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Irving Fisher’s Debt Deflation Theory and Its Relevance Today

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I’m sure readers have noticed that talking about the global economic downturn as a depression is suddenly respectable. A mere three months, use of that term would have gotten one branded as a alarmist (even Nouriel Roubini, who has a taste for drama, often used the code of “L shaped recession”).

As a result, economists and commentators are re-examining the Great Depression, particularly since some doubt that the officialdom has drawn the correct lessons from it.

One respected economist from that era whose work is often praised but seldom followed is Irving Fisher. In a VoxEU article, Enrique Mendoza argues in favor of Fisher’s debt deflation theory, and explains its policy implications. Fisher is appealing because he sees the unwinding of excessive leverage as the driving force of a depression, while most other theories see it as an outcome.

From VoxEU:
Economists read the literature about the Great Depression with deep intellectual curiosity and savour in particular the still ongoing debate about its causes and remedies. Keynesians argue that price and wage rigidities and a failure of aggregate demand were the main culprits for the biggest economic catastrophe recorded in modern history. Monetarists posit that the main culprit was a terrible mistake on the part of the monetary authority, because it allowed the supply of money to contract. The new generation of Neoclassical economists argue that serious policy mistakes on the “real side” of the economy, such as the deployment of major trade barriers, turned a cyclical downturn into the Great Depression, and that issues of price rigidities, demand failures, credit, or monetary policy are at best of second-order importance.

In a seminal 1933 article, Mr. Irving Fisher offered a very different and innovative view. He focused on the meltdown of financial markets, the devastating effects of a downward spiral connecting the deflation of assets and goods prices, the process of deleveraging by households and firms, and contraction of economic activity.

Until about eighteen months ago, this was just one more of many unsettled economic questions that academic economists love to dwell on, largely because we don’t have a lot of data on Great Depressions to test our theories and because intellectual arrogance prevented us from taking seriously 1990s meltdowns in emerging markets and the Nordic countries as harbingers of what could happen to the US. Today, as we go through the catastrophic process of Fisher’s debt-deflation mechanism, there is no doubt that Fisher was right and the rest are just stories. If anything, we are left wishing prices were rigid!
But declaring a winner in the Great Depression debate is unimportant. The critical issue is to use the diagnosis that Fisher offered in his article – and what we have learned about debt deflations since then – to guide policy making. In this climate of hiring gurus for an ever-growing number of “top” economist posts in the US government, I would be very happy if we could just hire Irving Fisher!

Here are the lessons I learned after reading Fisher’s piece again and reflecting on our current dilemmas from its perspective.
Lesson 1: Fiscal stimulus is a band-aid. We need – now and for the next two years –massive government spending to support the unemployed and prevent the implosion of state and local governments. Beyond that, spending will not stimulate anything, and it has nothing to do with the causes of the crisis or with putting an end to it. It is the strong pain killer that the economy needs for the infection that afflicts it, but it is just a pain killer, not a cure. Well-crafted tax adjustments can be useful, but only if targeted to address the deflationary pressures and/or the fragility of the financial system (see Lesson 2). By the same token, trade protection and other similarly “brilliant” ideas floating around need to be opposed. They will do nothing to attack the causes of the crisis, and they could make the recession deeper and more protracted.

Lesson 2: Deflation must be halted and reversed, and the credit system restarted. Today, as in the early 1930s, these two parts of the puzzle are tightly interrelated, as Fisher explained. Deflation will not stop if the collapse of the credit system is not contained, and the collapse of the credit system will not stop until the deflation of asset and goods prices is controlled. A trillion dollars of fiscal stimulus today will not avoid catastrophe if the financial stabilisation fails. Conversely, the sooner a credible, comprehensive, and effective financial stabilisation plan is implemented, the lower the actual cost of “true” fiscal support needed for the social safety net.

Being realistic, however, even if we had this ideal situation in place tomorrow, a major recession – unlike anything most Americans alive today have ever seen – is unavoidable. Catastrophe is here and we will not escape it. But even the 18-to-24-months catastrophe we are in is not the worst outcome. The worst outcome would be a full repeat of the Great Depression. The worst of the Great Depression was not so much the initial economic collapse, as dramatic as that was, but its persistence for several years. This is what we still have time to avoid and where our energy should be invested. The political spin about pushing for reforms and bailouts to “avert disaster” needs to be corrected, so that everyone’s expectations are not biased towards thinking that a trillion dollars of fiscal stimulus means back to business as usual. The emergency is real and present, but not to escape catastrophe. All the numbers we have about employment, production, world trade, the financial system, etc. show that we are already in a catastrophe. The emergency is to avoid the persistence of the stagnation that occurred during the Depression. The emergency is to prevent most of the next decade from looking like 2008.

Lesson 3: Prevention. We got into this mess because financial development advanced way ahead of not only regulators and government officials, but the actors in financial markets themselves, including the geniuses who created the innovative financial products that we have now come to know (and fear) by their acronyms – CDOs, MBSs, CMOs, and the greatest villain of all, CDSs!

Preventing the next debacle, however, requires careful thinking. Imposing regulations and controls that would return the financial system to its 1960s structure would be a major mistake. The challenge is to identify where things went very wrong and plug the deep holes that exist while preserving the enormous potential that the securitisation of financial assets has for enhancing efficiency and standards of living worldwide. A starting point is to recognise that government made two huge mistakes in (a) directing regulators to ignore products like CDSs, by pretending that simply by an act of law they could be declared not to be standard securities or a form of gambling (both of which they were!), and (b) instituting and enlarging the implicit government guarantee backing the fast expansion of mortgage giants Fannie Mae and Freddie Mac. Had the wisdom of people like Mrs. Brooksley Born prevailed in the late 1990s, the CDS market would have been at least supervised, if not regulated. This alone would have saved us enormous pain today, because the jump from the mid-billions problem that sub-prime mortgages were to the mid-trillions debacle we are suffering occurred largely due to the casino-like setup in which AIG and other financial companies conducted the CDS business.

So I end with the lesson that the master himself gave to conclude his article:

“Finally, I would emphasise the important corollary, of the debt-deflation theory, that great depressions are curable and preventable through reflation and stabilisation.”

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88 comments

  1. ndk

    Fisher’s original work, for the biblically minded. It’s very accessible to anyone who can understand Yves, much less her minions like Waldman.

    “Finally, I would emphasise the important corollary, of the debt-deflation theory, that great depressions are curable and preventable through reflation and stabilisation.”

    And here is where the master — a truly brilliant economist — is wrong. The policy prescriptions fail to reflate or stabilize, as Bernanke has already demonstrated. I’m working on a post to explain why: essentially, repeated use of monetary policy drives the natural real interest rate successively lower, to the point where it becomes negative. Once it’s negative, authorities are really powerless. Steve Irwin’s got one of the foundations I’ll use, but there are others, and a lot of conjecture.

    I believe the natural real interest rate is already negative today, though the current real interest rate is much higher. As such, credit(money and debt) must be destroyed before we can proceed, unless you harbor extreme faith in expectations targeting. This is all excluding as always a miraculous break of trade links and outbreak of inflation, which I view as unlikely.

    As has been stressed repeatedly, credit is not the independent variable. Credit is a deeply dependent variable, on real interest rates, equilibrium real interest rates, GDP growth, and other economic factors. We need to fix the independent variables, not bad assets per se.

    What will the effect of artificial credit growth be, i.e. quantitative easing? Who knows. My best guess is a rise in real interest rates and little benefit, like Japan. I have yet to see any compelling theoretical nor empirical evidence that it is a solution in most circumstances.

    Lesson 3: Prevention.

    I’m increasingly led to believe the culprits cited here — though virtually criminal instruments — are just lackeys. I think monetary policy was the true issue. Again, more later, when I finish my post.

  2. bg

    Oh god, here I go agreeing with ndk again.

    How can we cite Fisher without discussing Minsky? Can’t we see that the trend line will be re-established, but only after we undershoot after the overshoot?

    And all we can do is make it worse by creating false incentives. It may be a necessary paliative, but delaying the day of reckoning is not a cure.

    Also, I think Norielle’s “L shaped recession” is often suffixed with “as Japan experienced in the 90′s”. He has gone on record of stating that depression was unlikely unless the government screwed things up. (mighty big if)

  3. Yves Smith

    ndk,

    Waldman is not a “minon”, that is really unfair. He has his own blog and was gracious enough to guest post here when I was off the grid for a week plus.

  4. Dave

    @ndk … and Steve Keen isn’t Steve Irwin … though the similarities are many — both aussies, both croc-wrestling rogues in their respective fields; fortunately only one dead (well, so far – the black helicopter hasn’t arrived to dispatch Steve II as far as I know!) ;)

    Dave (an aussie)

  5. ndk

    Waldman is not a “minon”, that is really unfair. He has his own blog and was gracious enough to guest post here when I was off the grid for a week plus.

    I use the word with extreme affection for you both, and I really apologize if it came off wrong. I like using colorful words with tongue in cheek. I love Interfluidity and naked capitalism, two of the most insightful blogs around, and was referring only to his presence as one of your contributors.

    Oh god, here I go agreeing with ndk again.

    Heaven help us all. But Minsky’s observations — that lowered real interest rates encourage consumption at the expense of investment — are also critical to my rank, amateur hypothesis.

  6. ndk

    @ndk … and Steve Keen isn’t Steve Irwin … though the similarities are many — both aussies, both croc-wrestling rogues in their respective fields; fortunately only one dead (well, so far – the black helicopter hasn’t arrived to dispatch Steve II as far as I know!) ;)

    Also right, and my apologies again. My only defense is I was petting stingrays at the aquarium tonight. Thanks for the correction.

