This may very well be the most important data point that we are currently receiving every quarter.  Yesterday’s Z1 released by the Federal Reserve showed a continuing decline in household credit.   The latest reading showed a -2% decline in total household debt growth versus last year.  The Fed summarized the data:

“Household debt declined at an annual rate of 2 percent in the first quarter; it has contracted in each quarter since the first quarter of 2008.  Home mortgage debt fell at an annual rate of 3½ percent in the first quarter, ¾ percentage point more than the decline posted last year.  Consumer credit rose 2½ percent at an annual rate in the first quarter, the second consecutive quarterly increase.”

Total household debt continues to decline

Frustratingly, I’ve been discussing this dynamic for well over 2 years now.  In early 2009 I wrote about why this wasn’t the banking crisis that Ben Bernanke thought it was, why the aid package would likely fail to help Main Street (it focused too much on Wall St) and why we were remarkably similar to Japan:

“Unfortunately, our leaders have misdiagnosed our problem as a banking crisis and not a Main Street crisis.  We have ignored the real root cause of the problem which lies not with the bank balance sheets, but with the household balance sheets.  As I have long maintained, we are looking more and more like Japan and the balance sheet recession they suffered.  While we ignore Main Street in favor of Wall Street it’s likely that the recession on Main Street will endure….”

Being a consumer driven economy this decline in debt remains the most important component of our economic plight.  As I’ve previously explained, the collapse in consumer debt has been the primary cause of weak economic growth.  Consumers took on excessive debt levels during the housing boom and when housing prices collapsed their balance sheets were turned upside down.  Consumers were left with excessive debt, collapsing aggregate incomes and a subsequent balance sheet recession.  The overall result is that consumers are still working to pay down this debt and remain in saving mode as opposed to debt accumulation and spending mode.

This is a highly unusual event that has only been seen on rare occasion in developed economies over the last 100 years.  As this process occurs there is only one entity that can help to stabilize the economy – the US Federal government.  As we know from the sectoral balances, when the private sector is in saving mode and not spending mode (due to debt reduction) and the current account remains in deficit, there is only one sector that can offset this weakness in an attempt to create economic growth.  That is the public sector.  Thus far, we’ve managed to fend off the austerity chatter, however, the risks appear to be on the rise as government officials become convinced that the United States is bankrupt (something that is fundamentally impossible).

This is the exact situation we have seen in Japan for the last 20 years and it is currently occurring in much of Europe.  If the United States implements a policy of austerity there is little doubt that the economy would continue to contract again, unemployment would increase and the economic malaise would worsen.  By my estimates, this situation is likely to persist well into 2012 and perhaps longer depending on how the economic environment progresses.


* Addendum 1 - It’s important to note that the consumer debt reduction process is a good development.  It is necessary to help build the foundation for a sustainable recovery.  Consumer debt accumulation in moderate levels should been seen as a good thing.  Unfortunately, it was the excessive debt binge that caused our current predicament.  As this process heals over the years we should embrace it and accept it as a necessary part of the natural economic progression following a debt bubble.  That requires a unique policy response and a particularly important need to focus on Main Street’s woes and not Wall Street’s woes.

** Addendum 2 – Because monetary policy works largely to increase the debt levels and by helping the banking sector, it can actually be detrimental to this natural healing process during a balance sheet recession.  This is why we should reject further Fed intervention in the markets and encourage Congress to look into potential aid packages such as a reduction in taxes.

*** Addendum 3 – Scott Fullwiler wrote a spectacular piece on sectoral balances here.  This should really help clarify what is going on today.  Scott Fullwiler for Treasury Secretary?  :-)


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Your ability to decipher this incredibly complex economic environment never ceases to amaze me. Thanks for making things so easy to understand for the rest of us.

  • Neil Wilson

    Probably worth linking in Scott’s excellent description of the dynamics of Sectoral Balances at this point.

    It shows the difference between what the austerity bunch expect to happen and what is likely to happen instead.

    Well worth a read.

  • Apt Capital

    Excellent analysis.
    It is amazing that both the monetary and fiscal authorities in the US seem bent on doing precisely the wrong thing.

  • Cullen Roche

    What a superb piece by Scott. Just reposted on pragcap as well.

  • Cullen Roche

    Yeah, it would be hilarious if it wasn’t hurting so many millions of people.

  • Cullen Roche

    Just trying to call it like I see it!

  • Alex

    The key point here is that the government’s record deficits are enabling the de-leveraging of the private sector. Given the USA runs a current account deficit, the government must deficit spend in order for the private sector to de-leverage (or undo their negative saving) without an economic depression.

    This balance sheet recession could continue for much longer than predicted if Congress gets scared to spend.

  • Cullen Roche

    Exactly right. I am optimistic that we can work through this faster than most might assume, but the govt appears to be trying to do the wrong thing at every opportunity. Unfortunately, despite the fact that this message has been 100% right for years now few people are listening and the discussion appears to be headed in the exact wrong direction….



  • VRB Ii

    Thanks CR

  • Mediocritas

    A core problem with our monetary system is that money created as credit, must be repaid with interest and yet no money was ever created to represent the interest that must be repaid. Said another way, money owed in the world always exceeds the money that exists, resulting in accelerated deflation and inevitable default should a save & repay psychology become dominant.

    As consumers continue to deleverage and money continues bleeding overseas due to the USA’s trade imbalance, it is only deficit spending that can keep US deflation at bay. Why it stinks is that cash isn’t flowing through the right channels and people who don’t understand the mechanisms in play are blocking an increase of the debt ceiling.

