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Chris Joye’s reply to my last post on hous­ing pro­vides a neat segue into the broad­er top­ic of why I entered the pub­lic debate on eco­nom­ics in the first place. It was because in Decem­ber 2005, I became con­vinced that a major glob­al eco­nom­ic cri­sis wasabout to hit. I felt that some­one had to raise the alarm, and that—at least in Australia—I was prob­a­bly that some­body.

Two years lat­er, that cri­sis did hit. Called “the Glob­al Finan­cial Cri­sis” by Aus­tralians and “the Great Reces­sion” by Amer­i­cans, it is now uni­ver­sal­ly regard­ed as the worst eco­nom­ic cri­sis since the Great Depres­sion.

The vast major­i­ty of econ­o­mists were tak­en com­plete­ly by sur­prise by this crisis—including not just Chris Joye and the ubiq­ui­tous “mar­ket econ­o­mists” that pep­per the evening news, but the big fish of aca­d­e­m­ic, pro­fes­sion­al and reg­u­la­to­ry eco­nom­ics as well.

As late as June 2007, the Chief Econ­o­mist of the OECD observed that:

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 … In line with recent trends, sus­tained growth in OECD economies would be under­pinned by strong job cre­ation and falling unem­ploy­ment. (Jean-Philippe Cotis, 2007, p. 7; emphases added)

In Aus­tralia, the Reserve Bank was equal­ly con­fi­dent that the future was rosy, both local­ly and glob­al­ly:

Eco­nom­ic data in Aus­tralia over recent months have sig­nalled a pick-up in the pace of growth in demand and activ­i­ty… These con­di­tions have been accom­pa­nied recent­ly by high­er-than-expect­ed under­ly­ing infla­tion.

Growth of the Aus­tralian econ­o­my has for some time been assist­ed by favourable inter­na­tion­al con­di­tions. Cur­rent expec­ta­tions of offi­cial and pri­vate-sec­tor observers are that the world econ­o­my will con­tin­ue to grow at an above-aver­age pace in both 2007 and 2008. (RBA, August 2007, p. 1; empha­sis added)

The award for the worst tim­ing has to go to Oliv­er Blan­chard, found­ing edi­tor of the Amer­i­can Eco­nom­ic Asso­ci­a­tion’s spe­cial­ist jour­nal, AER: Macro. On August 12, 2008, Blan­chard pub­lished a glow­ing overview of con­ven­tion­al macro­eco­nom­ics:

For a long while after the explo­sion of macro­eco­nom­ics in the 1970s, the field looked like a bat­tle­field. Over time how­ev­er, large­ly because facts do not go away, a large­ly shared vision both of fluc­tu­a­tions and of method­ol­o­gy has emerged. Not every­thing is fine. Like all rev­o­lu­tions, this one has come with the destruc­tion of some knowl­edge, and suf­fers from extrem­ism and herd­ing. None of this dead­ly how­ev­er. The state of macro is good. (Olivi­er Blan­chard, 2009p. 210; empha­sis added, Olivi­er J. Blan­chard, 2008)

How wrong they were. The eco­nom­ic and finan­cial cri­sis that is now the defin­ing social con­text of our times began months after the OECD declared the future “benign”, days after the RBA pre­dict­ed above aver­age growth, and one year before Blan­chard’s hap­less paean. Unem­ploy­ment rose rather than fell—dramatically so in the USA. Four years lat­er, US unem­ploy­ment remains stub­born­ly high, despite the biggest eco­nom­ic stim­u­lus pack­ages in his­to­ry, while recent data even shows an uptick in unem­ploy­ment in Aus­tralia, the OECD coun­try that has weath­ered the cri­sis with the least dam­age to date.

Fig­ure 1: Con­ven­tion­al eco­nom­ics fore­casts of falling unem­ploy­ment in 2007-08 were dra­mat­i­cal­ly wrong



Why did con­ven­tion­al econ­o­mists not see this cri­sis com­ing, while I and a hand­ful of non-ortho­dox econ­o­mists did (Dirk J Beze­mer, 2009, Dirk J. Beze­mer, 2011, 2010)? Because we focus upon the role of pri­vate debt, while they, for three main rea­sons, ignore it:

