Private debt crashed the economy in 2008. They still are not watching it.

Summary of a recent video by Steve Keen [1]

See Steve’s break down of the terrifying debt projections of the United States GAO in the new YouTube video that he recently uploaded.

The U.S. Government Accountability Office (GAO) recently told Congress that U.S. debt will hit 250% of GDP in 30 years unless there is urgent action. Their warning sounds serious, but it is constructed on a model that gets money creation completely wrong:

(a) Their model assumes federal government deficits drain money from the private sector: The textbooks teach that the government’s borrowing takes funds away from households and firms. But double entry bookkeeping shows the opposite. Government deficit spending creates money in private bank accounts, which grows GDP and causes the debt ratio to stabilize rather than spiral.

(b) They treat government bonds as if they are sold to households: In reality, only banks participate in primary bond auctions. When you model that correctly using Steve’s economic model Ravel, the exponential debt curve that the GAO projects simply does not happen. The ratio converges.

(c) They ignore private debt entirely: The velocity of money has collapsed from 2.2 turns per year to 1.4 because households are weighed down by private debt. That is what is making the government debt ratio look worse. And it is private debt cycles that cause actual economic crises, not government deficits.

(d) The real policy advice is the opposite of what the GAO recommends: If you want to reduce the government debt ratio, reduce private debt. With less private debt, households spend more freely, velocity rises, and the ratio comes down on its own.

Steve walks through the GAO model step by step and rebuild it with correct banking mechanics within the source video [1].

The simple GAO advice to cut government deficits will make things worse, not better.

1. Source: Summary of the video https://www.youtube.com/watch?v=28Gf4f-hIUc