    Given the “interest dilemma”, net debt across sectors can only rise over time. The need to deficit spend is concentrating this into the government sector and creating some huge numbers that are freaking people out. MMTers know the debt is really quite meaningless, it’s just a number representing the current cash in the system plus the rolling legacy factor of interest. The latter can ensure that net debt eventually rises to a level far beyond any capacity to ever repay but what people seem to fail to understand is that there isn’t any intention to repay it all, nor should there be. This is the state all around the world. All the major economies are posting big numbers and stabilizing one another, rolling debt indefinitely, just don’t try to pay it off! (Are you listening Europe?).

    The Fed isn’t at war with Treasury. It’s not going to try to ‘bankrupt’ Treasury. Maybe it was an aim in the past, to bleed the country dry, but that it’s the case now. (The Fed IS the government). They are basically the same entity, separated by a thin paper wall that (unnecessarily) forces the Fed to engage Primary Dealers as middlemen when participating in bond auctions.

    At some point, there needs to simply be a large debt cancellation to deal with the interest dilemma, no more complex than the flick of a pen. It could be done worldwide, we’d blink a few times, and nothing bad would happen. At the very least, official government debt should not include that owed to the domestic central bank. Either cancel it outright, or shift it to a different set of books because it’s irrelevant. Even better, calculate the legacy interest component of net debt and, while it’s concentrated in government hands and owed to the central bank, just cancel that component because it is logically impossible to repay and only causes disaster if any attempt is made to do so by politicians who don’t understand how the monetary system actually works (austerity).

    Regarding the organic principal (and by that I mean principal exclusive of that extended to service legacy interest, in other words cash truly required to support stable prices under real economic growth), the only reason the govt brings it into the system as debt is because it wants to signal the market that it can withdraw said money in repayment (leading to elimination) at a later stage should inflation arise. It’s just a confidence trick, an accounting measure, nothing more.

    With a few legislative changes, the government could simply hand out enough money to allow fuel deleverage of the private sector without recording it as debt. Net money supply would barely change while deleverage continued. Then, when the private sector decided to start borrowing again, expansion of the money supply would be controlled by taxation. Money pulled in through taxation would then be destroyed, in the same way as if it would have been eliminated if being used to service debt. There’s no difference here. One way records a number on a piece of paper (and freaks people out), the other does not.

    Of course the story is different when govt bonds are being held by the private sector (not central banks), but that’s not what I’m talking about here. It’s not clever to allow an external entity to fund rolling of legacy interest debt as this allows the foreign sovereign to hold you over a barrel. Your only defense is M.A.D. The Fed knows this all too well, as do all the central banks, which is why they play so nice with one another and hammer the out-group. Only China threatens to throw a spanner in the works, but, so far, that’s all just bluff and bluster.

  • Anonymous

    ” Said another way, money owed in the world always exceeds the money that exists, resulting in accelerated deflation and inevitable default should a save & repay psychology become dominant.”

    I also initially thought that THIS is the problem of the system, and it partially surely is, but Steve Keen has shown that even without new money creation, IR may be repaid and the system is in equilibrium, due to money velocity being higher than 1. So I am afrait the quantity of money critique is not fully true, but to an extent it has merit.

    Now why has deleveraging such a negative effect then? As per Steve Keen again and common sense, GDP grows not only due to income, but also due to net debt creation (which to the extent that it is not inflationary) creates additional aggregate demand. When debt growth slows down, this additional demand drops and “credit impulse” turns sharply negative in the short run (second derivative effect), with the latter leading to panic.

  • BT

    This is a good post and I only make one complaint:

    Please don’t conflate private sector total debt repayment (which tends to contract bank balance sheets and the total *stock* of credit) with private sector net saving (which is a *flow* measure from government deficits and net exports).

    The way the MMT crowd presents this, people can confuse ‘paying down debt’ with ‘net savings’.

    A better way to present this is to talk about the total stock of money. Either private sector borrowing or government borrowing creates deposits (bank balance sheet liabilities) and loans/bonds (bank balance sheet assets). If the private sector is not borrowing enough to keep the economy growing, then the government needs to step in to maintain growth in the stock, and hence flow, of money in the economy.

  • Mediocritas

    Sure, I’m familiar with this. If banks rapidly cycle their profits (from interest) back out into the system and velocity keeps up, the system can keep functioning.

    But I don’t believe this to be sustainable in the longer term. Firstly, that recycling clearly does not occur rapidly enough as evidenced by the overgrowth of the financial sector relative to the rest of the economy and by the fact that money, concentrated into financial endpoints tends to stay concentrated as it takes its time flowing through the watershed back to where the working stiffs actually need to find it. In some cases, it stays within a specific (financial) tribe of society and never again sees the light of day.

    For example, I, as a banker, am quite likely to purchase a piece of fine art at auction. My money flows to another banker who sold it and uses the money to buy a Maserati, sending money to the luxury auto dealer who uses it to buy diamonds from Australia, etc. The money originally came from working stiffs servicing their loans but it’s going to be quite some time before it dilutes and cycles back to their peons.

    Inevitably, we arrive at a situation where we’re all running on the spot so fast that we just can’t do it anymore. Collapse and defaults become unavoidable, causing the financial sector to hold onto cash even more tightly and the downward spiral to worsen.

  • hh

    Thanx CR. Nice explanation as usual.

    Could you tell me more about areas where the additional government spending should occur and what would be the adequate size?
    As I see the government should buy some services/goods for money from one group of citizens and give it over (for free) to another citizens, could you name/choose/show those groups please?