    The best thing about writing your own posts: you can edit and correct them when others point out such careless mistakes.

  7. Dave

    I don’t think Steve Keen would take umbrage at the comparison :)

    I can just imagine him now, lifting a deadly “Paulson” off the ground … “corr, look at this big fella … whoah … a deadly little sucker … the venom of a Paulson can kill over three hundred trillion dollars in a single strike”

    :P

  8. Anonymous

    Prevention. We got into this mess because financial development advanced way ahead of not only regulators and government officials, but the actors in financial markets themselves, including the geniuses who created the innovative financial products that we have now to know (and fear) by their acronyms – CDOs, MBSs, CMOs, and the greatest villain of all, CDSs!

    Prevention starts with sound money. The rest is useless litterature.

    Of course, when one brilliant student start reading Von Mises, one will at best end as a teacher in economics in the US hinterland.

    The Keneysian, monetarist stuff will open doors to even the dumbest economists. For some obvious reasons.

    Yves, it is about time you take time to include Austrian economics into the picture. I know that you did not study it at school. But you are definitely an open mind.

    Do not wait for the dollar to become a latin currency to polish your wunderbar German accent.

  9. Jojo

    February 10, 2009

    10 Things You Should and Should Not Do During Deflation
    by Robert Prechter

    The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.

    1) Should you invest in real estate?

    Short Answer: NO

    Long Answer: The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60 percent and you realize you’ve made a horrendous mistake, you can call your broker and get out (unless you’re a mutual fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.

    - Conquer the Crash, Chapter 16

    2) Should you prepare for a change in politics?

    Short Answer: YES

    Long Answer: At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to use force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property.
    You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.

    - Conquer the Crash, Chapter 27

    Link

    ===========================

  10. Anonymous

    Err…is this the same Irving Fisher who said in October 1929, a few days before the Market Crash, “Stock prices have reached what looks like a permanently high plateau”?

    If so, he strikes me as one of those “Idiot Savants” best left alone!

    Carl, Cyprus

  11. Yves Smith

    Yes, Fisher said that, and lost a ton of money in the Crash too. He then went and though very deeply about why he had been so wrong, which is where the debt deflation theory came from.

    Have any of the big name economists who failed to see our crash coming taken the view that their beliefs were seriously flawed and went and did a fundamental reassessment? Not to my knowledge.

  12. mmckinl

    This discourse begs the question: Is the current situation, though likely similar in scope the same as the Great Depression in its causes and manifestations?

    I think there are very important differences. The Great Depression though caused by a financial crisis, as ours, was a much simpler problem. All the assets needed to restart the economy were in place. This current crisis gives us a much more difficult set of problems.

    In the Great depression the goal was and should have been the recovery of the previous economic structure. I don’t believe we can return to our previous economic structure of 70% consumption through geometric debt accumulation … We not only have to halt the deflationary spiral but reengineer a new economy.

  13. Anonymous

    I’ll start at the end for those of you that would roll your eyes: someone, please help me understand why so few even among those who sharply criticize the orthodoxy are even willing to explore and discuss the issue of eliminating central banking as we know it today along with fractional reserve banking as the only real solution.

    We’ve had “better regulation” many times after crises and yet the devastating busts always recur, along with the same old analyses that never led to lasting solutions.

    All of the financial “innovations” (really workarounds to regulation) at least implicitly relied on a Fed backstop and were fueled by artificially low interest rates.

    I submit that as long as there is a central bank with unlimited authority to create money out of thin air combined with fractional reserve banking, such crises will recur, with varying frequency and magnitude but always with considerable destruction of genuine wealth.

    Of course, even without a central bank and fractional reserve banking, people can lend and borrow recklessly and that would be damaging, but it is highly unlikely to get out of control without such enablement.

    I understand the extreme reluctance on the part of those close to the action to even consider the fundamental changes – after all, the profit handsomely from the current, inherently corrupt system. How about everyone else? Anyone?

  14. FairEconomist

    In the Great depression the goal was and should have been the recovery of the previous economic structure.

    Not at all. Prior to the GD the economy was highly dependent on consumer credit and had an extraordinarily high inequality of income; in both respects surpassed in America only by, um, now. The economic structure installed after the GD was very different, with high equality and virtually no borrowing for consumption.

    I think our goal for the resolution of this crisis should be to repeat the reforms of the GD which produced the healthy postwar economy.

  15. mmckinl

    FairEconomist said…
    In the Great depression the goal was and should have been the recovery of the previous economic structure.

    Not at all. Prior to the GD the economy was highly dependent on consumer credit and had an extraordinarily high inequality of income; in both respects surpassed in America only by, um, now. The economic structure installed after the GD was very different, with high equality and virtually no borrowing for consumption.

    ~~~~

    I should have been clearer. When I said economic structure I meant the real economy sans the financial structure … Of course the financial structure had to change but did the industrial economy, the retail economy? The fact is that the Great Depression was in many ways much more about reforming the financial structure to reinvigorate the other sectors of the economy. Our current troubles have been ingrained in to other sectors as this debt binge has taken place over 25 years or so such that the economy we have now was built around these false premises.

  16. Anonymous

    Mike SHedlock was the first to call for an L-shaped recession. I don’t know why Roubini gets all the hype (except that he loves to hype himself all over TV. I don’t know any other economist who is so devoted to getting himself in the media). Roubini was calling for a U-shaped recession last year when Mish made the case for L-shaped

  17. Anonymous

    By the way, Gary North makes the case that there were only three economists of note in the 20th century:

    Fisher, Keynes and Mises

    Everyone else, as he says, was a spear carrier.

    I totally agree with that. Friedman was a spear carrier for Irving Fisher. Krugman is a spear carrier for Keynes.

    There aren’t any prominent spear carriers for Mises. Well, prominent in the sense that the establishment pays them any heed. The establishment HATES Austrians because they constantly tell politicians what they cannot achieve.

  18. FairEconomist

    I do think the real economy has to change. Less housing, less conspicuous consumption. More – well, we don’t actually know what we want more of, and I think that is the big force behind long-term economic trouble in this kind of depression. People are unemployed because we don’t know how to use them usefully.

    Part of the answer is likely leisure, but I don’t think that’s all of it. One thing I personally believe we need more of is healthcare, especially preventative health care, and that’s a big area of ignorance. We have limited knowledge about to improve long-term health and even more limited knowledge on how to get people to do things to improve their health.

  19. Anonymous

    @anon,2:43

    Could not agree with you more, vested interests have a death grip on their idealogical baby and wont let go, humans that spend a life time of effort will not relinquish their ideology till it kills them or us. Is this mess the best the human race can do. We live in a physical Universe not one made of imaginary investment options to sucker the ill informed for the benefit of a few bugger thy fellow human types.

    Skippy

  20. cap vandal

    Actually, I have become a fan of Fisher from an earlier post on this site. I would advise everyone to just read his original stuff — The Debt-Deflation Theory of Great Depressions– plus the primary source has a flavor of realism that comes from living in the middle of it. It isn’t a theoretical outcome, it was what you saw when you woke up in the morning,

    I posted some excerpts but the original is better.

    The central idea is that debt liquidation causes deflation which then increases real debt.

    “The more debtors pay, the more they owe”
    This is important for those that think that there is some value bedrock for assets. The correct price is a function of general economy, which is unknowable.

    To get a taste of just how bad things were, I would also recommend that people read his article on stamp script. The net effect is to get a sense of the importance of maintaining as much aggregate demand as possible, as well as doubling down on fiscal stimulus, etc. There will be more then enough creative destruction, regardless of what happens. And the idea of punishment seems secondary to getting things moving They had a show trial of Andrew Mellon for tax evasion (he was acquitted) in the second Roosevelt term, just because he was the symbol of the prior order.

    I’d also recommend the 1940, second edition of Graham’s Security Analysis. Almost any primary source has an edge and sense of realism that gets quickly lost in the retelling.

  21. Anonymous

    Yves, I agree that many economists have not seen this coming and have not re-examined their beliefs (or even admitted that they were wrong); I suspect they have not lost a ton of money yet.

    In my opinion, the one economist who principally foretold of this Depression and wrote about it in various books, was the late Bob Beckman, who died in December, 2007.

    Carl, Cyprus

  22. Richard Kline

    The point of fiscal stimulus, putatively, is to support and ideally to augment demand. I do not believe, contra VoxEU in point two, that demand and asset prices are essentially uncorrelated. They are not correlated 1:1, and I’m not clear that their relationship can even be adequately modeled. Nor is it by any means proven—very much not—that fiscal stimulus will translate effectively into demand, though there will surely be some impetus resulting. Thus, the opposition to fiscal stimulus as ‘pointless’ expressed in this article strikes me as, at least, debatable. If we, somehow, preserve asset prices while demand craters, than the affluent will come sailing through while those who work for a living do a face plant; that’s not my idea of a ‘desirable outcome.’ There is a place for supporting demand in the response to this _financially induced_ crisis. We will of course bungle it, but.

    Regarding point three’s double prong, I find the VoxEU argument tendentious. Completely. There is a) NO evidence that CDSs grossly augmented the bubble, nor provoked its bursting. I am not advocating CDSs; their instability is insane, and reform is needed. In the one instance we have seen of settlement of a big CDS problem, Lehman’s, they largely netted out. CDSs are a problem, but they are not a driver of our present crisis. And then b) Fannie and Freddy did not, DID NOT create this bubble: their lending was among the most responsible, although given the volume they surely helped pump prices due to the ready availability of loan volume and a firm floor under prices that they represented. To the extent to which this crisis was a ‘real estate’ problem, the true rogues were the _other_ securitizers, you know, the private Wall Street shops like Merrill. Those were the folks that would securitize whale shit because rubes in Slobovia would buy it, loosely speaking. For the VoxEU folks to propose their a) and b) as the ‘major problems’ needing solution, there is a serious, not to say suspicious, bias in their perspective.

