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Private Debt Is a “Rock of Damocles” Hanging Over the Economy: Steve Keen

Daily Ticker

We can get ready for a fresh budget debate on Capitol Hill as the two parties put forth blueprints for spending and tax targets.

Related: CBO 2013 Outlook: Slow Growth, Smaller Deficits

While reining in government budget deficits is an ongoing debate, economist and author of Debunking Economics tells The Daily Ticker lawmakers are focusing on the wrong kind of debt.

Related: Krugman: Yes, We Have To Fix The Deficit Eventually–But Not Now

Public debt may be a staggering $15 trillion, but private sector debt is more than twice that at $38 trillion.

Keen argues while the focus is on cutting government spending, if the government spends less it could trigger a private sector deleveraging, meaning the private sector spends less, takes out less debt, or pays down debt. This can cause an economic slowdown or contraction.

This private sector debt hangs over our heads like a "rock of Damocles," according to Keen, conjuring the Greek legend (though according to the tale it's a "sword" of Damocles, Keen thinks a rock better represents the size of the threat).

Related: Health Care Spending Cuts are Key to Controlling the Deficit: Alan Blinder

Is $85 billion in sequestration cuts enough to unleash the rock and trigger private sector hemorrhaging? Keen says maybe not, but the rock will always be there unless private debt is extinguished through some kind of forgiveness of "debt jubilee" process.

Keen for his part is working on advancing the way economists think about and model private debt, developing a new Minksy modeling platform.

Lauren Lyster is the host of The Daily Ticker and Hot Stock Minute. You can follow her on Twitter at @LaurenLyster.

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