Wednesday, July 6, 2011

Economics for the post MTV Generation -- It's the debt stupid

I previously mentioned an entertaining video regarding the competing economic theories of Keynes and Hayek.  Here is round two, and while its a few months old it deserves attention.

When watching the video pay close attention to the assistants to each boxer, you may recognize some other names as well as what appears to be Chairman Ben Bernanke in the first row of the meeting.

While the debate over monetary and fiscal stimulus continues (most recently as the wrangling over the federal debt limit) I'd like to repeat a graph I've shown before.

Total US debt (private, corp, government) to GDP rose for this entire data series until the great financial crisis of 2008.  Since then its been dropping and this is one reason our recovery has felt so sluggish as corporations and individuals continue to delever.

I have mentioned before how even with a very steep yield curve we are not seeing a rebounding economy and others have noticed this as well; the steep yield curve mechanism appears broken.

From Bonddad:
for virtually the entire period beginning in late 1929 and continuing right through the Great Depression and into the 1950s, the yield curve was resolutely positive. And yet that period coincided with the two worst downturns in the last 100 years, as well as three other recessions.

Until the private sector deleverages monetary policy levers will be less effective. I have suspicions as to how Mr. Bernanke will 'fix' this problem but I'll leave that to a later post with evidence.

So what explains the current crisis and malaise? I think Steve Keen is on to something.  I strongly suggest you watch this video and examine his theories.

edit: sorry about the autoplay. Hit the pause button to stop it.


  1. Appreciate you finding and sharing the debt-debunking video.

  2. No Problemo.
    Mr. Keen is onto something here. I try to promote his idea when I can.