Debt Deflation is Us

In the last post on Economic Narratives I made some points I want to clarify and expand on in this post.  First of all, I talked about the failure of economics to predict the crisis of 2008 or to recognize the recession which began in January of 2007, with the notable exception of Steve Keen.  I asserted that the failure to predict this outcome brought into question the failure of economics as a predictive science.  Steve Keen's existence would appear to contradict this, and it certainly does in the case of predicting financial over investment leading to a crisis, but the point of both examples together is to demonstrate how economics gets muddled by assumptions, emotions, and political battles.  One of the key features of economics is the "exogenous" event, an event that comes from outside the world economists wish to model.  This "exogenous" world outside the models is a very big world. 

The larger point I made and will expand on over time is the notion that economic growth has limits.  These limits are imposed by laws of nature.  If economics is to be legitimized as something useful then it must account for the natural world of hard natural resources limited in quantity and the laws of energy.  The economist sees these as peripherals, as simply commodities whose supply to the market is dependent on the demand for them.  In other words, natural resources are effectively limitless.  It sounds absurd because it is absurd.  There will be more on that as well.

For now, some info.  These videos are all of Steve Keen.  The first is in an interview with Max Keiser and they discuss a lot of things like how capitalism should function, Hyman Minsky instability hypothesis and debt deflation, and why we aren't out of the woods economically.

This video is from a briefing organized by Dennis Kucinich.  This was when the "fiscal cliff" was the big debate.  Keen warns against driving over the cliff.  One of the more interesting parts is when he compares the current crisis to the Great Depression and explains how the wartime economy during World War II fixed the debt overhang created in the 1920's.  Note how much government spending was required to finally break the deflation.

Keen is an astute observer and there's plenty that he says which is non-controversial.  There's plenty that is, such as his in his remedies, like his idea of a debt jubilee.  These two video's do pretty well in setting up the current economic-financial situation for a few current news stories.

Deflation rules the roost

The problem of falling oil prices

Good collection of graphs with some commentary.

A little climate fear.