Rudd’s Essay in the SMH


Rudd’s Essay in the SMH

I found it pretty readable.  I’d invite everyone to read it.  Steve Keen approves of it, although Ross Gittens doesn’t (SMH Monday 27/7) (I trust Steve Keen more).

Steve Keen emphasises that ‘deleveraging’ (ie paying down debt) reduces GDP by the amount that is being paid off – eg paying $1 extra off your mortgage means not paying $1 to your local grocer or whatever.  The economy’s growth therefore starts off negative as it has to overcome the money being put to non-productive use paying off debt.   So if 3% is taken out of the economy because people are paying debt, then the economy must “grow” at 3% to just stay static.

In Keen’s post he identifies the last two great depressions (1890 and 1930).  In the first he notes that deleveraging occurred at an annual rate of about 4% – which he takes as a ‘natural’ rate of deleveraging.  In the second debt fell faster as a result of gearing up for and fighting WWII.  In that case debt fell by an annualised rate of 8%.     Australians have so much debt it will mean that either we reduce GDP by a small amount for a very long time (slowly deleveraging), or we reduce GDP by a large amount for ‘short’ time.  The very long time (based on 4% “natural” deleveraging) equates to 30 years before the debt to GDP ratio will be low enough for deleveraging to stop.    Here’s the kicker though – the ‘short’ time, based on 8% deleveraging is 15 years.

Keen believes that Govt stimulus will not overcome the massive debt that needs to be paid off.  He forecasts debt forgiveness as the only option which will work in any reasonable amount of time.

1 Response to “Rudd’s Essay in the SMH”


  1. 1 Calum Coburn 27 July 2009 at 11:25 pm

    Thanks Brandan. 1 little important detail missing: Steve Keen’s url link: http://www.debtdeflation.com/blogs/


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