First­ly, they believe that the pri­vate sec­tor is ratio­nal in every­thing it does, includ­ing the amount of debt it takes on. For this rea­son, Ben Bernanke, the neo­clas­si­cal “expert” on the Great Depres­sion, ignored Min­sky’s Finan­cial Insta­bil­i­ty Hypoth­e­sis: Hyman Min­sky (1977) and Charles Kindle­berg­er (1978) have in sev­er­al places argued for the inher­ent insta­bil­i­ty of the finan­cial sys­tem but in doing so have had to depart from the assump­tion of ratio­nal eco­nom­ic behav­ior . [A foot­note adds] I do not deny the pos­si­ble impor­tance of irra­tional­i­ty in eco­nom­ic life; how­ev­er it seems that the best research strat­e­gy is to push the ratio­nal­i­ty pos­tu­late as far as it will go . (Ben S. Bernanke, 2000, p. 43; emphases added.)

Sec­ond­ly, they believed that the lev­el of pri­vate debt—and there­fore also its rate of change—had no major macro­eco­nom­ic sig­nif­i­cance: Fish­er’s idea was less influ­en­tial in aca­d­e­m­ic cir­cles, though, because of the coun­ter­ar­gu­ment that debt-defla­tion rep­re­sent­ed no more than a redis­tri­b­u­tion from one group (debtors) to anoth­er (cred­i­tors). Absent implau­si­bly large dif­fer­ences in mar­gin­al spend­ing propen­si­ties among the groups, it was sug­gest­ed, pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nom­ic effects … (Ben S. Bernanke, 2000, p. 24; emphases added)

Final­ly, the most remark­able rea­son of all is that debt, mon­ey and the finan­cial sys­tem itself play no role in con­ven­tion­al neo­clas­si­cal eco­nom­ic mod­els. Many non-econ­o­mists expect econ­o­mists to be experts on mon­ey, but the belief that mon­ey is mere­ly a “veil over barter”—and that there­fore the econ­o­my can be mod­elled with­out tak­ing into account mon­ey and how it is created—is fun­da­men­tal to neo­clas­si­cal eco­nom­ics. Only eco­nom­ic dis­si­dents from oth­er schools of thought, like Post Key­ne­sians and Aus­tri­ans, take mon­ey seri­ous­ly, and only a hand­ful of them—including myself (Steve Keen, 2010; http://www.economics-ejournal.org/economics/journalarticles/2010–31)—for­mal­ly mod­el mon­ey cre­ation in their macro­eco­nom­ics.

Even the most “avant-garde” of neo­clas­si­cal econ­o­mists, like Paul Krug­man, have only just begun to con­sid­er the role that debt might play in the econ­o­my:

Giv­en both the promi­nence of debt in pop­u­lar dis­cus­sion of our cur­rent eco­nom­ic dif­fi­cul­ties and the long tra­di­tion of invok­ing debt as a key fac­tor in major eco­nom­ic con­trac­tions, one might have expect­ed debt to be at the heart of most main­stream macro­eco­nom­ic models—especially the analy­sis of mon­e­tary and fis­cal pol­i­cy. Per­haps some­what sur­pris­ing­ly, how­ev­er, it is quite com­mon to abstract alto­geth­er from this fea­ture of the econ­o­my. (Paul Krug­man and Gau­ti B. Eggerts­son, 2010, p. 2)

Even when he attempt­ed to break from this mould, Krug­man did so from the same point of view as Bernanke above—that the lev­el of debt does­n’t mat­ter, only its dis­tri­b­u­tion, and that one can abstract com­plete­ly from how mon­ey is cre­at­ed:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all lev­el of debt makes no dif­fer­ence to aggre­gate net worth — one per­son­’s lia­bil­i­ty is anoth­er per­son­’s asset… In what fol­lows, we begin by set­ting out a flex­i­ble-price endow­ment mod­el in which “impa­tient” agents bor­row from “patient” agents [where what is bor­rowed is not mon­ey, but “risk-free bonds denom­i­nat­ed in the con­sump­tion good”], but are sub­ject to a debt lim­it… (Paul Krug­man and Gau­ti B. Eggerts­son, 2010, pp. 3 & 5)

In con­trast, I have ded­i­cat­ed my aca­d­e­m­ic life to extend­ing the Finan­cial Insta­bil­i­ty Hypoth­e­sis first devel­oped by Hyman Min­sky, and for that rea­son I was always aware that pri­vate debt plays a much more impor­tant role in the econ­o­my than neo­clas­si­cal econ­o­mists com­pre­hend. Hav­ing been giv­en the task of explain­ing (in an Expert Wit­ness Report) how enforc­ing a preda­to­ry loan could have dele­te­ri­ous con­se­quences for peo­ple who were not par­ties to the loan, I there­fore turned imme­di­ate­ly to the lev­el and rate of growth of pri­vate debt.

