-What triggers recessions and depressions?

An alternative to popular faith

        Readers of this blog know debt growth is necessary for economic growth. The graphs and data in the various posts, for instance The federal debt and federal deficit are necessary for economic growth, show that surpluses preceded every depression in U.S. history, and reductions in debt growth preceded every recession in the past 50 years.
        While this degree of correspondence transcends coincidence, it leaves a troubling question: What is the trigger? The recession of 2001 was preceded by ten years of deficit growth reductions, while the recession of 2007 was preceded by only three. Other recessions also were preceded by varying periods of reduced deficit growth or surpluses. Similarly, the 1929 Great Depression was preceded by nine years of surpluses, while the 1819 depression was preceded by only two.
        This makes predicting a recession difficult. While running a surplus seems to be a fairly prompt causative agent for recessions or depressions, debt growth can decline for several years before a recession begins. Reduced deficit growth is a necessary detonator of recession or depression, but some other event must serve as a more immediate signal, a trigger. For example:

*The recession of 1960 may have been triggered by the Vietnam war, which began in 1959
*The 1970 recession: Possible trigger: Also may have been the Vietnam war, this time by the protests and the public realization the war was going poorly.
*The 1973 recession: Possible trigger: The first Arab oil embargo
*The 1980 recession: Possible trigger: The Iranian revolution causing another oil crisis
*The 1990 recession: Possible trigger: Desert Storm
*The 2001 recession: Possible trigger: The bursting of the “dot.com” bubble.
*The 2007 recession: Possible trigger: Collapse of the subprime mortgage market
        All recessions and depressions share one factor – reduction in debt growth – but all have had different triggers. It appears if we have only reduced deficit growth without the trigger, no recession or depression will result. And, a trigger event, without reduced deficit growth, will not cause a recession. The recession/depression bomb requires both a detonator (reduced debt growth) and a trigger.
        Triggers are difficult to evaluate (i.e., how serious they are), but as one small step toward predicting recessions we should keep in mind that a recession is far more likely during federal deficit growth rate decreases.

Rodger Malcolm Mitchell

19 thoughts on “-What triggers recessions and depressions?

  1. I think your ideas would make a lot more headway by changing terminology. Using words like “debt” and “deficit” and “spending” when really these words bear no likeness to their everyday meanings entails long explanations. Just change the words. Just say there is no such thing as spending, deficit, and debt with fiat currencies, rather than trying to educate people in accounting. It’s too abstract for the most people. Come up with a “technical vocabulary” suitable for “free” deficit money. You could even get rid of the term “money.”


  2. The book, FREE MONEY, offers a possible glossary, similar to what you suggest:

    Common Term True Meaning
    credit (debt)—– money or deposits
    federal debt—– economic surplus or money or federal deposits
    federal deficit—– Money or economic surplus
    federal surplus—– Economic deficit
    trade deficit—– import surplus
    lend—– create money
    spend (government)—– send money to the economy
    reduce debt—– destroy money
    to tax—– to confiscate and destroy money
    a tax—– a money confiscation/destruction system
    owes—– has created (money)
    save (government)—– avoid distributing (money)
    waste (noun)—– less productive money distribution
    budget—– money distribution goal or limit
    our economy—– business


  3. Excellent! Thanks for the kind reply. Now, how about a nice downloadable pdf version of “Free Money” for us folks living abroad in “non-modern” countries?

    BTW, is there a small difference of opinion regarding taxes between you and Mosler? He says taxes are necessary because that is the legal basis for the government issuing the currency, and it also serves the purpose of “cooling” an “overheated” system, when deficit spending gets ahead of production (this also would imply a very flexible schedule of taxation, wouldn’t it; doesn’t sound too practical).


  4. There is a rather large difference of opinion between Warren Mosler and me on the inflation issue, although he has moderated his opinion slightly in the past few days.

    Briefly, he had said he would fight inflation by reducing money supply, i.e. by increasing taxes. I have told him this was like curing an ingrown toe nail by foot amputation, because reducing the money supply causes recessions and depressions.

    Interestingly, if you go to Warren’s site, you will see: “MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” I guess his law doesn’t apply to inflation.

    Yesterday he wrote this to me: “I didn’t say raising taxes would be my first choice. First I’d go after any micro factors driving up prices.” So, he’s moderating. You can ask him what micro factors he’s talking about, and how he would control them.

