Debt Deflation and Crisis

When analyzing debt and economic growth, usually only government debts are examined. They are seen as a corollary to economic crises, devaluation of currencies, and government defaults -- and while I'm not going to dispute or discuss these claims here in this post, perhaps on a later day, I will say that they are misleading trends of analyses in relation to the current financial crisis. There is another 'kind' of debt that is up for discussion and more pertinent to the crisis of 2007 -- credit market debt, which consists of domestic non-financial sectors (household debt, business/corporate debt, and government debt) and domestic financial sector debt.

This explosion of credit began around the time of the institution of 'Reaganomics,' where individuals took to lending and spending over saving despite stagnant wages. 

 

A more detailed look of the trend since 2002, with its peak. The shaded area depicts the length of the recession.

 

However, the above graphs show the total credit market debt. Broken down, household (consumer) credit debt depicts the same trend.

What does all this mean? Fundamentally, this means that the expansive economic growth of the previous three decades were on shaky footing to begin with, likely leading to the global economic collapse that followed. The impact of the credit boom since the 1980s is described in an article by the research institute Center for American Progress (CAP) by Christian E. Weller. He writes:

"The debt is highest among the middle class. Middle-income families before the crisis had a debt-to-income ratio of 155.4 percent in 2007, the last year for which data are available, for families with incomes between $62,000 and $100,000, which constituted the fourth quintile of income in our nation in 2007. This ratio is higher than for any other income group. Families in the top 20 percent of income (with incomes above $100,000) had a ratio of debt to income of 123.6 percent, and families in the third quintile (with incomes between $39,100 and $62,000) owed 130.7 percent of their income. Households in the bottom 40 percent of the income distribution (with incomes below $39,100 in 2007) owed well below 100 percent of their income."

Shocking as it is, this is the not the first time such a credit upsurge occurred. There was a similar phenomenon that occurred before the Great Depression of the 30s. Samuel Brittan, in his review of Richard Duncan's 'The New Depression: The Breakdown of the Paper Money Economy,' writes:

"It is certainly striking how both the 1929 Wall Street crash and the 2007-08 financial crisis were preceded by a huge credit explosion. Credit market debt as proportion of US gross domestic product jumped from about 160 per cent in the mid-1920s to 260 per cent in 1929-30. It then fell sharply in the 1930s to its original position. Later it surged ahead in two upswings after 1980 to reach 350 per cent of GDP in 2008."

The corresponding graphic, using the analysis by Jeffrey Gundlach, Chief Investment Officer from TCW:

This analysis of crises in relation to credit market debt is attributed to economist Irving Fisher, and his ideas were largely ignored in favor of mainstream Keynesian view of economic crises, which argued that they were caused by an insufficiency of aggregate demand. Since the recent economic crash of 2007, Fisher's ideas have enjoyed a resurgence in economic thought. His theory on debt deflation has been of significant fascination in the heterodox Post-Keynesian school of economics, and is now beginning to enter the mainstream. Economist Paul Krugman discusses Fisher's ideas in one of his posts on his blog "Conscious of a Liberal" in the NY Times -- below is the graphic taken from the article (with added information).      

                         

Since the total credit market debt owed has been stagnant since late 2009, reaching its 'peak,' and if GDP steadily keeps rising, it is likely that debt deflation will occur all the same as it did during the Great Depression. However, the issue of private debt and its hindrance on the consumer is still an issue -- and if spending is ever to increase significantly, the issue of wages and consumer debt must be addressed.
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- An analysis of the total credit market debt by Crestmont Research. 

Zizek's Old Joke

The joke, as Zizek tells it, goes along these lines: 

A man is convinced he is a grain of seed. He is quickly taken to a mental institution where the doctor eventually convinces him that he not a grain of seed; he is a man. He is then supposedly cured and is permitted to leave the hospital. However, once he steps outside, he immediately rushes back in trembling with fear. "There is a chicken outside," the man says "and he is going to eat me." The doctor tells him, "Come now, you know very well you not a grain of seed, but a man." "You and I surely know that," the man tells him, "but does the chicken know?" 