  • boatman

    when you type public sector stimulis and support i read partisan wish list….i realize no money spent is ‘truly’ wasted, but much of the last stimulis was not an investment in our future, it was JUST…… spending…… money.

    a bullet train from L.A. to Lost Wages, Nevada for harry reid?

    would be great if we can get something we need for it.

  • Brick

    So the evidence for the consumer paying down debt is that the Household debt declined at an annual rate of 2 percent in the first quarter. I have to ask how much of that debt decline is due to foreclosures. In some respects that makes things twice as bad because suddenly people go from living rent free to having to pay rent. We also have some balance sheet retraction due to people falling of social security. My take would be that the problem is not balance sheet retraction but non balance sheet expansion. That difference could be important because it affects the length of time you would need to apply stimulus and tends to negate the effects. Stimulus has to promote growth to be long term sustainable in my view.
    We cannot ignore that consumer credit rose 2½ percent at an annual rate in the first quarter, which is not exactly what you would expect in a balance sheet retraction. Here again you need to delve into more detail to see that alot of that expansion is due to student loans.
    Now I have had to re read Scott’s post on sectoral balances and he is correct that bankruptcy is not an issue and that austerity can increae the deficit, but I still have some issue with it. Namely around currency valuation, imported inflation and time delays in changes happening. Those flows can get temporarily out of step while changes occur and they are not instaneous. It seems to me those delays can do a lot of harm if you move too quickly in the direction of austerity or stimulus. Now if you argued that every country applied the same stimulus package and allowed their currency to fully float, then it would work. In otherwords I think that there are complexities not explored which alters the dynamics of how the interactions work, but I am open to persuasion.

  • Mitch83

    Hi Mediocritas,

    “Said another way, money owed in the world always exceeds the money that exists, resulting in accelerated deflation and inevitable default should a save & repay psychology become dominant.”

    You have to look at it keeping in mind to seperate the government sector and private sector.
    The private sector’s debt might always be greater than the “credit money” available due to interest (btw this force is the engine of innovation, the private sector can’t stand still, it always has to serve debt), but the private sector has an additional “money stock” originating from government spending which is “net money” for it, because it is no PRIVATE LIABILITY. Public “debt” are net financial assets for the private sector (you correctly state that of course nobody shall repay it)! It is like the “money cadre” on which the “credit money” is leveraged (atm this leverage is clearly too high -> deleveraging, also regarding that much private debt wasn’t appropriately collateralized before 2008 and private creditworthiness was shattered in the crisis, this all btw has to do with psychology).
    The government sector can carry on its “debt” forever and as monopoly supplier of the currency has the ability to always serve all interest payments.

    “With a few legislative changes, the government could simply hand out enough money to allow fuel deleverage of the private sector without recording it as debt.”

    The funny thing is, although government liabilities are recorded as “debt”, it is not “true” debt, even atm. No legislative changes necessary. It all comes down to the point that the bonds of monetarily sovereign governments can easily be counted as money. Why?
    When the US spends it injects reserves into the private sector (to the banks of the beneficiaries), so it KNOWS that these reserves are there when issuing USTs. It KNOWS by definition that on the auctions there are ALWAYS the banks of the beneficiaries that want to buy USTs. Bid/Cover ratios on auctions are always >1, there will never be an auction that fails in the US. If you know the “creditors” will ALWAYS buy your “debt”, it is not true “debt”.
    What is the primary reason for this?
    You have to understand that banks can convert all their non-interest bearing reserves into interest bearing USTs and don’t lose one bit of purchasing or lending power. USTs are ALWAYS better than reserves.
    First let’s look at purchasing power (thanks to Scott Fullwiler for explaining this): A bank doesn’t go to the mall shopping, when it wants to buy something it just buys, perhaps creating an overdraft at the Fed. If necessary, it then either a) goes to the interbank market and borrows reserves from other banks, b) goes to the Fed’s discount window or doing repos with it (the Fed ALWAYS guarantees to accept USTs as collateral), c) sells USTs on the liquid secondary markets, d) goes to the private repo markets.
    Let’s look at the lending power: Banks are never revenue constrained. If they find a creditworthy borrower they just give loans, no matter how many reserves they have. The Fed HAS TO provide the reserves through OMOs/repos in order to meet its interest target rate. Also the bank could again do a) – c) to get reserves or make a sweep account to circumvent rr etc.
    So USTs are “money” for banks, and better than reserves because of interest.

    The US government KNOWS it can ALWAYS at least sell their desired amount of USTs, and perhaps more.

    So the US already hands out money without going into “real debt”. No legislative changes needed.

  • Thomas

    You do really great work with your interpretation of the balance sheet depression and with MMT.

    I disagree, however, with your conclusion that the government has to “pick-up the slack” and spend in order for the private sector to save – this is much like old-school economics.

    The deleveraging will occur regardless of the government spending or not. You write about Japan with knowledge – you should know this.

    It takes more than $7 of new debt to get $1 of GDP growth, based on official numbers. We are getting close (if we are not already there) to the zero-bound range where no amount of new debt will bring GDP growth.

    Balance sheet dynamics are much greater in scale and relevance than income statement flows. You can’t plug the whole in one (balance sheet) with the outlays of the other and expect to be better off the next year.

    Much like the MMT you know so well about, in the end it is a zero sum game. The long-term growth prospects will be the same with or without government spending from time zero forward. Long-term growth prospects will reflect current balances sheet strength that may in turn allow sound investments in innovation and productivity.

    The rest is hogwash. Asset values at some point will reflect balance sheet strenght or weakness and consequent growth prospects. GPD growth of 1-2% will bring valuation multiples to dizzing lows. Government spending won’t change that.

