rise if the rate of growth of private
debt exceeds the sum of inflation plus the rate of economic growth.
• Additional equations needed for
– Rate of inflation
• Lagged convergence to equilibrium prices in monetary economy
– Variable nominal interest rate
• Lagged inflation premium to base interest rate if inflation > 0
Simple complex systems model…
• Slightly more complicated but still simple model (in equations)
s
 s  1    t   r  t   d  t  ; r 
v
Inflation-adjusted
r  t   if  inflagnominal
inflag  t  , rrate
 t   0, rb interest
b
1st
1 
1

inf
t


1



t




order time lag
determines
 inflation
 P  1  s

  Ifn  r 


1 d
   
  Kr       


 dt
v



1 d
   w fnaffects
 inf  t  share
Inflation
     wages
 dt
 Ifn  r  

 s
 debt

v affects
 Ifn  rgrowth


1 d Inflation


 d
 
  Kr   inf  t  


d dt
d

 v

inf  t  
1
d
1 
inflag  t  rate

1
Lagged interest
reaction
toinflation
inflag  t  dt
 inf  inflag  t  
Simple complex systems model…
• The same model in Open Source system dynamics program Minsky:
Rising inequality & crisis (full nonlinear price model)
• Falling workers’ share… • Offsets rising bankers’ share…
• Capitalist are
the last ones to
know that
capitalism is
coming to an
end…
Crisis because the mainstream ignores private debt
• Employment, inflation & profit give no warning of crisis:
• Private debt ratio is the key indicator of impending crisis
Crisis because The Left ignores private debt too
• There is no “tendency for the rate of profit to fall”
• There is a “tendency for private debt to grow exponentially”
Crisis because the mainstream ignores private debt
• Key implication of model
– Level of private debt a key factor in macroeconomics
– Too high a level of debt will cause a crisis
– Private debt ratio should be a key macroeconomic target
• But economic mainstream rejects importance of debt:
– “The idea of debt-deflation goes back to Irving Fisher (1933)…
– His diagnosis led him to urge President Roosevelt to subordinate
exchange-rate considerations to the need for reflation…
– Fisher's idea was less influential in academic circles, though, because
of the counterargument that debt-deflation represented no more
than a redistribution from one group (debtors) to another
(creditors).
– Absent implausibly large differences in marginal spending
propensities among the groups, it was suggested, pure
redistributions should have no significant macroeconomic effects.”
(Bernanke 2000, p. 24)
Crisis because the mainstream ignores private debt
• Mainstream persists in ignoring private debt—even after 2008 crisis:
– Krugman rejects Koo’s “balance sheet recession” argument:
• “Maybe part of the problem is that Koo envisages an economy
in which everyone is balance-sheet constrained, as opposed to
one in which lots of people are balance-sheet constrained.
• I’d say that his vision makes no sense: where there are debtors,
there must also be creditors, so there have to be at least some
people who can respond to lower real interest rates even in a
balance-sheet recession.” (Krugman 2013)
– Stiglitz lambasts banks for not facilitating lending:
• “While our banks are back to a reasonable state of health, they
have demonstrated that they are not fit to fulfill their purpose...
• Between long-term savers and long-term investment in
infrastructure stands our short-sighted and dysfunctional
financial sector.” (Stiglitz 2016)
• Can’t understand why banks aren’t lending much now?…
Crisis because the mainstream ignores private debt
• Check the level of private debt…
Private Debt to GDP Ratios
240
220
200
Percent of GDP
180
160
140
USA
UK
Euro Area
Australia
Japan
China
120
100
80
60
40
20
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
BIS data: http://www.bis.org/statistics/totcredit.htm
2010
2015
2020
Crisis because the mainstream ignores private debt
• Rate of growth of credit is low to negative because level is so high…
Private Debt Growth
45
40
Percent of GDP per year
35
30
25
20
JapanCrisis
USA
UK
Euro
Aust.
Japan
China
GFC
15
10
5
0
0
5
 10
 15
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
BIS data: http://www.bis.org/statistics/totcredit.htm
2010
2015
2020
Crisis because the mainstream ignores private debt
• Mainstream see banks as “intermediaries”, not “originators” of loans
– “Think of it this way: when debt is rising, it’s not the economy as a
whole borrowing more money.
– It is, rather, a case of less patient people—people who for whatever
reason want to spend sooner rather than later—borrowing from
more patient people.” (Krugman 2012, pp. 146-47)
• The Bank of England knows better:
– “Whenever a bank makes a loan, it simultaneously creates a
