Dancing with Steve

It's getting difficult for me to avoid reading Steve Keen.


In Economics in the Age of Deleveraging Keen identifies the "Age of Leverage" -- for the US, the years between World War Two and 2007 -- and the "Age of Deleveraging" (the years since 2007). He provides two graphs showing dramatic increase in private debt followed by sudden decline, and says "only the Great Depression compares".

And Keen says this:

Non-economists might expect professional economists to pay great heed to these indicators—after all, surely private debt affects the economy? However, the dominant approach to economics—known as “Neoclassical Economics” —ignores them completely, on the a priori grounds that the aggregate level of private debt doesn’t matter: only its distribution can have macroeconomic impacts.

Keen objects to the notion that "the aggregate level of private debt doesn’t matter". In other words, Keen thinks the aggregate level of private debt DOES matter.

He doesn't put it in those words, exactly, but that's what he is saying: The level of debt matters. I like to say the level of TOTAL debt matters; Keen here says it's the level of PRIVATE debt that matters. But anyway total debt is composed mostly of private debt, so we are not very far apart.


So then I was thinking maybe Keen had changed his view since I read him some time back. Actually, since my first post that references Keen. In that post I wrote:

Keen says the "superficially good economic performance" since the mid- to late-80s was "driven by a debt-financed speculative bubble." I say it was driven by the growth of debt. I say the host of Debtwatch has overstated the case.

I was saying it is the level of debt that matters: An excessively high level of debt is the problem. Keen was arguing that the problem was not the level of debt, but the use to which debt was put: speculative use. Keen had explained:

... the debt added to the economy’s servicing costs without increasing its capacity to finance those costs. At some stage, the growth of unproductive debt had to falter, and when it did a serious financial crisis would ensue...

But I thought otherwise:

Keen's explanation is wrong. It suggests that if all the debt was productive debt, there would have been no problem. That's blindly optimistic. Accumulating debt would have created the crisis eventually, no matter how you label that debt.

So. In the older post (June 13th, 2010) Keen said the problem was not debt, but "unproductive debt" specifically. In his recent post, however, he seems to suggest it is the aggregate level of debt that matters. He seems to say that the problem results from how much debt there is, rather than what kind of debt it is. I thought he was coming around to my way of thinking. I was bejabbered.

Bejabbered, but wrong. In the recent post Keen says

an increase in debt adds to aggregate demand—and it is the primary means by which both investment and speculation are funded.

Speculation, again. The level of debt matters to Steve Keen because it influences "both investment and speculation". If not for speculation, he says, things would be grand!

Keen remains concerned about the difference between productive and speculative debt. His remarks regarding the level of debt arise from his concern with the level of speculative debt. Keen still fails to see the cost of debt in general as a cost issue for the economy. A factor cost issue.

Keen, from the recent post:

If the change in debt is roughly equivalent to the growth in income ... then nothing is amiss: the increase in debt mainly finances investment, investment causes incomes to grow, and the economy moves forward in a virtuous feedback cycle. But when debt rises faster than income, and finances not just investment but also speculation on asset prices, the virtuous cycle gives way to a vicious positive feedback process: asset prices rise when debt rises faster than income, and this encourages more borrowing still.

Keen sees no problem with accumulating debt, as long as that debt was created for productive use and not for speculation.

What I see is that debt ALWAYS "rises faster than income" -- except at the end:

Graph #1: Total Debt relative to GDP (GDP is Income!)

If there is any question in your mind that excessive debt can create problems in the economy, check out the Debt Accumulation item in my sidebar....

// UPDATE FOR JIM & JAZZ

Graph #2: Total Debt relative to GDP, through 1982

Graph #3: Total Debt relative to GDP, 1962-1972

Well look at that! Sure enough, the ratio went DOWN from 1965 to 1969.

Oh no-no wait! It went up from 1966 to 1968.

So what do we have?  1965-66 and 1968-69 the ratio went down.

THOSE were the years when debt was "productive"???