Summary: Today we discuss secular stagnation (what Tyler Cowen calls The Great Stagnation). It has emerged as a major public policy concern as forecasts for a boom proved false (again) in 2014 — and the economy slowed in the early days of 2015. We face a dark future if we can’t restart the economy, especially if the 1% continue to skim off most of what little growth we get. First in a series about this, perhaps among our most serious problems. {1st of 2 posts today}
“…a full-fledged recovery … requires a large outlay on new investment, and this awaits the development of great new industries and new techniques. But such new developments are not currently available in adequate volume.”
— Speech by Alvin Hansen (Prof Political Economy, Harvard), 28 December 1938. He was right. WWII provided the missing spark to start a US recovery.
Introduction to stagnation.
Since 2010 mainstream economists have assured us that the economy was returning to normal (i.e., 3-4% real gdp growth). Many forecast a that boom was coming (4-5%). Almost all agreed that rising rates and inflation lie ahead. Skeptics, like me, predicted that growth would remain stagnant and that deflation was loose in the world. Now that debate has ended, and the debate begins about the causes and cures of secular stagnation — and rising concern about deflation.
The first warnings, disregarded.
In 2011 Tyler Cowen (Prof Economics, George Mason U) published The Great Stagnation, explaining that the US economy had reached a technological plateau, and so began a period of slow growth. Few believed him.
In the November 2011 Monk Debates the proposition was “Be it resolved North America faces a Japan-style era of economic stagnation”. Paul Krugman and David Rosenberg spoke for for the resolution; Larry Summers and Ian Bremmer spoke against it.
Krugman said “It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.” Rosenberg said “When all the stimulus is gone and the Emperor is disrobed, it is not going to be a pretty picture.” The vote was 55% – 45% against. Likewise in the wider world our slow growth was considered a cyclical problem and its deeper causes ignored.
In the following years David Rosenberg converted to the optimists’ side, becoming a roaring bull about the economy and stock market. In 2013 Larry Summers moved in the opposite direction, warning about stagnant growth. He gave his first alarm quietly and uncertainly in a speech to the IMF on 8 November 2013 — Excerpt:
I wonder if a set of older and much more radical ideas — that I have to say were pretty firmly rejected, a set of older ideas that went under the phrase secular stagnation — are not profoundly important in understanding Japan’s experience in the 1990s, and may not be without relevance to America’s experience today.
… Now, this may all be madness, and I may not have this right at all. But it does seem to me that four years after the successful combating of crisis, since there’s really no evidence of growth that is restoring equilibrium, one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before, and taking steps whose basic purpose is to cause there to be less lending, borrowing, and inflated asset prices than there were before.
My lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential.
Reality casts the final vote.
Now, 3 years after the debate, most economists agree that we have some kind of global secular stagnation. But what is it, exactly? The Economist notes that “Despite the sterling efforts of the authors to pin down the term, secular stagnation remains a baggy concept, arguably too capacious for its own good.” Krugman explains there are two different definitions:
{S}ecular stagnation is the claim that underlying changes in the economy, such as slowing growth in the working-age population, have made episodes like the past five years in Europe and the US, and the last 20 years in Japan, likely to happen often. That is, we will often find ourselves facing persistent shortfalls of demand, which can’t be overcome even with near-zero interest rates.
{the other view} associated in particular with Bob Gordon {is} that the growth of economic potential is slowing, although slowing potential might contribute to secular stagnation by reducing investment demand. It’s a demand-side, not a supply-side concept. And it has some seriously unconventional implications for policy.
Krugman explains the implications:
This is a really important distinction, because secular stagnation and a supply-side growth slowdown have completely different policy implications. In fact, in some ways the morals are almost opposite.
If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.
But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).
Conclusions
Tomorrow we’ll delve into the details, but here’s the bottom line. Reliable treatment requires accurate diagnosis, in economics just as in medicine. Unfortunately, here we see the same confusion in economics as we do with climate scientists studying the pause: a problem unexpectedly appears in a serious area and experts offer many explanations — some overlapping and some contradictory, most given with great confidence.
