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Can We Avoid Another Financial Crisis?
The Great Financial Crash had cataclysmic effects on the global economy, and took conventional economists completely by surprise. Many leading commentators declared shortly before the crisis that the magical recipe for eternal stability had been found. Less than a year later, the biggest economic crisis since the Great Depression erupted.
In this explosive book, Steve Keen, one of the very few economists who anticipated the crash, shows why the self-declared experts were wrong and how ever-rising levels of private debt make another financial crisis almost inevitable unless politicians tackle the real dynamics causing financial instability. He also identifies the economies that have become 'The Walking Dead of Debt', and those that are next in line - including Australia, Belgium, China, Canada and South Korea.
A major intervention by a fearlessly iconoclastic figure, this book is essential reading for anyone who wants to understand the true nature of the global economic system.
In this explosive book, Steve Keen, one of the very few economists who anticipated the crash, shows why the self-declared experts were wrong and how ever-rising levels of private debt make another financial crisis almost inevitable unless politicians tackle the real dynamics causing financial instability. He also identifies the economies that have become 'The Walking Dead of Debt', and those that are next in line - including Australia, Belgium, China, Canada and South Korea.
A major intervention by a fearlessly iconoclastic figure, this book is essential reading for anyone who wants to understand the true nature of the global economic system.
140 pages, Hardcover
First published January 1, 2017
47 people are currently reading
1,025 people want to read
About the author
Steve Keen
23Ìýbooks177ÌýfollowersSteve Keen is a professor in economics and finance at the University of Western Sydney. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics and Marxian economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Hyman Minsky, Piero Sraffa, Joseph Alois Schumpeter, and François Quesnay. His recent work mostly concentrates on mathematical modeling and simulation of financial instability.
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May 30, 2024
Mainstream “Economics� is made to hide crises...
Preamble:
--Mainstream (Neoclassical) economics has silently purged reality from Economics departments more successfully than any “authoritarian� state could manage, since the best censorship is naturalized in social imagination (“there is no alternative�) rather than primitive Orwellian forms that we are distracted with (see Vijay Prashad on and Chomsky's Necessary Illusions: Thought Control in Democratic Societies).
--3 noteworthy Western academics (esp. on financial crises) who have left mainstream academia are Yanis Varoufakis, Michael Hudson, and Steve Keen. I’ve focused on the first 2 because of their synthesis of geopolitics with political economy, and Varoufakis� superb writing style.
--However, I was delighted to see Keen has recently shifted his talents (esp. in analyzing financial crises) to analyzing the economics of the climate/ecological crises! All hands on deck! This has been sorely missing in the other 2’s theoretical works (particularly Hudson; Varoufakis at least is politically pushing the Green New Deal in Europe via DiEM25).
…Keen’s shift has started with deconstructing how mainstream economics completely trivializes climate change (ex. 90% of GDP won't be affected by climate change because it happens indoors!, see Keen's and with Tim Lenton etc.), while us Patreon Keeners anticipate more construction towards biophysical economics (i.e. inputting energy into economics) with a Post-Keynesian (money/state/private debt/banking) framing (and hopefully ). This shift is not covered in this book (later published as The New Economics: A Manifesto); I decided to read this as a concise review of Keen’s previous works (as Debunking Economics: The Naked Emperor Dethroned is extensive and I’m already buried in related works by others).
--Also, for those who love David Graeber (RIP), here’s a between Keen and Hudson remembering Graeber.
Highlights:
--Clearly, these 140 pages are dense, so beginners should start with Varoufakis' Talking to My Daughter About the Economy: or, How Capitalism Works—and How It Fails.
1) Mainstream (Neoclassical) Economics as deception:
--The trap with “debunking economics� is you spend a lifetime in a deliberate labyrinth, losing time to build alternatives (see Varoufakis� experience: ). This section is not about “capitalism� vs. “socialism�; it’s about how mainstream economics cannot even describe capitalism. Mainstream economics is not a science to understand the economy; it is an institutionalized religion to defend the status quo of capital.
--Keen (bless him) has tried to systematically untangle this doctrine, revealing some insights on the pathology of capitalism’s idealism:
a) Micro simply aggregated to Macro:
--Ex. taking an individual’s supposed (i.e. lower prices means more consumption) and simply aggregating this to form the (macro) market demand curve. This conveniently assumes uniform individuals and commodities, obscuring the distribution of incomes between classes as well as necessities vs. luxuries for commodities.
--This becomes more problematic when we add in time, because it turns out reality is not static (nor equilibrium). After all, this fails the complex systems framework adopted by actual sciences that seek to model reality. A complex system is not just the summation of its parts, because the parts interact with one another to create non-linearity, emergence (properties from interaction not observed in the parts), feedback loops, etc. (You can start to see why mainstream economists are also failing at considering climate change, and why Keen is so furious with them!) Thinking in Systems: A Primer
--If we return to our example, decreased prices on a macro level can result from a recession thus decreased wages, an interaction which clearly does not result in increased consumption! The ridiculous thing is “complex systems� models can have simple parts (thus understandable + useful), since the “complexity� is in the interactions; meanwhile, mainstream models (i.e. DSGE) quickly become a mess while remaining useless. It gets worse�
b) No money, banks, credit-money and private debt:
--Mainstream models obscure the role of money, as if we live in a barter economy where money is just an intermediary in market exchange (which is obsessed over as if this moment is the totality of the economy). It is increasingly toxic (and convenient) to have Finance be absent in the age of Finance Capitalism, given that money (interest payments) is both income (for creditors) and cost (for debtors), and accumulated (money power).
--Next, private banks are assumed as just intermediaries lending someone’s savings to someone else (redistribution rather than money creation). Or, private bank lending is assumed as restricted by State money-creation because of a bank reserve ratio requirement. Both are dangerous illusions (see below).
--Obscuring Finance/private banks means omitting the mountain of private debt from speculation (ex. housing prices, corporate debts) and focusing the blame on “public debt� (and always on spending for social needs, not the military). There are plenty of myths on State money creation/inflation/taxation not explored in this book:
-an Americentric intro: The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
-a dive: Where Does Money Come From?: A Guide To The Uk Monetary And Banking System and
2) Real-world Economics on Capitalism’s Volatility:
--Before we start this section, it’s important to realize the actual history of global capitalism’s volatility (routine market crises including the Great Depression which was only resolved by the greatest war in human history, WWII) and to consider how such crises can even occur if capitalism is truly about matching supply to demand in a progressive equilibrium. Now, onto capitalism’s volatility:
a) Private banks:
--Mentioned above, private banks create money via bank loans and this is not restricted by Central banks (especially since deregulation of Finance during Neoliberalism). This is the theme of the documentary �97% Owned� (97% of money created by private banks: ).
...This means private banks direct social spending, which results in massive speculative bubbles in assets (mortgages/rents + stock/bond prices) for debt interest payments (a bank’s product is debt) + capital gains rather than long-term investments (including corporate profits based on innovations).
--Just as banks create money, this money gets destroyed once the debt is repaid or wiped via bankruptcy (more on this later).
b) “Financial Instability�:
--Building on Hyman P. Minsky, we can first consider a medium-term cycle in capitalism: risk-taking and optimism during stability leads to innovations/more investments and a positive feedback loop of euphoria building a bubble of speculation and debt-leveraging risk-taking.
…The key sign here is the private-debt-to-output ratio, where debt interest and risk build until it bursts (for Finance’s exponential growth vs. real production’s S-curve growth, see The Bubble and Beyond). There is also the related profit squeeze from the rising debt-ratio as well as wage/raw materials costs.
--Then, there’s the long-term tendency to build up private debts: this was apparently missed by Keynes� The General Theory of Employment, Interest, and Money; the next medium cycle builds on residual private debts.
--If we consider demand = existing money turnover + credit, the flow of credit can easily seize/turn negative as private banks panic and stop lending while paying down debt/deleveraging/bankruptcy destroys money as mentioned above and curiously decreases demand (Keen brings up Irving Fisher’s “Fisher Paradox� here, although I prefer Hudson’s clear point that paying “bad debts� takes away from paying for goods/services).
