The GFC: Scale, Causes, Consequences Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com.

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Presentation transcript:

The GFC: Scale, Causes, Consequences Steve Keen University of Western Sydney Debunking Economics

The Scale: Biggest Bubbles in History

The Scale: Greatest Debt Level in History

1890s Depression 1930s Depression Let’s zoom in here The Scale: Greatest Debt Level in History But Australia’s different, right?... Our “Crisis? What Crisis?”

The Ponzi Economy & 84-92: debt-induced boom, bust, & recovery… Sustained recoveries only when Debt/GDP ratio rose again What odds on a third upward trend? Versus 1890/1930 style deleveraging?

Back in the USA… Deleveraging-driven downturn… Correlation 1980-Now: -61%Correlation 1980-Now: -61% Correlation 1990-Now: -83%Correlation 1990-Now: -83%

Why hasn’t it happened here? Give it time… Correlation 1980-Now: -84%Correlation 1980-Now: -84% Correlation 1990-Now: -94%Correlation 1990-Now: -94%

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

Better dynamic, credit-aware modelling needed… Minsky’s “Financial Instability Hypothesis” more realistic… Click here to download Vissim viewer program Click here to download Vissim viewer program Click on the icon below to run this simulation after installing the Vissim ViewerClick on the icon below to run this simulation after installing the Vissim Viewer

Better dynamic, credit-aware modelling needed… Which gives more “bang for buck”— rescuing bankers or debtors? Click on icons below to run this (after installing the Vissim Viewer)Click on icons below to run this (after installing the Vissim Viewer)

Prognosis & Remedies? Deleveraging-induced downturn inevitable –Deleveraging outweighs government stimulus E.g. 1 st Rudd stimulus A$42bn (4% GDP) Aggregate private debt A$2 trillion –5% deleveraging—A$100 billion cut in demand –Can’t solve debt-induced crisis with more debt Alternative policies… –Across-the-board debt reduction –Redefine capital assets to reduce Ponzi behaviour Time-limited Shares (like bonds) House valuation on imputed rent –Maximum secured mortgage debt say 10 times annual rental Or we’ll be here again in 2070…