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.  

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