--For politics/geopolitics, Keen applies the above by touching on only the end of the “Great Moderation� (which started in the mid-1980s but Keen focuses on the Bill Clinton bubble era 1993-2001), Japan’s continued lost decades as a debt zombie, and China’s contradictions with its reliance on global capitalism while the State controls its Finance. All three topics (indeed the entire book) require a broader view of post-WWII geopolitics to consider not just the how? but also the why?:
-Varoufakis� engaging The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy and follow-up And the Weak Suffer What They Must? Europe's Crisis and America's Economic Future
-Hudson is a treasure trove but less readable: Super Imperialism: The Origin and Fundamentals of U.S. World Dominance
-Vijay Prashad providing the decolonization/Global South perspectives (although less economics): The Darker Nations: A People's History of the Third World
--In “political economy of private debt�, Keen (in a splendid systems-theory manner) explains how the political theatre of presidential terms distracts from the structural cycles of capitalism: the politicians lucky enough to reign during a boom get the triumph (while building the next bust as confidence builds private debts) and the hapless politicians during the bust get blamed for it (esp. “government deficit� as the cause rather than a necessary response).
...This should give pause for those who imagine “e±ô±ð³¦³Ù¾±´Ç²Ô²õâ€� as the pinnacle of “democracyâ€�, when so much power has migrated from the political sphere and into the economic sphere (private banks, autonomous Central banks, multinational corporations, intergovernmental organizations esp. WTO/IMF/World Bank, etc.).
3) Alternatives?:
a) “Modern Debt Jubilee�:
--Keen updates the historical “jubilee� (debt forgiveness, see Hudson/Graeber) with “helicopter money� (Central bank creating money and giving it directly to individual accounts), resulting in money given universally which must first be used to pay down any debts. This resolves the social tension of debt forgiveness supposedly favoring debtors instead of savers.
…This makes sense in certain cases, although it should still be combined with Hudson’s “bad debts� position where certain debts are blatantly criminal/parasitic/immoral (regardless of whether they were “legal� at the time) and paying them would be rewarding criminals. Hudson uses the modern example of debt forgiveness in Germany after WWII which targeted debts owed to Nazis (leading to the German economic miracle), and suggests the same needs to be done to entities like Goldman Sachs etc. And of course Graeber's Debt: The First 5,000 Years is a must-read on challenging the morality of debt.
b) “Entrepreneurial Equity Loans�:
--Keen considers alternatives restricting private bank lending, such as credit based on a ratio of the asset’s income potential (to limit debt-leveraging) and MMT (Modern Monetary Theory) promoting a state monopoly on money creation while private banks just profit from arbitrage (as a true intermediary).
…However, Keen concludes the former is insufficient to keep banks profitable and the latter still does not promote lending to entrepreneurs (the current system does not either), thus adding the “Entrepreneurial Equity Loans� where banks take an equity stake in business ventures instead of a loan.
…But the only reason we care about profitable private banks is because our current monetary system is so rigged that private banks create the vast majority of the money, so shutting them down abruptly would collapse our irrational economy. We should connect Keen's proposals with public banking and other community-based schemes (Another Now: Dispatches from an Alternative Present). Paraphrasing Paul A. Volcker in 2009: the main useful “financial innovation� by private banks in the past 20 years is the ATM, and it’s more a technical innovation rather than a financial one.
Preamble:
--Mainstream (Neoclassical) economics has silently purged reality from Economics departments more successfully than any “authoritarian� state could manage, since the best censorship is naturalized in social imagination (“there is no alternative�) rather than primitive Orwellian forms that we are distracted with (see Vijay Prashad on and Chomsky's Necessary Illusions: Thought Control in Democratic Societies).
--3 noteworthy Western academics (esp. on financial crises) who have left mainstream academia are Yanis Varoufakis, Michael Hudson, and Steve Keen. I’ve focused on the first 2 because of their synthesis of geopolitics with political economy, and Varoufakis� superb writing style.
--However, I was delighted to see Keen has recently shifted his talents (esp. in analyzing financial crises) to analyzing the economics of the climate/ecological crises! All hands on deck! This has been sorely missing in the other 2’s theoretical works (particularly Hudson; Varoufakis at least is politically pushing the Green New Deal in Europe via DiEM25).
…Keen’s shift has started with deconstructing how mainstream economics completely trivializes climate change (ex. 90% of GDP won't be affected by climate change because it happens indoors!, see Keen's and with Tim Lenton etc.), while us Patreon Keeners anticipate more construction towards biophysical economics (i.e. inputting energy into economics) with a Post-Keynesian (money/state/private debt/banking) framing (and hopefully ). This shift is not covered in this book (later published as The New Economics: A Manifesto); I decided to read this as a concise review of Keen’s previous works (as Debunking Economics: The Naked Emperor Dethroned is extensive and I’m already buried in related works by others).
--Also, for those who love David Graeber (RIP), here’s a between Keen and Hudson remembering Graeber.
Highlights:
--Clearly, these 140 pages are dense, so beginners should start with Varoufakis' Talking to My Daughter About the Economy: or, How Capitalism Works—and How It Fails.
1) Mainstream (Neoclassical) Economics as deception:
--The trap with “debunking economics� is you spend a lifetime in a deliberate labyrinth, losing time to build alternatives (see Varoufakis� experience: ). This section is not about “capitalism� vs. “socialism�; it’s about how mainstream economics cannot even describe capitalism. Mainstream economics is not a science to understand the economy; it is an institutionalized religion to defend the status quo of capital.
--Keen (bless him) has tried to systematically untangle this doctrine, revealing some insights on the pathology of capitalism’s idealism:
a) Micro simply aggregated to Macro:
--Ex. taking an individual’s supposed (i.e. lower prices means more consumption) and simply aggregating this to form the (macro) market demand curve. This conveniently assumes uniform individuals and commodities, obscuring the distribution of incomes between classes as well as necessities vs. luxuries for commodities.
--This becomes more problematic when we add in time, because it turns out reality is not static (nor equilibrium). After all, this fails the complex systems framework adopted by actual sciences that seek to model reality. A complex system is not just the summation of its parts, because the parts interact with one another to create non-linearity, emergence (properties from interaction not observed in the parts), feedback loops, etc. (You can start to see why mainstream economists are also failing at considering climate change, and why Keen is so furious with them!) Thinking in Systems: A Primer
--If we return to our example, decreased prices on a macro level can result from a recession thus decreased wages, an interaction which clearly does not result in increased consumption! The ridiculous thing is “complex systems� models can have simple parts (thus understandable + useful), since the “complexity� is in the interactions; meanwhile, mainstream models (i.e. DSGE) quickly become a mess while remaining useless. It gets worse�
b) No money, banks, credit-money and private debt:
--Mainstream models obscure the role of money, as if we live in a barter economy where money is just an intermediary in market exchange (which is obsessed over as if this moment is the totality of the economy). It is increasingly toxic (and convenient) to have Finance be absent in the age of Finance Capitalism, given that money (interest payments) is both income (for creditors) and cost (for debtors), and accumulated (money power).
--Next, private banks are assumed as just intermediaries lending someone’s savings to someone else (redistribution rather than money creation). Or, private bank lending is assumed as restricted by State money-creation because of a bank reserve ratio requirement. Both are dangerous illusions (see below).
--Obscuring Finance/private banks means omitting the mountain of private debt from speculation (ex. housing prices, corporate debts) and focusing the blame on “public debt� (and always on spending for social needs, not the military). There are plenty of myths on State money creation/inflation/taxation not explored in this book:
-an Americentric intro: The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
-a dive: Where Does Money Come From?: A Guide To The Uk Monetary And Banking System and
2) Real-world Economics on Capitalism’s Volatility:
--Before we start this section, it’s important to realize the actual history of global capitalism’s volatility (routine market crises including the Great Depression which was only resolved by the greatest war in human history, WWII) and to consider how such crises can even occur if capitalism is truly about matching supply to demand in a progressive equilibrium. Now, onto capitalism’s volatility:
a) Private banks:
--Mentioned above, private banks create money via bank loans and this is not restricted by Central banks (especially since deregulation of Finance during Neoliberalism). This is the theme of the documentary �97% Owned� (97% of money created by private banks: ).
