Friday, September 19, 2003

Debt & Deflation Theory

After finding this and reading, I just had to post it. This is truly a paper by a genius student. She has taken Irving Fisher to new heights. Anyone wishing to know more about our possible economic future must read this entire paper. I am impressed.

Debt & Deflation Theory
Debt Stats - C.H.I.P.S.{clearing house interbank payments system}

Debt-deflation and the future of the American Economy

Introduction by Steve Keen:

The subject Financial Economics at the University of Western Sydney introduces students to the proposition that the money supply is endogenous—determined by interactions between the finance sector and the economy rather than being independently determined by the Federal Reserve. Irving Fisher’s analysis of the causes of the Great Depression figures prominently in this subject, and in this year’s essay students were asked to:

"Explain Fisher's Debt Deflation Theory of Great Depressions, and in the light of it provide an evaluation of the economic history of America for the past two decades, and predict the USA's economic performance till 2010."

One of the outstanding essays was written by Karol Gellert.

Steve Keen is Associate Professor, School of Economics and Finance, University of Western Sydney, and author of Debunking Economics.

"Irving Fisher developed The Debt-Deflation Theory in 1933 in order to explain the economic mechanism that can lead to a Great Depression such as the one experienced by the US economy from 1929 to 1933. The main point of the theory is that over indebtedness acts in conjunction with deflation to produce a contracting economy causing bankruptcies, rising unemployment and falling profits. Over the last 20 years, one of the US economic policy makers’ goals has been to lower the rate of inflation. However a recent downward trend in the already low inflation, together with an impressive growth in debt, has brought to light Fisher’s theory and triggered fears of a debt-deflation induced depression.

The Debt-Deflation Theory of Great Depressions is an explanation by Fisher of the apparent boom bust pattern prevailing in the economy. He divides the theory into four sections. In the first section, “Cycle Theory in general”, Fisher defines different types of economic cycles and their possible causes. In the second section, “The Roles of Debt and Deflation”, he provides a theory of how excess debt and the consequent deflation play a major role in the boom bust cycle. The third section provides an overview of the Great Depression in light of his new theory and introduces the concept of inflation as a cure to depression and deflation. The last section explores the possible “Debt Starters” that initially triggers a boom economy."Full article: Debt & Deflation Theory

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