    The real cause of the bubble was the absolutely unconstrained creation of credit; in US banks; in Irish and UK banks; in the shadow banks; in any skank with a modem upon whom St. Alan the Greenspender smiled. And why, I wonder, don’t the authors of this VoxEU piece (generally a quality forum for economic critisism and data) speak to _that_?

  23. mmckinl

    FairEconomist said…
    I do think the real economy has to change. Less housing, less conspicuous consumption. More – well, we don’t actually know what we want more of, and I think that is the big force behind long-term economic trouble in this kind of depression. People are unemployed because we don’t know how to use them usefully.

    ~~~~

    Therein lies our problem. Productivity gains have all gone to the top. Even with the productivity gains since the 40 hour workweek Americans are working longer and it now takes two incomes to make a living.

    We need a new structure for our economy. It has been restructured around the 70% consumption model for over two decades. A huge number of jobs related to retail and leisure are gone for good. In the Great Depression the problem was a lack of demand to get the ball rolling. The jobs would follow. There is no stimulating our way back to a 70% consumption economy. We need a different model.

  24. Anonymous

    Richard Kline said “The real cause of the bubble was the absolutely unconstrained creation of credit …[snip]… And why, I wonder, don’t the authors of this VoxEU piece (generally a quality forum for economic critisism and data) speak to _that_?”

    Because that would require exploring the heresy of eliminating fractional reserve banking/central banking as we know it. That’s what I alluded to above.

    Now, as I asked, how do you explain the silence on that subject from most of those who have in other respects challenged the orthodoxy?

    @anon 2:43

  25. Anonymous

    @ all above try the truth, truth of advertising, truth of commitment, truth of of the rule of law for all. The banks and the uberment has show us all to be bad relationship partners, time for a separation or divorce court, claw-back social license now, until they show real commitment to the principles of the Constitution.

    Skippy

  26. Richard Kline

    To contradict myself (oh why not? I contradict everyone else), it is bootless to talk of _the_ cause of the current crisis, or of the Great Depression, or even of depressions, economic. Yes, there can be situations where there is a single overriding cause; we should be so lucky, but no. Typically, there are multiple causes, but furthermore their effects are not simply additive on a weighted basis, as one would often see in the weak chat which passes for economic theory, as they are mutually modifying multipliers. Causation in complex systems is a distributed function; that is the meaning of emergence. The reason why it’s hard to get a fix on ‘the solution to the crisis’ is that in fact the economy from whence said crisis sprang was an emergent property. [I know few followed that, but it had to be said.]

    Bubbles burst; at least all the ones we have studied do, though hypothetically once could have a bubblet which was stifled in its infancy. Excessive credit creation was a major contributory driver to the bubble. Cumulative stimulus (artificially low interest rates) was a contributory driver. Excessive consumption was a contributory driver. Decline of primary industrial production in the UK and US leading to GDP supported by speculation was a major contributory driver. Deliberate castration of regulatory restraints was a contributory driver. CDS pyramids making possible an extremely large shadow banking component was a contributory driver.

    That enough for y’all? Now the quiz. Which driver enhanced which? Which do we fix first to make the rest better natured? Hand in your answer sheets in, oh, ten years. Answers judged to be correct will receive a Bank of Sweden prize. No one knows what a correct answer is in the context just stated, but we’ll make one up as we go along, as always.

    The above is _not_ an excuse to do nothing to ameliorate the severity and speed of this crisis’s impact. But no one should have great confidence that ‘X is the solution.’ And we can’t afford (literally) to try every solution, so we are going to have to choose. I choose that we excuse the banksters from further occupancy of seats in the life boat, and that we put out fishing lines while we pull hard for the nearest shore.

  27. Anonymous

    @ Richard Kline,

    Well said, but to start the healing, truth would go a long way, in fixing the confidence issue, which is the bonding agent in this fast drying global glue of doubt. Many will have to be forthcoming of their crimes/human frailty’s and lean into the plate and take in on the head for the team.

    Skippy

  28. Richard Kline

    So FairEconomist at 2:58, yes, you describe it exactly right. The US deleveraged, excessive borrowing was wiped, inequality reduced ‘by natural selection,’ and a generation which saved cumulated the modest but real asset bases which gave the next two generations ann enviably comfortable life by any world-historical standard. Of course, we had a broad and expanding industrial base at the time, with huge innovation leads in many key areas relative to the rest of the world (think efficient gasoline cracking, and the first useful transistor as a fer instance). That’s the real problem now. Repeating the social response to the Depression of the 30s _is_ the best way to go, but we are highly unlikely to recapitulate a similarly favorable optimum in doing so. No one wants to hear this, but that is my view.

    And I agree as well with your remark in the subsequent comment that we don’t know what to do with all these folks in our present labor force. That is the nut of the problem, is it not? We do not have ‘good paying jobs’ for all of them, or a good idea how to alter our economy to produce the same, even were it possible. We can either except a less cushy, though still extremely comfortable way of life, have a ‘season of genius’ when we come up with A Great Something which we can produce which will yield wealth, or we can fight over a smaller pie. Most folks mosttimes fight over a smaller pie. I am really, really hoping that we don’t go there.

    Health care? The best thing we could do is to teach folks to monitor their own health. I could see an industry in doing that, but I can’t see American’s doing that, and I don’t see the American medical system facilitating competition in that way.

    We could completely reinvent structural construction in this country. We are idiots for living in ticky-tacky alder post and gypsum board squats. we could build with rammed earth and a little structural steel buildings which would last three hundred years, be fireproof, and energy efficient. I don’t think anyone in this country is that smart.

    We could invest in the design of our cities in a hundred ways, but existing powers don’t make money on that, and will stand in the way.

    We could legalize drugs, make the best of them and enjoy the ride, and build a for-profit recovery industry to take up the back slack. (I’m just sayin’.)

    But we won’t do any of these things, methinks, because we are not in a moment when the American people are capable, because not desirous, of thinking big. Everyone I watch in the media is longing to ‘get back to the way things were before.’ That is the problem. Which is why we will try to bolster an unstable context, and fail in that attempt. Not a very inviting prospect, but it will make nifty history for enquiring minds a millennia on.

  29. Richard Kline

    So Skippy at 5:21, I’m with you on that, brother, and I’d quote Lear again, but I did that once and I don’t like to repeat myself. : )

  30. Anonymous

    two dominant factors, namely, over indebtedness to start with and deflation following soon after;… where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two.” (Irving Fisher, 1933, p. 341)

    Supply side Bubble Economics. Bad when economic policy fails to act counter cyclically an worse when policy works procyclically. Simple really, in hindsight.

  31. Anonymous

    Richard Kline,

    thanks for reminding me that we are dealing with a complex system. Tends to be forgotten trying to follow and weigh all the different narratives.
    Jones

  32. purple

    There are plenty of jobs and activities that people can do that are useful and important. But are they profitable ? This is a profit oriented system.

    Nuns do important work. So do people who run homeless shelters. Their activities aren’t especially profitable.

    There is a fundamental breakdown between what is profitable for a private interest and what is actually valuable for society. A government run by bankers isn’t going to fill that gap.

  33. Greg

    For fair economist @3:31,

    I totally agree with your analysis.

    We do need a focus on health and how to stay healthy. With all the poor lifestyle choices being made there seems to be a market for personal trainers and the sort. Your comment about leisure activities, ties right in with this I believe. We have been running the rat race for too long and we’re fat, stressed out, suffering from depression and addicted to WATCHING other people play things while we drink/smoke/gamble/feud. Lets get off our butts and do stuff. A whole bunch of “Biggest Loser” style motivational coaches would improve our countries well being way more than 4 trillion worth of credit access.

  34. Anonymous

    I wonder how the aggregate numbers look?
    Considerable debt has been destroyed now by default; much more will be unwound by deleveraging as the major US (former) investment banks as they must meet new leverage standards. However, this is partly offset by new government-instituted debt in the form of ‘stimuli’.
    Are we going up or down, on net, and how much?

  35. Anonymous

    Yes! Code Words.

    • “L shaped recession = depression.
    • Great depression = great corruption.
    • Respected economist = someone who speaks in code words.
    • Unwinding of excessive leverage = resetting the Ponzi scam.
    • Economic ‘debate’ about its causes and remedies = deflective head f–k by gullible, fearful, or purposefully disingenuous sell out losers.
    • Keynesians, Monetarists, Neoclassical economists = class names given to the gullible or sell out losers who engage in the avoidance ‘debate’ and thereby provide ‘theoretical’ deflection and obfuscation for the corruption.
    • Academic economists = Ha, ha, ha – really funny! Crumbunist sell outs in tenure shackles.
    • Devising remedial financial plans for obviously corrupt government = gross f—–g stupidity.
    • Interest = immoral form of slavery.
    • Fractional reserve banking = slave market clearing house.
    • Rule of law = Corrupt scam owned by the wealthy corporate elite.
    • US Electoral system = Corrupt scam where the gullible slaves voluntarily validate and empower their masters, i.e., the political puppets of the wealthy corporate elite.
    • Scamerican = Fearful, gullible, crumbunist slave.
    • Injustice = Madoff still breathing.
    • Deception = the strongest political force on the planet.

    i on the ball patriot

  36. Anonymous

    Just wondering if anyone could tell what would happen if FED lowered borrowing rates below Zero percent.As in pay a Half or Quarter percent to the borrower?

  37. "Kingfish" Slaney Black

    Sure, Fisher is great and all, but saying “recessions are caused by debt deleveraging” is like Krugman saying “recessions are caused when people decide not to spend and to hold cash.”