That’s appropriate in science, where conviction give scientists drive and focus. It’s not helpful in public policy debates as non-experts have no rational basis to choose among the various theories — so they choose using their political and ideological biases.
A selection of readings from all sides of the debate.
Some believe that supply-side problems have slowed growth (e.g., Robert Gordon, Tyler Cowen). For details on their theories (and those of blue sky optimists) see Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?
Here are some articles about the many other theories about our slow growth:
- “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the
Zero Lower Bound“, Larry Summers, speech at the National Association for Business Economics Policy Conference, 24 February 2014. - “Secular stagnation: Facts, causes, and cures“, a Vox eBook, 10 September 2014 — A wide range of economists tackle the subject.
- “The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre“, Christine Lagarde (Managing Director, IMF), speech on 2 October 2014.
- “Secular stagnation, debt overhang and other rationales for sluggish growth, six years on“, Stephanie Lo and Kenneth Rogoff, Bank of International Settlement, January 2015.
- “Secular Stagnation: The Long View“, Barry Eichengreen, AEA Conference Paper, January 2015.
- “Is the Economy Still Threatened by Secular Stagnation?“, John Cassidy, New Yorker, 28 January 2015.
- “An Unconventional Truth“, Noureil Roubini, Project Syndicate, 1 February 2015.
- “Persistent Overoptimism about Economic Growth“, Kevin J. Lansing and Benjamin Pyle, Economic Letter (Federal Reserve of San Francisco), 2 February 2015 — “Since 2007 Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. “
For More Information
(a) See all posts about economics and about deflation.
(b) Recent posts about this economic cycle:
- Are we following Japan into an era of slow growth, even stagnation?, 18 November 2013.
- See the true trend of the US economy, hidden in the daily news, 1 August 2014.
- It’s not too soon to worry about the US economy. There are things worse than slow growth., 18 September 2014.
- Listen to the slowing US economy, hear echoes of Japan, 24 September 2014.
- 3 graphs tell the story about the US economy, hidden amidst the noise of the jobs report, 6 October 2014.
- Look at the economy. Fight the illusion of normality. Feel the weirdness., 8 October 2014.
- Here’s help to see the truth through the narratives in the news: looking at the jobs numbers, 9 December 2014.
- What does the data tell us about the US economy in 2015?, 6 January 2015.
I do not see that the two causes for stagnation (as per Krugman) are exclusive, which makes finding a solution even more complicated.
After all, if demography is on a downwards trend, then that means that both consumption-driven demand is going down (there are less consumers, after all) and that the supply of labor force is diminishing. If productivity improvements are decelerating, then this ultimately means that growth in distributable income (via wages or dividends to spend in consumer demand) is slowing down as well. I.e. each time both supply-side and demand-side factors are negatively impacted within the same process.
I have the feeling that people like Krugman recognize that traditional roadmaps to recovery are inadequate in the current uncharted waters (hence their head-scratching at the dilemma), but they seem too beholden to traditional models and analyses to figure out truly innovative approaches.
Guest,
“I do not see that the two causes for stagnation (as per Krugman) are exclusive”
Where does he say that they’re exclusive?
“…people like Krugman recognize that traditional roadmaps to recovery are inadequate in the current uncharted waters (hence their head-scratching at the dilemma), but they seem too beholden to traditional models and analyses to figure out truly innovative approaches.”
Do people hold you to such high standards? Figure out truly innovative solutions to world-scale problems or you’re fired. It’s easier said than done. New ideas appear in their own time, not on demand.
“If productivity improvements are decelerating, then this ultimately means that growth in distributable income (via wages or dividends to spend in consumer demand) is slowing down as well”
Why you did not consider that distribution of distributable income has changed irespectable of productivity? And then that change changed the demand?
Are you considering that dividends are being spent at the same rate as wages? How large part of dividends is not spent but saved(spent into buying more shares)? And how large part of wages is spent instead of saved?
Huge difference, isn’t it. And it has been happening since 1975 while productivity continued growth, distribution of distributable income has changed. this distributable income went more and more to savings /profits instead of spending. Ever increasing debt hid such distribution change. Now debt can not grow anymore. Hence Secular stagnation.