What I saw in Decem­ber 2005 shocked me. Though five years ear­li­er, when writ­ing Debunk­ing Eco­nom­ics, I had com­ment­ed that I expect­ed a debt-induced finan­cial cri­sis at some stage in the future (Steve Keen, 2001, pp. 311–312), the sheer scale and rate of growth of debt was stag­ger­ing. The 40-year long trend for pri­vate debt to rise 4.2% faster than GDP sim­ply could­n’t be sus­tained for­ev­er, and I felt that its break­ing was immi­nent. When it broke, I expect­ed that the Aus­tralian econ­o­my would enter a slump that would be far worse than that of the ear­ly 1990s (I’ll dis­cuss why I was wrong on this expec­ta­tion lat­er).

Fig­ure 2: Aus­tralian pri­vate debt rose 4.2% faster than GDP from 1965 till 2006



I quick­ly checked the US data to see whether this was mere­ly an Aus­tralian phe­nom­e­non, or a glob­al one. The pri­vate debt to GDP ratio was grow­ing more slow­ly in the USA—though over a much longer time­frame (at an aver­age 2.25% p.a. since 1945). The US’s ratio was almost twice as high as Aus­trali­a’s, and five times as high as it was at the end of WWII.

Fig­ure 3: A five-fold increase in US pri­vate debt to GDP since 1945



When these trends of ris­ing pri­vate debt end­ed, I felt we were cer­tain to expe­ri­ence an eco­nom­ic down­turn whose sever­i­ty would be unprece­dent­ed in the Post-WWII period—and which could even rival the Great Depres­sion.

The rea­son why I believed that a change in the rate of growth of debt could cause a cri­sis, while con­ven­tion­al econ­o­mists (in which cat­e­go­ry I include every­one from Paul Krug­man and Ben Bernanke to Chris Joye) saw no prob­lem with a high­er lev­el of pri­vate debt, is because the eco­nom­ic tra­di­tion to which I belong acknowl­edges that the growth in pri­vate debt boosts aggre­gate demand. When a bank lends mon­ey, it cre­ates spend­ing pow­er by cre­at­ing a deposit at the same time. This addi­tion­al mon­ey adds to spend­ing pow­er of the bor­row­er, with­out reduc­ing the spend­ing pow­er of savers.

Neo­clas­si­cal eco­nom­ics, on the oth­er hand, treats banks as sim­ple inter­me­di­aries between savers and lenders. A loan there­fore increas­es the spend­ing pow­er of the bor­row­er, but reduces the spend­ing pow­er of the saver.

If the neo­clas­si­cal mod­el of bank­ing were cor­rect, then the macro­eco­nom­ic effects of debt would be mut­ed, as Bernanke and Krug­man argued. How­ev­er, there is over­whelm­ing empir­i­cal evi­dence that this mod­el is wrong. This evi­dence was first com­pre­hen­sive­ly analysed by the Amer­i­can Post Key­ne­sian econ­o­mist Basil Moore (Basil J. Moore, 1979, 1988a, 1995, 1988b, 1997, 2001, 1983), but it was also rec­og­nized by the then Senior Vice-Pres­i­dent of the New York Fed­er­al Reserve, Alan Holmes, in 1969. While explain­ing why the Mon­e­tarist-inspired attempt to con­trol infla­tion by con­trol­ling the growth of the mon­ey sup­ply had failed, Holmes quipped that “In the real world, banks extend cred­it, cre­at­ing deposits in the process, and look for the reserves lat­er”.

At more length, Holmes summed up the Mon­e­tarist objec­tive of con­trol­ling infla­tion by con­trol­ling the growth of Base Mon­ey as suf­fer­ing from “a naive assump­tion”:

that the bank­ing sys­tem only expands loans after the [Fed­er­al Reserve] Sys­tem (or mar­ket fac­tors) have put reserves in the bank­ing sys­tem. In the real world, banks extend cred­it, cre­at­ing deposits in the process, and look for the reserves lat­er. The ques­tion then becomes one of whether and how the Fed­er­al Reserve will accom­mo­date the demand for reserves. In the very short run, the Fed­er­al Reserve has lit­tle or no choice about accom­mo­dat­ing that demand; over time, its influ­ence can obvi­ous­ly be felt”… [and] “the reserves required to be main­tained by the bank­ing sys­tem are pre­de­ter­mined by the lev­el of deposits exist­ing two weeks ear­li­er.” (Holmes 1969, p. 73) (Alan R. Holmes, 1969, p. 73; empha­sis added.)

