Friends, I’ve been reading up on the ideas of Economist Steve Keen. His ideas on debt, inflation, the financial crisis etc. are very interesting and highly controversial.
His ideas can most briefly be summarized like this: you’re all idiots, we’re completely fucked.
A bold statement indeed! Especially since it is being aimed at the bulk of the world’s leaders, and damn near every economist on the planet.
You see friends according to Keen the current reaction to the financial crisis is based on the theory of “Base Money” or “M0. This is money that the banks lend out to businesses, home owners and whoever else needs to fund something. The theory is that it is these loans that drive the economy and that if you don’t have enough M0 the economy will stall.
This is the theory that underlies the current response to the financial crisis, and it is the reason why the banks keep getting bailed out and given more money: it is hoped that they will lend this money out and thus stimulate the economy.
(This is why everyone with a brain got extremely annoyed when it was learned that bailed-out banks in America weren’t lending, they were using bailout money to give their executives huge bonuses.)
Likewise, it is argued that fluctuations in M0 are what cause economic crises.
But Keen was skeptical of this idea so he went and looked at what actually happened during various financial crises (which happen at a rate of about one every 5-10 years btw). What he found seemed at first to support the theory: over the past century economies hit trouble, governments inject more money into banks, and the economy improves.
But Keen looked at this and decided that it actually proved the Mo theory wrong because it shows that the economy was already in trouble before the M0 level changed. In other words it wasn’t that fluctuations in Mo were causing the crises. Instead levels of M0 were being changed after the crises had hit. So level so Mo weren’t causing the crises, they were just being changed in response to it.
To illustrate the point Keen found several examples of times when economies got worse when M0 levels increased and better when it decreased.
So what does Keen think is really going on?
He thinks it’s all the fault of debt and his explanation is one of those ideas that seems so obviously true that it is either absolute genius or complete bullshit.
Keen thinks that the more debt people have the worse the economy will do and he explains it in the following way (as I understand it):
1. When the economy is doing well people feel comfortable enough to go into debt to finance new projects, invest or speculate on the stock market.
2. This naturally leads to a bubble economy. That is to say people are buying lots of stuff which increases profits for businesses, and buying lots of stock which boosts the stock market. So it looks like everyone is doing great.
3. The problem is that all of this is financed by debt and sooner or later those debts come due.
4. Likewise the bubble economy, and the purchasing of stocks using borrowed money, create a stock market bubble that has to burst.
5. These two problems (3 and 4) feed off each other. When debts suddenly come due it lowers the stock market, causing stock prices to fall meaning speculators (who had been expecting prices to go up) lose money meaning they can’t pay their debts. When this happens banks (who were relying on getting those debt payments back) have to ask other people to pay their own debts (which they can’t do because the economy just tanked) and so on and so on.
6. At this point governments usually start giving the banks cash but this won’t help. People who are already in debt are not going to take out loans and banks who just escaped bankruptcy (ha ha) are not going to want to lend money either.
7. So people who have good business ideas can’t get the funding they need to make it happen and so the economy stagnates.
Let me summarise this briefly: the economy gets boosted by people going into debt, so people feel ok going into more debt, but sooner or later those debts need to be repaid, and that’s when the economy crashes.
Wealth built on debt isn’t actual wealth, it’s just clever accounting.
Support for Keen’s ideas has grown since it was revealed that the bank bailout in the US (which was expected to turn a 110% increase in M0 into an 800% increase in money circulating through the economy) only lead to a 20% increase in the money in the economy.
That’s right kids, the banks aren’t using their bailout money to boost the economy, like they were supposed to, instead they are putting it back into the stock market or just hoarding it, in case things get worse.
And according to Keen they are going to get much, much worse.
You see if Keen is right and debt is the underlying problem then that underlying problem is still there, in fact if anything debt is growing! The debt of the normal people who make up the economy is so high that the economy can’t move and that debt has not been bailed out. Even though banks and some other institutions have been given government assistance the finances of normal people have received barely any help at all.
Which means that all of the supposed growth in the economy that is taking place is actually just another bubble financed by yet more debt! Only this time it’s government debt not private debt.
The problem hasn’t gone away, it’s just taking a run up for its next push.
I don’t know enough about economics to know whether this is true or not, but it seems to make sense.
And if Keen is right the economy is going to crash again, and even worse than before.
[Standard Disclaimer: this post was entirely my own opinion and was not paid for in any way, directly or otherwise, by anyone or anything that stands to gain in any way from the ideas expressed herein.]