Sunday, September 19, 2010

New Steve Keen: Deleveraging with a Twist

Bucking the trend, the always insightful Steve Keen has a new post up discussing that deleveraging that nobody else seems to see (and he drills down to compare deleveraging by sector!):

The good news in the latest Flow of Funds data is therefore that a slowdown in the rate of deleveraging can impart a positive impetus to employment. However the bad news is that the economy is now hostage to changes in the rate of deleveraging, from levels of debt that far exceed anything it has ever experienced beforehand. Since much of this debt was taken on to finance speculation on asset prices rather than genuine investment, it is highly likely that deleveraging will accelerate in the future, as speculators tire—literally as well as metaphorically—of carrying large debt loads that finance stagnant or declining asset prices.
Drilling down into the debt data, it’s apparent that the sector that caused the crisis—the finance sector—is the one that has delevered the most is also the one whose rate of delevering is slowing most rapidly.

This is not a good thing, nor is it likely to last. The finance sector exists to create debt, and the only way it can do that is by encouraging the rest of the economy to take it on. If they were funding productive investments with this money, there wouldn’t be a crisis in the first place—and debt levels would be much lower, compared to GDP, than they are today. Instead they have enticed us into debt to speculate on rising asset prices, and the only way they can expand debt again is to re-ignite bubbles in the share and property markets once more.
Exactly.  Go, Steve!