I don’t usually go in for apocalyptic visions, but if one was looking for intelligent company in the fallout shelter then you could do a lot worse than economist Steve Keen.
Worryingly, Mr Keen and me seem to have a similar opinion of bankers, and of the usefulness of their activities over the past 40 years.
But Keen is also, well, keen on a debt jubilee to avert a financial catastrophe.
From The Guardian:
Keen shows how, from the late 1960s onwards, private sector debt in the US began to exceed GDP. It built up to wildly unstable levels from the late 1990s, peaking in 2008. The inevitable collapse in this rate of lending pulled down aggregate demand by 14%, triggering recession.
This should be easy enough to see with the benefit of hindsight, but what lends weight to Keen’s analysis is that he saw it with the benefit of foresight. In December 2005, while drafting an expert witness report for a court case, he looked up the ratio of private debt to GDP in his native Australia, to see how it had changed since the 1960s. He was astonished to discover that it had risen exponentially. He then did the same for the United States, with similar results. He immediately raised the alarm: here, he warned, were the conditions for an economic crisis far greater than those of the mid-1970s and early 1990s. A massive speculative bubble was close to bursting point. Needless to say, he was ignored by policymakers.
Now, he tells us, a failure to address these problems will ensure that this crisis will run and run. The “debt-deflationary forces” unleashed today “are far larger than those that caused the Great Depression”. In the 1920s, private debt rose by 50%. Between 1999 and 2009, it rose by 140%. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.
Do I believe – like Keen – that the solution is to write off all debts and start again?
Not yet. I still think we’re very different to Japan (let alone Keen’s Ancient Rome) though I’m not quite so confident as I was a year ago.
If we’re going to write off the debt of companies and citizenry alike, then at least Keen’s version of a debt jubilee has the potential benefit of not utterly punishing savers – since they are allocated the same portion of the free money that Keen would like to print, and they have no debts to pay off with it.
It would still be a nightmare scenario though, financially-speaking – and surely on the streets, too.
