The GFC: Scale, Causes, Consequences

1
The GFC Scale, Causes, Consequences

• Steve Keen
• University of Western Sydney
• Debunking Economics
• www.debtdeflation.com/blogs
• www.debunkingeconomics.com

2
The Scale Biggest Bubbles in History
3
The Scale Greatest Debt Level in History
4
The Scale Greatest Debt Level in History

• But Australias different, right?...

Lets zoom in here
Our Crisis? What Crisis?
1890s Depression
1930s Depression
5
The Ponzi Economy

• 72-74 84-92 debt-induced boom, bust,
  recovery

?

• What odds on a third upward trend?

Sustained recoveries only when Debt/GDP ratio
rose again
?

• Versus 1890/1930 style de-leveraging?

6
Back in the USA

• Deleveraging-driven downturn

• Correlation 1980-Now -61
• Correlation 1990-Now -83

7
Why hasnt it happened here?

• Give it time

• Correlation 1980-Now -84
• Correlation 1990-Now -94

8
Did neoclassical economists see this coming?

• the current economic situation is in many ways
  better than what we have experienced in years
• Our central forecast remains indeed quite benign
• a soft landing in the United States,
• a strong and sustained recovery in Europe,
• a solid trajectory in Japan
• and buoyant activity in China and India.
• In line with recent trends, sustained growth in
  OECD economies would be underpinned by strong job
  creation and falling unemployment. (p. 9)
• OECD Chief Economist Jean-Philippe Cotis
• in OECD Economic Outlook June 2007
• Why so ignorant?
• Static modelling (equilibrium-assuming
  dynamics)
• Ignore role of credit debt

9
Better dynamic, credit-aware modelling needed

• Minskys Financial Instability Hypothesis more
  realistic

Click here to download Vissim viewer program

• Click on the icon below to run this simulation
  after installing the Vissim Viewer

10
Better dynamic, credit-aware modelling needed

• Which gives more bang for buckrescuing bankers
  or debtors?

• Click on icons below to run this (after
  installing the Vissim Viewer)

11
Prognosis Remedies?

• Deleveraging-induced downturn inevitable
• Deleveraging outweighs government stimulus
• E.g. 1st Rudd stimulus A42bn (4 GDP)
• Aggregate private debt A2 trillion
• 5 deleveragingA100 billion cut in demand
• Cant solve debt-induced crisis with more debt
• Alternative policies
• Across-the-board debt reduction
• Redefine capital assets to reduce Ponzi behaviour
• Time-limited Shares (like bonds)
• House valuation on imputed rent
• Maximum secured mortgage debt say 10 times annual
  rental
• Or well be here again in 2070

???