...This means private banks direct social spending, which results in massive speculative bubbles in assets (mortgages/rents + stock/bond prices) for debt interest payments (a bank’s product is debt) + capital gains rather than long-term investments (including corporate profits based on innovations).
--Just as banks create money, this money gets destroyed once the debt is repaid or wiped via bankruptcy (more on this later).
b) “Financial Instability�:
--Building on Hyman P. Minsky, we can first consider a medium-term cycle in capitalism: risk-taking and optimism during stability leads to innovations/more investments and a positive feedback loop of euphoria building a bubble of speculation and debt-leveraging risk-taking.
…The key sign here is the private-debt-to-output ratio, where debt interest and risk build until it bursts (for Finance’s exponential growth vs. real production’s S-curve growth, see The Bubble and Beyond). There is also the related profit squeeze from the rising debt-ratio as well as wage/raw materials costs.
--Then, there’s the long-term tendency to build up private debts: this was apparently missed by Keynes� The General Theory of Employment, Interest, and Money; the next medium cycle builds on residual private debts.
--If we consider demand = existing money turnover + credit, the flow of credit can easily seize/turn negative as private banks panic and stop lending while paying down debt/deleveraging/bankruptcy destroys money as mentioned above and curiously decreases demand (Keen brings up Irving Fisher’s “Fisher Paradox� here, although I prefer Hudson’s clear point that paying “bad debts� takes away from paying for goods/services).
--For politics/geopolitics, Keen applies the above by touching on only the end of the “Great Moderation� (which started in the mid-1980s but Keen focuses on the Bill Clinton bubble era 1993-2001), Japan’s continued lost decades as a debt zombie, and China’s contradictions with its reliance on global capitalism while the State controls its Finance. All three topics (indeed the entire book) require a broader view of post-WWII geopolitics to consider not just the how? but also the why?:
-Varoufakis� engaging The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy and follow-up And the Weak Suffer What They Must? Europe's Crisis and America's Economic Future
-Hudson is a treasure trove but less readable: Super Imperialism: The Origin and Fundamentals of U.S. World Dominance
-Vijay Prashad providing the decolonization/Global South perspectives (although less economics): The Darker Nations: A People's History of the Third World
--In “political economy of private debt�, Keen (in a splendid systems-theory manner) explains how the political theatre of presidential terms distracts from the structural cycles of capitalism: the politicians lucky enough to reign during a boom get the triumph (while building the next bust as confidence builds private debts) and the hapless politicians during the bust get blamed for it (esp. “government deficit� as the cause rather than a necessary response).
...This should give pause for those who imagine “e±ô±ð³¦³Ù¾±´Ç²Ô²õâ€� as the pinnacle of “democracyâ€�, when so much power has migrated from the political sphere and into the economic sphere (private banks, autonomous Central banks, multinational corporations, intergovernmental organizations esp. WTO/IMF/World Bank, etc.).
3) Alternatives?:
a) “Modern Debt Jubilee�:
--Keen updates the historical “jubilee� (debt forgiveness, see Hudson/Graeber) with “helicopter money� (Central bank creating money and giving it directly to individual accounts), resulting in money given universally which must first be used to pay down any debts. This resolves the social tension of debt forgiveness supposedly favoring debtors instead of savers.
…This makes sense in certain cases, although it should still be combined with Hudson’s “bad debts� position where certain debts are blatantly criminal/parasitic/immoral (regardless of whether they were “legal� at the time) and paying them would be rewarding criminals. Hudson uses the modern example of debt forgiveness in Germany after WWII which targeted debts owed to Nazis (leading to the German economic miracle), and suggests the same needs to be done to entities like Goldman Sachs etc. And of course Graeber's Debt: The First 5,000 Years is a must-read on challenging the morality of debt.
b) “Entrepreneurial Equity Loans�:
--Keen considers alternatives restricting private bank lending, such as credit based on a ratio of the asset’s income potential (to limit debt-leveraging) and MMT (Modern Monetary Theory) promoting a state monopoly on money creation while private banks just profit from arbitrage (as a true intermediary).
…However, Keen concludes the former is insufficient to keep banks profitable and the latter still does not promote lending to entrepreneurs (the current system does not either), thus adding the “Entrepreneurial Equity Loans� where banks take an equity stake in business ventures instead of a loan.
…But the only reason we care about profitable private banks is because our current monetary system is so rigged that private banks create the vast majority of the money, so shutting them down abruptly would collapse our irrational economy. We should connect Keen's proposals with public banking and other community-based schemes (Another Now: Dispatches from an Alternative Present). Paraphrasing Paul A. Volcker in 2009: the main useful “financial innovation� by private banks in the past 20 years is the ATM, and it’s more a technical innovation rather than a financial one.
May 16, 2017
What Is Wrong With the World, Part II.
Professor Steve Keen’s little book packs a powerful punch, I must say. This is an economics textbook � and I just couldn’t stop reading it until its unforgettable punch line (“Stagnation at the global level will be the outcome, not because of an absence of new ideas from scientists and engineers, as ‘secular stagnation� devotees assert, but because mainstream economists have clung to delusional ideas about the nature of capitalism, even as the real world, time and time again, has proven them wrong.�)
The professor is frustrated, angry and in a mood to settle scores with the establishment, and he goes about it with relish, all caution to the wind, as he’s now safely convinced that facts, reason, and rationality are on his side (N.B.: They are! He is right). The result is fascinating, and the fact that the approach is “academic� enhances its credibility.
It was Keynes who famously wrote that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.� Actually, they are pretty much alive and singing and theirs are the tunes the World is dancing to, right up to and beyond the cliff ‘s edge. People with reason on their side, like the professor here, have an ethical duty to keep shouting in the wind, and to ultimately be vindicated for having, in time, pointed to the right issues and the right policy alternatives, knowing full well that they will be ignored until after the end, and probably even then. Nevertheless, their honor imposes that they must persist; this is akin a Greek tragedy (ancient or current�), with the difference that we all are going to live through the dire consequences.
A few points on what Economics should be concerned with, but isn’t: “The development of euphoric expectations leads to finance being given to projects that are doomed to fail, and to banks accepting ‘liability structures � their own and those of borrowers � that, in a more sober expectational climate, they would have rejected�, and these euphoric investments accumulate losses during the boom; the demand for finance during the boom drives up money market interest rates, reducing the financial viability of many otherwise conservative investments; stock market participants may sell equities in response to perceived excessive asset valuations at the height of a boom, thus triggering a collapse in credit (�) Inequality rises as well, since with a higher level of debt, the larger share of income going to bankers leaves a lower share for workers (and raw material suppliers) (�) Without bankruptcy, debt would continue to compound forever, and there would be no escape. (�) So credit is the cause of both the booms and the slumps of the global economy, and its smoking gun can be found at the scene of every economic crisis � even ones like in Spain and Greece where the suicidal policies of the Eurozone are a key additional cause of economic failure. (�) Credit has thus been a serial ‘Zombifier� of economies, turning once vibrant economies into the ‘Walking Dead of Debt� after exciting but unsustainable booms�. There is much more in the book, buy it already.