Why did neo­clas­si­cal econ­o­mists ignore this per­fect­ly sen­si­ble analy­sis, and the host of empir­i­cal evi­dence sup­port­ing it accu­mu­lat­ed by Moore and oth­ers, includ­ing even neo­clas­si­cal stan­dard-bear­ers like Kyd­land and Prescott (Finn E. Kyd­land and Edward C. Prescott, 1990, p. 4)? I would like to say that “faced with a choice between real­i­ty and their assump­tions, neo­clas­si­cal econ­o­mists chose their assump­tions”, but strict­ly speak­ing that would­n’t be true. The vast major­i­ty of neo­clas­si­cal econ­o­mists have no idea that this empir­i­cal evi­dence even exists. But if they had heard of it, most of them would have dis­missed it any­way because it under­mines numer­ous core beliefs in neo­clas­si­cal eco­nom­ics, includ­ing the belief known as Wal­ras’ Law. This is because, once it is acknowl­edged that the growth in cred­it can expand aggre­gate demand, then:

In place of a nec­es­sary equiv­a­lence between (notion­al) aggre­gate demand and aggre­gate sup­ply (Robert W. Clow­er, 1969, Robert W. Clow­er and Axel Lei­jon­hufvud, 1973), aggre­gate demand will exceed aggre­gate sup­ply if debt is ris­ing, and fall below it if debt is falling.

The nom­i­nal amount of mon­ey mat­ters, and bank­ing & debt dynam­ics have to be includ­ed in macro­eco­nom­ic mod­els, while neo­clas­si­cal eco­nom­ics ignores them.

debt dynam­ics have to be includ­ed in macro­eco­nom­ic mod­els, while neo­clas­si­cal eco­nom­ics ignores them. The neat sep­a­ra­tion of macro­eco­nom­ics from finance can no longer be main­tained, since the change in debt finances pur­chas­es of assets, as well as pur­chas­es of new­ly pro­duced goods and ser­vices.

Worst of all, the belief that every­thing hap­pens in equi­lib­ri­um has to be aban­doned. Ris­ing debt is not nec­es­sar­i­ly bad—in fact it is an essen­tial aspect of a grow­ing economy—but it is nec­es­sar­i­ly a dis­e­qui­lib­ri­um process, as Schum­peter argued long ago (Joseph Alois Schum­peter, 1934, pp. 95, 101).

Work­ing from the per­spec­tive that the econ­o­my is dri­ven by aggre­gate demand, and that aggre­gate demand is GDP plus the change in debt, I there­fore expect­ed the cri­sis to begin when the rate of growth of debt slowed down sub­stan­tial­ly. In August 2007, when the RBA pub­lished its opti­mistic fore­cast for 2007 and 2008, I pub­lished the fol­low­ing obser­va­tion on the Aus­tralian econ­o­my:

Reduc­ing the rate of growth of debt from its cur­rent lev­el of 15% to the sev­en per cent rate of growth of nom­i­nal GDP would mean a reduc­tion in spend­ing next year, com­pared to the cur­rent trend, of over $100 bil­lion. That is equiv­a­lent to an eight per cent reduc­tion in aggre­gate demand com­pared to trend, and would have the same impact on the econ­o­my as a ten per cent fall in nom­i­nal GDP. This real­i­sa­tion is why I first observed in ear­ly 2006 that an even­tu­al reces­sion is inevitable—and why, in mock hon­our of Keat­ing’s famous phrase, I gave it the moniker of “The Reces­sion We Can’t Avoid”. (Steve Keen, 2007, p. 37)

That hypo­thet­i­cal process began in the USA in ear­ly 2008 (though Aus­tralia did in fact avoid that recession—a point I dis­cuss lat­er). Aggre­gate demand fell sharply in 2008 even though debt was still ris­ing; then in mid-2009 the change in debt actu­al­ly turned neg­a­tive.

Fig­ure 4: A slow­down in the rate of growth of debt caused the Great Reces­sion



Since aggre­gate demand deter­mines employ­ment, the rate of unem­ploy­ment explod­ed as the debt-financed por­tion of aggre­gate demand col­lapsed.

