Why This Time Is Different

A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:


We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen’s been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Asymptosis.