  • Sormiou

    Agree with Thomas.
    For the last 20 years Western economies have been “eating” their forward growth thanks to the (over)use of credit.
    Solving this with more credit (this time by governments instead of individuals/companies) to consume today the growth of tomorrow is just a way of kicking the can down the road.
    I’m not advocating huge austerity measures, but at least a reasonable approach that would primarily see developped countries governments prioritize their budget to education/reducing hiring costs.

  • Mitch83

    “I disagree, however, with your conclusion that the government has to “pick-up the slack” and spend in order for the private sector to save – this is much like old-school economics.”

    No, the private sector can TRY to save, but if the government doesn’t “pick-up the slack” all that happens is that the money supply shrinks through deleveraging = private debt amortization -> deflation -> more debt amortization / debt defaults -> more deflation etc. This is the deflationary death spiral.

  • Mitch83

    “Solving this with more credit (this time by governments instead of individuals/companies)”

    There is a huge difference between public and private debt. Public “debt” is “net money” for the private sector, meaning it has NO PRIVATE LIABILITY. So it’s the “money cadre” that gets leveraged by private debt aka “credit money” (which has a corresponding liability in the private sector).
    In times where the leverage is too big, the ratio between “credit money” and “net money” has to be adjusted. It can be done by deflationary depressions or by increasing public “debt”.

  • Geoff

    Sure, households are retrenching but corporations are not. Non-financial corporate balance sheets are currently very sound, with plenty of room to lever up, spend and create jobs. Perhaps I’m looking at the glass as half-full, but there is too much pessimism around here.

  • Mitch83

    Modern economic activity based on the division of labour is characterized by preliminary financing, which is the private sector going into debt. This debt force keeps the private sector to innovate to pay down the debt. It’s the engine of progress and wealth. If “money” isn’t debt based like in feudalism you have no dynamics.
    Debt (public and/or private) can never be repaid as a whole without ending Capitalism as we know it. There always have to be people that go into debt at least as much as old debt is paid down. If this isn’t achieved you end in a deflationary death spiral (vicious circle).

  • Mitch83

    You describe the big imbalance of excessive and increasing wealth concentration in the hands of rich individuals/corporations that don’t need to / want to go into debt. It widened after the crisis. This is no pessimism, it goes straight to the heart of the system.
    Long-term the only solution I see to save the system is some sort of reallocation / redistribution of wealth to individuals that want to go into debt by providing them the adequate collateral for “credit money”.
    This can be done in a non-bloody, non-anarchic/revolutionary way by targeted “social” government spending / taxation to prop up the balance sheets of the “poor”/Main Street, so that they can afford to buy back high quality collateral.

  • ES

    > This balance sheet recession could continue for much longer than predicted if Congress gets scared to spend.

    Isn’t it also a question of who benefits from all the spending? It seems corporations have benfites so far but they are very stingy with passing the benfits to the workers. And the workeras are the ones most burdend by the debt and thus dragging the economy down. I know for a fact none of the last 2 years spending benfited me personally , the salaries have been flat for almost 10 years now. In my case the only way to get more income is to take increasingly more and more work and responsibility, i.e. via productivity gain. But on a larger scale this approach displaces other less experienced (younger) workers creating a vicious unemployement spiral.

  • Michael

    Excellent article. The consumer is 70% of GDP. With consumer spending dropping GDP will drop. Consumer debt repayment will force a reduction in spending. Reduced consumer spending will reduce GDP. It seems absolutely clear to me. The Federal Government only cares about the big-money elites and not America. The big-money buys the government and will get the government benefits. The American public will not get the benefits of government policy. The end result is a continue of the decline in the standard of living. Whether we get inflation or deflation is immaterial to the country as a whole because we are going to suffer dramatically either way. It’s just a matter of time.

  • james

    so cullen doesn’t believe in the a “free” market?

    the government has been running deficits longer than most have been alive.

    “government must pick up the slack?” maybe its just cullen’s terminology that i have problem with. “how bout government must get out the way?”

    how many more trillions must the government spend? the usa is already a “welfare” state. and, i thinks there has been much discussion on this board about how effective government is at redistributing capital and picking winners.

  • Cullen Roche

    I said we need to cut taxes, not spend more.

    Anyone who believes in a truly “free market” doesn’t understand how a representative republic functions. Truly “free markets” only work in an anarcho-capitalist society and those don’t exist despite Robert Murphy’s dreams of coconut islands…..

  • Cullen Roche

    Agreed. I am not super pessimistic about any of this. I just think it means high unemployment, low growth and the sort of environment we’ve basically been in.

  • Cullen Roche

    Tax cuts. I didn’t say spending.

    I agree that the de-leveraging will occur no matter what. But the difference between providing the pvt sector with some broad relief (via tax cuts) could potentially be the difference between low growth and full blown economic contraction and something much more drawn out and painful.

    Why should the entire country suffer for the sins of the reckless?

  • Cullen Roche

    Mitch, you’re on fire today.

  • SS

    Cullen, your back and forth on twitter with Zero Hedge is amazing. Anyone who doesn’t follow pragcap on twitter is missing out.

  • Midwest FA

    Good stuff. But I can’t help remembering the old testament prohibition against charging interest. I’m no bible thumper. Far from it. And I fully recognize that there would have been no rise of capitalism, technology, etc if it had not been for the rise of a banking system based on interest. But it’s interesting to remember this prohibition against charging interest. Did the ancients understand the problem in the same way? Hard to know.

