4 Years of Calling the GFC
Steve Keen is professional economist. Steve predicted the Global Financial Crisis in December 2005, and predicted falls in house prices of up to 40%. Some believe he is a “doomsayer” while to many of us he is merely a realist.
Steve has recently written his latest edition of “Debtwatch”. Debtwatch No 41, December 2009: 4 Years of Calling the GFC looks at where Steve started his journey and began to realise the global and Australian economic situation.
“…debt had been growing faster than GDP–4.2% per annum faster in Australia’s case for over 40 years, and 2.7% faster for longer in the USA’s. An unsustainable trend in debt had been going on for almost half a century.
Staring at those graphs, I realised that these debt bubbles had to burst (and probably very soon), that a global financial crisis would erupt when they did, that someone had to raise the alarm, and that given my knowledge, that someone was me.
Less than 2 years later, the Global Financial Crisis erupted, and economists who didn’t see it coming, and who for decades had argued that government spending could only cause inflation, suddenly called for–and got–the biggest government stimulus packages in world history to prevent an economic Armageddon.”
Australia's Private Debt to GDP Ratio, 1945-2006
He covers topics such as debt servicing, deflation and depressions, bad theories, and his opinions on where we are headed.
“With such ignorance about the dynamics of debt, academic economists and Central Banks around the world are hoping that the crisis is behind them, even though the cause of it–excessive levels of private debt–has not been addressed. They are recommending winding back the government stimulus packages in the belief that the economy can now return to normal after the disturbance of the GFC.
In fact “normal” for the last half century has been an unsustainable growth in debt, which has finally reached an apogee from which it will fall. As it falls–by an unwillingness to lend by bankers and to borrow by businesses and households, by deliberate debt reductions, by default and bankruptcy–aggregate demand will be reduced well below aggregate supply. The economy will therefore falter–and only regular government stimuli will revive it.”
Steve’s predictions for the future?
“…I do not share the belief that the GFC is behind us: while the level of private debt remains as gargantuan as it is today, the global economy remains financially fragile, and a return to “growth as usual” is highly unlikely, since that growth will no longer be propelled by rising levels of private debt.”
If you have the time, this really is a worthwhile read. Steve Keen’s blog is at www.debtdeflation.com.