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

Tyler Durden's picture


The infamous debunker of most-things-classically-economic was recently asked to brief Congress on the fiscal cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass. The paper, slides, and presentation - designed to be simple enough for Dennis Kucinich and his colleagues in Congress to comprehend - provide another glimpse as Steve Keen argues that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector - and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit.

Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that Keen calls the "Rock of Damocles".


Full briefing here:


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. 


Keen's paper here:

Keen 2012 Fiscal Cliff Lessons From 1930 s


The slides can be access here.


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Mon, 12/10/2012 - 21:55 | 3050539 zorba THE GREEK
zorba THE GREEK's picture

They screwed it up then, they're screwing it up worse now.

Mon, 12/10/2012 - 21:59 | 3050554 vast-dom
vast-dom's picture

Rock of Damocles??? WTF are you talking about??? It's the SWORD of DAMOCLES you fucking ignoramus! The Rock is Sisyphusian! Jeez man give him an PhD quick!

Mon, 12/10/2012 - 22:02 | 3050564 markmotive
markmotive's picture

Budgets are so 1990s

The printing press is where it's at. And according to Jim Rickards the Fed is trying to import inflation.

Mon, 12/10/2012 - 22:19 | 3050610 Stackers
Stackers's picture

that guy just proved my theory that we have already gone off the cliff and are just waiting for enough people to look down.

Mon, 12/10/2012 - 22:31 | 3050645 Harlequin001
Harlequin001's picture

Ah, I get it. So it's the governments fault that we have recessions, and they can fix it.


Tue, 12/11/2012 - 04:38 | 3051306 Popo
Popo's picture

Steve Keen "gets it" right up until he starts proposing solutions.   He's mister "debt forgiveness" and wants to let all mortgage holders default and still keep their houses.   Fuck that.   That's socialism for the irresponsible assholes -- and it leaves responsible people out to dry.   Let the free market work, Mr. Keen.   Housing prices will and must collapse.  Let the idiots who borrowed more than they can afford rent for a while.

Tue, 12/11/2012 - 05:47 | 3051331 Lednbrass
Lednbrass's picture

Agreed, and now that Keen is in search of a new sugar daddy the last thing he wants is less central government spending- he literally depends on it to live.

Mon, 12/10/2012 - 22:37 | 3050659 Michaelwiseguy
Michaelwiseguy's picture

Someone said the "Fiscal Cliff" meme is just a scare tactic to make it sound scary so you buy it and become frightened of it. I don't buy into the fright.

The so called Fiscal Cliff is merely shifting from slightly positive GDP to slightly negative GDP due to reduced government spending, causing reduced consumer spending and lower servicing of debt levels. Isn't that what we want, lower government spending?

In other news: The Planet Will be Getting Colder

I've been cheer leading for Grand Solar Minimum since 2009 when I discovered the low solar activity and brutally cold planetary conditions that followed. It's the Sun Stupid! I still am cheer leading for more low solar activity and more brutally cold planetary conditions. I don't enjoy the effects of global cooling, the crop failures, and high frozen dead body counts, but I feel it is necessary to teach the man-made global warming/climate change zealots a lesson they will never forget. It is my recommendation the Sun stay in a low output phase till the lesson is learned.

Our current solar cycle 24 – still in a slump – solar max reached?

Tue, 12/11/2012 - 09:06 | 3051491 Flakmeister
Flakmeister's picture


So if it is all the sun, how do you explain this?

Since ~1980 the effects of radiative forcing from C02 has been greater than any variation in the sun....

You should also read this

Anthony Watts is a drop out former weatherman that is so wrong on so many things that it is not even funny...

Here is his track record on Arctic Ice

We are going to be in a world of hurt when the next strong El Nino hits

Tue, 12/11/2012 - 16:14 | 3052807 Mad Cow
Mad Cow's picture

The shill Cackmeister just couldn't help himself. Didn't you get the memo?

Tue, 12/11/2012 - 20:39 | 3053856 GlenD
GlenD's picture

Arctic ice shrinkage and Antartica ice growth is part of a cycle recently discovered called the Pacific Decadal Oscillation. Previous unknown maps (google "Cache of historical Arctic sea ice maps discovered") show that the arctic shrank and recovered in 1940's-50's  whilst CO2 levels were rising.

When the Pacific Decadal Oscillation switches, arctic will start growing ice and Antartica ice will shrink.

Yawn.... back.



Wed, 12/12/2012 - 01:38 | 3054831 Flakmeister
Flakmeister's picture


I suggest you check the first figure here:

Taken from

You can also check out this analysis

Bad form on your part, you are not allowed to make shit up.....

Tue, 12/11/2012 - 20:28 | 3053804 GlenD
GlenD's picture

There was an interesting paper from William Livingston and Matthew Penn US solar Observatory concerning sunspots may dissapear by 2015. I did some chasing up and writings (from Ireland) of unusual heatwave that preceded the last Little Ice Age which occurred during the suns last Mauder Minimum.  Sadly a repeat of Mauder Minimum will devastate crops and kill off millions  as it did so last time. The Global warming threat be picnic to another Little Ice Age. Sadly the government is more interested in carbon tax than protecting its populations.

Wed, 12/12/2012 - 01:44 | 3054838 Flakmeister
Flakmeister's picture

Any real "chasing" would have found this

and the peer reviewed papers therein.....

You appear to be simply babbling...

