Debt, Inequality, and Credit Stagnation
Steve Keen Kingston University London IDEAeconomics Minsky Open Source System Dynamics www.debtdeflation.com/blogs Secular Stagnation Mark I • Hansen 1939 – “Not until the problem of full employment … from the long-run, secular standpoint was upon us, were we compelled to give serious consideration to those factors … which tend to make business recoveries weak .. and which tend to prolong and deepen the course of depressions. – This is the essence of secular stagnation—sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” (Hansen, 1939, p. 4) • Hansen blamed “external factors” – Technological change & population growth: • “Fundamental to an understanding of this problem are the changes in the "external" forces, if I may so describe them, which underlie economic progress—changes in the character of technological innovations, in the availability of new territory, and in the growth of population.” (Hansen, 1939, p. 4) Secular Stagnation Mark I • His timing was a bit off… US Unemployment Rate 28 Hansen1934 Hansen1939 26 24 22 21 20 Hansen’s expectation 18 17 16 14 12 10
Percent of workforce of Percent 8 6 4 2 0 1920 1925 1930 1935 1940 1945 1950 1955 1960 Secular Stagnation Mark II • 80 years later, along comes Larry: – “a decline in the full-employment real interest rate (FERIR) coupled with low inflation could indefinitely prevent the attainment of full employment…” • This is after the financial crisis, which, of course, is no longer an issue: – “If a financial crisis represents a kind of power failure, one would expect growth to accelerate after its resolution as those who could not express demand because of a lack of credit were enabled to do so… – How might one understand why growth would remain anaemic in the absence of major financial concerns? Suppose that a substantial shock took place … and that this tended to raise private saving propensities and reduce investment propensities… – one would expect interest rates to fall … until the saving and investment rate were equated at the full-employment level of output… – But this presupposes full flexibility of interest rates…” Secular Stagnation Mark II • Finance clearly irrelevant when Hansen & Summers extemporised… USA private debt to GDP 180 Hansen1934 Summers 170
160
150
140
130
120
110
100
90
80
Percent of GDP of Percent 70
60
50
40
30
20
10
0 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020
BIS and US Census Normalized Data Secular Stagnation Mark II • Back to Larry’s FERIR brainwave: • “A variety of structural changes … suggest that FERIR levels may have declined substantially. These include: – Slower population and possibly technological growth means a reduction in the demand for new capital goods to equip new or more productive workers…” • And the cure for a FERIR is? – “some major exogenous event will occur that raises spending or lowers saving…”; or – “In the long run, as the economy’s supply potential declines, the FERIR rises, restoring equilibrium – albeit not a very good one.” • So a FERIR is really, really important! • Um, but what is it though?… Secular Stagnation Mark II • The FERIR was recently discovered by MIT’s fabled CERN* laboratory – CERN stands for “Crazy Economic Rationalisations of aNomalies” • A “FERIR” (“Full-Employment Real Interest Rate”) is an antiparticle to a “NAIRU” (“Non-Accelerating Inflation Rate of Unemployment”) • FERIR created when NAIRU collides with a GFC (“Global Financial Crisis”) – The GFC particle does not exist in TSM (“The Standard Model”) – It may come from a parallel (or possibly orthogonal) universe called TRW (“The Real World”) • The collision with a GFC causes the NAIRU to decay… – And to emit a ZLB (“Zero Lower Bound”) and a FERIR • The long-lived ZLB particle inverts all other standard particles, so that – Growth, which was high, is now low – Inflation, which was bad & everywhere, is now good & nowhere – CBs (“Central Banks”) which prevent inflation, now try to cause it; & – HMDs (“Helicopter Money Drops”) which were mad, are now sane • Footnote *: CERN has been reported to COCOA (the “Campaign to Outlaw Contrived and Outrageous Acronyms”) Secular Stagnation Mark II • Of course, there was no empirical data that might have alerted CERN to the possible importance of the CREDIT particle… Credit and Employment (Correlation 0.93) 15 0 Summers 14 13 1 12 11 2 10 9 3 8 7 4 6 5 5 4
