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This time is different, after all

It is well known, and it has been discussed in this blog, that the crisis has been to a great extent associated to the fact that wage stagnation has led to the accumulation of increasingly more unsustainable levels of private debt (echoes of both Godley and Minsky, from the Levy Institute). The graph below shows the percentage change in federal government, household and financial sectors outstanding debt. In other words, expansions have been associated to ever growing private debt.

FRED Graph

Note that, in the 1990s, the federal debt growth rate turned negative when the dot-com bubble allowed for revenue to go up sufficiently, together with the reduction of military spending after the end of real socialism, and the Clintonian "end of welfare as we know it," to lead to significant fiscal surpluses.

Also, in every recession (shaded areas) when private debt (the blue and red lines for household and financial sectors) went down (the blue line does not go down in the Bush II recession, since mortgage debt allowed its continuous expansion), the green line of government debt goes up. More dramatically with every recession, since the fall in private debt is ever stronger.

The main difference between the current Great Recession with the previous two recessions is that private debt falls (negative rate of growth represented by the blue and red lines below the zero line) as a result of deleveraging (debt-deflation). And note that those two are still negative, so there is still need for more public debt, after all spending does maintain a relation with income and debt!


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