    In contrast, I would control the demand for money, by raising interest rates. Warren feels this actually would cause inflation, by raising production/marketing costs. Yet, the worst inflation in modern (post-1971) history — Carter’s inflation — was cured with high interest rates.

    You must understand that tax rate control has been a fundamental belief of neo-Chartalism for many years, and it’s hard to turn that super-tanker around.

    Rodger Malcolm Mitchell


  5. Thanks, Roger. Interest rate control makes much more sense, and is far more flexible a tool.

    Moreover, the idea that taxes–a coercive instrument if ever there was one–are the reason for being of currency seems to put an evil at the heart of the system. No one likes to pay them. And the idea on the one hand, that the fiat money is free, but has to be earned and paid back to the government by the sweat of one’s brow, on the other hand, is not just. As you and Warren and the other chartalists point out, taxes in a fiat system do not serve the purpose people ordinarily think they do.

    Incidentally, living as I do in Mexico, could you comment on that system? Is it a pure fiat system? One thing seems clear: not all contemporary economies quite fit the US model: there is an international dollar reserve system-hegemony. Other countries are subject to “raids” on their currency depending on their position with respect to the dollar. But the dollar is not subject to such raids. The role of Wall St. makes for messy models.


  6. Warren, Randall Wray and I have discussed the role of taxes. I believe I finally have convinced them it’s not the taxes per se that are necessary, but rather the law that requires tax payments in dollars.

    For instance, a law requiring dollar payment for water probably would be enough. The advantage of taxes is the ease with which the government can monitor payment, because the money comes to them.

    In any event, federal taxes are not necessary. State and local taxes would be sufficient.

    I’m not familiar with foreign governments. It’s hard enough staying current with ours. What do you mean by “raids”?

    Roger Malcolm Mitchell


  7. Here’s an examples:



    Bear raids on weak currencies can be viewed as battles. On one side are the central banks, which are the only market players at times ready to sell low and buy high to protect their national economies. On the other side are all others, individuals and institutions, not just speculators or hedge funds but indeed anyone who is ready to jump into the fray at some point in hopes of buying low and selling high.

    Bear raids were prevalent prior to the 1929 crash. The collapse of the US market and ensuing depression helped Franklin D Roosevelt’s campaign for president. Investment banker Joseph P Kennedy was appointed by Roosevelt to head the newly created Securities and Exchange Commission. New regulations cleaned up the roles of bankers and brokers and made the stock market safer for investors.



  8. Hi Rodger,

    I don’t have a graph of the federal deficit in front of me, but my impression is that there was no slowing of debt creation in the few years prior to the 2007 recession. If true, doesn’t this present a problem for your theory?


  9. Jack,
    The problem with intuition is it so often is wrong. The debt hawks rely on intuition, which is why Congress has been so slow to prevent and cure today’s recession.

    Go to the graph in item 8 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ You’ll see that the rate of deficit creation began to fall in 2004. You also will see that every recession was preceded by a period of declining rates of federal debt creation.

    Rodger Malcolm Mitchell


    1. Rodger,

      Although you’re correct, I can’t help but notice that the rate of deficit creation seems to have been steadily falling since about 1983 yet recessions were fairly rare and not very deep. So my question remains somewhat unanswered. Why 2007 and why so deep?


  10. Jack, that is exactly what the article addresses. Prior to each recession there was a decline in deficit growth. Then an increase in deficit growth cured each recession.

    So, a decline in deficit growth seems to be a necessary ingredient for a recession. Without that decline, no recession. But what is the trigger that precipitates each recession?

    Think of a recession as a snow avalanche. The necessary ingredient is a big pile of snow. Without that, no avalanche. But what is the trigger? A loud sound? A strong wind? a sudden rain? A careless skier? Lightning? Just as each avalanche has a different trigger, each recession has a different trigger.

    To prevent an avalanche, you should prevent snow (if you could), and to prevent a recession, you should prevent a decline in debt growth.

    Does that clarify?

    Rodger Malcolm Mitchell


  11. Looking at the graph, I’m not sure one can draw a clear correlation. 1983-2002 sees a long slow downward slope punctuated by only two brief recessions so one would almost be tempted to conclude that a decreasing rate of deficit formation is not antithetical to economic growth. The only clear correlation is that deficits increase during a recession but no surprise there.