This just tells us the nature of psychoanalytic study -- it not enough to convince the truth to the patient, but one must also be convinced that others assume that same truth. It is this struggle of truths that encapsulates the psychiatric field, which attempts to normalize individuals who have accepted a reality different than that of one's peers. 

Plato's Allegory of the Cave and Modernity

In the beginning of book VII of Plato's Republic, Socrates begins to describe his most famous story -- the allegory of the cave. 

"And now, I said, let me show in a figure how far our nature is enlightened or unenlightened: Behold! Human beings living in an underground den, which has a mouth open toward the light and reaching all along the den; here they have been from their childhood and have their legs and necks chains so that they cannot move, and can only see before them, being prevented by the chains from turning round their heads. Above and behind them a fire is blazing at a distance, and between the fire and the prisoners there is a raised way and you will see, if you look, a low wall built along the way, like the screen which marionette-players have in front of them, over which they show puppets" [514]. 

An illustration would aid in understanding Socrates' scenario, with shadows being created on the wall the prisoners are facing. 

"To them, I said, the truth would be literally nothing but the shadows of the images" [515c].  

To Socrates, this is the dark aura of the unenlightened persons -- living in the mere shadows of reality and lacking any movement beyond the state of mind that was molded of them. Unable to move their heads, the prisoners are unaware of the real mechanisms that guide their lives, instead they resort to the reflections as an understanding rather than being able to comprehend the reasons behind these reflections. So what occurs when the prisoners are released from their shackles, and forced to see the light? Socrates explains.

"And now look again, and see waht will naturally follow if the prisoners are released and disabused of their error. At first, when any of them is liberated and  compelled suddenly to stand up and turn his neck round and walk and look toward the light, he will suffer sharp pains; the glare will distress him, and he will be unable to see the realities of which in his former state he had seen the shadows; and then conceive someone saying to him, that what he saw before was an illusion, but that now, when he is approaching nearer to being and his eye is turned toward more real existence, he has a clearer vision -- what will be his reply? And you may further imagine that his instructor is pointing to the objects as they pass and requiring him to name them -- will he not be perplexed? Will he not fancy that the shadows which he formerly saw are truer than the objects which are now shown to him?" [515d] 

"...and if he is compelled to look straight at the light, will he not have a pain in his eyes which will make him turn away to take refuge in the objects of vision which he can see, and which he will conceive to be in reality clearer than the things which are now becoming shown to him?" [515e]

Socrates here makes a crucial point, and it is this aspect of his telling that is the most relevant. Although the individual has been freed of the prison he was once kept in, he still yearns to go back to the comfortable reality of ignorance (the shadows). The newly-awakened sense of consciousness is suppressed, and replaced with comfortable thoughts; those that coincide with the reality the individual once took as 'real.'

Socrates, with this simply allegory, describes a phenomena that is common and persistent in modern social groups and cultural mores. He also describes psychological attributes which are a common theme in psychiatric studies, which have ramifications far beyond individual enlightenment. In Freudian terms, such mechanisms can be described as one of the major defense characteristics of the mediating ego -- outright simple denial, in this case. Being one of the more primitive of the mental defenses, such a reaction is knee-jerk one which lacks any rationalization when initially done. It is done to purely derive pleasure (i.e relieving anxiety and restoring one's comfort zone), and, lacking any justification, it falls into the trap of succumbing to the id, the instinctual drives that seeks to maximize pleasure. It is unresponsive to one's real positioning in reality, which is shown when the freed individual in the cave rejects what is true. 

