FINAL WORD: Steve Keen

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