Mon, 12/10/2012 - 22:07 | 3050586 malikai
malikai's picture

I was thinking the same thing. I bet he just thought he sounded cool saying the name Damocles.

Fucking tool.

Mon, 12/10/2012 - 22:20 | 3050613 SV
SV's picture

Beyond that, his whole use of GDP is completely screwed up.  Take page 7 with House Prices & Change is against this fictitious GDP where we have some price index that's not being allowed to truly deleverage (because of the fraud, corruption, etc in the system).  Karl D (as much as I don't agree with his position on PMs) has an excellent deconstruction on the crap that is GDP.  Once you really start to understand what "GDP" is, these chart as an expression of GDP % are totally worthless.

Mon, 12/10/2012 - 22:35 | 3050652 nmewn
nmewn's picture

When over a third of GDP consists of counting the same bean twice (redistribution of the same bean) that's really all that needs be said.


Mon, 12/10/2012 - 22:48 | 3050696 XitSam
XitSam's picture

Don't you understand?! It is the flow that matters! Bean flow!

Tue, 12/11/2012 - 00:20 | 3050991 AldousHuxley
AldousHuxley's picture

but fed can create beans out of thin air when wall st. eats the beans while counting and telling folks that they can predict future bean flow.

Tue, 12/11/2012 - 02:29 | 3051219 James-Morrison
James-Morrison's picture

Keen is all about Jubilee.
Nothing new here, just filler.

Tue, 12/11/2012 - 04:39 | 3051308 Popo
Popo's picture

Exactly.  Fuck Steve Keen.   He's a walking policy disaster.   He completely "gets it" when it comes to economics, and fails disastrously when it comes to recommending policy.

Mon, 12/10/2012 - 22:56 | 3050730 disabledvet
disabledvet's picture

i do agree that is a SERIOUS problem. (i haven't fact checked this so i'm taking you at your word...which is a nice way of saying "it's probably worse than you say.") the problem with comparing anything today to the 1930's is that we basically had no Federal Government back then...and CERTAINLY no "military/industrial complex" like we've had "full bore ten years running" now. in other words to NOT default to inflation is to just give lie to anything you say. the reason why i can point to a 100 percent return that i have called and still be underwhelmed is that with inflation running at 10 percent...probably for a decade now...the "real rate of return" (adjusted for the worthlessness of our money) is actually far less. in other words long before any of us so much as shit a dollar we've already paid a massive tax courtesy of horrific monetary policy. (citation: John Williams of Shadowstats.) so sure...the soundbites sound good with the crowd about lower pay and loss of benefits...something which is in fact true vis a vis the American worker i might add...but to simply blame "Republicans" is so over the top i don't even know where to begin...other than to say WE NEED TO WORK TOGETHER IF ANY PROBLEMS ARE TO BE SOLVED. It's really awful the way everyone has to "play for the camera"....which to me gives lie to anything substantive that needs to be done. I mean we ARE TALKING THE BUDGET are we not? this is somehow a "populist matter"? REALLY? anywho i'm not giving...probably because i have no choice however. i think this Administration (though i HIGHLY doubt the President was in the loop on any of this) really made a mess of things when they went around the entirety of the Senate to throw General Petraeus under the bus. It is my view that that action PRECIPITATED Israel's attack on Hamas actually. But hey..."what's not to like about partisan politics" right? That is unlike MY manichean struggle of course...which really does impact you and me!

Tue, 12/11/2012 - 05:01 | 3051320 StychoKiller
StychoKiller's picture

Budget?  Did the Senate actually pass one lately?

Mon, 12/10/2012 - 22:58 | 3050736 disabledvet
Mon, 12/10/2012 - 22:22 | 3050623 fnord88
fnord88's picture

Because when a sword drops it neatly severs. When a rock drops it crushes everything in its path, and humpty dumpty cannot be put back together again.

Mon, 12/10/2012 - 22:34 | 3050650 Harlequin001
Harlequin001's picture

Aw come on. It's an easy mistake to make, rock, sword, rock, sword.

Hell I've always been confused by the two...

Now, if I could only decide wether to wind my arse or scratch my watch...

Tue, 12/11/2012 - 00:04 | 3050954 Bicycle Repairman
Bicycle Repairman's picture

Rock, sword, paper.

Paper wins.  For now.

Mon, 12/10/2012 - 22:53 | 3050715 mess nonster
mess nonster's picture

Oh, don't get so bent out of shape. Sure, the metaphor has been mangled, but in a very appropos way, I think. Damocles brown-nosed Dionysus- "Oh how lucky you are to be king!" So Dionysus put Damocles on the throne, to enjoy the view as it were, only he hung a sword over Damocles' head, suspended by one hair of a horse's tail, signifying just how much fun it really is to be a king.

So really, what will a sword to to the gargantuan, many tentacled monster that is the Federal Government? This is the beast that has a thousand pea-sized brains, that is such a ravenous, amorphous blob that a sword, should it fall upon it, would merely go unnoticed. How much better to replace the sword with a giant, asteroid-sized rock, one sufficient to crush the nasty, slimy freakish thing, or at least to wound it so terribly that it must mewl and writhe in agony, to our most contented amusement?

Mon, 12/10/2012 - 23:03 | 3050749 Budd Fox
Budd Fox's picture

Keen is right . It is one of the many Tylers that messed up.

Tue, 12/11/2012 - 07:17 | 3051384 Thamesford
Thamesford's picture

It could be that we're so far in debt we have reverted to the stone ages :s

Tue, 12/11/2012 - 08:13 | 3051434 paddy0761
paddy0761's picture

The Rock of Domocles:

He is referring to a debt "overhang" ready to squash the economy at any time. 

