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How to Burst the Global Debt Bubble


It wasn't lack of regulation that got us into this mess, but regulation itself.

Australian economist Steve Keen is one of the very few who have called this economic crisis correctly. What distinguishes Keen is that his economic forecasts are based on levels of debt and changes in levels of debt as opposed to money supply, output capacity, and other things that led most economists astray.

Keen's video is about 19 minutes long but very much worth listening to in its entirety, as it improves as it goes along. Everything below in quotes, until the next bold title is a partial transcript from the video.

Steve Keen:

"If you have a sane economy, and by sane economy I mean one which is not addicted to debt, not a Ponzi economy, then the change in debt each year should contribute a minor amount to demand. Therefore, if you tried to correlate debt to the level of unemployment you would not find much of a correlation. Unfortunately that is not the economy we live in."

"The red line shows the percent contribution that debt contributes to demand and the blue line which is inverted is the unemployment rate."

"There should be no correlation if the economy is operating sensibly. Correlation is now at the level of 83%. Because we have a debt driven economy, the change in debt levels each year is the major determinant in the change in economic performance."

"Neoclassical economic theory is dangerous. Neoclassical economists completely missed this crisis. My favorite statement comes from the OECD in its June 2007 report."

" A recent survey trying to find economists who predicted this found 12. And there are 10,000-15,000 economists in the US alone which is why I don't particularly accept their assurances that everything is OK from now on."

"Now why are economists so ignorant? Two major reasons. First of all the type of modeling they do is static where you ignore time, or if you have dynamics you assume they are converging to some nice stable situation in the future. And they ignore almost completely the role of credit and debt."

"I probably win the Dr. Doom award around the planet these days now that Nouriel Roubini is expecting the recession will end in about 6 months time. I think it's got a lot longer to go than that."

"What we are going through is a deleveraging crisis and we haven't experienced one of those since 1930. Last time it took 10 years and a world war to get rid of it, and this time we are staring up with 1.7 times the level of debt in America, not even mentioning the derivatives catastrophe that is also there."

"And deleveraging which is the attempt by the private sector to reduce its debt level can overwhelm the government's stimulus. The whole problem was caused by irresponsible lending and the only way out of this ultimately is to eliminate that debt. The debt has to be written off."

Powerpoint Presentation

The above text is a partial transcript from his presentation and the slides are 2 of many slides from the accompanying Powerpoint presentation. You can download the presentation on Steve Keen's Debtwatch Blog. You will need to listen to the video to understand some of the slides.

Australian readers will want to pay particular attention as Australia is certainly not out of the woods.
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