I am one of the handful of economists which gives the lie to the cliché that “no one saw it coming”. I did foresee the 2008 crisis.
I focus on
something that most other economists deliberately ignore: the level and rate of
change of private debt. They worry about government debt but believe that
private debt is unimportant because they assume that private lending simply
transfers spending power from the saver to the borrower. As Ben Bernanke put
it, private lending is a “pure redistribution” which “should have no
significant macroeconomic effects”.
I disagreed, because I asserted that bank
lending creates new money, and — since no one borrows for the sheer pleasure of
being in debt — the increase in bank debt (which I call credit) increases
demand. The same process works in reverse: a wholesale reduction in private
debt destroys money, and demand along with it.
In 2006, I knew that a crisis was imminent,
because US private debt had virtually trebled as a share of GDP over its
immediate post-World War Two level (it was also almost three times as large as
government debt). On some metrics, credit had reached over 200% of GDP. The rate
of growth of debt had to stop, and when it did, credit could go from adding to
demand to subtracting from it — just as had happened in 1930. At a time when
the OECD was telling its member countries that “our central forecast remains
indeed quite benign”, I was expecting and warning of the biggest economic
crisis since the Great Depression.
We now know who was right. Credit went from
boosting demand to cutting it by just as much. Private debt peaked at 170% of
GDP and started to fall, while only then did government debt rise, from 60% to
100% of GDP (type: myf.red/g/lk5V into your browser to see the Federal Reserve
data on this). As credit turned from positive to negative, unemployment
skyrocketed, and it only started to fall as credit started to rise again (see:
myf.red/g/lk6g).
The crisis is now in the rear view mirror,
but it has left a legacy of excessive private debt: it is still over 150% of
GDP. Another US crisis like 2008 is unlikely, because that requires a high
level of credit as well as high debt. But excess private debt will act as a
ball and chain around any economic recovery, as it has for Japan ever since its
virtually identical crisis in 1990.
A sustained recovery will only occur if
that level of private debt is reduced. I have a proposal for how this could be
done deliberately, via policies that I describe as a “modern debt jubilee”. But
I expect that we’ll reduce it the same way we did back in the 1930s and 1940s:
by accident. Private debt more than halved as a percentage of GDP during the
war, not by deliberate policy, but as a side effect of fighting the existential
threat posed by Nazi Germany and imperial Japan. The combination of rationing
and huge government spending gave the private sector little to do with its
money but pay down debt. What we now call the golden age of capitalism from
1946 till 1966 followed.
This time, the existential threat will come
from climate change. Once we finally realise the scale of the threat it poses
to human existence on this planet, no expense will be spared in fighting it.
Just as no one in 1940 objected to the UK’s budget deficit hitting 40% of GDP —
because the perceived alternative was losing the war — no one will object that
we should not burden future generations with excessive government deficits
today because, unless we act decisively, there will be no future generations.
That last accidental private debt reduction
ushered in the golden age of capitalism. We need a new golden age of both
capitalism and the ecology. Whether we achieve them is a moot point today, just
as who would win World War II was a moot point in 1939.
Steve Keen is a distinguished research fellow and honorary professor at UCL, and the author of Debunking Economics and Can We Avoid Another Financial Crisis? You can help crowdfund his development of realistic economics with as little as $1 a month at
www.patreon.com/ProfSteveKeen.