What does magnificent settling of scores look like? Let’s take a look and be awed, illuminated and entertained: “The textbooks from which mainstream economists learn their craft shielded students from the absurdity of these responses, and thus set them up to unconsciously make inane rationalisations themselves when they later constructed what they believed were microeconomically sound models of macroeconomics, based on the fiction of ‘a representative consumer�.� (�) But to actually do this, economists have to embrace a concept that to date the mainstream has avoided: complexity. (�) Anderson specifically rejected the approach of extrapolating from the ‘micro� to the ‘macro� within physics. If this rejection applies to the behaviour of fundamental particles, how much more so does it apply to the behaviour of people? (�) Nor is macroeconomics applied microeconomics. Mainstream economists have accidentally proven Anderson right by their attempt to reduce macroeconomics to applied microeconomics, firstly by proving it was impossible, and secondly by ignoring this proof, and consequently developing macroeconomic models that blindsided economists to the biggest economic event of the last seventy years. (�) The failure of economics to develop anything like the same capacity is partly because the economy is far less predictable than the weather, given human agency, as Hayekian economists justifiably argue. (�) it is possible to develop, from first principles that no macroeconomist can dispute, a model that does four things that no DSGE model can do: it generates endogenous cycles; it reproduces the tendency to crisis that Minsky argued was endemic to capitalism; it explains the growth of inequality over the last fifty years; and it implies that the crisis will be preceded, as indeed it was, by a ‘Great Moderation� in employment and inflation. (�) The most important was that Godley did not make the assumptions the mainstream required: his papers discussed inter-sectoral monetary and credit flows, not the optimising behaviour of rational agents. His analysis was also strictly in terms of money stocks and flows, when the mainstream had long ago convinced itself that the macroeconomy could and indeed should be modelled as if money, banks and debt did not exist.� (�) You might wonder how economists trying to understand Japan’s sudden transition from economic powerhouse to economic basket case could miss as stark a piece of evidence as Figure 14. The reason is that they did not even consider this data when they went looking for clues. Their approach to sleuthing has more in common with Peter Sellers and his comic invention, the bumbling detective Inspector Clouseau, than it has with Sir Arthur Conan Doyle and Sherlock Holmes. Through a series of plausible but false propositions, they have blinded themselves to the obvious.� (�) Having eliminated money as a potential clue in any economic murder mystery, the next step in the mainstream economics detective manual is to write banks out of the script as well.� Etc. All of it bloody brilliant!
And what about the world we live in (most of us, anyway): “In alphabetical order, the other countries that became Debt Zombies in 2008 in addition to the USA are Denmark, Ireland , the Netherlands, New Zealand, Portugal, Spain and the UK. (�) The outstanding candidates for future Debt Zombies are Ireland, Hong Kong and China. The others which have both requisites for a debt crisis � a high level of debt, and a substantial reliance on credit as a source of demand for the last half-decade � are (in alphabetical order) Australia, Belgium, Canada, (South) Korea, Norway and Sweden. Borderline countries � those with one strong requisite but not both � are the Netherlands and Switzerland (debt above 200 per cent of GDP and moderate credit of about 5 per cent of GDP per year for the last five years), Finland, France and New Zealand (debt above 175 per cent of GDP and credit of about 5 per cent of GDP), and Malaysia, Singapore and Thailand (debt above 125 per cent of GDP and credit above 10 per cent of GDP). (�) Lending for speculation on real estate became the main function of the private banking sector. (�) Debt thus plays a pernicious role in our political system, as well as in our economy. Because a private debt bubble stimulates demand while it is expanding, the incumbent on whose watch the bubble begins gets an undeserved reputation for effective economic management. Then when the bust occurs, the blowout in government spending that results lands the hapless incumbent at the time with the charge of being a poor steward of the nation’s finances. The political system rewards the lackey of credit who triggers the unsustainable boom, and makes a political victim of the incumbent when the boom collapses. But the public would not make this misidentification without the help of the misinformation spread by the economics profession. Mainstream economists are the real culprits in the crisis and its aftermath, since they advise governments that credit is in fact benign, that rising private debt is no cause for alarm, that a bigger and politically more dominant finance sector is in fact good for the economy, and that the government should avoid running deficits. (�) This is a world that was supposed to function like clockwork. Instead, it performed poorly (compared to the more regulated 1950s and 1960s), and its clock stopped ticking when the Global Financial Crisis hit, because this model world of Neoclassical fantasy omitted key elements of the real world that unfortunately cannot be expunged from the real world itself. Credit matters here; the real world is always in disequilibrium, and many of the so-called ‘imperfections� removed by Neoliberal reformers removed feedback effects that attenuated capitalism’s inherent instability.�
Best phrase: “Her [Dame Margaret Thatcher’s] ‘reforms� were supposed to unleash the creative forces of capitalism, but instead they unleashed the credit-creating capacity of the City of London, and set off a leverage bubble that drove asset prices skyward while starving British industry of development capital.�
Runner-up: “Even if that could be done, large swathes of the public would oppose those policies because of a mindset about both economics and public morality which has been shaped by that same unrealistic view of the economy. The public treats bank debt as morally equivalent to debts between individuals, where failure to repay forces a genuine loss on the lender. This misidentification is aided and abetted by the mainstream model of banks, which ignores their role as ‘money factories� which can and do periodically create too much debt, and instead pretends that they are ‘money warehouses� that only lend out what the public deposits with them.�
My take: It is indeed possible to gain a modicum of respect for the dismal science, but one absolutely needs to read this book to start that journey (Professor Michael Hudson’s last two books are also eminently respectable, but as they aren’t in any shape or form “academic�, they aren’t relevant for the purpose of this consideration.)
Professor Steve Keen’s little book packs a powerful punch, I must say. This is an economics textbook � and I just couldn’t stop reading it until its unforgettable punch line (“Stagnation at the global level will be the outcome, not because of an absence of new ideas from scientists and engineers, as ‘secular stagnation� devotees assert, but because mainstream economists have clung to delusional ideas about the nature of capitalism, even as the real world, time and time again, has proven them wrong.�)
The professor is frustrated, angry and in a mood to settle scores with the establishment, and he goes about it with relish, all caution to the wind, as he’s now safely convinced that facts, reason, and rationality are on his side (N.B.: They are! He is right). The result is fascinating, and the fact that the approach is “academic� enhances its credibility.
It was Keynes who famously wrote that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.� Actually, they are pretty much alive and singing and theirs are the tunes the World is dancing to, right up to and beyond the cliff ‘s edge. People with reason on their side, like the professor here, have an ethical duty to keep shouting in the wind, and to ultimately be vindicated for having, in time, pointed to the right issues and the right policy alternatives, knowing full well that they will be ignored until after the end, and probably even then. Nevertheless, their honor imposes that they must persist; this is akin a Greek tragedy (ancient or current�), with the difference that we all are going to live through the dire consequences.
A few points on what Economics should be concerned with, but isn’t: “The development of euphoric expectations leads to finance being given to projects that are doomed to fail, and to banks accepting ‘liability structures � their own and those of borrowers � that, in a more sober expectational climate, they would have rejected�, and these euphoric investments accumulate losses during the boom; the demand for finance during the boom drives up money market interest rates, reducing the financial viability of many otherwise conservative investments; stock market participants may sell equities in response to perceived excessive asset valuations at the height of a boom, thus triggering a collapse in credit (�) Inequality rises as well, since with a higher level of debt, the larger share of income going to bankers leaves a lower share for workers (and raw material suppliers) (�) Without bankruptcy, debt would continue to compound forever, and there would be no escape. (�) So credit is the cause of both the booms and the slumps of the global economy, and its smoking gun can be found at the scene of every economic crisis � even ones like in Spain and Greece where the suicidal policies of the Eurozone are a key additional cause of economic failure. (�) Credit has thus been a serial ‘Zombifier� of economies, turning once vibrant economies into the ‘Walking Dead of Debt� after exciting but unsustainable booms�. There is much more in the book, buy it already.