  • james

    i’m sure i have a lot of common ground with you but:

    many believe the market not being truly being “free” or “free-er” is the problem. and the economy should be allowed to go through its cycles to correct fundamental excesses, rather than government overreacting, artifically delaying the cycle, and creating other problems in the process.

    and i think the TREND in the national debt to gdp is a genuine cause for concern.

    “The ratio of federal debt held by the public to nominal GDP is likely to move up from about 40% before the onset of the financial crisis to about 70% in 2011.” That puts the debt-to-GDP ratio at its highest level since the early 1950s, as a result of the huge debt buildup during World War II and just afterward. The CBO projects that the debt-to-GDP ratio will soar to 82% by 2019.

  • Cullen Roche


    I am a free market guy. Trust me. I don’t like govt allocating funds. I hate when the fed intervenes in the markets. But we have to also understand that we live in a society where we have decided upon an organized representative republic. So, by definition, as a people we have chosen to have some level of oversight and intervention from an entity that is larger than all of us. In many ways, it binds our society.

    Now, is that entity too large and overstepping its boundaries? At times, yes. Just look at my rants against some of the spending over the years or the Fed, etc. But that doesn’t mean govt is ALWAYS bad.

    Given that there is no solvency debate, I don’t see why the country as a whole should choose to punish the prudent when it’s the imprudent who messed up? So, I say let banks fail. Let homeowners underwater fail. These things are going to occur no matter what. If you can’t pay your mortgage a tax cut isn’t going to make or break you. But don’t let ME go down in YOUR mess of a ship.

    There’s no reason why the entire country should suffer just because a bunch of homeowners messed up and the banks decided to turn a small boom into a bubble.

  • Mark

    Winston Churchill said “Americans can always be counted on to do the right thing, after they have tried everything else first.”

    We are still deep into trying everything else.

  • El Viejo

    Ha! What a metaphor for the times in which we live!

  • El Viejo

    Old Chinese curse:

    “May you live in interesting times.”

  • Anonymous

    “Inevitably, we arrive at a situation where we’re all running on the spot so fast that we just can’t do it anymore. Collapse and defaults become unavoidable, causing the financial sector to hold onto cash even more tightly and the downward spiral to worsen.”

    Well, I agree with that. I notice the same. That is why I said this theory has merit to an extent. Mitch above says this stimulates innovation – well it is true only to an extent, but currently we seem to be overstimulated and exhausted. Because the productivity gains do not accrue to the common man, but to the elite only. Notice that innovation and scientific progress has existed in all kinds of regimes and social systems over time. So I would say – no innovation and scientific progress are not due to the monetary system (although they may have been overstimulated for a period by it).

    Currently we are like a taxi driver who has not slept 5 nights and has been drinking coke to stay awake. And we are wondering why is the third coke in the sixth night not stimulating enough. Maybe the driver just needs one more coke?


  • Cullen Roche

    Tax cut boatman. Unless of course, you’d like your taxes increased :-)

  • james

    well, the real economy killer is inflation, ala, a devaluing currency.

    i don’t think its any coincidence the us dollar has been in 10 year bear market, while the national debt has increased by leaps and bounds.

    and sorry, i think the cpi is bogus. the markets and my checkbook tell me differently.

  • Cullen Roche

    ECRI declining, M3 very low, bond yields approaching new lows, etc. CPI isn’t the only indicator showing low inflation….

  • Charles R. Williams

    Debt is not the issue. Household net worth is the issue. The fall in household net worth is the driving factor behind the recession. People need to add to their wealth. The decision to collectively save more and consume less can normally be accommodated but the size of this shift exceeds opportunities to invest. So money is piling up as real interest rates go negative and unemployment is stuck at 9%. This is where “animal spirits” come into play and risk-taking job creators have zero confidence in this administration’s policies. The economy will continue to creep forward. Unemployment will continue to creep down until it hits the disappointing new normal that follows from those policies, possibly 7-8%.

  • Cullen Roche

    Good point. Will keep in mind.

  • boatman

    now you’re talkin MMT man.

  • Ralph Musgrave

    Cullen, Re sectoral balances, William Dudley (president of the New York Fed) struggles manfully with the concept here and gets his knickers in a twist.

    See the ten or so paragraphs starting “However, the large size of the fiscal deficit….”

    Do you think he has been taking a peep at MMT material?

  • Cullen Roche

    Just our economic reality. This is no time for higher taxes.

  • Dan Kervick

    What kinds of additional incentives could we give companies to create jobs and raise their employees’ incomes and security level?

  • Cullen Roche

    Higher revenues. And that means higher aggregate demand. Higher aggregate demand will stem from healthy consumers. It’s going to take time. We’re moving in the right direction, but it’s a snail’s pace….

  • Mediocritas

    I don’t think you really absorbed my post Mitch, otherwise you wouldn’t have written yours because you’d realize I agree with you! Nothing in your post I don’t understand and didn’t just say (so I’d thought). Read it again, I’m saying that (international factors aside) govt debt is irrelevant. I’m pointing out that it could easily be diddled to satisfy the debt hyperventilators and it wouldn’t make a lick of difference. I’m not actually suggesting that it should be.

  • Mediocritas
  • LVG

    It’s amazing what a few months will do. I was beginning to question whether your analysis on QE was right. It seemed right, but the data didn’t corroborate it. It certainly does now. Nice work Cullen.

  • Ralph Musgrave

    Cullen, I think Dudley makes a couple of mistakes, as follows. First he trots out the usual “deficit terrorist” bit about how the deficit and national debt expansion cannot go on as they are much longer. See passage starting “However, the large size of the fiscal deficit…..”