    Yeah, but why? Why the debt deleveraging, why the holding onto cash?

    Long story short: the middle and working classes were progressively squeezed to where they couldn’t pay debts or afford new consumer goods (Keynsian) plus the concentrated wealth at the top made shitty investment decisions that didn’t produce hoped-for returns (Austrian), because there weren’t enough of them to constitute a truly competitive market (Smith) and also because there wasn’t any buying power left to produce returns (Keynes again).

  38. Anonymous

    Being an optimist, I don´t see the world repeating something like the Great Depression.
    Some believe that the political mess of the thirties was caused by it, but in fact, the situation was already dreadful before 1929. Fascism in Italy (Mussolini in power since 1922), fascism in Japan,the nazi party as the second or third political force in Germany, Stalin in the URSS, dictatorship in Spain, political unrest in France, ongoing wars all arounf the world, from Yugoslavia to Mexico….
    All of this must be have been bad for business.

  39. Dave Raithel

    Like many of the above commentators. I’ve read Fischer and Keynes (well, mostly secondary sources, I’ll confess) as being more complementary than contradictory. I can appreciate that at some point the inflation of stimulus drives down real interest rates, which devalues assets, but that’s why I heartily concur with Richard Kline’s observation “it’s hard to get a fix on ‘the solution to the crisis’ [because]the economy from whence said crisis sprang was an emergent property”. Still, policy prescriptions need to pick out certain things to do, hopefully not at cross-purpose; and yet people who look at the same set of contributing factors as the place for efficacious policy will offer different prescriptions.

    If I’ve understood Steve Keen correctly, he goes from his Fischer-Minsky analysis to the repudiation of debt (which is not what I take from Mendoza). That sounds like the Jubilee Talk floating around a few weeks ago – or the “j” jubilee talk I thought I got from Tyler Durden (banks write off what’s owed them, the Fed writes of what the banks owe it …) The fix is going to require concrete decisions about who benefits, and who takes the hits (a variant of Martin Wolf’s take, with all proposals so far found wanting.) The policy proposals are as much moral – matters of distributive justice – as they are causal.

  40. N.Faibis

    Why nobody’s talking about Irivng Fisher’s 100% Money written in 1935. All the solutions to avoid a great depression are in this book. Reflation means nothing. Our financial system is absolutely absurd. A fisherian revolution is needed.

  41. Anonymous

    Anonymous 8:48 asked; “Just wondering if anyone could tell what would happen if FED lowered borrowing rates below Zero percent.As in pay a Half or Quarter percent to the borrower?”

    Yes, the Tom Waits song, “Step Right Up”, would need a few new lines …

    Lyrics to Step Right Up :

    Step right up, step right up, step right up,
    Everyone’s a winner, bargains galore
    That’s right, you too can be the proud owner
    Of the quality goes in before the name goes on
    One-tenth of a dollar, one-tenth of a dollar, we got service after sales
    You need perfume? we got perfume, how ’bout an engagement ring?
    Something for the little lady, something for the little lady,
    Something for the little lady, hmm
    Three for a dollar
    We got a year-end clearance, we got a white sale
    And a smoke-damaged furniture, you can drive it away today
    Act now, act now, and receive as our gift, our gift to you
    They come in all colors, one size fits all
    No muss, no fuss, no spills, you’re tired of kitchen drudgery
    Everything must go, going out of business, going out of business
    Going out of business sale
    Fifty percent off original retail price, skip the middle man
    Don’t settle for less
    How do we do it? how do we do it? volume, volume, turn up the volume
    Now you’ve heard it advertised, don’t hesitate
    Don’t be caught with your drawers down,
    Don’t be caught with your drawers down
    You can step right up, step right up

    That’s right, it filets, it chops, it dices, slices,
    Never stops, lasts a lifetime, mows your lawn
    And it mows your lawn and it picks up the kids from school
    It gets rid of unwanted facial hair, it gets rid of embarrassing age spots,
    It delivers a pizza, and it lengthens, and it strengthens
    And it finds that slipper that’s been at large
    under the chaise lounge for several weeks
    And it plays a mean Rhythm Master,
    It makes excuses for unwanted lipstick on your collar
    And it’s only a dollar, step right up, it’s only a dollar, step right up

    ‘Cause it forges your signature
    If not completely satisfied, mail back unused portion of product
    For complete refund of price of purchase
    Step right up
    Please allow thirty days for delivery, don’t be fooled by cheap imitations
    You can live in it, live in it, laugh in it, love in it
    Swim in it, sleep in it,
    Live in it, swim in it, laugh in it, love in it
    Removes embarrassing stains from contour sheets, that’s right
    And it entertains visiting relatives, it turns a sandwich into a banquet
    Tired of being the life of the party?
    Change your shorts, change your life, change your life
    Change into a nine-year-old Hindu boy, get rid of your wife,
    And it walks your dog, and it doubles on sax
    Doubles on sax, you can jump back Jack, see you later alligator
    See you later alligator
    And it steals your car
    It gets rid of your gambling debts, it quits smoking
    It’s a friend, and it’s a companion,
    And it’s the only product you will ever need
    Follow these easy assembly instructions it never needs ironing
    Well it takes weights off hips, bust, thighs, chin, midriff,
    Gives you dandruff, and it finds you a job, it is a job
    And it strips the phone company free take ten for five exchange,
    And it gives you denture breath
    And you know it’s a friend, and it’s a companion
    And it gets rid of your traveler’s checks
    It’s new, it’s improved, it’s old-fashioned
    Well it takes care of business, never needs winding,
    Never needs winding, never needs winding
    Gets rid of blackheads, the heartbreak of psoriasis,
    Christ, you don’t know the meaning of heartbreak, buddy,
    C’mon, c’mon, c’mon, c’mon
    ‘Cause it’s effective, it’s defective, it creates household odors,
    It disinfects, it sanitizes for your protection
    It gives you an erection, it wins the election
    Why put up with painful corns any longer?
    It’s a redeemable coupon, no obligation, no salesman will visit your home
    We got a jackpot, jackpot, jackpot, prizes, prizes, prizes, all work guaranteed
    How do we do it, how do we do it, how do we do it, how do we do it
    We need your business, we’re going out of business
    We’ll give you the business
    Get on the business end of our going-out-of-business sale
    Receive our free brochure, free brochure
    Read the easy-to-follow assembly instructions, batteries not included
    Send before midnight tomorrow, terms available,
    Step right up, step right up, step right up
    You got it buddy: the large print giveth, and the small print taketh away
    Step right up, you can step right up, you can step right up
    C’mon step right up
    (Get away from me kid, you bother me…)
    Step right up, step right up, step right up, c’mon, c’mon, c’mon, c’mon, c’mon
    Step right up, you can step right up, c’mon and step right up,
    C’mon and step right up
    Urgent
    Act now
    Free money at the FED
    Pay till your dead

    ———–
    Wake up and smell the deception, its the strongest political force on the planet.

    i on the ball patriot

  42. joebhed

    Thanks for raising Fisher’s debt-deflation theory to the discussion of today’s economic conflagration.

    The dialogue shows that a lot of non-box-thinkers are readers here.

    I find a different, later-developed theory of Fisher more relevant to today’s financial dilemma.
    In reading his Hemphill-forwarded “100% Money”,
    Fisher sets the following goals:

    ‘Designed to keep checking banks 100% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt’.

    In his book, Skull-and-Boneser Fisher endorsed the so-called Chicago Plan put forward by leading economists at the University of Chicago.

    The Chicago Plan included 100 percent bank reserves, and Fisher endorsed it because he believed the system in place before 1935 had been far too unstable.

    The Chicago Plan.
    Greenbacks.
    NOW.

  43. Andrew Bissell

    “Finally, I would emphasise the important corollary, of the debt-deflation theory, that great depressions are curable and preventable through reflation and stabilisation.”

    Sigh. It is becoming truly amazing to watch people so clearly diagnose the causes of the crisis (credit expansion, failure of centralized government regulation), and then conclude the solution is largely more of the same (BETTER MANAGED credit expansion, SMARTER AND MORE VIGOROUS centralized government regulation).

    Yves is not going to give Austrian economics any kind of audience, because her ideas of what constitutes serious economics are being passed through a “can’t-be-libertarian” filter. The only time Austrian-style ideas get any hearing here is if they’re passed through guys who reach non-libertarian policy conclusions like Steve Keen.

    Never mind if Robert Prechter’s been warning of deflation and the unwinding of credit-driven speculation for a decade now; if the prescribed remedy is less government regulatory, economic, and monetary power, he certainly must be ignored.

  44. Markel

    Yves, interesting read as always. But I’m confused a bit. None of these prescriptions are in any way outside the mainstream of current discussions right now. Yes, there’s a blooming good chance that real remedies will be gelded by entrenched interests. But that is a lesser hill to climb than introducing completely novel ideas to an incredulous audience. Isn’t that a glimmer of hope?

  45. Andrew Bissell

    You know, since the answer is *always* to get credit reflation going again, maybe what we really need is a government agency that can put guns to bank presidents’ heads to make them lend, and put guns to consumers’ heads to make them borrow. It will usher in an era of UNENDING prosperity!

    Actually, I expect we’ll be seeing measures very similar to this emanating from the Fed fairly soon … deposit taxes, two-tiered dollar regime, and the like.

  46. Richard B

    Here’s a thought. Have the Treasury use the first trillion to pay off the nation’s outstanding credit card debt. The malls would be packed the next day!

  47. SocialismSucks

    I knew I would be able to get to the bottom of this thread without seeing a mention of the great Hayek, the man who correctly predicted the 1929 Crash.

