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The economics of deleveraging: The aftermath of financialization

Thomas I. Palley

This paper provides a simple model of deleveraging that surfaces the contradictions inherent in neoliberal financialization and explains the pattern of US business cycles over the past thirty years. Deleveraging involves a two step correction. The first step is when a borrowing boom ends. The second step is when agents increase saving and re-pay debt. Borrowing accelerates economic activity as consumers spend. When borrowing stops, the economy slows. Moreover, the economy is further slowed by accumulated debt burdens. With deleveraging, households increase saving and re-pay debt which deepens the economic slowdown. Repayment reduces debt, helping economic activity eventually to recover.

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