  12. Economics is as complicated as the weather. So, you’ll never see perfect correlations.

    I have a graph of 90 degree days in Chicago, from 1928 through 2001 — 73 years. There were far more 90 degree days the last 4 days of August than at the middle of the month. But the beginning of the month was hotter yet. July is the hottest month, so why is the middle of August cooler than the beginning and the end? Does this mean sunlight doesn’t cause heat?

    The eye sees what it wishes to see. I see downward slopes in advance of every recession but one — the recession of 1982, and I suspect that one was just a continuation of the 1980 recession, which did see a reduction in debt growth. All the other recessions were introduced by reduced debt growth. For a complex science like economics, that’s astounding correlation.

    Don’t you find it meaningful that that all recessions begin while there is reduced debt growth and all end while there is increased debt growth? Same with depressions. Unlikely this is all a coincidence.

    Rodger Malcolm Mitchell


  13. Increased debt growth coinciding with recessions could likely be simply a result of lower tax receipts due to smaller corporate profits and individual incomes. Unless you want to argue that lowering profits and income is what brings us out of recession, I’m not sure what one can conclude.


  14. I feel that you may be confusing cause and effect. Business cycles of booms generate large incomes and therefore large tax payments to the Federal Government. So, it appears that government debts is lowered. When the bust comes, the Government typically continues to spend even though taxes paid are much less, which appears as a rise in Government Debt. So, it seems the boom & bust business cycle drives recessions and depressions, not the effect of the resulting changing ratio of tax income and deficit spending.


    1. Understood. But if you look at the first graph HERE, you’ll see that prior to each recession, deficit growth declines. This wouldn’t happen with the scenario you suggest.

      When Clinton ran his surpluses, I correctly predicted they would lead to a recession.

      Further, prior to each depression in U.S. history, federal debt has declined. See THIS page. Again, the cause and effect seems clear.

      Rodger Malcolm Mitchell


  15. The deficit is not the only variable that has a positive correlation with growth, and correlation does not prove causality.

    The equilibrium deficit size depends on non-government savings, which changes without government action, and tends to be pro-cyclical (correlated). The more income people have, the more they save and the more imports they purchase. The equilibrium deficit must offset their savings and net imports (which are the dollar savings of foreigners), so the equilibrium deficit rises along with incomes.

    Absent any policy change, rising income causes rising income taxes and falling income maintenance spending, and the actual deficit behaves in a counter-cyclical manner.

    With the equilibrium deficit rising and the actual deficit falling, two things can happen. If the lines cross before full employment, then government becomes a drag on economic growth rather than a stimulus. As the economy approaches even closer to full employment, growth becomes harder to achieve, and GDP flattens and turns down. The GDP peak occurs quite some time after the actual deficit becomes too small.

    It’s a cycle, not a trend. Absent outside influences, the cycle reverses itself. Naturally. All by itself.

    During the recession, incomes fall, imports fall, savings fall, and the equilibrium deficit falls: pro-cyclical. Taxes fall and government spending rises, and the actual deficit rises: counter-cyclical. When the lines cross, the recovery begins, but again GDP bottoms out quite some time after the deficit becomes greater than the equilibrium deficit.

    Let’s call that Case I.

    If full employment is reached while the actual deficit is still above the equilibrium deficit, then inflation is the result. GDP flattens out because of resource constraints, aggregate demand is higher than output, and prices rise to clear the market. Rising prices work also to raise tax revenues, so the deficit continues to drop, and some time after the GDP peak the actual deficit becomes less than the equilibrium deficit, and the recession begins.

    Let’s call that Case II.

    The right tax policy for case I is to cut tax rates in recessions, and to cut them in expansions.

    Actual tax policy experience has often been the appropriate policy for Case II: raise taxes during expansions, in an attempt to prevent raising aggregate demand past the point of full employment. However, we’ve not had a Case II economy for a long time.

    I’ve come to think that the best way to cope with business cycles is to replace the unemployment insurance system with an ELR program, which adjusts automatically and counter-cyclically to private sector demand for labor, and because ELR, unlike unemployment insurance, would not expire, there should exist an appropriate level of taxation (given the size of government) such that the expansion of the ELR pool would immediately trigger a deficit greater than equilibrium, and vice verse. The ELR system can be made self-stabilizing, so that actual deficits would tend toward equilibrium deficits, whereas the current automatic deficit adjustments run on a cycle that is offset 90 degrees from the business cycle, creating automatic policy lags that ensure (in case II) inflationary stimulus, or (in case I) undesirable fiscal drag at less than full employment.

    Then we can get to the real arguments about the proper role of government.


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