Jordan,
Who is this “you” to whom you refer? I suggest you re-read, more carefully.
Editor
” You” is “guest” and the quote from his comment is the object of my complaint.
Jordan,
Please use a proper ID, not just a pronoun. On many devices people do not see to what you are replying.
Guest
Here is proof how distribution changed;
http://neweconomicperspectives.org/2015/02/senator-bernie-sanders-presents-tchernevas-research-show-reagan-helped-destroy-middle-class.html#more-9057
https://research.stlouisfed.org/publications/es/07/ES0707.pdf
How distributable income is shared between capital (dividends) and labor (wages) is not germane to my argument, which dealt with the issue of the linkage between supply-side (productivity) and demand-side (consumption) factors.
Even if 100% of productivity improvements were given back in form of wages, the fundamental issue I alluded to would remain: if productivity slows or stops growing, redistributable income slows or stops growing, and hence demand inevitable slows or stops growing.
The fact that redistributable income is increasingly channelled away from wages towards dividends/share buybacks, hence towards social classes where the propension to consume is lower, just accelerates the process; it does not alter its fundamental characteristics.
Guest,
“just accelerates the process”
That’s an interesting way to frame this, and well worth thought. I haven’t seen anyone describe the relationship of income distribution to growth in quite that way. Thanks for posting this.
Richard Qoo trys to point to probem of debtors not on supply side;
” “During [balance sheet recessions], monetary policy is largely ineffective because those with balance sheets underwater will not increase borrowing at any interest rate … The government also cannot tell the private sector not to repair its balance sheets”
Secular Stagnation was introduced by think tanks in order to persuade policy makers that “resistance is futile”, nothing can be done to return to growth. That is partially true; Nothing can be done from supply side action is true. A lot can be done from Demand Side action.
Krugman and Sumner are changing the original definition of SecStag in order to include demand side where the real problem comes from.
Taylor Cowen’s cause of SecStag is just ridiculus, “that the US economy had reached a technological plateau”. His theories reached cognitive plateau long time ago.
Another reason is given as “such as slowing growth in the working-age population”. that has been happening since 90’s and economy was still growing. Since all boomers entered working age in 80’s and then women also increased participation during 80’s growth of working age population was slowing, imigration has been slowing for whole century too, but it did not impact economic growth. Slowing of working age population is also bogus as reason for SecStag.
Working age population might have turned negative after GFC hit or not yet, but that was after GFC, it can not be the cause.
Jordan,
Koo spells his name as “Koo” (not “Qoo”) in his English-language publications.
You will see clear explanations of the questions you raise in the articles listed at the end, esp the Vox e-book.
Editor
I appologize for bad proofreading before posting, had some issue with posting so i did not do proofreading. I appologize.
I have read Vox article about e-Book content before i wrote my comment, and it tells me that it is giving wide range of conflicting theories. Should i accept only one from them which would give me the answers?
I accept some of Summers’, most of Krugman’s, and most of Koo’s explanation that goes deeper then Krugman’s but on the same line. And Eichengreen’s that cause is inequality, (but not other causes like education, deficits and public debt); Distribution of income that makes demand is geared toward savers much more disproportionally then to spenders.
Jordan,
“I have read Vox article about e-Book content before i wrote my comment, and it tells me that it is giving wide range of conflicting theories.”
If you had read the post you’d see that was *exactly* its primary point.
“Should i accept only one from them which would give me the answers?”
It helps to read the post before commenting. See the “Conclusion” section of the post.
The phrase “Helicopter drop” is en vogue. I see even George Magnus is citing evidence that such is coming. If a helicopter drop is to be tried I favor the version suggested by Steve Keen by which the dropped funds must be used to pay down debts if the recipients have any.
First of all this is fair. Those who loaded up on debt should be forced to use this windfall to pay down those debts rather than to consume or to leverage up even more. Those with no debt aka the poor are the ones who should finally have a chance to consume. This is the channel by which aggregate demand increases in central bank parlance. The Cohort that gets screwed by this is our beloved banking class. Paying down debt destroys loan assets on banks balance sheets and wipes out debt service income to banks. Couldn’t happen to a nicer bunch of guys IMO. This solves the wealth inequality problem as well. Desperate men do desperate things indeed.