Tue, 12/11/2012 - 08:27 | 3051453 akak
akak's picture

"The Rock of Damocles" --- is that like the Sword of Gibraltar?

Mon, 12/10/2012 - 22:00 | 3050555 markmotive
markmotive's picture

Spending cuts aren't really spending cuts.

Santilli rants:

Mon, 12/10/2012 - 22:07 | 3050582 AldousHuxley
AldousHuxley's picture

spending cut = decreased increase in spending



Tue, 12/11/2012 - 00:37 | 3051026 InvisibleHandyman
InvisibleHandyman's picture

I LOVE that it is Huxley that so clearly parses this doublespeak. Thank you ZH!

Mon, 12/10/2012 - 22:20 | 3050611 nmewn
nmewn's picture

Now here's a man that "get's it".

Slowing spending growth is not a cut in overall spending. Baseline budgeting (the process by which the US government budgets are made these days) means government spending always grows.

They start with a baseline, saying overall spending will never fall below X from the previous year. Thats Baseline Budgeting.

A slow down in that growth of spending is not a cut in spending because you will still spend more than in the previous year.

Its not a cut in spending.


Tue, 12/11/2012 - 02:06 | 3051184 glenlloyd
glenlloyd's picture

The govt stepped in to spend when 1) consumers who were broke couldn't and 2) those with the means didn't want to.

Now they want to send out the bills to cover the spending and then some. Just send the bill back.

I believe that its a case where the prosperity of the past needs to be paid for, and the bill is coming due.

Tue, 12/11/2012 - 11:53 | 3051933 bigkahuna
bigkahuna's picture

I believe it is raw greed, politicians using the fed and taxpayers as their ATM.

Mon, 12/10/2012 - 21:56 | 3050540 Kamehameha
Kamehameha's picture

Summarily tossed into the "Getting Paid to Tell Congress What they Want to Hear" file.



Mon, 12/10/2012 - 21:59 | 3050541 fonzannoon
fonzannoon's picture

I will never forget reading about 1937 in my economics class.. Negative real rates. 700 trillion in derivatives on the books. Fat finger traders losing billions in nanoseconds. Algorithms chasing each other all over the market and causing flash crashes. Firms going under and taking segregated client assets and then not getting in trouble. Hundreds of thousands dropping out of the workforce every month, lowering unemployment and subsequently getting celebrated. Mostly I remember the top street analysts were the ones running around their tv studio jumping up and down making animal noises.

Yes 1937 was a major blemish in our history books.

Mon, 12/10/2012 - 23:04 | 3050752 balz
balz's picture

You forgot Peak Oil.

Tue, 12/11/2012 - 03:06 | 3051254 prains
prains's picture

Um.....1937 was peak soil that's why it's called the dust bowl

Tue, 12/11/2012 - 00:14 | 3050978 seataka
seataka's picture

When the markets freeze, will it be like a global M F Global? Will transactions stop? Will be like a ticking watch's final tick?

Tue, 12/11/2012 - 01:00 | 3051087 lasvegaspersona
lasvegaspersona's picture

tick tock tick tock tick tock

Tue, 12/11/2012 - 05:34 | 3051329 Crash N. Burn
Crash N. Burn's picture

Not to worry, we've got the Bernanke! /sarcasm off

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

It get "better":

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

The Bernanke "plan", it would be hilarious if it wasn't THE plan.

Mon, 12/10/2012 - 21:56 | 3050545 ball-and-chain
ball-and-chain's picture

Steve Keen is cool.

But I'm still waiting for the Australian housing market to burst.

Waiting, waiting, waiting.

It's been four years.

Waiting, waiting, waiting.

Mon, 12/10/2012 - 22:30 | 3050643 lolmao500
lolmao500's picture

Yeah he's cool if you like shills.

Mon, 12/10/2012 - 22:46 | 3050688 centerline
centerline's picture

I don't know about that.  Mr. Keen does, in other presentations talk about peak oil, population growth versus resources, etc.  And he does a good job of poking some nice holes in mainstream economics.  Hard to tell if he really believes the system can be "fixed" or if there is a bigger picture he avoids painting for fear of getting thrown under the bus completely and rather advances the subject little by little.  Realistically, Steve is about the best chance economics has for giving Krugman (the real shill) a proverbial black eye.

Mon, 12/10/2012 - 22:52 | 3050708 XitSam
XitSam's picture

I thought I'd heard Keen say on Capital Account that he was a MMT guy.  

Tue, 12/11/2012 - 00:19 | 3050986 Poor Grogman
Poor Grogman's picture

At least Steve keen is not afraid to deal with the creation of money out of thin air, which most other economists simply won't talk about.

That said, he is still "on board" the current Keynesian death-march but I would bet that he understands that he is dealing with a dying system, he's just not quite ready to jump ship yet.

Steves work on changing rate of credit creation affecting demand cannot be accepted at face value unless you are aware that most credit is in fact brand new freshly created money.

Steve is out in front of the economics profession, but cannot afford to get too far out front till some support catches up a bit.

Tue, 12/11/2012 - 05:07 | 3051322 StychoKiller
StychoKiller's picture

Found a pic of the great Keen...

Mon, 12/10/2012 - 21:59 | 3050550 sangell
sangell's picture

Reducing the DEFICIT is not delevering either in the US or down under.