What does magnificent settling of scores look like? Let’s take a look and be awed, illuminated and entertained: “The textbooks from which mainstream economists learn their craft shielded students from the absurdity of these responses, and thus set them up to unconsciously make inane rationalisations themselves when they later constructed what they believed were microeconomically sound models of macroeconomics, based on the fiction of ‘a representative consumer�.� (�) But to actually do this, economists have to embrace a concept that to date the mainstream has avoided: complexity. (�) Anderson specifically rejected the approach of extrapolating from the ‘micro� to the ‘macro� within physics. If this rejection applies to the behaviour of fundamental particles, how much more so does it apply to the behaviour of people? (�) Nor is macroeconomics applied microeconomics. Mainstream economists have accidentally proven Anderson right by their attempt to reduce macroeconomics to applied microeconomics, firstly by proving it was impossible, and secondly by ignoring this proof, and consequently developing macroeconomic models that blindsided economists to the biggest economic event of the last seventy years. (�) The failure of economics to develop anything like the same capacity is partly because the economy is far less predictable than the weather, given human agency, as Hayekian economists justifiably argue. (�) it is possible to develop, from first principles that no macroeconomist can dispute, a model that does four things that no DSGE model can do: it generates endogenous cycles; it reproduces the tendency to crisis that Minsky argued was endemic to capitalism; it explains the growth of inequality over the last fifty years; and it implies that the crisis will be preceded, as indeed it was, by a ‘Great Moderation� in employment and inflation. (�) The most important was that Godley did not make the assumptions the mainstream required: his papers discussed inter-sectoral monetary and credit flows, not the optimising behaviour of rational agents. His analysis was also strictly in terms of money stocks and flows, when the mainstream had long ago convinced itself that the macroeconomy could and indeed should be modelled as if money, banks and debt did not exist.� (�) You might wonder how economists trying to understand Japan’s sudden transition from economic powerhouse to economic basket case could miss as stark a piece of evidence as Figure 14. The reason is that they did not even consider this data when they went looking for clues. Their approach to sleuthing has more in common with Peter Sellers and his comic invention, the bumbling detective Inspector Clouseau, than it has with Sir Arthur Conan Doyle and Sherlock Holmes. Through a series of plausible but false propositions, they have blinded themselves to the obvious.� (�) Having eliminated money as a potential clue in any economic murder mystery, the next step in the mainstream economics detective manual is to write banks out of the script as well.� Etc. All of it bloody brilliant!
And what about the world we live in (most of us, anyway): “In alphabetical order, the other countries that became Debt Zombies in 2008 in addition to the USA are Denmark, Ireland , the Netherlands, New Zealand, Portugal, Spain and the UK. (�) The outstanding candidates for future Debt Zombies are Ireland, Hong Kong and China. The others which have both requisites for a debt crisis � a high level of debt, and a substantial reliance on credit as a source of demand for the last half-decade � are (in alphabetical order) Australia, Belgium, Canada, (South) Korea, Norway and Sweden. Borderline countries � those with one strong requisite but not both � are the Netherlands and Switzerland (debt above 200 per cent of GDP and moderate credit of about 5 per cent of GDP per year for the last five years), Finland, France and New Zealand (debt above 175 per cent of GDP and credit of about 5 per cent of GDP), and Malaysia, Singapore and Thailand (debt above 125 per cent of GDP and credit above 10 per cent of GDP). (�) Lending for speculation on real estate became the main function of the private banking sector. (�) Debt thus plays a pernicious role in our political system, as well as in our economy. Because a private debt bubble stimulates demand while it is expanding, the incumbent on whose watch the bubble begins gets an undeserved reputation for effective economic management. Then when the bust occurs, the blowout in government spending that results lands the hapless incumbent at the time with the charge of being a poor steward of the nation’s finances. The political system rewards the lackey of credit who triggers the unsustainable boom, and makes a political victim of the incumbent when the boom collapses. But the public would not make this misidentification without the help of the misinformation spread by the economics profession. Mainstream economists are the real culprits in the crisis and its aftermath, since they advise governments that credit is in fact benign, that rising private debt is no cause for alarm, that a bigger and politically more dominant finance sector is in fact good for the economy, and that the government should avoid running deficits. (�) This is a world that was supposed to function like clockwork. Instead, it performed poorly (compared to the more regulated 1950s and 1960s), and its clock stopped ticking when the Global Financial Crisis hit, because this model world of Neoclassical fantasy omitted key elements of the real world that unfortunately cannot be expunged from the real world itself. Credit matters here; the real world is always in disequilibrium, and many of the so-called ‘imperfections� removed by Neoliberal reformers removed feedback effects that attenuated capitalism’s inherent instability.�
Best phrase: “Her [Dame Margaret Thatcher’s] ‘reforms� were supposed to unleash the creative forces of capitalism, but instead they unleashed the credit-creating capacity of the City of London, and set off a leverage bubble that drove asset prices skyward while starving British industry of development capital.�
Runner-up: “Even if that could be done, large swathes of the public would oppose those policies because of a mindset about both economics and public morality which has been shaped by that same unrealistic view of the economy. The public treats bank debt as morally equivalent to debts between individuals, where failure to repay forces a genuine loss on the lender. This misidentification is aided and abetted by the mainstream model of banks, which ignores their role as ‘money factories� which can and do periodically create too much debt, and instead pretends that they are ‘money warehouses� that only lend out what the public deposits with them.�
My take: It is indeed possible to gain a modicum of respect for the dismal science, but one absolutely needs to read this book to start that journey (Professor Michael Hudson’s last two books are also eminently respectable, but as they aren’t in any shape or form “academic�, they aren’t relevant for the purpose of this consideration.)
September 28, 2023
8/10.
No, we cannot avoid another financial crisis, because our world is controlled by the financial system (a.k.a. the bankers) who run money-printing organizations which create debt; this debt is then ignored by mainstream, Neoclassical economics as being of no importance; which, in total creates massive debt-to-GDP ratios. When the debt creation slows down, a large percentage of total spending (GDP + debt) will decline, thereby leading the economy to decline. The larger the debt-to-GDP ratio, the larger the decline is when debt creation slows down or stops.
Neoclassical economics ignores that the total economy is complex system, and cannot be derived from the individual economic agent (if such a thing even exists . . .). Such mainstream economics identifies the economy as being a generalized individual, and twists logic to such absurdities to say that the demand for products of the economy is just the individual's demand generalized. This ignores the fact that people demand different things, the most self-evident truth possible.
Further, modern economics ignores the financial sector and the ability of banks to create money in their equations for the economy. Banks are conceptualized as storing places, not manufacturing places. The debt that is created via this process (loaning out created money at interest) is essential towards understanding booms and crises.
The essential point of this volume is that debt will allow for expedited growth in the present, but inevitably in the long run will lead to a crash. Debt will finance increased spending, which will encourage business investment and more production. Debt will grow and grow until it is massively over GDP (e.g. ~175-200% in the 2008 financial crises, or ~150% before the Great Depression, or ~200% before Japan's economic crash in the early 90s). At some point, people will be unable to pay their debts and will realize that debt-financed growth is not eternal. Then the amount of credit increase per year will decline, with the concomitant decline in the economy. Because the debt was such a large percentage of spending/production growth, its contraction will cause a large decline in these two, thereby leading to a decline in the economy.
Now it is time to read a book about the banning of usury in Medieval Europe!
No, we cannot avoid another financial crisis, because our world is controlled by the financial system (a.k.a. the bankers) who run money-printing organizations which create debt; this debt is then ignored by mainstream, Neoclassical economics as being of no importance; which, in total creates massive debt-to-GDP ratios. When the debt creation slows down, a large percentage of total spending (GDP + debt) will decline, thereby leading the economy to decline. The larger the debt-to-GDP ratio, the larger the decline is when debt creation slows down or stops.
Neoclassical economics ignores that the total economy is complex system, and cannot be derived from the individual economic agent (if such a thing even exists . . .). Such mainstream economics identifies the economy as being a generalized individual, and twists logic to such absurdities to say that the demand for products of the economy is just the individual's demand generalized. This ignores the fact that people demand different things, the most self-evident truth possible.
Further, modern economics ignores the financial sector and the ability of banks to create money in their equations for the economy. Banks are conceptualized as storing places, not manufacturing places. The debt that is created via this process (loaning out created money at interest) is essential towards understanding booms and crises.