Peter,
“If a helicopter drop is to be tried I favor the version suggested by Steve Keen by which the dropped funds must be used to pay down debts if the recipients have any.”
That’s an Economics 101 violation. Paying down debt = savings. The majority of people (i.e., those with debt) increasing their savings rate (or an increase in aggregate savings rate) will decrease the rate of economic growth. It’s not a morality play.
The point of monetary injections is, among other things, to increase spending. Magnus makes this quite clear. The point of fiscal policy — largely government spending — is to inject money quickly into the economy. Coordinating the two, as all the major nations did after the 2008 crash, works quite well.
The increase in aggregate demand would be confined to the spending by non debtors. Typically this is poor people who never qualified for loans. The remaining component of helicopter money would serve to reduce private sector debt by reducing household debt levels. This component of the new base money would be non inflationary because for each unit of base money printed into existence by the Fed a corresponding unit of bank credit money will be paid out of existence. This means much more money can be printed without causing inflation. Note that this money would not be distributed to savers by the banks any more than loans were funded by savers when the loans were originally created by the banks. It would go to bank reserves. The Fed knows how to reduce excess reserves. Fundamentally the problem during debt deflations is that total credit money is shrinking by loan default and the CB must counter this by printing base money. Krugman would disagree with this. He thinks banks intermediate by taking savings from savers and lending it to borrowers. Empirically about three percent of bank loans can be explained if this were true. The other 97% are created in the act of lending by banks by crediting demand deposit accounts at the time the loan is created. This is not apparent when the debt is growing but is revealed through bankruptcy and debt default during debt deflations.
Under Keen’s plan the drop to debtors would reduce their debt burden and lower the probability of default. You might think the banks would love this idea as their default rate would come down but no. This policy would shrink the entire banking sector. Banks can escape the problems of debt default by seeking bail outs but a shrinking asset base is death to them. Loans are bank assets. Those holding securitized debt also see the security and its derivatives vanish as the debts are repayed. The rentiers thus also take a hit. Securitization is not a machine that runs well backwards.
Peter,
“The increase in aggregate demand would be confined to the spending by non debtors.”
The words “aggregate demand” do not mean what you think they mean.
Or at least not what Krugman says it means. According to Keen:
Aggregate demand=income(GDP) plus the change in debt.
Krugman thinks the change in debt is irrelevant to aggregate demand. If Krugman is right then Keen is nuts. If Keen is right Krugman is nuts. Someone is nuts and some policy that flows from these assumptions is nuts. There is indeed a challenge to the ruling paradym. It’s only wrong to make up new definitions for words if the old definitions actually make sense. Terms in equations have meaning only if the equations have meaning. Keen acknowledges that his ideas are an assault on the core predicates of neoclassicals.
Peter,
You still don’t understand the words you use. The concept of “aggregate demand” is Econ 101, and has nothing to do with any specific school of economics. Read the sentence again and think about it.
Also, I suggest you cite specific articles rather than just tell us what you think actual economists say. That would have a lot more credibility.
In fairness to Krugman’s world view Keen’s defining equation is only 97% true given the empirical data that 3% of new debt is offset by savings subtracting from aggregate demand. So PK is 3% right about banks just being intermediaries. Just as you don’t get to make up your own definitions you don’t get to write your own defining equations and not defend their logical basis. Krugman refuses to do this with Keen.
Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G + (X-M) C = Consumers’ expenditures on goods and services. I = Investment spending by companies on capital goods.
This is a definition by equation. The equation is:
Aggregate demand=GDP. Where GDP is defined as The sum of C,I,G,(X-M).
Keen says this equation is wrong not because the definition of GDP is wrong. GDP has its own defining equation given above. Keen accepts that GDP has meaning. His important contribution is that the defining equation for aggregate demand is wrong. It should say:
Aggregate demand=GDP plus the change in debt. I suppose we could leave the definition of aggregate demand alone and change the definition of GDP to include the change in debt. Something has to give here. Either PK shows that Keen’s equation for aggregate demand is wrong or not. The empirical data says Keen is 97% correct. This is not rocket science.