Mon, 12/10/2012 - 22:01 | 3050559 Cabreado
Cabreado's picture

Discussion of Intent, Control, and the rise of the Narcissist and Sociopath in places of influence would be more appropriate than comparing clean economic factors with those of the 1930's.

C'mon now... this ain't your Grandpa's devolution.

We should stop pretending.

Mon, 12/10/2012 - 22:13 | 3050583 NoDebt
NoDebt's picture

Love the scientific notation on the figures. 

I reckon we're in for a 10 to the 7th power sized shit storm sometime in the not-too-distant future.

Government debt in the 1930s also started from about 30% of GDP, if I read the graphs correctly (with very few unfunded liabilities hanging over their heads).  Today's government started at twice that level (again, if I read the graph correctly) PLUS the unfunded liability elephant waiting in the next room.  We were already low on Keynesian ammo before the battle began.  It's not like we were running huge surplusses before things went haywire.  Borrow and spend isn't gonna work this time and they know it.  So now we're PRINTING and spending.

Steve need not worry about a decrease in government spending.  That will continue unabated.  Watch what happens after they "raise taxes on the rich".  Yearly deficits will still easily top $1Trillion.



Mon, 12/10/2012 - 22:12 | 3050595 A Nanny Moose
A Nanny Moose's picture

Why do so many articles on this topic focus only on the government monetary "stimuli" during TGD 1.0?

I would posit that market liberalization is more important than any possible positive impacts resulting from robbing Peter to pay Paul, and inflating away savings in the process. None of this bullshit considers the timing of such events as the 21st Amendment in 1933, or tax increases in 1937/38 including, but not limited to The Marijuana Tax Act, and OASDI collections.

If stimuli were so effective, why the results in the Depression of 1920/21? Iceland 2008/09? Why are Japan and PFIIGS not recovering? Why would we ever give thieves even more money for that hamburger? Have we ever gotten our money on Tuesday?

Tue, 12/11/2012 - 04:03 | 3051292 natty light
natty light's picture



Mon, 12/10/2012 - 22:22 | 3050624 Bicycle Repairman
Bicycle Repairman's picture

This isn't 1937. We cannot afford that mistake this time.  Derivatives = BOOM.  And world war will not bail us out.

Mon, 12/10/2012 - 22:28 | 3050634 lolmao500
lolmao500's picture

Get real, America is already in recession.

And who cares. America NEEDS to swallow the pill now and take a 10-15% GDP reduction or it'll be MUCH, MUCH WORSE down the line.

Mon, 12/10/2012 - 22:50 | 3050701 centerline
centerline's picture

We never left the recession, unless you count monetary intervention papering over the smoking crater that used to be the private sector.  Seems to me the real goal here is to eliminate the private sector entirely.  Most of it is already on it's knees, just waiting for the kill shot.

Tue, 12/11/2012 - 01:06 | 3051098 lasvegaspersona
lasvegaspersona's picture


a 10-15% reduction in GDP? Do you mean devaluate by that much? Even that would not do anything. The excess of paper wealth to the real assets that represent real wealth is about 10 fold. When the panc comes and all those derivatives of real wealth want to be realized as such in the physical world....well like they say....the exits can get crowded.

Mon, 12/10/2012 - 22:27 | 3050635 Monedas
Monedas's picture

Dennis Kucinich is a stupid, evil, vile piece of excrement .... let's send him to Venezuela when Chavez croaks his frog song !

Mon, 12/10/2012 - 22:56 | 3050728 mess nonster
mess nonster's picture

Kucinich has something you don't- a hot wife.

Thu, 12/20/2012 - 23:32 | 3085461 helping_friendl...
helping_friendly_book's picture

My wife is hot and 12 years younger than I dick head. She makes twice what I do. I've never seen Kucinich's wife.

Tue, 12/11/2012 - 00:10 | 3050970 helping_friendl...
helping_friendly_book's picture

Dennis Kucinich has something you lack.

A penis.


Tue, 12/11/2012 - 01:00 | 3051085 Savyindallas
Savyindallas's picture

Yeah sure-and George W. Bush is an angel of the Lord who spoke to God daily about foreign policy while riding his horse out on the ranch at Crawford

Mon, 12/10/2012 - 23:03 | 3050717 Everybodys All ...
Everybodys All American's picture

Steve's advocating more public spending? Sounds like an Aussie Krugman.

Oh,one more thing Steve failed to mention. The only way his bs economics works is if this ends with a WWII type spending. Which means we are looking at WWIII and guess what happens in WWIII. Many of us die. Which means suddenly those entitlements no longer matter for the dead.

Tue, 12/11/2012 - 04:02 | 3051287 Assetman
Assetman's picture

Keen is neither a Keynesian nor a Aussie Krugman... let's just get that out of the way.

WWII type spending doesn't neccessitate creating a war.  It means, perhaps, finding more useful ways to spend that reduces the level of aggregate private debt (deleveraging) while keeping GDP working higher and the unemployment low.  I don't know about you, but I'd much rather use government money to reduce mortgage debt, expand infrastructure, or put that capital for people to utilize in private investments than to use towards propogating war.  It's wasteful spending and not necessary. 

What's probably just as bad is how spending is directed and financed today.  A great proportion of the benefits from monetary and fiscal policy are directed to segments of the economy that isn't creating propoprtional value (miliartism, banking & mortage, transfer payments, etc.).  This results in a massive misallocation of resources-- and more importantly-- neither directly nor properly addresses the debt management issues in the private sector.  With such a narrow focus of government largesse, there is also the distinct risk that those segments that managed captial so badly will do so again.  I know, it's absurd-- but that's exactly what we're doing.