The essential point of this volume is that debt will allow for expedited growth in the present, but inevitably in the long run will lead to a crash. Debt will finance increased spending, which will encourage business investment and more production. Debt will grow and grow until it is massively over GDP (e.g. ~175-200% in the 2008 financial crises, or ~150% before the Great Depression, or ~200% before Japan's economic crash in the early 90s). At some point, people will be unable to pay their debts and will realize that debt-financed growth is not eternal. Then the amount of credit increase per year will decline, with the concomitant decline in the economy. Because the debt was such a large percentage of spending/production growth, its contraction will cause a large decline in these two, thereby leading to a decline in the economy.
Now it is time to read a book about the banning of usury in Medieval Europe!
January 4, 2018
Few economists predicted the 2008 Global Financial Crisis. Steve Keen is one who did.
Our ability to successfully manage our lives is dependent on our understanding of the functioning of the systems of which we are a part. If we want to be healthy it is important to understand how our body works and the effect that various kinds of food will have on it. If we want to live in a safe environment we may need to know about geological systems to tell us if our home is built in an area prone to earthquakes. Our national economy is a system on which our wellbeing is dependent and that system is a subsystem of the global economy. Our ability to make wise decisions depends on our understanding of this system.
I’ve never had any economic training. If Keen is right, this may not be entirely a disadvantage as his central argument is that classical economic theory is founded on reductionist assumptions which have little relationship to the real world. Just as you can’t deduct the behaviour of a human being by analysing the behaviour of a single cell, making assumptions about the economic transactions of an imaginary consumer doesn’t enable us to better understand a national economy. It’s all about relationship. A change in the behaviour of one individual in a system will change the behaviour of others. This doesn’t mean that predictions can’t be made, but they are made by studying the behaviour of the system as a whole and looking for patterns.
The conclusion Keen comes to is that the key factor in financial crises, like the Great Depression and the GFC of 2008, is private debt. It makes sense. A boom in the economy is fed on credit. We feel optimistic so we take out a loan and buy more stuff. This provides income for companies to employ more people. But if this process continues and we run up more and more debt, eventually it proves unsustainable. We have to spend less because more of our income is taken up paying off bank interest. This is how I see it in my imagination, but Keen illustrates it with graphs which document the process in various countries.
This has political implications. We tend to blame our current politicians for the current state of the economy. In fact, both booms and busts are inherited, and the political decisions which contribute to them are those of people who left office a decade or more ago. Keen argues that the person most responsible for the economic troubles blamed on the Blair/Brown Labour government in the U.K., was Margaret Thatcher, who deregulated the banks and thus opened the door for a private debt funded economic boom for which Britons are now paying the price. The argument conventional economists are making is that the current problems are the result of too much government spending and that cutbacks are the answer. Keen argues that an increase in government spending is the result of the economic problems brought on by too much private debt, rather than the cause of the problem. The more people are unemployed, the more the government spends on welfare payments, but it was not the spending on welfare payments which made the people unemployed. An increase in the government deficit is far less of a problem than too much private debt.
I haven’t read many books on economics, so if there are serious flaws in Keen’s reasoning I might not be the one to see what they are, but this is a short book which I would recommend to anyone trying to gain a better understanding of the problems facing us.
Our ability to successfully manage our lives is dependent on our understanding of the functioning of the systems of which we are a part. If we want to be healthy it is important to understand how our body works and the effect that various kinds of food will have on it. If we want to live in a safe environment we may need to know about geological systems to tell us if our home is built in an area prone to earthquakes. Our national economy is a system on which our wellbeing is dependent and that system is a subsystem of the global economy. Our ability to make wise decisions depends on our understanding of this system.
I’ve never had any economic training. If Keen is right, this may not be entirely a disadvantage as his central argument is that classical economic theory is founded on reductionist assumptions which have little relationship to the real world. Just as you can’t deduct the behaviour of a human being by analysing the behaviour of a single cell, making assumptions about the economic transactions of an imaginary consumer doesn’t enable us to better understand a national economy. It’s all about relationship. A change in the behaviour of one individual in a system will change the behaviour of others. This doesn’t mean that predictions can’t be made, but they are made by studying the behaviour of the system as a whole and looking for patterns.
The conclusion Keen comes to is that the key factor in financial crises, like the Great Depression and the GFC of 2008, is private debt. It makes sense. A boom in the economy is fed on credit. We feel optimistic so we take out a loan and buy more stuff. This provides income for companies to employ more people. But if this process continues and we run up more and more debt, eventually it proves unsustainable. We have to spend less because more of our income is taken up paying off bank interest. This is how I see it in my imagination, but Keen illustrates it with graphs which document the process in various countries.
This has political implications. We tend to blame our current politicians for the current state of the economy. In fact, both booms and busts are inherited, and the political decisions which contribute to them are those of people who left office a decade or more ago. Keen argues that the person most responsible for the economic troubles blamed on the Blair/Brown Labour government in the U.K., was Margaret Thatcher, who deregulated the banks and thus opened the door for a private debt funded economic boom for which Britons are now paying the price. The argument conventional economists are making is that the current problems are the result of too much government spending and that cutbacks are the answer. Keen argues that an increase in government spending is the result of the economic problems brought on by too much private debt, rather than the cause of the problem. The more people are unemployed, the more the government spends on welfare payments, but it was not the spending on welfare payments which made the people unemployed. An increase in the government deficit is far less of a problem than too much private debt.
I haven’t read many books on economics, so if there are serious flaws in Keen’s reasoning I might not be the one to see what they are, but this is a short book which I would recommend to anyone trying to gain a better understanding of the problems facing us.
November 4, 2018
I picked up Professor Keen's mercifully short tract with hopes of a lucid, concise hypothesis of our economic fortunes. I was underwhelmed.
Professor Keen has a reductionist view of what ails the world's economies ... private debt. It seems he's devoted so much energy to this topic, he's akin to the barber who when asked if a potential client needs a haircut, knows only one answer ... yes.
While Professor Keen may be correct in pointing to private debt as the primary factor that pushed the economy's nose down in 2007, the reasons for the financial panic that followed were unrelated. I have a strong opinion on this topic because I had a bleacher seat for the entire mess up, as an employee of one of America's largest banks. I covered the financial institutions industry, observing the slow-motion train wreck first hand. Perhaps this points to one major problem with academics - they lack real world experience. Yet, they try to conform the real world to their models.
Professor Keen has a reductionist view of what ails the world's economies ... private debt. It seems he's devoted so much energy to this topic, he's akin to the barber who when asked if a potential client needs a haircut, knows only one answer ... yes.
While Professor Keen may be correct in pointing to private debt as the primary factor that pushed the economy's nose down in 2007, the reasons for the financial panic that followed were unrelated. I have a strong opinion on this topic because I had a bleacher seat for the entire mess up, as an employee of one of America's largest banks. I covered the financial institutions industry, observing the slow-motion train wreck first hand. Perhaps this points to one major problem with academics - they lack real world experience. Yet, they try to conform the real world to their models.
April 23, 2024
Bit to high for me
April 21, 2020
La lucidez de Keen para explicar la fallos y las crisis inherentes al capitalismo neoliberal es inmejorable. Altamente recomendado.
October 4, 2017
Can we avoid another financial crisis? No. Why is the more interesting question.
The author suggests that main stream economists are all wrong, because in their model, banks and debt do not exist. Financial crises are therefore impossible, as everything will eventually hum along nicely at equilibrium. He posits that that is simply not correct. The economy is a complex system so complex models are needed. The variables interact with each other, so it's more like fluid flow than 2D graph. Furthermore, his model predicts that there will Always be crises!
The other important idea from Keen is that total demand is GDP plus private credit. When credit growth even slows down, recession occurs. So this credit fuelled growth is addictive to governments and central banks.
He predicts that countries with private debt to GDP ratio >150% and rate of credit growth >10% will face another crisis soon, before 2020. That is worrisome as Singapore, together with China, US, Canada and Australia are all in that quadrant. Well I guess we will know soon.
