Debunking Economics
• Why is the world in economic chaos right now?
• Because the experts on the economy are experts on a flawed model
– Which ignores instability and assumes equilibrium
– Which ignores money and debt and assumes away bubbles
– Which treats government as “a business” when it is more “a bank”
• The real expert—ignored before the crisis—was Hyman Minsky
– “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)
• Inherent flaws? Three undeniable dynamic facts…
Capitalism’s Inherent Financial Instability
• The employment rate will rise if economic growth exceeds the sum of
population growth and growth in labor productivity;
• The wages share of output will rise if wage demands exceed growth in
labor productivity; and
• The private debt to GDP ratio will rise if the rate of growth of private
debt exceeds the rate of economic growth.
• First two facts can’t be ignored
• Neoclassical economists deny relevance of 3rd fact:
– “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, End this Depression Now!)
– “Absent implausibly large differences in marginal spending
propensities among the groups … pure redistributions should have
no significant macroeconomic effects.” (Bernanke 2000)
• By ignoring private debt, they saw “The Great Moderation”…
The “Great Moderation”
• “the past two decades has seen not only significant improvements in
economic growth and productivity but also a marked reduction in economic
volatility… dubbed ‘the Great Moderation’.” (Bernanke 2004)
The "Great Moderation"
16
Crisis
15
14
13
12
Percent; Percent per year
11
10
9
8
7
6
5
4
3
2
1
0
0
1
2
3
4
1980
Unemployment
Inflation
1984
1988
1992
1996
2000
2004
www.debtdeflation.com/blogs
2008
2012
2016
Capitalism’s Inherent Financial Instability
• When you leave the fact about debt out, this is what you see…
• When you include it, this is what you see
• Rising private debt caused the boom before the crisis & the crisis too…
Capitalism’s Inherent Financial Instability
• Rising inequality & rising private debt are directly related
Simulated Income Shares
110
Bankers
Capitalists
Workers
100
90
Percent of GDP
80
70
60
50
40
30
20
10
0
0
 10
0
5
10
15
20
25
Years
30
35
40
45
In the real world as well as in the model…
USA Change in Private Debt & Unemployment (Correlation -0.93)
20
12
Crisis USA
Debt Change
Unemployment
11
15
10
10
8
7
5
6
5
0
04
3
5
2
1
 10
1990
1995
2000
2005
www.debtdeflation.com/blogs
2010
0
2015
Percent of Workforce
Percent of GDP per year
9
Japan’s fate awaits unless we reform economics…
Japan Change in Private Debt & Unemployment (Correlation -0.89)
Percent of GDP per year
25
Crisis Japan
Crisis USA
Debt Change
Unemployment
6.5
6
20
5.5
15
5
10
4.5
5
4
0
0 3.5
5
3
 10
 15
1980
2.5
1985
1990
1995
2000
www.debtdeflation.com/blogs
2005
2010
2
2015
Percent of Workforce
30