Now, while I do think Keen is on the right track in addressing the central problem of how to "manage down" a private mountain of debt-- there are important distinctions about the 2010's that are starkly different than the 1930's.  In the late 1930's, the gap between private debt and public debt are nowehere near where they are today.  In essence, we have a much bigger mountain of debt to tackle.

The other issue is that through the issue of War Bonds, a vast majority of US government debt in the late '30s and early 40s was financed by an already delevered civil population (of whom had literal cash stashes under matresses).  At the current stage, the US is almost wholly dependent on the Federal Reserve to monetize US debt just to keep deficit spending at $1.3 trillion a year.  The scary thing is that the Ferderal Reserve has its own limits on how much balance sheet it can manage before things get out of their control (Ben Shalom thinks it's somewhere in the $9 trillion range).  The private debt mountain is much further removed from GDP than that (that's not to imply that getting private debt to a GDP of $16 trillion is the goal).  

The only way to really effectively 'solve' the problem is combine (a) direct private debt reduction; with (b) investments that have a real impact on economic growth and create excess capital (i.e. technology, infrastructure, etc.).  Investments in the banking sector (just to use an example) is a black hole that serves no real productive purpose.  

As for war, your investment only works well if you: (a) pick a fight with your major creditor; and (b) win the war, so that all those debts are essentially erased.  That all sounds good, until you see scores of thousands of your own people die.  And that's if you do win (ask the Germans what it's like on the losing end).

Steve Keen probably understands the problem-- but a proposed solution is a monumental challenge, for obvious reasons.  I'm pretty sure he knows we've already crossed the Rubicon.  I think the policies in place today just kicks the can with no real tangible benefit for the economy.  



Tue, 12/11/2012 - 10:59 | 3051378 Urban Redneck
Urban Redneck's picture

Free Shit Army wants their AWOL Zombies-in-training back...  The only way to really effectively 'solve' the problem is combine (a) direct private debt reduction; with (b) investments...  I'll make this simple- the government already "invests" more EACH YEAR than exists private consumer debt in the US.  In 24 months more new public debt is created than the entire existing supply of private debt you want had out free shit to cover.  More "investment" means more public debt, while the private debt is a relative pimple on the 800lb gorilla's ass.

Mon, 12/10/2012 - 22:54 | 3050725 Stuck on Zero
Stuck on Zero's picture

Here's how ZHers can fix the problem.  Go out and borrow every penny you can get your hands on and buy physical gold.  There.  You've done your part.


Mon, 12/10/2012 - 22:59 | 3050734 Encroaching Darkness
Encroaching Darkness's picture

Just as the generals are frequently accused of being ready to fight the last (previous) war, economists appear to be ready to defeat the last (previous) depression; and with the same results, likely (getting your ass handed to you by a new enemy / economy that doesn't fight / react like the last one).

Who in America is looking at the government debt as a GOOD thing except economists? Who on earth would QUIT deleveraging (paying down household debt) because the government is taking on more?

Most folks I know (I have friends in low places) are doing their best just to keep a roof overhead, food on the table and kids in school; I'm certainly not taking on any new debt, and if the car breaks, another used one will have to do.

But then, I don't have a finance / government / parasite job, so maybe I'm the exception that proves the rule. Oh well, onward to fiscal calamity, comrades!

Tue, 12/11/2012 - 11:49 | 3051915 Bollixed
Bollixed's picture

"and if the car breaks, another used one will have to do."

Shhhh...too much of that kind of talking will give them the ammo they need for another Cash for Clunkers program.

We can't have the people talking about buying shit that doesn't require adding massive debt for depreciating assets, now can we.

Mon, 12/10/2012 - 23:19 | 3050810 swabeyjw
swabeyjw's picture

Best I can tell Keen has it right. I would like to see Keen move on to structuring options that might legitimize a balanced approach to gifting and jubilees. 

Mon, 12/10/2012 - 23:48 | 3050903 PUD
PUD's picture

China plans to expand gov debt to build 1200 coal fired power plants. I will grant you that this will expand the economy. I will also grant you and guarantee you that that the consequences of this mindset...of perpetual growth by any and all means...will far outweigh the benefits. There were 5 times fewer people on the planet in 1937 than there are now and that is a significant difference that seems to never enter the equation of the money scientists.

Tue, 12/11/2012 - 00:07 | 3050962 helping_friendl...
helping_friendly_book's picture

I read about a new nat gas pipe line from Kazakhstan to China. I am hoping those 1200 power plats you write of will burn nat gas vs. coal.

It might clear up the sky line in Beijing?

I hope China will embrace horizontal drilling to exploit, cleaner, nat. gas. instead of coal.

I live on the East Coast of USA and have noticed the very clear panorama we see when going over Afton Mountain the last few trips.

I surmise the P-Plants are using nat. gas and the result is crystal clear view with respect to the smog we witnessed the last two years.

I hope China exploits nat. gas instead of coal.

Game Changer!

Mon, 12/10/2012 - 23:56 | 3050913 PUD
PUD's picture

"The crisis was caused by the growth of private debt collapsing."

This is wrong.

