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The GFC: Scale, Causes, Consequences

The GFC: Scale, Causes, Consequences. Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com. The Scale: Biggest Bubbles in History. The Scale: Greatest Debt Level in History. The Scale: Greatest Debt Level in History.

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The GFC: Scale, Causes, Consequences

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  1. The GFC: Scale, Causes, Consequences Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com

  2. The Scale: Biggest Bubbles in History

  3. The Scale: Greatest Debt Level in History

  4. The Scale: Greatest Debt Level in History • But Australia’s different, right?... Let’s zoom in here Our “Crisis? What Crisis?” 1890s Depression 1930s Depression

  5. The Ponzi Economy • 72-74 & 84-92: debt-induced boom, bust, & recovery… ? • What odds on a third upward trend? Sustained recoveries only when Debt/GDP ratio rose again ? • Versus 1890/1930 style de-leveraging?

  6. Back in the USA… • Deleveraging-driven downturn… • Correlation 1980-Now: -61% • Correlation 1990-Now: -83%

  7. Why hasn’t it happened here? • Give it time… • Correlation 1980-Now: -84% • Correlation 1990-Now: -94%

  8. Did neoclassical economists see this coming? • “the current economic situation is in many ways better than what we have experienced in years… • Our central forecast remains indeed quite benign: • a soft landing in the United States, • a strong and sustained recovery in Europe, • a solid trajectory in Japan • and buoyant activity in China and India. • In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (p. 9) • OECD Chief Economist Jean-Philippe Cotis • in OECD Economic Outlook June 2007 • Why so ignorant? • Static modelling (equilibrium-assuming “dynamics”) • Ignore role of credit & debt

  9. Better dynamic, credit-aware modelling needed… • Minsky’s “Financial Instability Hypothesis” more realistic… Click here to download Vissim viewer program • Click on the icon below to run this simulation after installing the Vissim Viewer

  10. Better dynamic, credit-aware modelling needed… • Which gives more “bang for buck”—rescuing bankers or debtors? • Click on icons below to run this (after installing the Vissim Viewer)

  11. Prognosis & Remedies? • Deleveraging-induced downturn inevitable • Deleveraging outweighs government stimulus • E.g. 1st Rudd stimulus A$42bn (4% GDP) • Aggregate private debt A$2 trillion • 5% deleveraging—A$100 billion cut in demand • Can’t solve debt-induced crisis with more debt • Alternative policies… • Across-the-board debt reduction • Redefine capital assets to reduce Ponzi behaviour • Time-limited Shares (like bonds) • House valuation on imputed rent • Maximum secured mortgage debt say 10 times annual rental • Or we’ll be here again in 2070… ???

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