Straight Talk with Steve Keen: It's All About the Debt

Economic activity—and hence employment—is thus determined not merely by the level of production and incomes, but also by changes in the level of debt. This generates credit-driven cycles that can occur even if debt is still growing, simply if the rate of growth of debt alters. It can also generate long false booms, if the rate of growth of debt continually outstrips the rate of growth of the economy, and especially if that debt financed not entrepreneurial innovation, but gambling on asset prices.

That’s been the story of the last 40 years for America and much of the OECD: debt has grown faster than GDP, and much of the debt has financed speculation rather than investment. The growth in debt during the long boom stimulated demand, but it didn’t add to productive capacity. So when the rate of growth of debt stopped, the debt burden was much higher than it had ever been before.

The only way to restart growth as we had known it for the last 4 decades was for debt to start growing faster than GDP once more. My belief that we’d reached the end-point of this process—that debt to income ratios had reached a limit—is why in late 2005 I predicted that there would be a serious Depression-level crisis in the near future.

Much of my work is truly complex, in the technical sense of the word—I have built complex dynamic mathematical models of the economy which simulate both a debt-driven boom and a debt-deleveraging-driven depression, and these guide my analysis—but the essence of my analysis can be conveyed with a simple numerical example.