The crisis was caused by the exponential explosion in private debt that went on to collapse

Fixed it for him

It's like saying "the man died of complications from withdrawal of heroin use"

No, the man died because he was addicted to heroin

Tue, 12/11/2012 - 06:21 | 3051354 Rip van Wrinkle
Rip van Wrinkle's picture

Agreed one million times.


Either these schmucks are stupid or evil, one of the two. If you misdiagnose the problem, you can't treat the illness.

Tue, 12/11/2012 - 10:43 | 3051702 swabeyjw
swabeyjw's picture

Good luck if you believe private debt has returned to zero. On the current path this just a low pass for a bit of sight seeing before the bumpy landing. Than again with HFT, perhaps it will not be a landing but high frequency exponential resets and eventual welfare for the 99% - perhaps France is a model for the future?

Tue, 12/11/2012 - 12:00 | 3051962 exi1ed0ne
exi1ed0ne's picture

In a debt based monitary system it is the collapse in the rate of growth, not the growth itself that maters.

Mon, 12/10/2012 - 23:58 | 3050935 ncdirtdigger
ncdirtdigger's picture

Why does Mr Keen ignore the effects of the Labor Act of 1935 (which was decided by the SCOTUS in 1937)? Private sector deleverage could be seen as linked to the effects of higher anticipated labor costs.

Tue, 12/11/2012 - 01:06 | 3051097 Orly
Orly's picture

It's the last thing that businesses have to pull forward.  Companies have pulled forward credit and demand and now wages.  Wages are hardly on the rise and could be said to have seen diminishing returns for more than 20 years running.  Wage demand is a coiled snake waiting to spring.  Witness the increased use of food stamps, the internet idea that government assistance is worth $95,000 to a working family.

With that kind of spring-load, inflation could really take off when comanies did indeed see that higher labor cost.  In fact, the only way inflation can take off is by way of wage inflation and with 20 years without a raise, the cost effects could be tremendous.  And with available employees on the sidelines, discouraged and not even looking, getting them to work is going to take a renaissance in US manufacturing.

That's why increased wages aren't happening until new manufacturing arrives in the USofA.  Be prepared for a long and drawn-out muddle.  Once it turns, though, there are going to be price shocks all over the economy that's gonna make the 70's look like the 50's.


Tue, 12/11/2012 - 00:02 | 3050946 Professor Fate
Professor Fate's picture

In the end, its just one layer after another of bullshit from politicians and economists.  One heaping, steaming pile after another.  Its too late.  America is now like a crack whore with too many people having a near worthless education looking for someone to "give" them that job and benefits they are so entitled to rather than letting go of the teat and creating one of their own.  Full of spineless addicts and parasites dependent on handouts and welfare rather than drugs.  Everyone knows this.  No news here.  And like any crack whore, America will not get better until she hits rock bottom.  There is no fix other than to just let her crawl into a corner, yank the empowering money needles out of her arms, and let her heal on her own.  

I like Keen, but what the hell.  Out of one side of his mouth he says we need a debt jubilee.  Out of the other he says we need more debt.  Christ, somebody put the paddles on this guy and jolt his ass.

"Push the Button, Max"

Fate the Magnificent  

Tue, 12/11/2012 - 10:55 | 3051740 swabeyjw
swabeyjw's picture

Sometimes getting the understanding on the edge everyone's tongue clears the tolerance for theft and precipitate the build of the obvious solutions. Waiting, waiting, waiting.

Tue, 12/11/2012 - 00:24 | 3051002 tsuki
tsuki's picture

It might have designed to be simple enough for Dennis Kucinich to understand, but I doubt Tom Colburn could. 

Tue, 12/11/2012 - 00:59 | 3051082 JuicedGamma
JuicedGamma's picture

Congress = girly men.  No balls.  F them all!

Tue, 12/11/2012 - 02:23 | 3051211 MagicMoney
MagicMoney's picture

So what is Keen's saying? We need more debt? Isn't the problem the debt in the first place? He says we don't need taxes or what? What's he saying?  I don't think  he even knows. I sure as hell don't get what he wants. Is debt wealth?  Of course the Austrian view says the recession is the actual cure for the free market. Bad debts have to be purged, resources redeployed.  Savings have to increase, that means banks loan less  cheap money, and loan money that can be paid back by actual productivity versus a pay day loan so people can buy more stuff. Consumers have to save more, spend less, so they can actually get real jobs, and maybe even export. Just like Bernanke famously said "what goes up must come down" while everybody laughed in the room. Ironically, he believes he can prevent the going down part, keep the economy at least elevated until some miracle happens.

Tue, 12/11/2012 - 03:32 | 3051267 AUD
AUD's picture

Steve Keen is a fucking idiot. Nobody, least of all ZH, should care what he says.

Here's another example of his 'work' -

Tue, 12/11/2012 - 11:07 | 3051777 swabeyjw
swabeyjw's picture

Debt is money. If debt collapses liquidity collapses. Liquidity collapses and the number of cash flows left that can service a debt collapse and look out below. Keen has a lot more to say. This was enough for one go. He has blog and a fair bit of support.

Tue, 12/11/2012 - 14:05 | 3052415 MagicMoney
MagicMoney's picture

So we need more debt? Ok so let's create more debt. Let's go do it!!!! More debt, the more money we have.

Tue, 12/11/2012 - 14:06 | 3052428 MagicMoney
MagicMoney's picture

WHich debt are you talking about? So what are you saying? We need more debt? If so let's create it.

