Record private debt drags down world growth: economists

In an e-mailed interview, the economics professor was asked how the crisis is changing the global economic landscape. 

“A healthy capitalist economy actually needs some private-debt-financed spending so that firms can invest more than their retained earnings when they wish to expand. Now that private debt is at unprecedented levels, business borrowing to finance investment will be very uncommon. The result is that the economy will grow very slowly, if at all, in debt-encumbered societies like those of the Western OECD. So we are in for a sustained period of low growth in the West until private debt levels fall substantially. Unfortunately since conventional economists and politicians are obsessed about reducing public debt, there is little likelihood of private debt being reduced for more than a decade. So the global economy is likely to grow very slowly for the foreseeable future,” he said.

To the same question, Richard Duncan, the author of “Economics In The Age Of Fiat Money” said “Ever since the crisis erupted in 2008, the global economy has been on government life support, including trillion dollar budget deficits and trillions of dollars of fiat money creation. That is still the case. Without this government intervention, the global economy would collapse into a new great depression.”

Both of them were among a few economists correctly predicting the global financial crisis. They will be in Bangkok today at a dinner talk on "What the Future Holds", hosted by MBMG International and co-sponsored by The Nation. 

Duncan’s first book, “The Dollar” crisis, was published in 2003. In the book, he said that the US trade deficit was destabilising the global economy by flooding the world with excess dollar liquidity, causing unsustainable asset price bubbles in the trade surplus countries (like Japan in the 1980s, Thailand in the mid-1990s, and China more recently).

“(This is) also causing the US economy to be blown into a bubble as the trade surplus countries reinvested their dollar earnings back into US dollar-denominated assets. These trade deficits were being financed with credit. I expected the crisis to come when the US property bubble popped. It did,” he said.

Predicting the crisis, Keen said that most economists ignored Hyman Minsky and his "Financial Instability Hypothesis" before the crisis. I did my PhD on this topic and it led him to expect that private debt bubbles would occur and cause economic crises when they burst. 

“In December 2005, plotted the ratio of private debt to GDP in Australia and the USA, and saw that both ratios were rising exponentially and had already reached levels that had never occurred since World War II. I therefore expected that these trends would break down, and when they did that a crisis bigger than anything since the Great Depression would occur,” he said.