Peter,
When someone suggests that you cite an expert or authoritative source, that seldom expresses an interest in more of your explanations. Also, you still don’t see the contradiction between the actual meaning of aggregate demand and what you wrote. I suggest you cite what Keen said rather than continue on like this. I don’t believe you’re qualified to give lectures on macroeconomics.
Here is a recent post by Keen:
http://www.debtdeflation.com/blogs/2014/02/02/modeling-financial-instability/comment-page-1/
Here is an out take:
Literally no-one disputes that the financial sector was the cause of the post-2007 economic crisis: disputation instead centers on the causal mechanisms. I follow Fisher (Fisher 1933) and Minsky (Minsky 1980) in assigning key roles to the growth and contraction of aggregate private debt (Keen 1995; Keen 2000), but this perspective is rejected by New Keynesian economists on the a priori basis that private debts are “pure redistributions” that “should have no significant macro-economic effects” (Bernanke 2000p. 24), and as a corollary to the oft-repeated truism that “one person’s debt is another person’s asset” (Krugman 2012c, p. 43).
My analysis also follows the Post Keynesian tradition of endogenous money (Moore 1979; Moore 1983) in seeing the banking sector as an essential component of the macroeconomy, yet this is also dismissed by New Keynesian economists on the grounds that banks are merely a specialized form of financial intermediary (Krugman 2012a; Krugman 2012b; Krugman 2013a; Sumner 2013; Tobin 1963), all of which can be safely ignored in macroeconomic models. When banks are introduced in New Keynesian models, they function not as loan originators but effectively as brokers between savers and borrowers (Eggertsson and Krugman 2012b, pp. 21-22).
In response, authors in the Post Keynesian and Endogenous Money traditions express exasperation that New Keynesian authors ignore credit creation and the accounting mechanics of bank lending (Fullwiler 2012; Roche 2013), as laid out in numerous Central Bank publications (Carpenter and Demiralp 2010; ECB 2012; Holmes 1969; Keister and McAndrews 2009).
Given the key public policy role of economics, and the acknowledged failure of Neoclassical models in general to anticipate the financial crisis (Bezemer 2009; Blanchard 2009; Blanchard, et al. 2010; OECD 2007), the existence within academic economics of two diametrically opposed perspectives which fail to communicate is a disservice to the public.
– See more at: http://www.debtdeflation.com/blogs/2014/02/02/modeling-financial-instability/comment-page-1/#.dpufThis paper will be published in a forthcoming book on the crisis edited by Malliaris, Shaw and Shefrin. In what follows, I derive a corrected formula for the role of the change in debt in aggregate demand, which is that ex-post aggregate demand equals ex-ante income plus the circulation of new debt, where the latter term is the velocity of money times the ex-post creation of new debt. – See more at: http://www.debtdeflation.com/blogs/2014/02/02/modeling-financial-instability/comment-page-1/#.dpuf
And an abstract:
This paper will be published in a forthcoming book on the crisis edited by Malliaris, Shaw and Shefrin. In what follows, I derive a corrected formula for the role of the change in debt in aggregate demand, which is that ex-post aggregate demand equals ex-ante income plus the circulation of new debt, where the latter term is the velocity of money times the ex-post creation of new debt. – See more at: http://www.debtdeflation.com/blogs/2014/02/02/modeling-financial-instability/comment-page-1/#.dpuf
Peter,
You made a specific claim: “suggested by Steve Keen by which the dropped funds must be used to pay down debts if the recipients have any.” I didn’t ask for definitions of aggregate demand or other stuff. This does not support your claim in the slightest.
Here is keen proposing a helicopter drop and debt jubilee as I have described. Scroll down for the helicopter drop part. “The Crisis in 1000 words—or less“, Steve Keen, Debtwatch, 22 July 2012
URPE–The Union for Radical Political Economics–is holding a Summer School for the Occupy movement, and as part of that invited papers that explained the crisis in 1000 words or less (so that they can beo printed on one double-sided sheet). Here’s my effort in somewhat less than 1,000 words (though with 2 figures). In the interests of URPE’s objective in this exercise, here’s the PDF of this blog post for general download.