Tue, 12/11/2012 - 02:35 | 3051221 jgeneric
jgeneric's picture

What he was saying is nothing new.  I've heard all my life that government spending and WWII were responsible for getting us out of the Great Depression.

It wasn't until others started looking at the data and determined that excessive government spending was keeping us FROM getting out of the depression.  Hyek himself pleaded that governments cut spending...NOW.  His contention was that, yes there will be a big hit up front, but the economy would bounce back quicker without government spending.

We've already seen the FAILURE of trillions of dollars in "shovel ready" spending that was guided by government.... into pensions instead of the much needed public works projects.  Government spending is wasteful and is incapable of granting the required results.

And so what if he predicted a crash in some market?  You have no idea how many people have come out of the woodwork making that claim!!!

Tue, 12/11/2012 - 03:07 | 3051257 q99x2
q99x2's picture

Oh good I was thinking I'd have to go back to work. 4 more years. 4 more years. Think I'll get a white ObamaPhone and maybe a car in the next couple of years.

Tue, 12/11/2012 - 04:39 | 3051309 Bubba Schwartz
Bubba Schwartz's picture

and a free house!


Tue, 12/11/2012 - 03:32 | 3051268 Freewheelin Franklin
Freewheelin Franklin's picture

His assessments are good, but his solutions are not. Bob Murphy sent me a critique he and Gene Callahan wrote on Keen's book, "Debunking Economics", and I can't find it.


Damn, that pisses me off.

Tue, 12/11/2012 - 04:35 | 3051302 Ham-bone
Ham-bone's picture


Keen shows apples and oranges and says if we take our oranges, mash them up, we'll have apple sauce.  He's too smart to be this foolish...

If Keen wanted to show real picture he should show depression vs. now inclusive of todays unfunded liability costs (that were not in existence in the GD).  $4T to $7T public deficits and real public debt rivaling the private debt.  Real debt and deficits now are unprecedented. 

Comparing growth of US in WWII w/ rest of world in ashes and US acting as worlds new global exporter (equivelant of todays China). 

So much bullshit in this presentation...right on the money as far as what congress wants to hear. 

Tue, 12/11/2012 - 13:37 | 3052307 Amagnonx
Amagnonx's picture

Yep - Im with you - Keens is reading from Blankfiens hymn book I think.


What is needed is DEFAULT!!!   Let rates rise as the market demands - burn all the fkn trash, and cart away the TBF's.

Tue, 12/11/2012 - 04:37 | 3051305 Bubba Schwartz
Bubba Schwartz's picture

If you believe Mauldin's thesis, tax increases and reduced spending will both drag GDP down....but it is the only method he sees for getting us back to somewhat normal footing if such a course course were to be followed for several years.  Unfortunately, he sees no political will to do this.

Interestingly enough, if you look at Hoover's budgets, they were fairly balanced, but he spent alot in hoping to stimulate things, too.

Let nature take its course, and that will be painful as the markets are so distorted after so many years of tinkering....

Yes, in so many ways, the 2012 election was 1936 all over again....buckle up!


Tue, 12/11/2012 - 04:51 | 3051315 Ham-bone
Ham-bone's picture

Reality is a $4t + deficit and Mauldin suggests tinkering w/ $85b in tax revenue and some backloaded spending cuts that never get implemented...Like Mauldin but lets first recognize true scope of the problem then ponder the potential solutions if we truly care to constructively attempt to deal with our challenges.

Tue, 12/11/2012 - 07:16 | 3051383 Peterus
Peterus's picture

What does it mean to "manage the impact" of private debt? This is his solution, how would this actually work? What concrete actions would go into this "management of impact"?

Tue, 12/11/2012 - 08:29 | 3051455 tradewithdave
tradewithdave's picture

The Chicago Plan is a set-up.  It's like a sophisticated investor telling you they want to come in as a business partner with you.  After you let them in they show up with their cousin Vinny.  He stands around a lot at the door with something under his jacket. 

Keen's Modern Jubilee, The Chicago Plan, it's all a lead-up for the divorced currency system and the introduction of triple-entry accounting... which curiously is also the basis for Bitcoin.  Soros connections with the first two are clear... still not sure about the third.


Tue, 12/11/2012 - 08:46 | 3051469 Sandmann
Sandmann's picture

So Popo []explain the accounting - let's use Double Entry. You want house prices to collapse - fine. Mortgages in the US are non-recourse unlike Europe so that's fine. Let's say there is an Asjustment of 30% in house prices downwards and the Banks and Mortgage Lrnders have to write off say 25% Mortgage Balances which wipes out their Equity. That is the Best Outcome because the US Government can nationalise those Banks and prop up their Balance Sheets withy taxpayer funds and stick the cost on the National Debt which is only $16 Trillion.

If those Mortgages are held by Japanese Banks or German Banks and Insurers they might not like the Write-Down and simply dump US Treasuries to redeem Cash to bolster their own Balance Sheets but that's no problem because US Taxpayers are lightly taxed compared to Japanese or Europeans and could probably handle 20% Sales Tax and 80% Taxes on Gasoline. So the US could probably afford to have the Feds write off their $4.6 Trillion in Mortgage Paper.

Steve Keen is not asking for a Debt Jubilee to do anyone any favours - he is simply stating that you can a) Choose to Organise a Debt Writedown  or b) It will just happen   - there are no options, there is simply more DEBT in the world than Collateral so one way or another Debt is worthless even if you think it is an Asset supporting the Loans you carry for another Asset


Tue, 12/11/2012 - 18:39 | 3053450 swabeyjw
swabeyjw's picture

I do nor see it that way. When a bank goes bust, stock holders take a loss but the bond holders get the bones and the bones are the debt - where is the jubilee? Same old, same old best I can make out.