matching deposit in the borrower’s bank account, thereby creating
new money.” (Bank of England 2014, p. 14)
• Mainstream can’t see why this matters:
– “OK, color me puzzled. I’ve seen a number of people touting this
Bank of England paper … as offering some kind of radical new way
of looking at the economy…while banks are indeed more
complicated … this doesn’t mean … that they are somehow outside
the usual rules of economics. Don’t let monetary realism slide into
monetary mysticism!” (Krugman 2014)
Crisis because the mainstream ignores private debt
• Lending as a “pure redistribution”; bank as intermediary
Assets
Reserves
Lending
Paying interest
Repaying
Bank Fee for arranging loan
Nothing
on Asset
Side
Liabilities
Saver
Equity
Investor
From
To
To
From
Bank
Shuffling
$ on Liability Side
To
From
From
To
• Lending as money creation; bank as originator of loans
Assets
Reserves
Lending
AssetsLiabilities
&
LoansLiabilities
Saver
Investor
From
Rise To
Paying interest
Repaying
From
To
Assets & From
• Is there no essential difference, as Krugman
claims?...
Liabilities
Fall
Equity
Bank
To
Loanable Funds vs Endogenous Money
• Modelling this in Minsky:
Loanable Funds vs Endogenous Money
• Change banks from “Intermediators” to “Originators”
Loanable Funds vs Endogenous Money
• Is it any different?
Loanable Funds vs Endogenous Money
• Why is it so different?
– Loanable Funds:
• Banks intermediate between savers & investors
• No creation of money by lending
• No creation of additional demand either
– Endogenous money:
• Banks originate loans to investors (& speculators)
• Money created by lending
• Additional demand created
• Change in Debt thus adds to demand
– But how to reconcile this with “ExpenditureIncome”
identity?...
Loanable Funds, aggregate demand & income
•
•
•
•
Consider 3 sector model with sectors S1, S2, S3
Expenditure not debt-financed shown by CAPITAL LETTERS
Debt financed expenditure shown by lowercase letters
3 situations considered
– Borrowing not possible
– Borrowing from other sectors possible (“Loanable Funds”)
– Borrowing from banks possible (“Endogenous Money”)
• First case “Say’s Law” (actually “demand creates its own supply”)
Activity
Expenditure
(Exp.)
Sector Sector 1
Sector 1
-(A + B)
Sector 2
C
Sector 3
E
Net Income
Sector 2
Sector 3
A
B
-(C+D)
D
F
-(E+F)
• Negative sum of diagonal elements is aggregate demand
• Sum of off-diagonal elements is aggregate income
Loanable Funds, aggregate demand & income
• Clearly Expenditure  Income:
ADSL   A  B    C  D    E  F 
AYSL  A  B  C  D  E  F
• Loanable Funds: Sector 1 borrows b from Sector 2 to spend on Sector 3
– Sector 1’s funds for spending increase by b
– Sector 2’s funds fall by b (split 50:50 between S1 & S3 for simplicity)
Activity
Expenditure
(Exp.)
Sector Sector 1
Sector 1 -(A + B+b)
Sector 2
C-b/2
Sector 3
E
Net Income
Sector 2
Sector 3
A
B+b
-(C+D-b)
D-b/2
F
-(E+F)
• Aggregate outcome clearly the same as without borrowing
• Sound logical basis of Bernanke’s “Absent implausibly large differences
in marginal spending propensities among the groups, it was suggested,
pure redistributions should have no significant macroeconomic effects.”
Endogenous money, aggregate demand & income
• But what if a bank lends to Sector 1?
– Assets & liabilities of banking sector rise equally; and…
– Increased spending power for Sector 1 not offset by fall in Sector 2
• Causes a rise in Sector 1’s spending, and incomes of Sectors 2 & 3
Bank Assets
Loans
b
0
0
Activity
Expenditure
(Exp.)
Net Income
Sector S1
S2
S3
S1
-(A+B+b)
A
B+b
S2
C
-(C+D)
D
S3
E
F
-(E+F)
ADEM   A  B  b    C  D    E  F 
AYEM  A  B  b  C  D  E  F
• Aggregate outcome greater (if b>0) than without borrowing
• Increase in debt causes equivalent increase in expenditure and income
Endogenous money, aggregate demand & income
• Reconciliation with ExpenditureIncome identity
– Expenditure is the sum of
• Expenditure financed by turnover of existing money
– Measured—however poorly—as GDP (Expenditure method)
– Dimensioned in $/Year
• Plus expenditure financed by new debt
– Measured—more accurately—as Change in Debt
– Dimensioned in $/Year
• Plus gross financial transactions (debt & deposit interest)
• Total expenditure is therefore AD  V  M  d D  rD  M  rL  D
dt
• Income side of identity needs amendment too:
– Vast majority of debt today finances asset purchases
– Modern monetary theory must integrate macroeconomics & finance
– Income side is therefore Income plus capital gains
GDPY 
d
d
 PK  K   V  M  D  rD  M  rL  D
dt
dt
Endogenous money, aggregate demand & income
• GDP & capital gains are both affected by change in debt
• GDP growth and change in capital gains affected by debt acceleration
d
d
d
 d