Fig­ure 5: Change in debt-financed demand and unem­ploy­ment, USA











Since debt finances asset pur­chas­es as well as pur­chas­es of goods and ser­vices, I also expect­ed the turn­around in the growth of debt to cause asset mar­kets to tank as well—which they did, in spec­tac­u­lar fash­ion.

But here the cau­sa­tion was complex—because as well as ris­ing debt caus­ing asset prices to rise, ris­ing asset prices also encour­age would-be spec­u­la­tors to enter the stock and hous­ing mar­kets with bor­rowed mon­ey. There was there­fore what engi­neers call a “pos­i­tive feed­back loop” between the change in asset prices, and debt.

Fig­ure 6: A pos­i­tive feed­back between ris­ing (and falling) debt and ris­ing (and falling) asset prices



This aspect of cap­i­tal­ism is com­plete­ly abstract­ed from by neo­clas­si­cal eco­nom­ics, since its macro­eco­nom­ic analy­sis only con­sid­ers the buy­ing and sell­ing of new­ly pro­duced com­modi­ties. To con­sid­er it prop­er­ly, we have to tran­scend the core con­cept of neo­clas­si­cal think­ing, Wal­ras’s Law.

The Schumpeter-Minsky Law

The cor­ner­stone of the Neo­clas­si­cal barter mod­el of cap­i­tal­ism is “Wal­ras’s Law”. To cite the Wikipedia here, “Wal­ras’ Law hinges on the math­e­mat­i­cal notion that excess mar­ket demands (or, con­verse­ly, excess mar­ket sup­plies) must sum to zero. That is, Sum[XD] = Sum[XS] = 0”.

The essence of Wal­ras’ Law is the propo­si­tion that, to be a buy­er, one must first be a seller—so that the source of all demand is sup­ply. In an envi­ron­ment of free exchange where it is assumed that most mar­ket par­tic­i­pants were “nei­ther thieves nor phil­an­thropists”, neo­clas­si­cal econ­o­mists assert­ed that “the net val­ue of an indi­vid­u­al’s planned trades is iden­ti­cal­ly zero” (Robert W. Clow­er and Axel Lei­jon­hufvud, 1973, p. 146). A sell­er was assumed to only sell in order to buy, and to expect a fair return, so that the sum of each per­son­’s sup­ply would equal that per­son­’s demand. Call­ing the gap between a per­son­’s demand and sup­ply “excess demand”, neo­clas­si­cal econ­o­mists assert­ed that:

The mon­ey val­ue of all indi­vid­ual EDs [excess demands] summed over all trans­ac­tors and all com­modi­ties, is iden­ti­cal­ly zero. (Robert W. Clow­er and Axel Lei­jon­hufvud, 1973, p. 152)

Sev­en­ty years ago, the great evo­lu­tion­ary econ­o­mist Joseph Schum­peter argued that Wal­ras Law was false in a cred­it econ­o­my, because cred­it gave entre­pre­neurs spend­ing pow­er that did not come from the sale of exist­ing goods.

An entre­pre­neur, in Schum­peter’s mod­el, was some­one with an idea but no mon­ey to put it into prac­tice. How does such a per­son actu­al­ly get the mon­ey, Schum­peter mused?

whence come the sums need­ed to pur­chase the means of pro­duc­tion nec­es­sary for the new com­bi­na­tions if the indi­vid­ual con­cerned does not hap­pen to have them?(Joseph Alois Schum­peter, 1934, p. 72)

After rul­ing out the con­ven­tion­al answer that it came sole­ly from sav­ings on part­ly quan­ti­ta­tive and part­ly log­i­cal grounds, Schum­peter observed that:

there is anoth­er method of obtain­ing mon­ey … the cre­ation of pur­chas­ing pow­er by banks… It is always a ques­tion, not of trans­form­ing pur­chas­ing pow­er which already exists in some­one’s pos­ses­sion, but of the cre­ation of new pur­chas­ing pow­er out of noth­ing … which is added to the exist­ing cir­cu­la­tion. (Joseph Alois Schum­peter, 1934, p. 73)

The capac­i­ty for banks to cre­ate mon­ey endogenously—“out of nothing”—is cru­cial here. Giv­en this capacity—which Schum­peter took as obvi­ous, and which lat­er empir­i­cal work has shown to be the case—aggregate demand is greater than aggre­gate sup­ply, with the dif­fer­ence being account­ed for by the change in debt.