The author suggests that main stream economists are all wrong, because in their model, banks and debt do not exist. Financial crises are therefore impossible, as everything will eventually hum along nicely at equilibrium. He posits that that is simply not correct. The economy is a complex system so complex models are needed. The variables interact with each other, so it's more like fluid flow than 2D graph. Furthermore, his model predicts that there will Always be crises!
The other important idea from Keen is that total demand is GDP plus private credit. When credit growth even slows down, recession occurs. So this credit fuelled growth is addictive to governments and central banks.
He predicts that countries with private debt to GDP ratio >150% and rate of credit growth >10% will face another crisis soon, before 2020. That is worrisome as Singapore, together with China, US, Canada and Australia are all in that quadrant. Well I guess we will know soon.
January 20, 2018
Very well written book. I had no background in economics whatsoever and was still quite easy to read overall. It's very succinct, never overexplaining and rarely underexplaining.
Steve Keens explains exactly what mainstream economists got wrong, and how he was one of the few to be able to predict the global economic crisis of 2008. It spends a significant and deserved amount of time explaining the flaws of neoclassical economics and the necessary difference between micro and macroeconomics.
It dives into how the crucial importance of credit was ignored despite supporting data and how politicians keep misdiagnosing economic outcomes, never getting to the root of the problem, to the point of getting ourselves in such a snowball that it's not impossible to get out of.
On the topic on hand, I think this is the perfect book, and no one could have made a better job.
Steve Keens explains exactly what mainstream economists got wrong, and how he was one of the few to be able to predict the global economic crisis of 2008. It spends a significant and deserved amount of time explaining the flaws of neoclassical economics and the necessary difference between micro and macroeconomics.
It dives into how the crucial importance of credit was ignored despite supporting data and how politicians keep misdiagnosing economic outcomes, never getting to the root of the problem, to the point of getting ourselves in such a snowball that it's not impossible to get out of.
On the topic on hand, I think this is the perfect book, and no one could have made a better job.
December 17, 2017
Not many people can claim that they've called a major financial crisis. Five years from now, Professor Keen will be able to say he's done it twice. I just hope some of the ideas in this book further penetrate mainstream economics so that a lost decade doesn't become a lost generation.
February 7, 2018
This book rather continues the theme of past and present financial crises. If anything, it belongs in the category of 'financial crises soon to come'. It has been interesting to chart how financial crises arise (the Overends Crisis of 1866) and how a policy response was framed (the financial crisis of 1914). It is disturbing to see that the conditions of 1866 are not that very different to those today, and our policy response is quite timid compared to that of 1914.
The book starts by considering two shortcomings of conventional macroeconomics - the belief in the exogeneity of the money supply and the consequent setting aside of the financial sector. This provides the starting point for the book. The author demonstrates how credit conditions have a multiplier effect within the financial sector. This makes the money supply endogenous to the system, and not exogenous, as is currently assumed.
If we take that insight, we can derive some interesting conclusions from it. For example, one that stayed with me the most is that, if we move from the monetary economy to the real economy, purchasing power can be seen as aggregate demand plus credit growth. This helps to explain the recent bout of debt fuelled growth in China, which has been a bit of a puzzle. It also helps to explain the observation that households have been maintaining their living standards in the face of falling real incomes by taking on more debt. Our recent growth has not been propelled by growth in our productive capacity. It has been propelled by the growth in total credit within the economy.
This works fine until credit growth stops. One of the reasons why it stops is that lenders become wary about the ability of the borrowers to repay and service their loans. If credit growth just falters - a stumble rather than a fall - then the multiplier effect works in the reverse direction. Credit then becomes scarce and operational conditions in the real economy become tighter. A downturn begins. Conventional economics says that this downturn couldn't happen, which is probably why conventional economics was blind-sided by the crash of 2007.
The policy prescriptions in this case are quite clear. There is a case for the government to make up any reductions in aggregate demand through a programme of spending. Spending on investment is better, but spending on the current account will do just as well. This will help to shore up credit and help to counter the downward multiplier.
Since 2010, we have seen the exact opposite of this. Whereas trading conditions have called for a fiscal expansion, we have actually been on the receiving end of a fiscal contraction - austerity. The role of a fiscal expansion is to inject liquidity into the monetary system, as well as demand into the real economy to mop up that additional liquidity. A monetary expansion through QE serves to inject liquidity into the monetary system. Without the corresponding fiscal expansion, that monetary injection only serves to pump up asset bubbles, in our case in the stock markets and property markets.
It is at this point that we get to see the answer in the title. Pumped up asset bubbles have not gone any way to resolve the disruption of the credit system. We still have the global financial imbalances that gave rise to the growth of credit to begin with. This suggests that it is a matter of time before we experience another financial crisis, except that, this time around, the monetary authorities have far fewer policy tools through which they can address it.
A heavy dose of inflation would help to resolve the matter, but politics tends to get in the way here. Inflation tends to redistribute income shares from the 'haves' to the 'have nots', and the current political structure is not geared to achieve this. It is for this reason we can expect that future economic turbulence may be closely associated with political turbulence. One feel that the pressure is rising as further austerity fails to resolve the crash of 2007.
This is a very short book, but it is very deep. It is surprisingly easy to read for an economics polemic. The author understands what he is saying, and sets it out in a very clear, logical, and methodical way. Prior familiarity with economics would be useful in reading the book, but a lay person acquainted with current affairs ought not to find it too much of a struggle. I found it to be a very useful text.
The book starts by considering two shortcomings of conventional macroeconomics - the belief in the exogeneity of the money supply and the consequent setting aside of the financial sector. This provides the starting point for the book. The author demonstrates how credit conditions have a multiplier effect within the financial sector. This makes the money supply endogenous to the system, and not exogenous, as is currently assumed.
If we take that insight, we can derive some interesting conclusions from it. For example, one that stayed with me the most is that, if we move from the monetary economy to the real economy, purchasing power can be seen as aggregate demand plus credit growth. This helps to explain the recent bout of debt fuelled growth in China, which has been a bit of a puzzle. It also helps to explain the observation that households have been maintaining their living standards in the face of falling real incomes by taking on more debt. Our recent growth has not been propelled by growth in our productive capacity. It has been propelled by the growth in total credit within the economy.
This works fine until credit growth stops. One of the reasons why it stops is that lenders become wary about the ability of the borrowers to repay and service their loans. If credit growth just falters - a stumble rather than a fall - then the multiplier effect works in the reverse direction. Credit then becomes scarce and operational conditions in the real economy become tighter. A downturn begins. Conventional economics says that this downturn couldn't happen, which is probably why conventional economics was blind-sided by the crash of 2007.
The policy prescriptions in this case are quite clear. There is a case for the government to make up any reductions in aggregate demand through a programme of spending. Spending on investment is better, but spending on the current account will do just as well. This will help to shore up credit and help to counter the downward multiplier.
Since 2010, we have seen the exact opposite of this. Whereas trading conditions have called for a fiscal expansion, we have actually been on the receiving end of a fiscal contraction - austerity. The role of a fiscal expansion is to inject liquidity into the monetary system, as well as demand into the real economy to mop up that additional liquidity. A monetary expansion through QE serves to inject liquidity into the monetary system. Without the corresponding fiscal expansion, that monetary injection only serves to pump up asset bubbles, in our case in the stock markets and property markets.
It is at this point that we get to see the answer in the title. Pumped up asset bubbles have not gone any way to resolve the disruption of the credit system. We still have the global financial imbalances that gave rise to the growth of credit to begin with. This suggests that it is a matter of time before we experience another financial crisis, except that, this time around, the monetary authorities have far fewer policy tools through which they can address it.
A heavy dose of inflation would help to resolve the matter, but politics tends to get in the way here. Inflation tends to redistribute income shares from the 'haves' to the 'have nots', and the current political structure is not geared to achieve this. It is for this reason we can expect that future economic turbulence may be closely associated with political turbulence. One feel that the pressure is rising as further austerity fails to resolve the crash of 2007.