    But, yes, bow down to Fisher, the man who couldn’t see The Crash coming until it hit him in the head like a sledgehammer.

  48. wraft

    Unless I’m mistaken, Keen’s cyclic model shows that debt deflation is caused by lack of banker reinvestment following a shock. As a result, even credit worthy firms are not able to get credit.

    Another idea of Fisher’s I haven’t seen here is the issuance of negative interest scrip. If the government were to issue copious amounts of this depreciating scrip, it would be spent in the real economy rather than be hoarded by the banks.

    credit card rebellion (with music)

  49. FairEconomist

    @Richard_Kline:

    Excellent points about VoxEU’s prescriptions being secondary for CDS and downright wrong about Fannie/Freddie. I was so taken with their clear exposition of Fisher’s debt deflation (which I think is the core of the problem we face now) that I didn’t notice that.

    I think debt deflation is the core not in the sense of being the ultimate cause but in the sense of making an inescapable depression Great. The depression is caused by bad debts and the need to reorient the economy after a long period of misallocation due to mispricing. Debt deflation is a feedback cycle that converts a depression into a monster.

    Prior to the Great Depression, depressions started with shattering Panics where huge sectors of the economy were obliterated in very short periods. The financial crises typically lasted only a month or so. There just wasn’t much time for debt deflation to work.

    I think what happened in the Great Depression was that the government, and the financial sector, intervened enough to prevent a Panic, but not enough to cure the debt deflation. So the debt deflation ground on and on, grinding us into penury.

    Unfortunately I think we’re following the same path now. The shattering panic was successfully averted; but we still have untold trillions in assorted bad debt still sitting around and we’re seeing the debt deflation cycle where bankruptcies cause real losses causing deleveraging causing bankruptcies and so on and so on. One particular effect of the delay that’s setting my teeth on edge is companies going out of business because they can’t afford the backbreaking rents property owners are charging to pay their mortgage. In two years or so those rents are either coming down or going to be inflated away so that’s pure loss; but the business is being wiped now with all the collateral damage.

  50. reason

    Richard Kline,
    what brilliant commentary.

    ndk
    I’m interested in somebody proving that monetary policy is to blame for “low equlibrium real interest rate(s)”.
    Remarks
    a. You used interest rate in the singular which I don’t understand.
    b. I’m not sure that I believe that “equilibrium” is a useful or well defined concept.
    So I’m not sure I even understand the concept you are trying to express.

    I know that Minsky believed that risk premiums would fall during a long period without recessions. I think that it is important effect, but surely this is not the same thing that you are talking about.

    My own view is that the shock to perceived balance sheets cannot be repaired quickly enough to avoid a severe contraction, and that even massive stimulation is only a palliative. And the recovery must as mentioned by many, look different from the economy that proceeded the crash. I think it must be a good idea to increase the amount of base money and decrease the amount of credit. But how to distribute it? That really is the question.

    As for the observed severe disequilibrium that proceeded it, I can see several things we could look at.
    1. Anti-speculation devices – in particular Tobin taxes (or other increases in transaction costs) and constraints on hot flows (e.g. compulsory fixed term deposits accompanying large foreign flows).
    2. International financial reform to force surplus countries to actively seek balance by stimulating domestic consumption.
    (As suggested by Keynes in the 1930s).
    3. We should think about what a toxic mix limited liability (and agency problems are a form of limited liability) and high leverage is and how we could go about prevented. Maybe leverage over x% should be restricted to partnerships?
    3. Shock-horror – redistribution (I’m a basic income person myself.)
    P.S. (re point 1) I know at least one commentry (in the Melbourne Age) suggested that the culprit is always in the end a real estate bubble. In Germany, I know I get annoyed about the high transaction costs of real estate transactions there. But – Germany is one country that didn’t have a real estate bubble. The real estate market there is very illiquid. Maybe that is not such a bad thing. (They also don’t allow people to just walk away from negative equity mortgages.)

    As for the fractional reserve banking and the federal reserve are the source of all our problems crew … sorry they should read more history. And I will believe in Austrian economics when they mix in the hurly-burly of empirical testing. For their supporters to accuse other economic schools of blind adherance to ideology is absurd in the extreme. How can we choose between alternative ideologies – through empiricism – how else?

    Sorry for the long post, but this is a very interesting thread.

  51. RPB

    Lesson #4

    Government influence into the private mortgage market is disastrous and should be avoided. Fannie and Freddie should be dramatically shrunk to reflect historical rates of home ownership. No more of these ideologically driven housing experiments that derive data from unexplained correlation; not causality.

    Lesson #5

    Our elected officials need a serious, month long education course each year on development in the financial industry. They should be educated on how modern finance and the modern economy works. They should be exposed to Keynesian views, Neo-Classical views and Austrian views. Congress’ utter stupidity throughout this entire ordeal have been frightening.

    Lesson #6

    Change the way in which lobbying can happen. Force all candidates for federal office to use ONLY government money in their campaigns. Perhaps this may diminish UNDUE influence on their policy decisions from the unions, the Israelis, the banks, the insurance companies, the mortgage brokers, the farmers, etc. It is time we ban these special interests from participating in our government. It is absolutely ridiculous that we allow such manipulation of our elected government. Special interest influence is disgusting and has influenced our government to consider their interests over the voters.

  52. FairEconomist

    Health care? The best thing we could do is to teach folks to monitor their own health. I could see an industry in doing that, but I can’t see American’s doing that, and I don’t see the American medical system facilitating competition in that way.

    I agree the current system isn’t set up for that. The killer problem is that the benefits from preventative medicine mostly have benefits decades down the line. Setting up incentives is a tough problem. It’s certainly not possible via private insurance.

    I agree that *good* construction and reworking our urban areas for long-term functionality (the cheap internal combustion engine is not long for this world) are good ideas. And frankly, designing a system where people can indulge in recreational drugs with minimal health and societal consequences is a great goal. A lot of people really, really, want to use and there are ways for them to do so without much harm to them and to the rest of us. You couldn’t really ask for a better economic driver for anti-depressionary employment; high demand, low capital requirements, a severely underserved market, and knocking out the biggest pillar of organized crime.

    But we won’t do any of these things, methinks, because we are not in a moment when the American people are capable, because not desirous, of thinking big.

    That may be the real-world force being reflected financially in debt deflation. Right now, when we’ve learned that our prior system for running the economy were badly flawed, is the time we most need to be daring, brave, bold, and foresighted – to think of ways to Make Things Better and make them happen. But the very economic stress that tells us we need this make us fearful and short-sighted: ill-suited for the tasks we face. Except, it seems, psycho me – after getting really depressed this fall at the loss of the cheery world of the 90′s, I am now seeing the legions of people looking for something to do and the willingness to change created by the crisis as a real opportunity to Make Things Better, thinking about how to use it, and feeling hopeful about the future – not the next few years, but down the line.

  53. David Herr

    Preventing deflation and restarting inflation is impossible with private debt approaching 300% of GDP and total debt approaching 350% of GDP. That debt has to be reduced, through savings and pay-down, and, for those who cannot hope to repay what they have borrowed, default and bankruptcy. Only when total debt gets down to 150-200% of GDP, will recovery become possible. That is why willy-nilly increases in public debt make the problem worse. We should limit new public debt to the cost of FDIC depositor bailouts for insolvent banks ($3-4 trillion), and pay for that increase in public debt by CUTTING other expenditures.

  54. Andrew Bissell

    Change the way in which lobbying can happen. Force all candidates for federal office to use ONLY government money in their campaigns. Perhaps this may diminish UNDUE influence on their policy decisions from the unions, the Israelis, the banks, the insurance companies, the mortgage brokers, the farmers, etc. It is time we ban these special interests from participating in our government. It is absolutely ridiculous that we allow such manipulation of our elected government. Special interest influence is disgusting and has influenced our government to consider their interests over the voters.

    Better yet, let’s just repeal the whole “petitioning for a redress of grievances” Amendment entirely. Our elected officials would make much better decisions if only we could completely insulate it from any outside influences.

  55. Anonymous

    @RPB:”Government influence into the private mortgage market is disastrous and should be avoided.”

    this will not prevent housing bubbles

  56. chasd00

    I’ve been reading this blog for a while and feel rather unqualified to make a comment (I’m a software engineer) but one thing I’ve realized is that there is nothing like a conservation of wealth law in economics. Money and wealth can be created and destroyed at will. I believe that one fact will always make economics an imprecise field at best and inaccurate over any length of time. I don’t envy you all heh.

    With respect to the current issues, if i had my way i would insure state and local governments like in Lesson 1, bump up unemployment programs to get ready for the job losses, and then let the cards fall where they may and allow a new equilibrium to be reached.

    btw, the ferocity at which economists defend their theories reminds me of the database administrator lot. Hell hath no fury like a DBA defending their system of choice.

  57. FairEconomist

    Preventing deflation and restarting inflation is impossible with private debt approaching 300% of GDP and total debt approaching 350% of GDP.

    Do you honestly think that if Bernanke printed 40 trillion and bought every treasury, mortgage, car loan, and corporate bond in the country we wouldn’t see inflation? You can argue over how much is needed (I think 1 hundredth of that would suffice for measurable inflation) but if Bernanke really wants inflation, we’ll get it.

  58. ndk

    I’m interested in somebody proving that monetary policy is to blame for “low equlibrium real interest rate(s)”.
    Remarks
    a. You used interest rate in the singular which I don’t understand.
    b. I’m not sure that I believe that “equilibrium” is a useful or well defined concept.
    So I’m not sure I even understand the concept you are trying to express.

    reason, the equilibrium real interest rate in question here refers to the policy rate set by the Fed. The second point is quite valid, and the concept has gone through a thousand re-definitions from Wicksell through today. There’s definitely some “something” there, though. Here’s a great backgrounder given by Ferguson.