GDP

P

K

V

M

D  rD  M  rL  D 
 K 
Y


dt 
dt
dt
 dt 

• Change in debt by far most the volatile element on expenditure side
– Logical basis for extraordinary empirical correlations between
• Change in debt & economic activity (employment rate, etc.)
• Acceleration in debt and change in economic activity
• Acceleration in debt and change in asset market prices
• Empirical findings contradict mainstream macro & finance theory
– Rather than changes in debt being “pure redistributions” with “no
significant macro-economic effects”, changes in debt are the main
determinants of macroeconomic outcomes
– Rather than leverage not affecting asset prices (Modigliani-Miller
theorem), leverage is the main determinant of asset prices…
Change in Debt & Economic Performance
• Change in debt & unemployment 1980-Now
18
12
16
11
14
10
12
9
10
8
8
7
6
6
4
5
2
4
0
03
2
4
2
Debt Change
Unemployment
1
6
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
www.debtdeflation.com/blogs
Percent of workforce
Percent of GDP per year
US Private debt change & unemployment (Correlation -0.64)
Change in Debt & Economic Performance
• Acceleration in debt & change in unemployment 1980-Now
8
80
6
60
4
40
2
20
00
0
2
 20
4
 40
6
 60
8
 80
 10
 12
Debt Acceleration
Unemployment Change
 100
 120
 14
 140
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
www.debtdeflation.com/blogs
Percent change per year
Percent of GDP per year per year
US Private debt acceleration & unemployment change (Correlation -0.8)
Change in Debt & Asset Market Performance
• Acceleration in mortgage debt & house price change 1980-Now
5
15
4
12
3
9
2
6
1
3
0
00
1
3
2
6
3
9
4
Mortgage Acceleration
House Price Change
 12
5
 15
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
www.debtdeflation.com/blogs
Percent change per year
Percent of GDP per year per year
US Mortgage acceleration & House Price Index change (Correlation 0.7)
Change in Debt & Asset Market Performance
• Acceleration in margin debt & SP500 change 1980-Now
2
60
1.6
48
1.2
36
0.8
24
0.4
12
00
0
 0.4
 12
 0.8
 24
 1.2
 36
 1.6
Margin Debt Acceleration
SP500 Change
 48
2
 60
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
www.debtdeflation.com/blogs
Percent change per year
Percent of GDP per year per year
US Margin Debt acceleration & SP500 change (Correlation 0.49)
Change in Debt & Asset Market Performance
• From one of the oldest capitalist markets to one of the newest…
7500
2.5
7200
2.4
Shanghai Index
6900
2.3
6600
2.2
Margin Debt
6300
2.1
6000
2
5700
1.9
5400
1.8
5100
1.7
4800
1.6
4500
1.5
4200
1.4
3900
1.3
3600
1.2
3300
1.1
3000
1
2700
0.9
2400
0.8
2100
0.7
1800
0.6
1500
0.5
1200
0.4
900
0.3
600
0.2
300
0.1
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
www.debtdeflation.com/blogs
Margin debt as percent of GDP
Shanghai Index
Shanghai Index & Margin Debt
Change in Debt & Asset Market Performance
• This crash is margin-debt-driven, unlike previous one in 2008
Shanghai Index Monthly Change & Margin Debt Acceleration (Corr 0.46)
1.6
M axM argin
28
24
1.4
1.2
20
16
1
0.8
12
8
0.6
0.4
4
0.2
00
0
4
 0.2
8
 0.4
 12
 16
 0.6
 0.8
 20
 24
1
 28
 32
2014
Index Change
Margin Debt Acceleration
2014.25 2014.5 2014.75
2015
 1.2
2015.25 2015.5 2015.75
2016
2016.25 2016.5 2016.75
 1.4
 1.6
2017
www.debtdeflation.com/blogs
• Minskian analysis explains what mainstream cannot comprehend
• Built using an approach the mainstream explicitly rejects…
Percent change per month per month
Percent Change in Index per month
32
Implications for economic theory
• Minskian economics violates all mainstream methodological rules:
Mainstream “New Keynesian”
Heterodox/Minsky/Keen
Methodological Individualism
Structural “Top-Down” Identities
“Economics is about what individuals do:
not classes, not “correlations of forces”,
but individual actors.
This is not to deny the relevance of
higher levels of analysis, but they must
be grounded in individual behavior.
Methodological individualism is of the
essence.” (Krugman)
“Men make their own history,
but they do not make it as they
please;