Schum­peter’s stu­dent Min­sky added to this the obser­va­tion that the growth of debt was nec­es­sary to sup­port a grow­ing econ­o­my:

If income is to grow, the finan­cial mar­kets, where the var­i­ous plans to save and invest are rec­on­ciled, must gen­er­ate an aggre­gate demand that, aside from brief inter­vals, is ever ris­ing. For real aggre­gate demand to be increas­ing, … it is nec­es­sary that cur­rent spend­ing plans, summed over all sec­tors, be greater than cur­rent received income and that some mar­ket tech­nique exist by which aggre­gate spend­ing in excess of aggre­gate antic­i­pat­ed income can be financed. It fol­lows that over a peri­od dur­ing which eco­nom­ic growth takes place, at least some sec­tors finance a part of their spend­ing by emit­ting debt or sell­ing assets. (Hyman P. Min­sky, 1982, p. 6; empha­sis added)

Min­sky also point­ed out that the entre­pre­neur is not the only one who gets spend­ing pow­er this way: so too does the Ponzi Financier, the spec­u­la­tor who attempts to prof­it by buy­ing and sell­ing assets on a ris­ing mar­ket:

A Ponzi finance unit is a spec­u­la­tive financ­ing unit for which the income com­po­nent of the near term cash flows falls short of the near term inter­est pay­ments on debt so that for some time in the future the out­stand­ing debt will grow due to inter­est on exist­ing debt. Both spec­u­la­tive and Ponzi units can ful­fill their pay­ment com­mit­ments on debts only by bor­row­ing (or dis­pos­ing of assets). The amount that a spec­u­la­tive unit needs to bor­row is small­er than the matur­ing debt where­as a Ponzi unit must increase its out­stand­ing debts. As a Ponzi unit’s total expect­ed cash receipts must exceed its total pay­ment com­mit­ments for financ­ing to be avail­able, via­bil­i­ty of a rep­re­sen­ta­tive Ponzi unit often depends upon the expec­ta­tion that some assets will be sold at a high enough price some time in the future. (Hyman P. Min­sky, 1982, p. 24; empha­sis added)

Min­sky thus inte­grates the dynam­ics of asset mar­kets with Schum­peter’s vision of a cred­it-based econ­o­my, in which an impor­tant com­po­nent of aggre­gate demand comes from the endoge­nous expan­sion of spend­ing pow­er by the banks. This yields an account­ing iden­ti­ty which is true in a cred­it-based econ­o­my, where­as Wal­ras’ Law is only true in the neo­clas­si­cal fic­tion of a pure barter econ­o­my (David Grae­ber, 2011).The “Schum­peter-Min­sky Law” is thus that:

The sum of all incomes plus the change in debt equals the rev­enue the sale of goods and ser­vices plus net asset sales.



Putting this in a more styl­ized way:

Wages + Prof­its + Change in Debt = Price Lev­el * Out­put + Net Asset Sales,

where

Net Asset Sales = Asset Price Lev­el * Quan­ti­ty of Assets * Frac­tion of Assets sold.

The change in debt is thus relat­ed to the cur­rent lev­el of eco­nom­ic activity—on both com­mod­i­ty and asset markets—which explains the cor­re­la­tions shown ear­li­er between the rate of change of debt, the lev­el of out­put (and hence of unem­ploy­ment), and the lev­el of asset prices.

An obvi­ous sec­ond-order impli­ca­tion of this—first explored sta­tis­ti­cal­ly by (Michael Big­gs et al., 2010; see http://ssrn.com/paper=1595980)–is that the accel­er­a­tion of debt is relat­ed to the rate of change of out­put, unem­ploy­ment, and asset prices. Enter “the neb­u­lous con­cep­tion” that Chris Joye derid­ed, the “Cred­it Accel­er­a­tor”: It is a log­i­cal con­se­quence of a cred­it-based view of how cap­i­tal­ism func­tions.

To be con­tin­ued next week…

Bernanke, Ben S. 2000. Essays on the Great Depres­sion. Prince­ton: Prince­ton Uni­ver­si­ty Press.

Beze­mer, Dirk J. 2009. ““No One Saw This Com­ing”: Under­stand­ing Finan­cial Cri­sis through Account­ing Mod­els,” Gronin­gen, The Nether­lands: Fac­ul­ty of Eco­nom­ics Uni­ver­si­ty of Gronin­gen,

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