Briefing for Congress on the Fiscal Cliff: Lessons from the 1930s

Outgoing Ohio Congressman Dennis Kucinich arranged for me to give a briefing at Congress today on the Fiscal Cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass.

I argue that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector–and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit.

Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that I call the “Rock of Damocles”.

Click here to download the paper I presented; Click here to download the Powerpoint slides.

Dennis Kucinich’s introduction: