US Economy: Private Debt to Aggregate Demand 1990-2013

Interesting post on the Credit Writedowns site by Aussie economist Steve Keen in which he explains why America has gone through ‘the Great Moderation’ since 2008. Below is a very good graph to justify his statement and part of his post.

the Great Moderation occured because Americans borrowed up big from 1993 till 2008, increasing private debt from $10 trillion to $40 trillion when GDP rose from $6 trillion to $14 trillion. It’s also why ‘the Great Recession’ occurred – because when Americans stopped borrowing and instead started to reduce their debt, demand (for both goods and services and assets like houses and shares) collapsed.


So contra Bernanke’s belief that the aggregate level of private debt doesn’t matter, it matters a great deal. That in turn means that Americans are very unlikely to spend more because of QE, because they’re already straining under a level of private debt that is unprecedented – even after several years of deleveraging, the level of private debt compared to GDP is higher than it ever was during the Great Depression.

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