Burning the Midnight Oil for Populist Economics
This is something that you are never shown when anybody raises the "debt crisis". Total debt in the United States compared to total US GDP.
Steve Keen marks the level of total national private indebtedness which has been associated with Great Depressions in the United States and in Australia. We are fortunate here that Steve Keen is an Australian, and can look back beyond just the Great Depression of the 1930's, which we had in common, and can look to the Panic of 1893 and the following Great Depression of the 1890's, which we also had in common. However, we don't have the data in the US for the 1890's, because in the US in the 1890's we operated under "wildcat" banking. For practical purposes, we continued under a modified form of wildcat banking after the establishment of the Federal Reserve System, through to the establishment of the Federal Open Market Committee by act of Congress in 1933.
If we think about it, during the period of Wildcat banking, we had three "industrial" depressions in 60 years. In the 1800's what it was that was "depressed" was different for different observers, so we have both Industrial Depressions and Agricultural Price Depressions. And the wave of exported agricultural commodities from the United States, first and foremost, led to a sustained Agricultural Price Depression from 1893-1896 often referred to by historians as the "Long Depression".
The "Long Depression" had it its bookends two clear Industrial Depressions. The first was the Great Depression of 1873-1879, the longest single sustained downturn in GDP in our nation's history (the single block of grey in the US Bureau of Economic Analysis economic downturns in the . This was similar in many ways to Japan's Lost Decade and what many of us fear is going to turn out to be the Austerity Hysteria Depression of the twenty-teens, it started with a severe financial crisis, the Panic of 1873, and a severe economic recession, and then the recession dragged on in a period of economic stagnation that did not end until recovery began in 1879.
The "Great Depression of the 1890's" was more similar to the Great Depression of the 1930's ~ two recessions in a row with a weak recovery in between. The first severe recession was set off by the Panic of 1893. In an area of wildcat banking with Gold Reserves playing a central role, a key element of the ending of the Great Depression of the 1890's was the Klondike Gold Rush.
Of course, the Great Depression of the 1930's being not only more recent but also the deepest economic downturn in US history, and a Depression that once could not escape by turning to subsistence farming on the now-closed Frontier, has largely wiped the memories of these earlier Great Depressions from our minds ~ something which the clever spin-masters take advantage of when they explain how the New Deal was somehow responsible for extending the Great Depression and if only we had done nothing ~ as in the 1870's and 1890's ~ everything would have been sunshine and light ~ as obviously was not the case in the 1870's and 1890's.
But Wait A Minute, What About Government Debt
Anyway, thanks to the Australians experiencing Depression conditions in the 1890's and 1930's, as did the US, we have three observations of what happens with private debt and depressions, not just one.
And what happens is that a surge of debt reaches a point where there is a massive financial crisis. That massive financial crisis leads to a downturn in GDP, at first increasing debt as a percentage of GDP (that is, the bottom of the fraction gets smaller, making the percentage bigger). But then there is a wave of bankruptcies and the unsustainable overhang of private debt is knocked back down to a sustainable level.
The sustainable levels seem different for the US and Australia, closer to 100% in 1890's Australia, and to 175% for the Great Crash of 1929 in the United States. Indeed, I would suggest that the reason that the Australian level of private debt was no larger than it was in 1929 was that the contributions to the defense of the British Empire in 1915 to 1918 slowed growth in Australia, and so Australia primarily "imported" its participation in the Great Depression of 1930 via collapse of export incomes. But all that changes is the timing of the collapse: if not for the roar of the Roaring 20's in the US, perhaps the rest of the world may have been spared a Great Depression until the middle of the 1930's.
And ... government debt? What the hell difference would it make, unless the government debt was owed in a foreign currency? As long as US government debt is owed in US dollars, and Australian government debt is owed in Australian dollars, those dollars can be created at the stroke of a pen and strike of a keyboard. In the US case, this is via the decisions of the meeting of the Federal Open Market Committee, followed by actions of the technicians that carry the decisions out.
You'll hear a lot about government "borrowing" ... but its all confusion or misinformation. If the FOMC is maintaining a particular interest rate, and the Federal Reserve auctions treasury bills or bonds on the open market, that drains reserves from the system. Maintaining the interest rate requires restoring those reserves, which the FOMC does by ordering Federal Reserve Banks to buy bonds. And after a fairly small amount required to run the Federal System is deducted, all the surplus interest payments on bonds held by the Federal Reserve Banks are returned back to the Treasury.
Which is the functional equivalent to selling someone an IOU from your right pocket in return for money, and then using that money to buy that IOU back again, putting it in your left pocket. Its not a real obligation unless its out in circulation.
Actually, the same thing if the government "retires debt": the government pays the bond holders for their bonds. That pushes reserves into the system. Maintaining the interest rate requires draining those reserves, which the FOMC does by ordering the Federal Reserve to sell bonds. So even though the bonds are "bought back from the public", the public ends up holding about the same amount of bonds, and its the Federal Reserve that has reduced its holdings.
Which is the functional equivalent of passing that IOU back from your left pocket to your right pocket, except you force yourself to play a game of first buying an IOU from a member of the public to put in your right pocket, and then selling one from your left pocket.
And even those are based on rules that the government imposes on itself. When something is a serious emergency ~ not over 10% of the nation's available labor hours and productive capacity unemployed, but a World War that makes wealthy people afraid for the security of their real property and persons ~ the rules are easily changed to allow the Federal Reserve Banks to buy bonds directly from the Treasury.
So when you hear about a debt crisis, you will be hearing about more Kabuki Theater being played out in Washington DC. But what you won't hear about is the massive private debt burden in our economy. The same massive private debt burden that in the 1893 led to a massive financial collapse leading to a Great Depression, in 1929 led to a massive financial collapse leading to a Great Depression, and in 2008 led to a massive financial collapse ... which may or may not lead to a Great Depression, depending on whether we let the Austerity Hysterics insist on repeating the actions of the past in order to repeat the lessons of the past.
Message from Marley: Buffalo Soldier