Tue, 12/11/2012 - 09:18 | 3051515 masterinchancery
masterinchancery's picture

How about the massive tax increases on business in 1937--could that have had anything to do with it? Duh!

Tue, 12/11/2012 - 09:40 | 3051550 dscott8186
dscott8186's picture

Never mind the tax increases FDR plopped on the economy during this time period and never mind the economy killing regs that discouraged job creation.  

They never learn because they never can admit their mistakes. 


FDR and the Lessons of the Depression Higher taxes on capital and increased union power led to the 1937 economic slide.

Here are the facts: Real government spending, measured in 1937 dollars, declined by less than 0.7% of GDP between 1936 and 1937, and then rebounded in 1938. It is implausible that such a small and temporary decline reduced real GDP by nearly 3.5% in 1938 or reduced industrial production by about one-third.



But in 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation's own retained earnings.

The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

Let's not let the facts get in the way of a good narrative.  Tax, tax, tax, spend, spend, spend that's the answer, that's always the liberal answer, free stuff for everyone, who needs to work for a living anyway?

Let them have their tax increase, LET IT BURN!  Bring on a full blown economic Depression and let the majority of voters who elected Obama learn their lesson for the next few generations.  Every 100 years or so we forget the lessons of the past thinking we are so sophisticated and in control. 



Tue, 12/11/2012 - 10:44 | 3051704 Counterfiat
Counterfiat's picture

Declaring bankruptcy is a debt jubilee, with the reality of consequences for bad decisions for all parties involved.

So Keen says we need a debt jubilee for taxpayers in debt, because banking corporations received tax funded debt (jubilee) forgiveness instead of the reality of bankruptcy. OK all of tomorrows purchases were brought by debt into yesterday, so we have to face the reality of that. Corpserations have exported jobs overseas and we have lived it (the betrayal) up with ponzi money - nope no real solutions here. Crazy solution suggesting unemployment can be helped with more debt. Keep the ponzi zombie alive!




Tue, 12/11/2012 - 11:48 | 3051910 Steve in Greensboro
Steve in Greensboro's picture

Step 1: Print enough USD to pay off the debt and pay it off.

Step 2: Balance the budget by cutting spending, including laying off at least half of the employees of the Federal government.

Step 3: Convert to a gold standard.

Watch the U.S. grow at 8% annually for 20 years.

Tue, 12/11/2012 - 12:30 | 3052092 dscott8186
dscott8186's picture

Politicians once being granted to do step one will never need to do steps 2 and 3, it's not in their interest and in fact ceases to be necessary. 

And now you understand the end game of Obamanomics.  Pay off debt with imaginary money, money becomes worthless, you all now serve the political elite as slaves for the common good as you will be paid in worthless money.

Tue, 12/11/2012 - 14:14 | 3052452 Flakmeister
Flakmeister's picture

So what happens in 2 years when we can no longer import oil because the gold done run out?

Tue, 12/11/2012 - 13:39 | 3052316 Amagnonx
Amagnonx's picture

DEFAULT bitchez .. thats whats needed .. and a few hundred feet of rope.

Tue, 12/11/2012 - 20:45 | 3053749 MagicMoney
MagicMoney's picture

All is nice with charts, and graphs as most economist use, but Steve Keen's doesn't explain why private debt shrank. For example he says instead he is using correlations between public, and private debt. That public debt increase correlates with a private sector debt decrease, or vice-versa. He uses WW2 as an example. During WWII, supplies, and materials were rationed for the war effort. There was little to buy for the common american. In fact money itself was useless. You need some kind of coupon to buy stuff. Government also issued war bonds.  Basically he is emphasizing on cash flows of debt. Basically he is saying that savings produced a booming economy in the post war years, because US consumers simply didn't buy much during WWII. US government did. However he makes claim that government debt is essential for the private sector to delever. This is not a necessarily true premise.


 Yes private sector debt did grow from 2000-2006, because Alan Greenspan lowered interet rates. Austrian school already said many years now that inflation, ie money created out of thin air creates inflation. Keen's debt deflation is just pointing out how prices deflate when debt deflates. Yes government spending does provide a non market stimulus to the market, but nevertheless the government has to borrow or confiscate that money in some form. Yes lower tax receipts does increase government debt. This should be known.


The economy needs investments that produces things that mankind needs. Cash flows on debt, having more money, speculating on price gains, or loan sharking people ain't a real economy. You know like the housing bubble, or borrowing money to buy Chinese made stuff, maxing out credit cards, and yes government spending. Spending money isn't economic growth. Real growth comes from purchasing power, savings, and investments. Spending comes afterward. Keen's might be right, that private debt, some of it needs a write-down, but then again, government is supporting it. Government supports the housing market practically. Sounds sensible except the fact he want suggest using tax payers to foot the bill.

Wed, 12/12/2012 - 23:19 | 3058287 ken
ken's picture

Oh, private theft vs. public theft?


Thu, 12/20/2012 - 03:12 | 3081810 cgagw
cgagw's picture

Let us move to some intermediate tricks, First I will explain the board leap, In order to do this trick good north face cheap warm enough you need two wave boards, So grab one of your friends boards and place the board on the ground heading in the direction you want to ride.

Do NOT follow this link or you will be banned from the site!