Now, the basic question -- what does this all this Freudian lingo translate to and what are its implications? In modern society, especially in the Western world, we are bombarded with information more so than any other period in history. With such immense amounts of information, one must, consciously or not, form a concrete methodology of understanding; choosing out of this immensity, what one wishes to engage in. Much of this "choosing" occurs unconsciously; we are driven towards our ideology, at least to the unaware, towards what is fed to us. The media cultivates our perceived normality, reinforces our social positioning, and ferments in us certain desires. This is what I would presume Socrates would call "the cave" -- be it through reality TV, or creating a character of ourselves on social networking, these all create reflections that we perceive as integral to our consciousness. The shadows themselves are manifested in viewing our personal taste as authentic, but they are merely constructs of social mediums (i.e the puppeteers). Submitting to the id, certain such mediums tap into our pleasure principle -- creating desires and indulgences, or as Marx would call it, the fetishism of the commodity.

There is a twist to Socrates' tale, however. There is no need for such a 'bringer of light' that shows the prisoner the enlightenment. Knowledge in the Information Age is not suppressed, rather it is steadily subdued and structurally ignored. The knowledge of the internet is in the open, ready to be accessed, however social mechanisms and cultural norms that have been created over the years have created such a culture where information is paradoxically restricted. Be it in the political sphere, in literature, or any other -- structures within our own system facilitates "the cave" while subduing the enlightenment Socrates' pushes. Alienating to an insatiable degree, it bears resembles to one of the eerie mottoes of The Party in George Orwell's book 1984; IGNORANCE IS STRENGTH. It grants strength to the structures that dominate our consciousness, and consequently empowers the overseers of our individualistic demise.

The Compatibility of Freud and Marx

At first, the marriage of Freud and Marx in academia seems a bit out of place. It initially seems to be a senseless attempt to encapsulate two different fields of study, and to place them in similar spheres would be to diminish their individual professionalism and importance. Despite being distinct areas of interest, they do share parallels that should be properly analyzed and discussed cohesively.

Sigmund Freud is seen as the founder of psychoanalysis, and more generally, of modern psychology. Responsible for uncovering and studying the unconscious mind, Freud brought to light certain mechanisms which drive individuals, that are absent from one's natural cognition. Understandably so, this discovery had a profound impact on our supposed potentiality and actions -- the idea of mental workings beyond our individual awareness, driving our instinctual assumptions and activities, was a grave revelation. Likewise, much of it was repressed and met with harsh criticism when first introduced. The idea of an "unconscious" agent of action was seen as obscene and dehumanizing to individualist pursuits. One's idealized desires were now being undermined as simply being partial products of unconscious mechanisms, that were outside an individual's control or presumptive awareness. It was a frightening for most to even consider. 

Marxism takes a similar approach in its analysis. Marx too was responsible for uncovering social mechanisms that have escaped the supposed reality of societies, but were always present and crucial to functioning. He theorized all societies engage in a creation of surplus value and its successive allocation. Who allocates this surplus is a question that is answered by the organization and structure of the particular society, albeit unknowingly to those within it. In feudalism, such allocation was done by the lords in distributing the surplus created by the serfs. In slavery, it was the slaveholders. In modernity, it is allocated by 'capitalists' -- or under the corporate model, by a board of directors. Like Freud, Marx brings forth the uncomfortable truth that has escaped the collective consciousness (rather than the individual). He discusses a social apparatus that has always existed, but has been absent from the mentality of the community. Similar to Frued's analysis of the ramifications of the unconsciousness on human behavior and conditioning, the allocation of the surplus is responsible for cultivating and molding the community culture, its cherished beliefs, and its wants. Once again, similar to Freud, we see workings that have been absent from human awareness, but have been crucial in its development. And just as Freud's developments, they have been suppressed all the same, and for similar reasons, although you could argue analyses of the unconscious have become relatively mainstream.

This is where the main similarity lies, which validates the merging the two fields for respective questions that require it. Such an approach is practiced by the likes of philosopher Slavoj Zizek, who adheres more to Lacan's methodology, and psychologist Wilhelm Reich, who analyzed class relations through a Freudian lens. Personally, I see much of Freudian psychology to be lacking and being too speculative where it should be substantiated. The works of Jacques Lacan and Carl Jung are perhaps more compatible with Marxian thought, especially Jung's work on the collective unconsciousness, however Freud's analysis still has its uses despite its recurring limitations.