Percent of GDP of Percent 3 6 2
1 7 (Inverted) workforce of Percent 0 0 1 8 2 3 Credit 9 4 Unemployment 5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
BIS & BLS Data Secular Stagnation Mark I • Just like there was nothing to alert Hansen in 1934 Credit and Employment (Correlation 0.8) 12 0 GreatDepression Hansen1934
10 2.5
8 5
6 7.5
4 10
2 12.5
0 0 15
2 17.5
Percent of GDP of Percent
4 20
Percent of workforce (Inverted) workforce of Percent 6 22.5
8 25
10 Credit 27.5 Unemployment 12 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940
BIS & Census Data Secular Stagnation Mark II • This correlation is zero in the TSM, & therefore can be ignored: Change in Credit and Employment Change (Correlation 0.88) 4 40 GFC Summers 3 30
2 20
1 10
0 0 0
1 10
2 20
3 30
4 40
5 50
6 60
7 70
8 80
Percent of GDP of year per Percent 9 90
10 100 (Inverted) year per change Percent
11 110
12 120 13 Credit Change 130 14 Unemployment Change 140 15 150 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
BIS & BLS Data Let’s leave MIT, CERN and TSM for TRW… • Credit doesn’t matter in TSM because of “Loanable Funds” – “Think of it this way: when debt is rising, it’s not the economy as a whole borrowing more money. – It is, rather, a case of less patient people—people who for whatever reason want to spend sooner rather than later—borrowing from more patient people.” (Krugman 2012, pp. 146-47) • Macro role for credit still not accepted in Post Keynesian economics – “In this primer we will examine the macroeconomic theory that is the basis for analysing the economy as it actually exists. We begin with simple macro accounting, starting from the recognition that at the aggregate level spending equals income.” (Wray 2011) – “Unless Keen (2014a) can explain how a purchase of a good or service does not provide income for the seller, then he should rethink his claim that debt extensions can force an inequality between expenditure and income at the aggregate level… – a sector can spend more than its current income, but the sum of sectors cannot.” (Fiebiger 2014, p. 296) Integrating Credit into Income Expenditure • An expenditure table view: – Divide economy into 3 non-bank sectors plus banking sector – Aggregate Expenditure negative sum of diagonal – Aggregate Income positive sum of off-diagonal elements – All flows (in $/Year) shown in lowercase – All stocks (in $) shown in uppercase – Greek r used for interest rate – First case: lending/borrowing does not occur: Assets Liabilities Equity
Loans S1 S2 S3 BE Level ($) Flows ($/Year)
S1 -(a+b) a b S2 c -(c+d) d S3 e f -(e+f) BE AE a b c d e f AY a b c d e f AE Credit and Income Expenditure • Loanable Funds and (almost) no role for credit – Sector 1 borrows l ($/Year) from Sector 2 – Pays interest of r.L ($/Year) to Sector 2 Assets Liabilities Equity
Loans S1 S2 S3 BE Level ($) Flows ($/Year)
S1 -(a+b+l+r.L) a+r.L b+l S2 c -(c+(d-l)) d-l S3 e f -(e+f) BE AE a b r L c d e f AY a br L c d e f AE Credit and Income Expenditure • Endogenous Money and an essential role for credit – Sector 1 borrows l ($/Year) from banking sector – Pays interest of r.L ($/Year) to banking sector… Assets Liabilities Equity
Loans S1 S2 S3 BE Level ($) Flows ($/Year)
S1 L l -(a+b+l+r.L) a b+l r.L S2 c -(c+d) d S3 e f -(e+f) BE g h i -(g+h+i) AE a b lL r c d e f g h i AYab l r L cdefghiA E • Change in debt (credit) plays an essential role in aggregate expenditure & aggregate income with endogenous money • Expenditure is fundamentally monetary • 2 sources of expenditure: turnover of existing money • New expenditure financed 1:1 by new debt Credit and Income Expenditure • How to measure? – GDP a (poor) approximate measure of flow of expenditure financed by existing money in $/Year – Change in debt a (better) measure of flow of credit created by new debt in $/Year – Dimensionally accurate & empirically OK to add together to measure aggregate expenditure at a point in time – Analogy • Flow in river • with a pump injecting or removing water:
Credit ($/Year) The “Smoking Gun of Credit” & Walking Dead of Debt • Add GDP to change in debt (credit) to measure aggregate expenditure • Peak GDP+Credit identifies every economic crisis since Japan… Japan GDP and Credit 600000 60 Crisis GDP Japan GDP + Credit 55 Credit 50 Average credit 5 years 45 before Crisis 18% GDP 40 35 400000 30
Average after: 25 minus 1.8% GDP 20 15
10 200000 5
Billion Currency Units per year Units per Currency Billion 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Walking Dead of Debt • USA USA GDP and Credit 20000 60 Crisis GDP USA GDP + Credit 55 Credit 50 Average credit 5 years 45 15000 before Crisis 11% GDP 40 35
30
Average after:25 10000 3.7% GDP 20
15
10
5
Billion Currency Units per year Units per Currency Billion 5000 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Walking Dead of Debt • UK UK GDP and Credit 2000 60 Crisis GDP UK GDP + Credit 55 Credit 50
45
1500 40
35
30
25
1000 20
15
10
5
Billion Currency Units per year Units per Currency Billion 500 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Walking Dead of Debt • Ireland Ireland GDP and Credit 300 60 Crisis GDP Ireland GDP + Credit 55 Credit 50
45
40
35 200 30
25
20
15
10 100 5
Billion Currency Units per year Units per Currency Billion 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Walking Dead of Debt • Spain Spain GDP and Credit 1500 60 Crisis GDP Spain GDP + Credit 55 Credit 50
45
40
35 1000 30
25
20
15
10 500 5
Billion Currency Units per year Units per Currency Billion 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Walking Dead of Debt • Greece Greece GDP and Credit 300 60 Crisis GDP Greece GDP + Credit 55 Credit 50
45
40
35 200 30
25
20
15
10 100 5
Billion Currency Units per year Units per Currency Billion 0 0
5
Change in Private Debt per year as percent of GDP as percent year per Debt Private in Change 10
15
0 20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BIS Data The “Smoking Gun of Credit” & Future Debt Zombies • Future Debt-Zombies: – Countries with >150% GDP private debt to GDP – Where debt is growing quickly (above 10% of GDP per year) – Can’t predict timing • Can be delayed by government enticement into private debt – Australia 2008 “First Home Vendors Boost” – UK “Help to Sell” – But inevitable since at high levels even stabilisation of debt/GDP ratio causes fall in aggregate demand & income The “Smoking Gun of Credit” & Future Debt Zombies • Low debt ratio
GDP Growth Rate 10% Debt Growth Rate 20% Final Debt Growth Rate 10% Initial Debt Ratio 50% Years 0 1 2 3 4 5 6 GDP 1000 $1,100 $1,210 $1,331 $1,464 $1,611 $1,772 Debt $500 $600 $720 $864 $1,037 $1,244 $1,369 Debt to GDP Ratio 50% 55% 60% 65% 71% 77% 77% Credit $100 $120 $144 $173 $207 $124 Total Demand $1,200 $1,330 $1,475 $1,637 $1,818 $1,896 Demand Growth Rate 10.8% 10.9% 11.0% 11.1% 4.3% The “Smoking Gun of Credit” & Future Debt Zombies • Medium debt ratio GDP Growth Rate 10% Debt Growth Rate 20% Final Debt Growth 10% Rate Initial Debt Ratio 100% Years 0 1 2 3 4 5 6 GDP $1,000 $1,100 $1,210 $1,331 $1,464 $1,611 $1,772 Debt $1,000 $1,200 $1,440 $1,728 $2,074 $2,488 $2,737 Debt to GDP Ratio 100% 109% 119% 130% 142% 155% 155% Credit $200 $240 $288 $346 $415 $249 Total Demand $1,300 $1,450 $1,619 $1,810 $2,025 $2,020 Demand Growth Rate 11.5% 11.7% 11.8% 11.9% -0.2% The “Smoking Gun of Credit” & Future Debt Zombies • High Debt Ratio GDP Growth Rate 10% Debt Growth Rate 20% Final Debt Growth Rate 10% Initial Debt Ratio 125% Years 0 1 2 3 4 5 6 GDP $1,000 $1,100 $1,210 $1,331 $1,464 $1,611 $1,772 Debt $1,250 $1,500 $1,800 $2,160 $2,592 $3,110 $3,421 Debt to GDP Ratio 125% 136% 149% 162% 177% 193% 193% Credit $250 $300 $360 $432 $518 $311 Total Demand $1,350 $1,510 $1,691 $1,896 $2,129 $2,083 Demand Growth Rate 11.9% 12.0% 12.1% 12.3% -2.2%
• Future Debt Zombies include… Some Future Debt Zombies • A sample of 18 vulnerable countries… Private Debt to GDP Ratios in Future Zombie Economies 240 GFC China 220 Canada Korea 200 Australia Norway 180 Sweden France 160
140
120
100
Percent of GDP of Percent
80
60
40
20
0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
BS data The “Smoking Gun of Credit” & Future Debt Zombies • Canada: Debt crisis almost certain during life of Trudeau Government Canada GDP & Credit 2500 60 Great GDP Receession GDP+Credit 55 Credit 50
45
2000 40
35
30
