Has Debt-Deflation Begun?
More Steve Keen (an Australian economist),
November 20. 2008 at
Today’s CPI data from the US Bureau of Labor Statistics reveals that consumer prices fell by 1 percent in the month of September.
This is the steepest monthly fall in the index since January 1938, and comes after two previous monthly falls (of 0.4 and
0.14 percent). It is therefore possible that a debt-deflationary process is underway.
There is no doubt that we are in a debt-induced economic crisis; America
may now have entered a deflationary crisis as well. The combination of the two is the motive force that sets in train a Depression,
as Irving Fisher explained in 1933, in his academic paper “The Debt-Deflation Theory of Great Depressions” (Econometrica,
1933, Volume 1, pp. 337-357).
According to Fisher, the steps that lead from a debt crisis, to falling prices, and
a Depression are:
“(1) Debt liquidation leads to distress selling and to
(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down
of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming,
as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
(4) A still greater fall in the net worths of business, precipitating bankruptcies
(5) A like fall in profits, which in a “capitalistic,” that is, a private-profit
society, leads the concerns which are running at a loss to make
(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies,
and unemployment, lead to
(7) Pessimism and loss of confidence, which in turn lead to
(8) Hoarding and slowing down still more the velocity of circulation. The above eight
(9) Complicated disturbances in the rates of interest, in particular, a fall in the
nominal, or money, rates and a rise in the real, or commodity, rates of interest.” (Econometrica, 1933, Volume 1, p.