Sunday, March 18, 2012


You cannot imagine what a relief it is for me to know that there is an actual economist who tells a story so similar to the story I tell.

It is also pretty weird to come home from work, have dinner, turn on my computer before dark on Wednesday, 14 March, and read a post by Steve Keen that was posted on Thursday, 15 March at 8:50 the next morning.

(As I write this it is still only 1:49 in the morning of the 15th. I woke up thinking about Keen's graph that I am about to show you.)

In Economics without a blind-spot on debt, Steve Keen writes

“Neoclassical” economists (who dominate both academic economics and policy advice to governments) have a blind-spot about the role of private debt in macroeconomics, yet despite the economy crashing once before because of it during the Great Depression, they continue to argue that it’s irrelevant now—during this latest crash.

Emphasis added. Keen continues:

Data on long-term private debt levels is difficult to find, but I’ve located it for both the USA from 1920 till today, and for Australia from 1880 (see Figure 1).

Wow. Glad to see I'm not the only one who uses the word "data" as if it were singular. Never sounded right to me to say "Data are..." I usually use "The numbers are..."

Anyway, Keen:

Figure 1

Clearly, there was a debt bubble before the Great Depression, and a plunge in debt levels during and after it (and Australian data also shows the same phenomenon during an earlier bubble and crash in the Depression of the 1890s; see Fisher and Kent 1999). The same process is clearly afoot again now.

What woke me up is not that the process is afoot again now, but that the Australian data numbers show "an earlier bubble and crash in the Depression of the 1890s".

The 1890s, the 1930s, and today. That's three debt crises.

And you know what? The 1840s, too. Back last November Nick Rowe wrote a post called Why has (private) debt increased? In a comment on that post, Min wrote

The U. S. also had a run-up of private debt before the depression of 1837 - 1843. That was fueled by land speculation, not consumerism.

So: 1837-1843, the 1890s, the 1930s, and today. Four debt crises. Unfortunately, the numbers get harder to find as you go back in time.

Actually, it's pretty hard to find numbers on private or total debt, even today, even on the Internet.

But anyway, Keen has documented three debt crises. And I woke up remembering that Shiller has documented three:

A graph of Shiller's interest rate data going back to 1871 shows three longwave peaks. Not two:

Graph #1
The graph also seems to show "secondary" peaks at the lows: one in the neighborhood of 1894, and another at the time of the Great Depression.
(From mine of 28 November 2011, based on data from Robert J. Shiller.)

Three peaks, as with Keen's graph. Plus secondary or minor peaks or hints of peaks that coincide with the debt crises that occur after the interest rate peaks.

Each time, the interest rate peak precedes the peak of debt. The years following the interest rate peak are -- I was going to say "years of increasing financialization" but that is not correct; almost all the years are years of increasing financialization.

The years between the interest rate peak and the debt peak are years of financial dominance and must therefore show a relative slowing of output growth (and more rapid growth of finance).

The years after the debt peak are years of decreasing financialization -- as we seem to be experiencing now. My Debt-per-Dollar graph shows one such peak during the FDR years, and the presumed beginning of another decrease in 2008.

My debt numbers don't go back far enough to show the third peak, the 1890s peak that Steve Keen points out. Interestingly, my graph does show a similar event (generated by policy) in the early 1990s. This strongly suggests that debt crises can be solved or even prevented by the appropriate use of policy. (One question remains: What is the appropriate policy.)

Here's an analysis of the 1990s event.

The graph below from mine of 2 December 2011 shows Debt-per-Dollar and part of the Shiller interest rate data. But this graph is short, and lacks the 19th-century peaks:

Graph #2


The Arthurian said...

So apparently I identify three stages in the cycle:
• Decreasing Financialization
• Increasing Financialization
• Financial Dominance
and repeat.

In the past century, we have Dominance in the Roaring '20s; Decrease during the FDR years; and Increase ever since, with dominance again since the Reagan years.

jim said...

Hi Art,
You wrote:

"Clearly, there was a debt bubble before the Great Depression, and a plunge in debt levels during and after it"

Actually if you look at that graph carefully, you will see that there wasn't a very big bubble before the depression and the debt at the start of the depression was about 160% of GDP. From there it shot up to 240% of GDP in the first couple years of the depression. This was not because debt increased it was because GDP fell and debt could not be shed anywhere near as fast as production fell.

Each dollar of debt still unpaid becomes a
bigger dollar, and if the over-indebtedness
with which we started was great enough,
the liquidation of debts cannot keep up with
the fall of prices which it causes. In that case,
the liquidation defeats itself. While it
diminishes the number of dollars owed, it may
not do so as fast, as it increases the value of
each dollar owed. Then, the very effort of
individuals to lessen their burden of debts
increases it, because of the mass effect of
the stampede to liquidate in swelling each
dollar owed.
-Irving Fisher,
The Debt Deflation Theory of Great
Depressions, 1933.

The Arthurian said...

Hi, Jim. Yeah, Keen wrote that (if that lends it any more credence). But I'll stand by it.

It doesn't have to be a big bubble (by today's standards) to be enough to cause a crisis and GDP collapse.

Because of the protections put in place during and after (and because of the Great Depression) we were able to generate a much higher peak by 2007 than they did in 1929.

But I do agree with you that the big spike of debt occurred not because debt grew from 1930-1933 but because GDP collapsed:

The Arthurian said...

but Australia's is particularly low, isn't it.