they do not make it under selfselected circumstances,
but under circumstances existing
already, given and transmitted
from the past.” (Marx)
Methodological Equilibration
Complex systems dynamics
“I am basically a maximization-andequilibrium kind of guy.” (Krugman)
“Any system transforms itself
simply by its mere working and if
history teaches us nothing else it
teaches that.” (Schumpeter)
Money
No essential role for banks, debt, money
Fundamentally monetary
Results
Did not expect or foresee crisis
Expected & foresaw crisis
Derivation
Process
• Monetary complex systems theory as the basis for a new economics…
Implications for economic policy
• In general: “Pure free market capitalism” is inherently unstable
– Capitalism needs fiat as well as credit money to avoid debt crises
• In particular: Not “secular stagnation” but “stagnant credit”
– Private debt must be reduced without reducing aggregate demand
• Could be done by “People’s QE”
– Existing QE buys assets from pension funds, insurance funds
– Creates money for entities that primarily buy assets
• Inflates asset prices—which excess leverage has already inflated
• Small spillover effect into non-FIRE sectors of economy
• People’s QE could
– Use Bank of England capacity to create money to inject funds into
individual bank accounts pro-rata (as done in Australia in 2008)
• With condition that debtors must pay-off debt
• While savers get a cash injection
• Reduce debt and asset prices without reducing demand
• Motivate banks to lend again via fall in income earning assets
– Can be done on trial basis to assess inflation, CAD effects
Implications for economic policy
• Ultimate objectives
– Reduce private debt to “safe” zone—well below 100% of GDP
– Redesign banking to reduce “Ponzi” lending in mortgages & shares
– “The PILL”: Property Income Limited Leverage
– Ban Margin Lending (“no credit cards in the casino”)
• Encourage “Schumpeterian” lending
– “EELs”: Entrepreneurial Equity Loans
• Current political likelihood of above reforms?...
Implications for economic policy
• And if we don’t reduce private debt?
• Then we will “turn Japanese”—minus its trade surplus & fiscal policy:
Private Debt to GDP Ratios
240
220
200
Percent of GDP
180
160
140
120
USA
UK
Euro Area
Australia
Japan shifted to GFC
China
100
80
60
40
20
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
BIS data: http://www.bis.org/statistics/totcredit.htm
2025
2030
2035
Implications for economic policy
• Not “secular stagnation” but “credit stagnation”—for 2 decades:
Future credit growth without People's QE?
45
GFC
USA
UK
Euro
Aust.
Japan shifted to GFC
China
40
Percent of GDP per year
35
30
25
20
15
10
5
0
0
5
 10
 15
1980
1985
1990
1995
2000
2005
2010
2015
2020
BIS data: http://www.bis.org/statistics/totcredit.htm
2025
2030
2035
Implications for the immediate economic future
• Crash in China inevitable: Debt growth 3 times US rate, level close to
Japan peak… Private Debt Bubbles from inception to crash
240
JapanCrash USA Crash
230
China since 2009
USA since 1993
Japan since 1980
220
210
Percent of GDP
200
190
180
170
160
150
140
130
120
110
100
0
5
10
15
20
25
www.debtdeflation.com/blogs
30
35
40
Implications for the immediate economic future
• End of China bubble will remove aggregate demand equivalent to ¼
China GDP from global economy…
Private Debt Bubbles from inception to crash
45
JapanCrash USA Crash
China since 2009
USA since 1993
Japan since 1980
40
35
Percent of GDP
30
25
20
15
10
5
0
0
5
 10
 15
 20
0
5
10
15
20
25
www.debtdeflation.com/blogs
30
35
40
Implications for economic pedagogy
• A Rethinking and Re-Learning of Economics is needed
• Learn Neoclassical economics well
– Warts and all (not the airbrushed textbook version)
• As a (hopefully passing) phase in the history of economic thought
• Learn other existing schools well too: none have complete alternative
– Austrian, Marxian, Post Keynesian, Evolutionary, Ecological, Feminist
• Learn complex systems approaches & thermodynamics
• But you won’t find that curriculum at Oxford or Cambridge!
• S0…