    I know that Minsky believed that risk premiums would fall during a long period without recessions. I think that it is important effect, but surely this is not the same thing that you are talking about.

    I can’t find the original document, so I may be misattributing it. The basic relationship is expressed here by Roubini. Since 1982, we’ve seen a consistent trend of decline in savings, real interest rates, and non-residential investment to GDP, with a relative increase in consumption.

  59. Cleanthes

    Man shall be framed for war and woman for the entertainment of the warrior. All else is folly.
    The great moderation in violence preceding World War I set up the conditions for the great bloodletting. The idea that war was to be avoided at all costs made possible the rise of dictators, economic depression, and World War II.
    The Great Depression was caused by the need for another war.
    Such applies a fortiori to today. We will have economic collapse until world war results. Hey, presto, unemployment problems go away.

  60. BondsOfSteel

    Hmm. Could we summarize by saying that our current problem would be solved if housing prices started rising with inflation again? (Or at least stopped declining?)

    Doesn’t seem very workiable.

  61. Mike Sankowski

    Hi All,

    You all must read and understand Warren Moslers soft currency economics. This discussion is not new or even unique, and his idea of tax driven money and that the government only creates money through deficit spending is crucial to understanding what we need to do.

    Steve Keen only explains the horizontal, and I think he his work is cutting edge. 20 years from today, they are going to be talking about his model, it is that good. But he does not leave any room for Big government, the vertical component of money creation. I think you can expand the model easily to account for this part of the money supply.

    I did not realize that Fisher recommended 100% printing of money in debt deflation situations. This is probably the only way to get out of this crisis, and I hope we start spending without borrowing very soon.

    Richard,

    You and Steve over at interfluidity are talking about the same issue through a different lens. It is a great idea – I had never even considered it before.

    No matter what we do, no matter how much we spend, it will take time for this labor to move to its new tasks, and our economy to move to making the new things that need to be made. This process will be painful no matter what we do, and our only hope is to reduce this pain in ways that we can. We need to recognize this and minimize human suffering.

  62. Anonymous

    As for the fractional reserve banking and the federal reserve are the source of all our problems crew … sorry they should read more history. And I will believe in Austrian economics when they mix in the hurly-burly of empirical testing. For their supporters to accuse other economic schools of blind adherance to ideology is absurd in the extreme. How can we choose between alternative ideologies – through empiricism – how else?

    Amen.

  63. Don

    Since October, I have been for two policies:

    1 ) A version of the Swedish Plan
    2 ) Quantitative Easing

    These policies were based on my reading of Fisher. Lehman issued in the first phase of Debt-Deflation. I called it a Calling Run so that it would connote a bank run, which it is very much like. It results in people calling in bonds, etc., for cash, and then putting that cash in safe investments. This is the Flight to Safety. It is more than just a problem of counterparty risk because people start moving their money even if they aren’t sure that they are connected to the counterparty risk at all.Contrary to John Taylor, it began right after Lehman failed. The only way to stop this Calling Run is for the government to step in forcefully, because only it has the resources to assure investors that it can handle the problem. Until the government is perceived as controlling and accepting the problem, and being willing to take the tough measures to end it, the Calling Run won’t end. People will continue to seek safety at all costs.

    The next phase is a Proactivity Run, which means employers shedding jobs proactively in anticipation of a deep bottom, even before demand has fallen enough to justify all the cuts. I believe that the productivity numbers show this.

    The next phase is a savings spree, which has now begun.

    The way out remains the same:
    1) A Swedish type plan
    2) Printing money ( I have called this Helicopter Money )
    3) Generous Social Safety Net spending

    The stimulus is largely an attempt to help with the diminution of the fear and aversion to risk.

    The best stimulus would be:
    1) $100 Billion in infrastructure that is justified, largely to show confidence by planning for the future
    2) $200 Billion A sales tax cut or payroll tax cut to be phased out going forward, in order to keep spending from dropping way down, not to encourage debt
    3) $100 Billion for investment In order to battle the fear and aversion to risk
    4) Social Safety Net spending Whatever it takes

    The current stimulus relies too heavily on 1.

    Finally, Yves recently had a guest post about banking. I suggested a Narrow/ Limited Bank solution, also a Fisher type idea, complemented by a non-guaranteed investment part of financial services.

    All these are based on Fisher, only with a more behavioral focus. Can anyone doubt that emotions have played a great part in facilitating this crisis?

    Here’s Fisher’s paper. Make up your own interpretation:

    http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

    Don the libertarian Democrat

  64. Anonymous

    Do you honestly think that if Bernanke printed 40 trillion and bought every treasury, mortgage, car loan, and corporate bond in the country we wouldn’t see inflation? You can argue over how much is needed (I think 1 hundredth of that would suffice for measurable inflation) but if Bernanke really wants inflation, we’ll get it.

    I think we would also get the end of the world as we know it and Bernanke’s head on a pike paraded down the streets of Washington. But who knows, maybe we’ve become a more docile people than that.

  65. Tortoise

    ndk and other friends who claim that stimulus does not work: Please stop it!

    You may say: “I do not like stimulus because it is against my interests”, “I am politically or philosophically opposed it”, or “it is not a good thing in the long term” but do not say “it does not work” because by doing so you damage your credibility.

    A great post “Just the Facts” by Paul Kasriel may explain what I mean:

    https://www-ac.northerntrust.com/content//media/attachment/data/econ_research/0902/document/ec020909.pdf

    From Kasriel, who is no Keynesian stooge but someone who can analyze data: “But never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal government spending/tax cuts and a central bank running the monetary printing press at a high speed… I believe that large increases in federal government spending that are monetized by the Fed and the banking system will result in a recovery in real economic activity. When that recovery sets in depends on how quickly the federal government increases its spending and by the magnitude of that increase.”

  66. Anonymous

    SocialismSucks, I am a big admirer of Hayek, but I am not aware that he predicted the Great Depression. Maybe he did and I would appreciate it if you could give me a reference.

  67. Mike Sankowski

    I know this if pouring gasoline on the fire, but sometimes it must be done.

    Here is Hayek, admitting his theory of unemployment is unscientific:

    “Briefly, we find the curious situation where the Keynesian theory, which is comparatively best confirmed by the statistics because it is the only one which can be tested quantitatively, is nevertheless false. Yet, it is widely accepted only because the explanation earlier regarded as true, and which is still regard as true, cannot by its very nature be tested by statistics.”

    Yikes.

    Also David, I disagree fully with your analysis that the U.S. cannot cause inflation. We could easily get it, it is just unpopular to implement among economists.

  68. Anonymous

    @all that said zero lobbyists.

    The voter is the primary lobbyist full stop, the rest are ticks on a dog.

  69. Juan

    Excessive credit creation was a major contributory driver to the bubble.

    Yes. And ‘excessive’ must be understood not so much in relation to Decline of primary industrial production in the UK and US leading to GDP supported by speculation was a major contributory driver. but to an earlier and substantial decline in the average rate of nonfinancial profit, and not only in the U.S. and UK, a decline that formed the basis for emergence of modern ‘financialization’ as well as a became-global neo-liberal regime with its looting of public assets and outright war on labor.

    If rate of profit was not itself a concretion of multiple semi-autonomous more and less contradictory relations, it would be of only some worth but as it was understood prior to more than a century of neoclassical blather, it contains/represents:
    -Change in total mass of capital relative to labor-value created (so investment, accumulation and over-accumulation…)
    -Change within the total mass of capital, e.g., its technical composition (so also sectoral disproportionalities, technological rents, displacement, concentration, competition, innovation..)
    -Change in mass and composition of employment, e.g., differences between directly productive and unproductive labor, their changing proportion and why.
    -Change in the possibility of transforming surplus value into profit, e.g., wages, distribution of income, real market expansion and its limits…(the market creates nothing, is not the source of profit but only where surplus within capitalism must be realized so provides a creative appearance.
    -Relative political weight of social classes and class segments…ideologies and counter-ideologies…
    -Substituting of credit in the attempt to overcome inherent imbalance between production and consumption but a substituting that via debt accumulation self-negates even as it enhanced, only enhanced, production of too large a mass of means of production.
    -More.

    Demand and supply sides are dialectically tied…modern econ, including Fisher, has overemphasized the former and in so doing given capital relations a cartoonish character appropriate to all the ‘well founded’ notions/practices of control.

    Fisher’s debt deflation theory failed to take sufficient account of post-1909 production-side changes which, during the 1920s, forced development of formal consumer credit and modern marketing.

  70. Juan

    Tortoise,

    Kasriel is right to use the word initial but then he places this fully within the context of demand as though greater demand is sufficient or more than sufficient to halt a devalorization process — once this position is taken we’ve moved not one step closer to understanding why the capital system is inherently cyclic and why capital must episodically destroy a portion of itself in order to survive. Nor do we even need to consider limits since we retain a technocratic pretense of control.

    So, somewhat contrary to what I just wrote:
    Limits to fiscal policy?

  71. Tortoise

    Juan,

    Capital can be “destroyed” in many different ways and not just through bankruptcy/debt repudiation/deflation. Inflation, expropriation, mismanagement and waste, wars and insurrections, and many other calamities essentially make wealth disappear. So, I must disagree with you and anyone who thinks that deflation (or, for that matter, inflation) is unavoidable. Milton Friedman has made some good points as to their being “monetary phenomena.” I find that, in the real world, it is political decisions and not economic determinism that lead to inflation or deflation.

    It would be my personal gain if we could enter a period of deflation. I love deflation but I love truth even more. :) That is why I try to make the point that deflation, unfortunately for some of us, can be easily remedied.