    Well there is a big problem here: what if households continue deleveraging for the next five years, and the deficit is needed for that period? Indeed, if that first chart of yours above is anything to go by, households WILL need to carry on deleveraging at their present rate for about five years if they want to undo the leveraging they undertook between Jan 2005 and Jan 2008. And thanks for that chart, by the way.

    Dudley is in a bind here. The way out of the bind is thus. Deficits do not need to be funded by an expanding national debt: they can perfectly well be funded by an expanding monetary base (as Keynes, Milton Friedman and other pointed out long ago). Indeed, in that it’s money that deleveraging households are after, funding the deficit with new money is entirely appropriate.

    His second mistake comes in the three paragraphs starting “Assuming that the consumption share…” Here he argues that when the deficit ceases or reverts to normal, the reduced injection from public to private sector will have to be made good by some other injection, e.g. increased investment. But, so he claims, there is not much chance of this injection. Therefor the injection will have to come in the form of a reduced drain of dollars to emerging market economies (EMEs).

    The flaw in that argument is that if demand by the private sector for private sector produced stuff recovers to pre-recession levels, then the bulk of the deficit, i.e. the injection from the US public sector to the US private sector can just cease. Period. Full stop. End of. There is no need for EMEs to be caught in the cross fire.

    Of course as long as EMEs continue to want to store up dollars, Uncle Sam will need to continue printing them and continue with a deficit (of smaller proportions).

    There’s nothing like churning out bits of paper with “$100” printed on them and exchanging them for real goods and services, and then gradually degrading the value of the bits of paper via inflation. Wish I could do that!

  • Bruce Holland

    Most of the household debt reduction is due to families defaulting of debt and getting charge offs from the creditor or going bankrupt. There is no household debt reduction other than discharge of debts through bankruptcy.

  • Gerald P

    Cullen you are correct, but the government (bankers incognito?)may in effect know what it is doing, to lower labor costs and to improve exports and tough out a lower standard of living with a shrunken middle class. The top 5% would maintain or grow its consumption via luxury goods and bonds, helping maintain the possibly artificial GDP standard to indicating growth.

  • billw


    I believe that BB understands what he is doing even if we disagree with him. He is a member of the liberal northeastern elites and they tend to take care of their own ( as in Wall Street )very well thank you.

  • Dennis

    “Long-term the only solution I see to save the system is some sort of reallocation / redistribution of wealth to individuals that want to go into debt by providing them the adequate collateral for “credit money”.” The ONLY SOLUTION. WOW. So we better get going on this.
    I posted an idea for doing this sort of thing. Uncle Sam could deficit spend $2,000 to each and every teacher in the world in 2011 (they must prove they were/are a teacher of kids at any level anywhere, for school year). Do this again in 2012. That way you could easily say that the money was not wasted by those individuals that wanted their free money for the purchase of puts and calls.

  • JWG

    “I say let banks fail. Let homeowners underwater fail. These things are going to occur no matter what. If you can’t pay your mortgage a tax cut isn’t going to make or break you. But don’t let ME go down in YOUR mess of a ship.

    There’s no reason why the entire country should suffer just because a bunch of homeowners messed up and the banks decided to turn a small boom into a bubble.”

    TPC, Amen! Let the markets clear; let the fire clear out the Wall Street banksters and the residential RE oversupply; prop up Main Street and the real economy with fiscal and monetary stimulus; bring back prudential banking old school style and recapitalize it with keystroke money if necessary. Nationalize and then liquidate the zombie TBTFs, hold an RTC-style international fire sale of assets and send fiscal and monetary stimulus to Main Street instead of Wall Street. Do what Paulson and Bernanke couldn’t do because they were part of the problem rather than the solution. To a Wall Streeter, it was unthinkable to do to Wall Street in 2008 what Reagan did to the S&Ls in the late 1980s, which included sending a lot of Main Street bankers to jail and liquidating their mess via the RTC.

    I hope it isn’t too late to do what should have been done in 2008-09. Every day we proceed further down the road of denial, mark to fantasy and welfare for Wall Street gets us closer to the Japanese trap of a zombie economy with spasms of QE keeping markets on life support. If we had let the fire burn on Wall Street in 2008-09 we would be growing again by now and the banksters would be spending their ill-gotten millions on white collar defense counsel and bail bonds.

  • Octavio Richetta

    Behind all the talk about how to revive/save the US economy via deficit spending, there seems to be the tacit assumption that, somehow, we could escape the mess we got ourselves into with no pain/little pain. There is no painless way to plug the black-hole left by the back-to-back bubble bursts.

  • jrbarch

    “A core problem with our monetary system is that money created as credit, must be repaid with interest and yet no money was ever created to represent the interest that must be repaid.”

    Mediocritas – just wondering, why isn’t the credit+interest(credit money created) = to the repayments (credit money destroyed)?


  • BT


    It’s not a tacit assumption, it’s the truth. The pain of recessions is caused by inadquate aggregate demand. Recessions end painlessly when aggregate demand returns.

    What determins the extent of pain is how deep the loss of demand is and how long it takes to recover. If you rely solely on the private sector (which is paying down debt faster than it is borrowing) it will take a very long time indeed. The government can step in an borrow more to maintain demand and prevent pain.

  • Scott Fullwiler

    I don’t think using the word “money” ever helps. It makes things more vague. Money is always someone’s liability. Better to be specific about whose liability and which one you are talking about.