Both the crisis and the apparent boom before it were caused by the change in private debt. Rising aggregate private debt adds to demand, and falling debt subtracts from it. This point is vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across recession, boom and bust between 1990 and 2012, the correlation between the annual change in private debt and the unemployment rate was -0.92.
The causation behind this correlation is that money is created “endogenously” when the banking sector creates loans, and this newly created money adds to aggregate demand—as argued by non-orthodox economists from Schumpeter through to Minsky. When this debt finances genuine investment, it is a necessary part of a growing capitalist economy, it grows but shows no trend relative to GDP, and leads to modest profits by the financial sector. But when it finances speculation on asset prices, it grows faster than GDP, leads obscene profits by the financial sector and generates Ponzi Schemes which are to sustainable economic growth as cancer is to biological growth.
When those Ponzi Schemes unravel, the rate of growth of debt collapses and the boost to demand from rising debt becomes a drag on demand as debt falls. In all other post-WWII downturns, growth resumed when debt began to rise relative to GDP once more. However the bubble we have just been through has pushed debt levels past anything in recorded history, triggering a deleveraging process that is the hallmark of a Depression.
The last Depression saw debt levels fall from 240% to 45% of GDP over a 13 year period, and the ensuing period of low debt led to the longest boom in America’s history. We commenced deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the “robust financial society” that underpinned the Golden Age that ended in 1966.
While we delever, investment by American corporations will be timid, and economic growth will be faltering at best. The stimulus imparted by government deficits will attenuate the downturn—and the much larger scale of government spending now than in the 1930s explains why this far greater deleveraging process has not led to as severe a Depression—but deficits alone will not be enough. If America is to avoid two “lost decades”, the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.
In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a “Modern Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency.
Without a policy of this nature, America is destined to spend up to two decades learning the truth of Michael Hudson’s simple aphorism that “Debts that can’t be repaid, won’t be repaid”.
Peter,
Thank you. It’s weird as usual. Got to love this: the government paying off debts would “not advantage debtors over savers”. Wow. New math, indeed.
It’s especially useful to see reports of the past, so we can benchmark them to results.
“a deleveraging process that is the hallmark of a Depression. … After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s …”
He anticipated continued deleveraging. In fact private sector was rising as he wrote this. Both business and household sector debt has risen since then. See the Fed’s Flow of Funds report. Consumer credit started rising as the recession ended in 2009.
So his prediction was false. Whatever the cause of the slow growth (~2 1/2% read gdp since the recession ended), we cannot blame deleveraging.
There is no way to test his theory about government-funded debt forgiveness. Since it is politically improbably in the US today, we’ll need to wait for a new political tide — or until some other nation tries it.
Peter,
BTW, this analysis is quite conventional. De-leveraging — increasing aggregate savings — depresses growth, as known back to Keynes paradox of thrift. The recommendation is non-consensus, focusing on paying down debt rather than increasing saving. It’s an interesting idea, since the rich hold most of the household sector debt (and the poor almost none). Seems quite daft, but everyone has there own perspective on these things.
It does not favor debtors over savers (non debtors) because both receive the drop.
His assertion is that growth will be slowed for decades if debt is not reduced quickly. Not that this negative growth trend will be uninterrupted.
His explanation is not that deleveraging equals saving so we should undo the effects of deleveraging by running deficits. That would be classic Keynes. His explanation is that private sector debt is too high as a percent of GDP so debt service costs are sucking the life out of the economy. Keynes never acknowledged this could happen, but Fisher did. More economists should have listened to and understood Fisher. This includes Krugman and Bernanke.
Though he suggests his jubilee will not punish holders of debt securitization products I don’t see how. MBS do sometimes get their underlying loans paid back and presumably distributed to investors but if done way more than expected it’s a mess. Derivatives on these even more so. Surely there will be some beating of breasts and gnashing of teeth by rentiers, ie pension funds, insurers, basically the FIRE sector if Keen’s proposal is adopted. Biblical pun intended.
