The Never Ending Depression

Steve Keen writes: Economists Ignore One of Capitalism’s Biggest Problems

In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring.

I can make the case empirically for non-economists pretty easily, thanks to an aside that Joe makes in his article. He observes that when WWII ended, many economists feared that there would be a period of stagnation:

Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In fact, the period from 1945 till 1965 is now regarded as the “Golden Age of Capitalism”. There was a severe slump initially as the economy changed from a war footing to a private one, but within 3 years, that transition was over and the US economy prospered—growing by as much as 10% in real terms in some years (see Figure 1). The average from 1945 till 1965 was growth at 2.8% a year. In contrast, the average rate of economic growth since 2008 to today is precisely zero.

I argue that a major reason for this unexpected Post-War turn of events was that credit expanded rapidly in the post-WWII period, and this provided a source of aggregate demand that economists back then hadn’t factored into their thinking—and as Joe shows, they’re still not doing it today. Credit grew more than 10% per year on average, fuelling an insatiable aggregate demand that drove the economy forward. In contrast, credit growth since 2008 has averaged a mere 1.4% per year—see Figure 2.

...Today, private debt is more than 4 times what it was in 1945—and at its peak in 2009, it was more than 5 times the 1945 level (see Figure 3). That’s why banks aren’t lending today, and that’s why aggregate demand is growing so slowly. The only way to get out of the “Great Malaise” is to bring this level of private debt down—without reducing aggregate demand in the process (and without anything as catastrophic as WWII either).

We are 8 years into a depression because the economists and policy makers who control the levers of power are using broken models.

Keen explains more fully in the article and offers his solution, a debt jubilee. I disagree with the debt jubilee as a solution, but I acknowledge it would solve the problem, and if that is the choice versus continuing current central bank policies, then a debt jubilee is much preferred.