    Parting shot: I now understand why the USA experienced more deflation more than most countries in the Great Depression despite having more advantages than any other country.

    Tortoise

  72. Juan

    Tortoise,

    ‘economic determinism’? – society’s REPRODUCTION of itself is necessarily based in production. Production is not some ahistoric production-in-general but production dominated by particular sets of _social relations_ which have necessarily included the state or proto-state as guarantor.
    So, ‘all of a sudden’, economic turns out to be quite a bit more than ‘economic’ and, other than for those seeking to use govt (or shocks) as scapegoat for systemic failings, not exactly purely political.

    What do you mean by capital, simply things and claims or the social-political-economic relations within which commodities become capital, or both?

    Am I mistaken in my recollection that Friedman’s theories have not held up all so well, even to point that he admitted such?

  73. K Ackermann

    Do you honestly think that if Bernanke printed 40 trillion and bought every treasury, mortgage, car loan, and corporate bond in the country we wouldn’t see inflation?

    I am an unusual counterfeitter. I just printed up $40 trillion dollars, and then I buried it.

    Was that inflationary?

    On a different matter, I think raising the capital gains tax would be stimulative.

  74. DocG

    It’s really amusing watching all these economists turn themselves inside out looking for solutions to the wrong problem. We are on the threshold of one of those huge moments in history that come once in maybe 200 years — and you guys are still trying to “fix it”? Give me a break. What’s needed now are prophets, poets and madmen:

    “The caverns of the Grave I’ve seen
    And these I showed to England’s Queen.
    If now the caves of Hell I view,
    Whom shall I dare to shew them to?”

    Wm. Blake, courtesy of http://amoleintheground.blogspot.com/

  75. Anonymous

    “Do you honestly think that if Bernanke printed 40 trillion and bought every treasury, mortgage, car loan, and corporate bond in the country we wouldn’t see inflation?”

    Is this possible?

    Let’s say employment gets so bad that wage growth goes to 0% to -2% a year and the fed succeeds in keeping price inflation at 1% to 2% thru GOV’T borrowing and/or making sure the dollar does NOT rise. Let’s also say people react the way they should (if nominal wages are zero or negative and real wages are negative NO MORE PRIVATE DEBT!!!!). In this extreme example PRIVATE DEBT goes to ZERO and the fed monetizes ALL THE PRIVATE AND GOV’T DEBT.

    They also make sure that MOST of the monetization goes to the excess savers. Now the middle and lower class has 6 trillion to spend and the excess savers spend 1 trillion and keep 44 trillion in their pockets as various financial assets. Is that wealth and income inequality to the extreme??? Would “top of the food chain” paulson like that???

  76. Anonymous

    Dan said: “Fisher’s theory sounds simplistic; not a word about income.”

    Actually, I think that not enough income to service the debt starts the debt default process ESPECIALLY when asset prices start falling. I also believe that the money supply mix (currency vs. debt) has TOO MUCH DEBT. I also believe that wealth and income inequality is in play too (the rich have too much of the currency and are only using debt to accumulate more currency and/or financial assets).

    Of course, I believe that the increase in debt allows the wealth and income inequality.

    In my opinion, the REAL problem probably started earlier than the buildup of debt, and that is not enough of the productivity gains (a productivity SHOCK is usually involved) goes to WAGES/INCOME (so that price inflation drops even if quantities increase) so that interest rates can drop so that DEBT LEVELS CAN RISE!

  77. Anonymous

    “By the end of his life, Friedman had pretty much given up on his idea of a “computer” that would increase the money supply by a fixed amount every year.”

    After reading Steve Keen’s Cavaliers of Credit, is that because the banks like to create DEBT first and then look for reserves/capital later???

  78. Anonymous

    The Fisher debt-deflation theory says that if the inflation rate falls or deflation occurs, then the real cost of servicing fixed nominal debt rise. The ability to service debt falls because of deflation as nominal incomes falls, defaults and foreclosure rise. Collateral is liquidated in foreclosure adding to lower prices in a deflationary spiral.
    Federal Reserve chairperson Bernanke, who has written extensively on the Great Depression, is a follower of the Fisher debt-deflation theory as a cause of that debacle. Maybe Bernanke does not only want to prevent deflation at all costs, but also wants to cause inflation. If you consider Fisher's debt-deflation theory, you can also look at increasing inflation which would then lower the real burden of debt both in terms of servicing and real amount owed (for existing debtors). Now – sounds great, now all those people can then afford to pay their existing fixed rate mortgages when a cup of coffee is $10 and it costs $100 for someone to wash your car, but the problem with this idea is that is simply does not work applied to the current situation. The mortgage crisis is not as much a function of servicing ability or debt-deflation as during the 1930s (and that mortgage crisis much worse with a few major American cities having half of their residential housing go through foreclosure), but moreover today is a pure asset price bubble, people who can easily pay their mortgages are literally walking away from their non-recourse loans and the negative equity in their houses for a financial windfall. Possibly one-third of US foreclosures are from speculators trying make a quick profit flipping houses who did not see the bubble bursting as one-third of foreclosures are rental properties. "Fixing" things by avoiding a Fisher type debt-deflation or by causing inflation is not going to help, people will still walk away from negative equity, real servicing ability is not the true problem, this is an asset bubble problem. Places with the highest foreclosure rates such as Florida, Nevada, and parts of California, are also the areas which had the highest prior appreciations and now highest depreciations of real estate values. It is not a question of rising or falling real debt servicing costs by the Fisher debt-deflation theory, it is more a question of asset values. Bernanke by following an unprecedented expansionary monetary policy might do long-turn harm by fighting current deflation at all costs.
    Other great works by Fisher is the Fisher equation: nominal interest rate equals real interest rate plus inflationary premium. The Fed. has increased the M1 money supply at a 40% annualized rate during the last quarter, and the monetary base has doubled over the last year. The US Treasury increased net borrowing by $1.2 trillion during 2008, much attributed to the September’s bailout bill, and will probably beat this record in 2009. The stimulus bill currently being considered in Congress is $800 billion in new spending. Despite the inflationary potential of these policies, with the world flight to “quality” during the current financial crisis, US treasury yields have been pushed down to near half century lows. It is only a matter of time before the Fisher equation kicks in with inflationary expectations. That could hurt real estate asset prices via higher nominal interest rates reducing new loan availability, affordability and demand, knock a bit more air out of the bubble, and let the economy lament in stagflation postponing recovery. While economic theory sounds logical, whether Fisher debt-deflation as a cause for fostering inflation, or the Keynesian nonsense lending support for the stimulus bill, neither will work.
    Lord Keynesian himself said (1935), “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. … … The difficulty lies not so much in developing new ideas as in escaping from old ones.”

    Also see Sam Brittan’s FT column “Deflation is the wrong enemy” (1/29/09)http://www.ft.com/cms/s/f043f816-ee2b-11dd-b791-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ff043f816-ee2b-11dd-b791-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcomment%2Fcolumnists%2Fsamuelbrittan

  79. Richard Kline

    So FairEconomist, I am by no means convinced that we are presently in a debt deflation scenario; open to suasion, but it doesn’t look that way to me. Let’s skip back to some comparables first.

    The Great Depression of 37, 1837 that is, is a classic case of debt deflation. Land speculation was the vehicle, as for political reasons the Federal government threw land sales wide open between the Appalachians and the Mississippi; there was much speculation in canals, toll roads, and other transportation initiatives thence as well. Wildcat banks, with effectively no reserves, sprang up and lent wildly to anyone who would sign a document, whilst politicos in Washington beamed upon such enterprise. Land prices unsurprisingly soared past anything where farm incomes from them could pay down the purchase, but many were buying in volume to flip by the time Big Money in NYC cut the wildcat banks off at the knee. They collapsed; land values tanked; everyone still owed at face for the mortgages and loan papers they had signed. The country ’bout had a pulmonary embolism. Took ten years, a war, and mucho more land (stolen from Mexico who stole title to it from its occupants) to get something like a recovery. There, the debt remained and smothered economic activity. Right; textbook.

    I would see the Great Depression of the 1930s as having two primary vectors. There was unquestionably a debt deflationary component; this started things off, and should be caused the proximal cause accordingly. The creditworthy amongst the American citizenry borrowed heavily in the Twenties, many to speculate in securities or equities by the end, much of that on margin. Once the Crash of 29 came and went, taking asset paper south, those debts remained up north. The driver of ‘Greatness’ in the resulting depression, though, seems to me much more the ripple-on effects of demand collapse. Unemployment soared, and the protectionist legislation which followed had the unintended but obvious effect of exacerbating unemployment severely as trade declines drove more unemployment. The banks in the US didn’t start collapsing until the middle and lower class were sucked down the demand crash into an inability to roll over their mortgage notes, service their crop loans, and personal bankruptcies. Debt deflation thus, to me, made a depression which demand collapse turned into a Depression.

    I am personally of the view that recessions are inevitable and not undesirable for underlying cyclical reasons. One gets depressions from them by structural distortions and regulatory mismanagement. One gets Depressions from them by gross corruption and stone stupidity. Or a comet hits, or a bunch of fascists bomb your country flat, both causing unemployment and demand collapse. The big D relates to demand collapse, to me, which is fundamentally driven either by unemployment or crucial resource depletion. That’s a sketch, with much excluded, but that’s how I see it.