25
1500 20
15
Percent of GDP of Percent 10
Billion Loonies per year per Loonies Billion 5
1000 0 0
5
10
15
500 20 1990 1992.8 1995.6 1998.4 2001.2 2004 2006.8 2009.6 2012.4 2015.2 2018
BIS & BLS Data Modeling credit in capitalism • My Minsky model can be derived by from 3 definitions in dynamic form: – Employment rate L/N=l; – Wages share of GDP W/Y=w; – Private debt to GDP ratio d=D/Y
• “Employment will rise if economic growth 1 d ˆ ˆˆ ll YR aˆ N exceeds the sum of population & labor l dt productivity growth” • “Wages share of output will rise if wage 1 d ww ˆˆ wa ˆ rise exceeds growth in labor productivity” w dt R • “Debt ratio will rise if rate of growth of 1 d debt exceeds rate of growth of GDP” d dˆ Dˆˆ Y d dt R Modeling credit in capitalism • Operationalise with simplest possible linear expressions • We get this system with intrinsic nonlinearities:
1 w r d SN v ll v KR
w wl llSN 1 w r d w SN 1 r d v dd SNKR 1 w r d v v Two possible outcomes • (1) Convergence to “good” equilibrium Stable systemWagesEmploymentPrivate (Linear Share functions) Debt of RateRatio Output 1006680
64 9060
62 8040
60
7020
Percent of GDP of Percent 58
Percent of GDP of year per Percent
Percent of population employed population of Percent 600 56
545020 000 505050 100100100 150150150 200200200
www.debtdeflation.com/blogswww.debtdeflation.com/blogswww.debtdeflation.com/blogs Stable Two possible outcomes • (2) Convergence to “bad” equilibrium after apparent “moderation” Unstable system (Linear functions) WagesEmploymentPrivate Share Debt of Rate RatioOutput 12040070
300 10065
200
6080
100
Percent of GDP of Percent
Percent of GDP of year per Percent 5560
Percent of population employed population of Percent 0
1005040 000 202020 404040 606060 808080 100100100
Unstable www.debtdeflation.com/blogswww.debtdeflation.com/blogswww.debtdeflation.com/blogs We’ve seen this before—in complex systems • Property of Lorenz “chaotic” model of fluid flow • This 800 behaviour cannot be generated by • Decreasing followed by standard 600 increasing turbulence equilibrium- oriented
400 “linear” model • Inherent nonlinearity 200 & non- • Convergence to equilibrium laminar flow… dynamics are 0 essential
200 0 5 10 15 20 Modeling credit in capitalism
• Solving for Eq, wEq and dEq yields: ll EZq lS v K v R EZq S v K R vv KZ R S d Eq • Wages share is a residual: w1 rd EEEe e e • Inequality stabilises if debt ratio converges to stable equilibrium • Inequality rises if debt ratio continues to rise • Rising inequality as a sign of systemic breakdown • Paradoxes as well: higher investment propensitylower growth Modeling credit in capitalism • Higher propensity to invest—higher debt level—lower growth Parameters • Strong sensitivity of Parameters
6 3% S 5 Z 3% debt to slope of S Z
investment function l 10 l 60% lS 10 lZ 60% S Z
2% 1% 6% v 3 r 4% 2% 1% KR 6% v 3 r 4% KR Equilibria given parameters• Bankers benefit at Equilibria given parameters
l l 60.2% expense of l l 60.2% Eq Z Eq l Z lS capitalists, workers S v v KR KR v 25.2% v 22.5% sEq Z sEq Z S S v v KR KR v v v v KR Z KR Z S S d 60% dEq 150% Eq So bankers share is b rd So bankers share is bEq rdEq • Higher desire to Eq Eq b 6% bEq 2.4% invest, lower Eq w 1 b 71.5% wEq 1 sEq bEq 72.4% growth rate Eq sEq Eq Equilibrium growth rate Equilibrium growth rate v v KR KR Z Z S S g 2.8% gEq 2.5% Eq v v Simple complex systems model… • With price dynamics & variable interest rate 1; wt r t d t s srv
Inflationr-adjusted t ifinflag nominal t 0, r b interest inf lag t , rrate b 11 1st orderinf timett lag 1 determinesw inflation P 1 s
1 d Ifn r l Kr l dt v 1 d Inflationw wfn affects l wages inftshare w dt
Ifn r s 1 d Inflationv affects debtIfn rgrowth d inf t Kr d dt dv 1 d 1 inft Lagged interestinf t rate reaction 1 to inflation lag inflag td t inf inflag t Simple complex systems model… • The same model in Open Source system dynamics program Minsky: Conclusion • We’re suffering from credit stagnation, not “secular stagnation” • Summers is as wrong now as Hansen was then… USA private debt to GDP 180 Hansen1934 Summers 170
160
150
140
130
120
110
100
90
80
Percent of GDP of Percent 70
60
50
40
30
20
10
0 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020
BIS and US Census Normalized Data