Posts Tagged ‘GFC’

Irving Fisher & debt-deflation

September 11, 2010 19 comments

Last week Joe Clark gave me a copy of Irving Fisher’s Econometrica article “The Debt-Deflation Theory of Great Depressions” and added a few less than friendly remarks about Fisher. Having just read the article, I can understand why. But instead of pointing out my disagreements, I think it is more valuable to point out what I think are the points of truth in the Fisher thesis.

Fisher suggests that the underlying cause of any large recession (he cites 1837, 1873, 1929) is the twin problems of (1) over-indebtedness; and (2) deflation. These then interact on net worth, profits and trade. Specifically, he points to the problem where de-leveraging (ie paying off debt) leads to deflation, which means the remaining debt is relatively larger… so that paying off debt puts people into more debt. And that makes people sad.

Fisher dramatises the issue (at one point even invoking starvation), but he is right to note the important role of money. As Friedman & Schwartz later showed, it was the sharp tightening of money supply by the Fed (along with the protectionist policies and increased political risk that came from congress) that turned a normal downturn into a “great” depression.

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Ruddonomics: the “crisis”

February 21, 2010 1 comment

In his infamous Monthly essay “The Global Financial Crisis“, Andrew Charlton Kevin Rudd uses the word “crisis” 14 times within three paragraphs. Scary stuff.

But my complaint about the essay is not the fear-mongering. That’s fairly standard in politics. My complaint is that Rudd simply gets the economics wrong, time and time again, starting with the second paragraph reference to “fundamentalism”.

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What would have been

February 11, 2010 3 comments

UPDATED: 16 February 2010

The government often claims that they saved Australia from recession, and they base this claim on some Treasury modelling.

The Treasury often does very good work, but I think that some people fall into the trap of assuming that Treasury is some sort of gold-standard of economic forecasting, when the truth is that their track record is mediocre. This is not intended as a criticism of Treasury, but of people who put too much faith in Treasury. Forecasting is a tough game, and economic models only ever provide a rough guide. I should know — I used to do forecasting for the Commonwealth Treasury.

So instead of assuming¬†Treasury is right, I thought I’d make use of the last year’s extra economic data (Treasury’s budget papers and the National Accounts) and try to work out what actually would have happened without the government’s two stimulus packages.

I’ll jump straight to the conclusions.

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