  • quark

    I see the Administration is beginning to tell NATO, this time in a more public forum to put up more $. It is unfortunate that the misguided financial policies during the Reagan administration under the misguided assumption of driving our economy while driving Russia’s into the ditch has found us in the ditch as well.

    Wonderful thing that we can enjoy reading how families are giving their homes over to the financial institutions…oh, I mean the government. Once the middle class can find jobs they will be vibrant consumers and ready to purchase homes once again. Ain’t gonna happen. The bubble has passed, the homes have been built and now stand empty and the baby boom generation and the generation that follows are jobless. Our real estate market looks like China’s.

    A citizen who has lost their jobs and then their home is not a taxpaying citizen. A citizen who holds a job but see their neighbor first lose their job then their home does not make a happy citizen nor does a citizen who feels blessed that their home value has fallen by 10%-80% make a happy citizen who wants to spend.

    This is not a chart of healing yet but a chart of destruction of heart of the middle class. As I said before, this isn’t going to end well regardless of the theoretic antidotes prescribed. W

    Congratulations, all of our free markets have turned America into Pottersville.

  • Cullen Roche

    Still working on that one. Hard to rewire my thinking!

  • Patrick

    “is unfortunate that the misguided financial policies during the Reagan administration under the misguided assumption of driving our economy while driving Russia’s into the ditch has found us in the ditch as well.”

    Are you nuts? During Reagan’s tenure, the economy grew by one-third and added 20 million new jobs, then in the following boom of the 90s, grew another third and added another 20 million jobs. So the economy practically doubles then contracts 20 years after he’s gone (2 recessions intervening), and its not the policies of 2008 but policies of way back then you blame? Why not pin it on Grover Cleveland while youre at it?

    Give us more of those ‘misguided financial policies’ and we just might get us out of our current malaise (shades of Carter-era feelings in our current quagmire).

  • Willy2

    Z1 is still contracting. So, all that government spending didn’t help at all. In stead of the US economy contracting by 10 to 12% the economy contracted only some 1 or 2%. In other words the FED/government can’t replace the private demand. Instead the US government now has much more debt to boot.

  • Willy2

    Still a lot of folks here on this forum drinking lots of Kool Aid called:
    1. “It’s (here in the US) different” or
    2. MMT.

    So, Z1 is still contracting. Then we’re still in a deflationary environment. And that’s what a lot of (Hyper-)inflationistas fail to grasp. And when the Eur/USD and the USDX finally turn a corner then deflation is back again in full force. And then my bet is that interest rates will be on the move higher. We’ll see how it will play out.

  • Ben W

    Well, yes, we blame Reagan’s policies (and him, and the other presidents who followed those policies), because they were the policies that got us into this mess. Lowering interest rates and running up debt – Reagan was the first “conservative” who did this, and for the most part it’s been how things have continued for the last 20 years, not just in Reagan’s time.

    Not to say that I’m blaming Reagan himself for all of this – it was him, Greenspan, Bush 2, Congress, etc. – not just Reagan.

  • Anonymous

    “Modern economic activity based on the division of labour is characterized by preliminary financing, which is the private sector going into debt. This debt force keeps the private sector to innovate to pay down the debt. It’s the engine of progress and wealth. If “money” isn’t debt based like in feudalism you have no dynamics.”

    Is this a counterfactual or can you prove it?


  • George H


    Do you have an entry, or a list, of all your “Special Report” posts? Maybe handy to review them later.

  • Mark F

    I don’t see how the government can pick up the slack. They currently have 14.3 trillion in debt already. The total private sector bad debt that will need to be deleveraged is far greater than that, 15 trillion in the financial sector alone. The government only takes in 2.1 trillion in tax revenue and they now have rising social security costs. Another factor is aging demographics. The older the median age of a country gets, the smaller the credit markets get. Everyone is trying to pay their debt off so they can retire. The credit markets work like a Ponzi scheme. You need to have more young people entering them to take on more new debt so it can trickle up to the X’ers and boomers so they can pay down their debt without reducing their discretionary spending, and therefore reducing the velocity of money. We don’t have that working in our favor anymore. Neither do any of the developed nations including China.

  • Hmmmmm

    Perhaps you need to change the name of your website from something other than “Capitalism”…. it is certainly not what you are advocating in any of your post. Just more MMT central planning, price fixing, distortions and manipulations…. Aka fascism, totalitarianism, and total garbage. It is also interesting because you seem to have general empathy for mainstream and real people even if you lack the understanding of human nature and beings. Don’t worry, I shall edify you.

    I will give you pragmatic… i.e…. inability to see or think past the status quo, and well… supporting the status quo of a fraudulent, corrupt and immoral monetary system is certainly pragmatic, from a point of view. However, capitalism…. Ehhh, no… not so much. Capitalism is more than private ownership and a profit motive.

    Frankly, I haven’t bother to read any of your comments and I certainly could not get past a parapraph or two in any of your “analysis” since it is so wrought with logic problems it becomes little more than humor and an exercise is seeing what sophistry you concoct to maintain mutually exclusive ideas. It seems you need some actual reeducation of what the discipline of “economics” actually is all about. No doubt you have some ivory tower formal education on such matters, but perhaps you forgot your intro 101 class. So, as you maybe have forgotten, economics is a social science (not a natural science with falsifiable theories and laboratory experiments) that simply studies the COMPLEX decisions individuals make in a world of nearly infinite wants and limited resources. So, when you can tell me the mechanism in which nearly 7 billion people, who each on average make 3,000 economic decisions a day from what to eat, how far to drive to even when to get dressed or tie their shoe, I would love to hear it. You MMTers are so locked in tunnel vision with your belief that simply adjusting monetary volume and government spending is the answer to how people make decisions. I left academia because of this nonsense and joined the real people of the world. YOU, and none of your central planning theorist of whatever name you choose to call them, have no idea how anybody other than yourself makes their resource allocation decisions. You are an arrogant fool to think otherwise. You have no idea how much milk I need in the fridge or when I need to change my car’s oil…. Therefore, YOU HAVE NO IDEA HOW TO SET PRICES THROUGH MONETARY POLICY.