    So where are we today, in the Hollow Oughts? Well we don’t really have enough unemployment yet to make a depressionary demand collapse—but we are working on it. It is interesting (from the Olympian analytical standpoint) that we did not get significant employment declines until over a year into the financial crisis. Even now, the unemployment increases are low in percentage terms by historical standars, if high and heading higher in absolute numbers. The biggest problem there, though, is that the jobs being lost are amongst the highest paying at their respective class levels, and these jobs will not come back: We are headed for structurally higher unemployment than anyone living today has seen, with no immediate prospects of replacing these lost jobs with ones nearly as remunerative. This is something, too, which present commentators advocating This or That Plan are not choosing to meaningfully engage with. Stimulate all you want, but those construction and banking jobs are _not_ coming back. Where are we going to get enduring, remunerative jobs? There is no strategy for that; in fairness, there has been no time to develop one, but the problem is real and will only loom larger as a practical and political issue over the next six-twelve years. Baristas and box store boxheads are not going to borrow and spend at the levels of the last generation, so our macro-strategy such as it is is busted flat.

    That brings us to the issue of debt deflation. Where is this debt that putatively is smothering the economy? Yes, private debt is at unprecedented levels, but _pesonal_ debt of the bulk of the citizenry is only at unwise levels. ‘Consumers’ are tapped, but not ruined. For those of us below the gold collar class, there were two principle kinds of debt, plastic and paper, that is credit cards and mortgages. Unemployment or mortgage losses will drive credit card defaults, but the latter are not so weighty and numerous as to crush the economy alone. Is the bulk of the citizenry smothered by mortgage debt, then? That is not obviously the case, at present. Most folks paying on a mortgage have or are in the process of taking a major paper loss, yes. That will affect their subsequent investments, and likely affect their spending. —But as long as they are employed, their incomes haven’t declined, or at least not declined severely, and so in this sense their real costs aren’t being levered upwards by asset deflation. For those who become unemployed, or who couldn’t afford their mortgage to begin with, there is foreclosure and or bankruptcy in the offing—but that constitutes an out from the debt deflation scenario in a sense, since they shed the debt in the process (if it costs them subsequent access to credit, a deflationary vector in and of itself). And I think that it is a political certainty that we will get a process to accelerate/mandate/facilitate mortgage cramdowns and refis. It will take another two-three years to get that done, but it is likely. So there is a larger out from mortage debt, which will come round about the time we would face mass mortgage defaults driven by unemployment. What I am saying rather clumsily here, FE and assembled, is that there is not a strong form debt deflationary scenario for the bulk of the American citizenry. Losses, hard times, not the Big D, though.

    The real overuse of leveage was at the top of the food chain, by the gold collar class, and especially by the money center banks. THIS is where all that ‘private’ debt is concentrated. But we do not necessarily have a debt deflationary scenario for them either, in so many words. If they were unable to refinance or shed all that stupendous short-term leverage they had, then yesss, they might be in a debt deflationary trap. But “Ready Money” Ben Bernanke whipped up all those alphabet windows to, in essence, roll ‘em over in the clover, do it again, long as it takes. Of course, if they try to sell their securitized junk, that drives down its price because no one wants to buy. That might more nearly be described as a ‘falling asset trap,’ not quite the same thing as a debt deflation; the effects may be similar, I’ll grant that. But the shoe is really on the other foot: the Big Lenders aren’t being crushed by what they owe but by what they own. This could be called the Imp in the Bottle Trap: you can walk away from a loan, in our society at any rate, but you can’t walk away from a loss without finding a greater drunkard to hold it for you first. The Gold Collar class are screaming as one for the Federal Guvmint to take this bottle of rum from them; every time we come close, Congress flinches, just a little from the howling in the wires, and the tired little men like Paulson and Geithner scurry back behind the curtain to come up with some New Ozzian Pronouncement.

    —Let them to broke, then, right? That’s the free market, Chicago Solution, Way of the Entrepreneur. . . . We can’t, that is the problem, and that is, to me, the real trap we are in. The money center banks over the last generation have so intermediated themselves into credit flows in the US that the economy literally has seized up when they trapped themselves in the bottle. Everything from your iPod purchase on plastic, to your mortgage refi, to your kid’s student loan, to your car dealer’s seller financing, to your small business’ payroll, to the trade finance of your local big box runs through the fingers of the Wide Boys of the Two Cities. Who are presently paralyzed by a toxic load of drink while their internal organs are gradually shutting down.

    To me, our present crisis is, first and foremost, a banking crisis, from the top down. And the solutions to that are tried and true: seize them, close them, replace them. If we had done this promptly in 07 or even early 08, we might have avoided the acceleration/down deflection of unemployment which is now threatening demand collapse. Well, our economic process was too corrupted, and our leadership class too craven for that. So yes, we are surely headed for depression; we are within the event horizon for that really. But we still do not have to get the Big D. What to do? Seize the banks, and ensure that a reasonable level of credit to everyday business continues to flow. Not reckless lending as in days of yore, but one simply cannot run a ‘developed economy’ without every day credit provision. Which the Wide Boys are incapbable of supplying, now and forevermore—and which they have every incentive to withhold until they are appeased by the public cutting out our livers to give them a transplant. If we take even another six months of appeasing said zombie Wide Boys at the apex of the gold collar class, we will get the Big D because by then we will push demand collapse beyond a level recoverable except by time’s natural rebound. Stimulus, pace certain liberals, is beside the point because the stopped heart of the problem is in the money center banks.

    Barack, buddy, you can quote me: Seize the banks, and seize them NOW.

  80. Richard Kline

    So “Kingfish” Slaney Black: “Long story short: the middle and working classes were progressively squeezed to where they couldn’t pay debts or afford new consumer goods (Keynsian) plus the concentrated wealth at the top made shitty investment decisions that didn’t produce hoped-for returns (Austrian), because there weren’t enough of them to constitute a truly competitive market (Smith) and also because there wasn’t any buying power left to produce returns (Keynes again).”

    Now that is a neat and quotable summation; moreover an accurate one as I follow you. This reminds description reminds me of how, in _The Good, the Bad, and the Ugly_, “Ugly” Tucco pries apart three or four high-end revolvers, to reassemble the best parts into One Bad Rod. And that piece shot straight, too.

  81. reason

    ndk
    reason, the equilibrium real interest rate in question here refers to the policy rate set by the Fed.

    That is a non-sensical answer. Try again.

    The second point is quite valid, and the concept has gone through a thousand re-definitions from Wicksell through today.

    What do you mean by valid? Can you point me to an example of an economy in equilibrium? I’m not sure Steve Keen would agree with you on that one.

    Since 1982, we’ve seen a consistent trend of decline in savings, real interest rates, and non-residential investment to GDP, with a relative increase in consumption.

    I don’t deny what has happened by I think the explaination lies elsewhere (neo-mercantilism for one).

  82. Juan

    anon @3;21 AM,

    have you looked at change in affordability ratios from a median house price as multiples of median income perspective?
    demographia did and, as prices rose faster than nominal incomes, found rising, even extreme, unaffordability in an increasing number of u.s. cities even though (or because) financing became so astoundingly loose.
    or yes, at least for the non-flippers, income played a part.

  83. Anonymous

    Prsdnt Obama Deludes Himself
    Re The Required Economy Collapse Cure
    It's Not Just The Economy, It's The Technology Culture That Collapsed

    A. Brief notes re the apparent major aspects of the collapse

    1) Jan 6 2009

    What Is "Scientific Progress"
    What Is Needed To Advance Science
    http://www.physforum.com/index.php?showtopic=14988&st=390&#entry392722

    2) Dec 24 2008

    For 2008 Sciencenews Of The Year YOK The World-Wide Economy Collapse
    Money Printing Will NOT Cure The Technology Culture Greed Cancer
    http://www.physforum.com/index.php?showtopic=14988&st=390&#entry390280

    3) Dec 22 2008

    Separate Technology From Science To Renovate Our Culture Including Economy
    http://www.physforum.com/index.php?showtopic=14988&st=375&#entry390004

    4) Nov 21 2008

    Real And Virtual Energy, And Keynesian Salvation Prospects
    http://www.physforum.com/index.php?showtopic=14988&st=345&#entry384952

    B. There are no short-cuts for effecting a cure of the malignant world economy greed cancer.

    From the above (4) ref:

    "The present tone of the world's culture, and even ethics, including the banners of a variety of types and shades of greed, has been set by the 20th century Technology Culture. Its essence is the legitimacy and admiration of gaining capital via virtual activities, activities without or beyond the production of real assets for humanity, real life resources.

    So the odds of the economy's salvation via Keynesian prospects are, in the long run, proportional to the odds that the culture of Earth's humanity will evolve towards ever more rational self-organization…which is, how unsurprisingly rational, the odds of every organism to survive…"

    There are no short-cuts for effecting a cure of the malignant world economy greed cancer. The cure and recovery from this cancer entails a steady resolute cultural modification of 20th century personal and societal capitalistic greed values-ethics-morals. It entails public education to value and promote legitimacy and respect only of shares-stocks of products and processes that contribute to health, security, basic comfort, education and science, and to reject and shun offers of any form of productionless capital gain or of luxuriousness.

    And it entails a steady resolute continuous promotion of rational respect to non-luxurious life style, to a wide civic public social security network, and to continuous pursuit of further scientific comprehension of ever closer approaching approximate models of the real world including life and ourselves. This would be a return to and furthering of Enlightenment's inherent philosophy and attitudes in regards to individualism, universal human progress and, most important to humanity, embarkment on a road to societal application of reason.

    Dov Henis

    (Comments From The 22nd Century)
    http://blog.360.yahoo.com/blog-P81pQcU1dLBbHgtjQjxG_Q–?cq=1

  84. Cangrande

    I think it’s rather strange, that Irving Fisher (and many others today) are trying to cure over-indebtedness by leding out more credit.

    Has it ever occured to someone, that there is a rather strange twist in Fishers argument on the road from the diagnosis to the therapy?

Comments are closed.