Peter,
“It does not favor debtors over savers (non debtors) because both receive the drop.”
No. Removal of debt increases the debtor’s net worth. It doesn’t matter how it’s done: by the creditor’s forgiveness (a Jubilee or principal reduction, aka debt defeasance), by governmental change to the contract (i.e., bankruptcy), or by a gift from a third party (e.g., by a “drop” from the Fed). The IRS considers it taxable income, except for statutory exceptions (e.g, bankruptcy).
Repayment of a debt to a creditor does not increase the creditor’s net world. The source of the money does not matter. It is not income, and the IRS does not tax it.
The helicopter money increases everyone’s net worth. Debtor net worth increases by debt reduction just as you say. Saver’s net worth goes up because they have more money after they receive the drop. If the helicopter windfall is taxed more tax is paid by middle class debtors than by bottom class “savers” who are really just poor people who are debt free. In this sense with progressive taxation poor “savers” are favored. Ok by me.
Peter,
We’re done here. You have no understanding of these things on even the simplest level — arithmetic.
Repayment of a debt to a creditor does not increase the creditor’s net world. The source of the money does not matter. It is not income
This much is true. Bank savers are creditors of banks. When they withdraw savings this is repayment of that deposit loan to the saver by the bank. Savings withdrawal is not a taxable event.
Other types of debt repayment are viewed the same. But banks don’t lend the savings deposited by savers out to borrowers. They lend out newly created debt money thus creating a newly created asset called a loan. The creation of base money for the helicopter drop is a genuine creation of money by Fed printing. If this is used to retire bank debt the net effect on money supply is zero. Credit money disappears and base money appears. If everyone in the country was a debtor then Keens jubilee would be a money supply wash. Neither inflationary nor deflationary.
If you’re not talking about currency dilution helping debtors over savers by Keens proposal then I’m just a dim bulb and must humbly go back to my day job doing particle beam line calculations.
Only dreams for some, others know what is going on…
http://www.zerohedge.com/news/2014-12-07/something-stinks-inside-bls-jobs-data
Something Stinks Inside The BLS Jobs Data
http://www.paulcraigroberts.org/2014/12/07/another-fabricated-jobs-report-paul-craig-roberts/
Another Fabricated Jobs Report — Paul Craig Roberts
http://www.epi.org/publication/missing-workers/
Missing Workers
The Missing Part of the Unemployment Story
http://www.computerworld.com/article/2879083/southern-california-edison-it-workers-beyond-furious-over-h-1b-replacements.html/
Southern California Edison IT workers ‘beyond furious’ over H-1B replacements
http://www.computerworld.com/article/2873670/anti-h-1b-senator-to-head-immigration-panel.html
Anti-H-1B senator to head immigration panel
And more about sinking prospects for most:
http://www.wsj.com/articles/how-a-two-tier-economy-is-reshaping-the-u-s-marketplace-1422502201
How a Two-Tier Economy Is Reshaping the U.S. Marketplace
The advance of wealthy households, while middle- and lower-income Americans struggle, is reshaping markets for everything from housing to clothing to beer.
http://ourfuture.org/20150204/how-one-item-in-president-obamas-2016-budget-hurts-older-americans
How One Item In President Obama’s 2016 Budget Hurts Older Americans
http://www.rollingstone.com/politics/news/while-deflategate-and-chaitgate-rage-america-quietly-robs-its-elderly-20150129
While Deflategate and Chaitgate Rage, America Quietly Robs Its Elderly
http://libertyblitzkrieg.com/2015/02/02/the-face-of-the-oligarch-recovery-luxury-skyscrapers-stay-empty-as-nyc-homeless-population-hits-record-high/
The Face of the Oligarch Recovery – Luxury Skyscrapers Stay Empty as NYC Homeless Population Hits Record High
http://ourfuture.org/20150204/california-state-of-inequality-series-tackles-growing-wealth-gap
California, ‘State of Inequality’: Series Tackles Growing Wealth Gap
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