    So lets break this down for the comment readers. So, this is a recession (sic) caused by a lack of debt based consumption. So, the obvious solution it to restart debt based consumption bubbles? Next, it appears both to be a good thing and a bad thing that household debt levels are decreasing. On one hand, that is the cause of the recession (sic) but on the other thing, tis “good” because it means sustainability in the future. Pray tell, what is your mechanism to prevent your next bubble from blowing? All that lovely regulatory capture? Non sequitur!

    So, you go on to say that this is not a “banking recession”… well, maybe not now thanks to insider bailouts and balance sheet relief has put bank reserves in a nicely capitalized position. However, do you even have an inkling of what a “financial crisis” is in relation to? Apparently leveraged CDOs and CDS to 40 to 1 (things that likely should not even exist) amounting to some $600 trillion in unknown black hole value is of no concern and of no cause? Where did all those derivatives magically go? Did ending Enron mark-to-market accounting fix that? Clearly this DEPRESSION is about many thing. A housing bubble collapse (actually, just a protracted asset collapse since DotCom burst), a financial crisis (caused by BANK BALANCE SHEET UNKNOWNS) and a consumer base spooked by government intervention, government debt, government spending, fear of taxation, REAL INFLATION which is highly regressive for people living on the margins, government control, a police state emerging and endless wars. So in one instance you are right (there, I gave you credit for something). Consumers are spooked and not spending but not for any reason I have seen you address yet. That is not a good thing when you have such a structurally unbalanced and inequitable system. But hey, don’t you MMT guys just think government should give us all minimum wage jobs in this event? Your silly little hoity theory does not address and can not address any of this, save yourself the energy in trying to devise another technocratic sophistry that will impress the rubes who read your work (by the way, if you agree with this man, consider yourself a moron by association). Again, real world buddy, come down from the ivory tower. Put down your abacus and join humanity.

  • Hmmmmm

    Do you know the difference between correlation and causation?

    I wonder….

    I really wonder…

    I have yet to see you actually provide any proof of your theories. It seems you take your own affirmative statements as proof.

    And no, austerity is nothing but a code word for bend over little guy as your social betters prepare to rape you.

    Maybe if you were congruent in some way with your thinking and writing, it would make more sense. But I think you need to understand it is not advisable to put mutually exclusive statements in the same paragraph.

    And back to your record of accurate calls… I can find none. Must be all in your mind.

  • Hmmmmm

    I am not impressed with your paralogisms and specious attempts to have it both ways on monetary and fiscal policy. Others may not see your inherent illogic, but it is clear as day on this side of the keyboard. The problems with your premises are the contradictions that must escape you. So, hoping you’d find your own way to your fallacies, I will just break it down this way, in the simplest possible form…. Do I need to bring along flash cards and finger paints?

    You advocate government spending as a solution to everything. In this, you assume to use the current fractional reserve central banking system to facilitate government spending, after all, who provides government with their funds? Since as you say it is not tax dollar (I have no time for this one right now), do you presume to create the government currency through the use of a central bank? Oh, I know your kind. You will just do it correctly, your school of thought will be the gentle stewards all the plebs need. The loving guiding hand? Sound about right so far chief?

    In planning to use a central bank apparatus to fund government operations, you are a central planner and only arguing for more of the same. The same situation that creates the “business cycle” will be replicated with all its horrific distortions and lives shattered under your school’s thumb. So are you a Communist, a fascists or just ignorant? I see nothing in the US Constitution speaking of such a central banking system, I do however know state allocation of capital through a central bank is a plank of Communism. I know no man who can appropriately issue debt to meet the needs of all the diverse and distinct LOCAL production cycles (the fatal flaw in any central bank – CENTRAL, get it? Where does production and the economy take place? Hint, since you need it, it ain’t CENTRAL – I digress)

    Yes, yes… you can call your religious belief system, your ideology fancy sounding things such as modern monetary theory, but it is nothing new and not a solution. It certainly isn’t as your falsely advertised website would have me believe, “pragmatic capitalism”. Not in the least.

  • Cullen Roche

    You’re still at it, huh? What happened to you being so important and having real work to do and not having the time to read anything here or being too important to leave comments? Should we assume by the length and weakness of your arguments that you’re not that important after all?

  • Peter D

    Patience, Cullen! The guy, as you noticed, obviously needs to vent. When he’s done, he just might actually – you know – read what you’re saying and think about it for some time. Then after he starts appreciating MMT – and I’ve seen people doing that more often than not – to spare himself the embarrassment, he might be back under a different nick and post here as a supporter!
    this one is priceless:
    So, this is a recession (sic) caused by a lack of debt based consumption. So, the obvious solution it to restart debt based consumption bubbles?
    Hmmmm, you really need to stop making a fool of yourself – this is 180 degrees opposite of what MMT advocates. By the way, stop over at Warren Mosler site too. Go thru the manadatory reading, if you’re so open-minded as you claim. It might just dawn on you that you had no idea what MMT was.

  • Cullen Roche

    Isn’t that great? He admits to not even reading half of the content or comments and then lays into me as if he knows what’s going on. Priceless.