This is a very short book, but it is very deep. It is surprisingly easy to read for an economics polemic. The author understands what he is saying, and sets it out in a very clear, logical, and methodical way. Prior familiarity with economics would be useful in reading the book, but a lay person acquainted with current affairs ought not to find it too much of a struggle. I found it to be a very useful text.
April 18, 2020
If you were going to read an economist nowadays, especially on this topic, would you read one of the many who were blithely unaware of the impending crisis in 2008 - or one who predicted it? And not just predicted it (in the sense that you are likely to hit a bullseye by throwing 50 darts at once at the board) but whose prediction was based precisely on the reasons it happened? This is a short account but is full of content. It is especially interesting in exposing the frailty of neo-classical economics in failing to understand the difference between reductionism and constructionism in the context of complex systems (pp. 32 - 35). It will be truly weird I think to anyone coming to standard economics with a background in any other subject that deals with systems dynamics and to understand how and why anyone would think that a complex system with all kinds of non-linearity and (especially positive) feedback would have natural equilibrium. And, indeed, that any "optima" would typically be anything other than "local" and plural. A good book to whet the appetite for his much more elaborate .
August 21, 2017
A short book, but a good book. Pitched at the reader slightly above the 'just enough knowledge to be dangerous' level in economics.
The cliff notes:
- Modern economic models can't predict financial crises because their models have no mechanism for predicting (or even post-dicting) instability. They have stability built into their assumptions, so they're as useless as a theory of evolution that's missing as crucial an element as mutation.
- Government surpluses in countries with already high private debt to GDP ratios will cause recessions wherever they are tried; Australia is next, and Turnbull will wear it.
- Credit is the cause of economic growth, but also the cause of its instability when credit is too loose (the flipside of credit is debt).
- Australia, China, Canada, and a half dozen other economies are sleepwalking their way into a multi-decade crises (see: Japan) and the only possible solutions are all politically infeasible.
At only 129 pages, well worth your time to read (a solid afternoon). If you own property in any of the above countries, it'll keep you awake at night.
The cliff notes:
- Modern economic models can't predict financial crises because their models have no mechanism for predicting (or even post-dicting) instability. They have stability built into their assumptions, so they're as useless as a theory of evolution that's missing as crucial an element as mutation.
- Government surpluses in countries with already high private debt to GDP ratios will cause recessions wherever they are tried; Australia is next, and Turnbull will wear it.
- Credit is the cause of economic growth, but also the cause of its instability when credit is too loose (the flipside of credit is debt).
- Australia, China, Canada, and a half dozen other economies are sleepwalking their way into a multi-decade crises (see: Japan) and the only possible solutions are all politically infeasible.
At only 129 pages, well worth your time to read (a solid afternoon). If you own property in any of the above countries, it'll keep you awake at night.
July 17, 2017
I'm on board with the arguments in this book and can see that accelerating private debt will eventually lead to a crash in Australia, but a lot of the technical economic information wasn't accessible to the average reader (in the authors defence, it's probably not a book meant for "the average reader")
February 25, 2019
A short, good-to-read and clearly stated view on what is wrong with modern macro. Steve Keen, a self-described 'heterodox economist' who foresaw the crisis of 2008, presents his viewpoint in a book that you as a non-economist can read and understand in an hour or two. That is one hell of an achievement.
May 16, 2017
I wish it had been a little longer, and expanded more on the political economy of debt. But basically this is brilliant stuff that should be read by all economists. Keen again proves himself to be a top destroyer of economic orthodoxy.
November 24, 2018
A bit of this short book restates what Steve Keen wrote in his Debunking Economics, only does so more succinctly. But, if I remember correctly, the discussion of the (destructive) role of (excessive) private debt in this book is new and very enlightening.
October 14, 2018
Here keen argues that
No, we cannot avoid it
Debt will eat the world
No, we cannot avoid it
Debt will eat the world
August 5, 2021
Important work
I found the author's work by searching for system dynamics in economics. The path I was groping in the dark to uncover - doing economics using SD, Steve had started down years of not decades earlier. Using this approach he found the instability that caused the financial crisis before it happened. He won an economics award for the economist most likely to save the world from the next financial crisis. His work is important and I am glad to be reading about his path.
If you want to understand the intersection of finance and economics, read his work. He has started what I think will be a revolution in economics. Textbooks will have to be rewritten.
I found the author's work by searching for system dynamics in economics. The path I was groping in the dark to uncover - doing economics using SD, Steve had started down years of not decades earlier. Using this approach he found the instability that caused the financial crisis before it happened. He won an economics award for the economist most likely to save the world from the next financial crisis. His work is important and I am glad to be reading about his path.
If you want to understand the intersection of finance and economics, read his work. He has started what I think will be a revolution in economics. Textbooks will have to be rewritten.
February 6, 2019
How oblivious mainstream economists are to private debt and economic data as a whole is truly amazing! The book could have been more complete if the effect of debt defaults on financial crises in the last century were explicitly discussed with data.
I’m not on the same page with Professor Keen on governments� ability to extend spending beyond taxation revenue, and I think further investigations and researches are required to resolve debt-fuelled crises.
Hats off to Steve Keen. Support him on Patreon.
I’m not on the same page with Professor Keen on governments� ability to extend spending beyond taxation revenue, and I think further investigations and researches are required to resolve debt-fuelled crises.
Hats off to Steve Keen. Support him on Patreon.
December 27, 2017
Concise, thought provoking, and a little scary
As a student of economics, there were moments where I could not believe the assumptions about aggregating micro models to macro. To see that same skepticism in print years later is validating.
I don't know if mean is correct about his modelling, ultimately, but the contrarian point of view is well presented in this book. I certainly found t enlightened.
Thanks Dr. Keen. I'll be following your work from now on.
As a student of economics, there were moments where I could not believe the assumptions about aggregating micro models to macro. To see that same skepticism in print years later is validating.
I don't know if mean is correct about his modelling, ultimately, but the contrarian point of view is well presented in this book. I certainly found t enlightened.
Thanks Dr. Keen. I'll be following your work from now on.
April 12, 2018
Steve Keen is probably the economist I most respect because he speaks common sense and doesn't do B.S. He is now being funded by public donations through patreon meaning he is not conflicted nor censored in what he says. This book was short but I like it. He gets straight to the point. He comes with practical common sense solutions and explains economics with simple examples and graphs. He doesn't venture into the weeds and lose the average reader.
July 18, 2024
I am not sure if everything stated by Keen is correct, but what I can say is that this is the type of book I have been looking for. Technical, but not hard to understand, straight to the point, with data and past events to support his thesis.
A book of 100 pages that has more information than other books of 500 pages talking about the cause of recessions.
Any recommendations of books with similar format?
A book of 100 pages that has more information than other books of 500 pages talking about the cause of recessions.
Any recommendations of books with similar format?
November 25, 2017
Brilliant summary of the state of the world economy after 2008, exposing logical errors in the responses of several governments without collapsing into technical jargon. Excellent read for anybody seeking understanding what the hell happened 'after Lehmann'.
October 12, 2021
Excellent. Best of the best.
Author summarises that private debt (to GDP) is the root cause of all economic crisis. We can not really avoid it but can implement policies to lessen the aftermath. Unemployment is also closely tied to credit in an economy.
Author summarises that private debt (to GDP) is the root cause of all economic crisis. We can not really avoid it but can implement policies to lessen the aftermath. Unemployment is also closely tied to credit in an economy.
June 3, 2017
Unfortunately far too short to properly discuss or analyse the issue.
August 27, 2017
Excellent little book making the very convincing argument that we are entering a consumer debt crisis that will most likely lead to a prolonged economic stagnation (or even worse).
December 2, 2017
ideas that should be well distributed today, but nice refresher and quick read.
January 8, 2021
great book
very short, to the point and wants for nothing
anyone interested in politics and/or the economy should read this book.
very short, to the point and wants for nothing
anyone interested in politics and/or the economy should read this book.
May 16, 2022
Solid essay on why too much private debt can cause economic crises.
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