More clear thinking – Steve Keen

Steve Keen as clear and straight forward as he’s ever been… his arguments are simple, clear and, astoundingly, arithmetically sound.


The consensus was for a 0.2% increase over the month of March, from 5.2 to 5.4 percent. In fact, it leapt by two and a half times as much, to 5.7%.

Here Steve Keen is discussing unemployment in Australia where by Western standards, unemployment is low. However, what matters here is not the absolute number as much as the rate of change of the number. SK then goes on to dissect US numbers too and, by implication, European numbers.

Now that our economy is utterly debt-dependent, the debt-financed asset-price bubbles have burst, and debt de-leveraging has begun in earnest, the economy will tank and unemployment will explode as debt-financed spending evaporates.

As the economy has become more and more debt-dependent–as the ratio of Debt to GDP has risen–this correlation has gone from being trivial to explaining 95% of the level of unemployment.

For those who believe that “Australia is different”, here’s the matching chart for the USA. The only difference is one of time: they began their decline in this Depression about a year before we did. But we are rapidly catching up.

Attempts to inflate our way out of this via either government spending or quantitative easing will also fail. The sheer scale of private debt de-leveraging swamps the government’s pump priming, while there is so much debt relative to government created money that the latter will have to be increased by astronomical amounts–and given to those in debt, rather than to the banks–to counter the collapse in demand caused by private deleveraging. To labour a comparison I’ve made numerous times, Rudd’s stimulus package will inject $42 billion into the economy, but a 5% reduction in debt by the private sector will remove $100 billion from it.

And, in a nutshell, the above is the problem in the West. First, the amount of bailouts our leaders are dishing out are woefully insufficient to actually make a dent in the debt load and, anyway, rather than giving the money to banks or AIG, this money would be far better spent by giving it to individual households. Far better spent in this context means that it would have greater impact on achieving the holy grail that all governments are after today: restarting inflation.

Even the slowdown in debt accumulation will swamp the government’s stimulus. In 2007-08, the last year of our debt bubble, private debt rose by $259 billion–adding 20% to aggregate demand. The fall of this to zero–a simple stabilisation of private debt–will remove 20% of demand from the economy. This is what is causing unemployment to explode now. On the monetary front, Bernanke has literally doubled government-created money in the USA in a matter of months, but even so the ratio of private debt to this is close to 30 to 1. He’d need to create twenty times as much  (and give it to the debtors to cancel their debts, rather than to the banks in a futile attempt to maintain their facade of solvency) before there would be any chance of a monetary stimulus working. I simply can’t see him trying it.


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