This page has been archived and commenting is disabled.
A Sobering Dose of Reality from Economist Steve Keen
Tired of the same old US-based bears such as Nouriel Roubini, Peter Schiff and Doug Kass? Sick of hearing the US is in deep trouble argument from Marc Faber and ex-pat Jim Rogers? Then, for those of you who are not familiar with the most outspoken Australian Nostradamus, let me introduce you to economist Steve Keen. Keen is one person who can legitimately contend that he saw the crisis coming and even warned about the potential impacts extensively on his website. Keen’s writings serve as another example of how nonsensical the claim is that “no one could have seen this coming;” a refrain that you hear from politicians around the world who want to remain blameless for the current economic calamity. Keen is a straight shooter who pulls no punches in his criticisms of other economists, political leaders, and central bankers all over the globe. The reason it is important to listen to him now is that he is still pounding the table about the debt overhang that is plaguing the Anglo-Saxon world. Unlike the bubble-perpetuating pundits you see on CNBC, Keen does not believe economies can recover from the implosion of a debt bubble by printing money or through just the passage of time. As such, he happens to believe that both the US and Australia are on an unsustainable path that may lead to an even larger crash.
I have embedded a video below of a must watch presentation from Keen. Here is a preview of some of the topics covered and associated commentary:
· Amusing and condescending explanation of the fact that Milton Friedman was not a Keynesian economist (as some professor named Joshua Gans had stated the day before)
o In fact, according to Keen calling Friedman a Keynesian is like calling the devil one of God’s angels
§ Calling Friedman a Keynesian is an insult to real Keynesians such as Minsky
· Discussion of the delusional theories espoused by Friedman and the other neo-classical economists who completely missed the crisis and whose ideas do not share anything in common with reality
o Neo-classical models cannot endogenously produce a financial crisis
§ Need a meteor strike or something
o Inability of the neo-classical models to reflect actual market conditions
· Commentary on the prescience of Minsky and how his theories on instability, banking, and crises are essential to understanding what the global economy is facing
o Minsky’s idea of the euphoric economy that leads to instability
o Ponzi financiers failure when the bubble bursts
§ Darlings of the stock market one day and in jail the next
· Reminder of the fact that there were in fact 2 bubbles in the US, a stock market and a housing bubble, both of which were driven by excess debt
o US Debt to GDP before the Great Depression: 170%
o Current US debt to GDP: 300%
§ Same dynamics that existed before the Great Depression are exaggerated now
o Failure to attack the underlying problem (too much debt) and only focusing on the symptoms (limited liquidity) by printing money and enacting stimulus will only prolong the day of reckoning
§ Can’t just paper over the debt overhang that is nothing like we have seen in history
· France is the only country that did not have a debt crisis and that is why it has shown growth
· Foolishness of the Kangaroo Theory of Economics that believes that Australia is different and is not facing a crisis
o But if there is any correlation between excess debt and impending crises the situation in Australia is not as stable as people assume
o Just because Australia’s debt to GDP is less than that of the US does not mean the country is out of the woods
· Helicopter Ben Bernanke’s ignoring of Minsky’s ideas in favor of the idea of the rational investor in his writings
o How scary is that a man who believes that human beings act rationally under uncertainty is the one trying to navigate the US out of this mess?
o Bernanke’s lack of understanding of the credit system and money creation
· Step by step explanation of how money is created by banks
o Suggestion that is better to give money to debtors than banks that just hold money as reserves
· Need for deleveraging in the Australia and in the US
o In Australia, 8% debt reduction occurred in the 1930s
§ Took a world war to get debt levels down
§ Would cause a 12% reduction in GDP if that rate were reached again
§ 4% debt reduction occurred in the 1890s during that depression
· Would take 30 years to get back to 1980 levels at this rate
o America’s problem is even worse due to larger debt load
§ Unemployment is being driven by deleveraging
· $2.5 trillion rate of deleveraging in US this year
o In 2006 the US was adding $4.5 trillion dollars in private debt
o Total demand was $18.5 trillion ($14 trillion in GDP+ $4.5 trillion in debt) so US demand was close to 25% debt driven
»
- advertisements -
< seems to forget that from WWII until the late seventies, the Keynesians had their way in determining and controlling the economic and monetary policies in the developed world, and they failed miserably. >
hmmm... that would be the post-WWII era when America - with Marshall Plan, 2-ocean navy, nuclear dominance, RISING wages and (until late 1960s) rising uniom membership - was the envy of the world. Sure, there were the Korean & Vietnam wars, and other assorted crisis, but (unless you were among the US overseas combat casualties of those wars), these were nothing compared to what European, Asian (and African) countries endured during the horrific wars of the 20th century.
By late 1970s, the world economy had MATURED quite a bit - American con-servatives like Milt Friedman & the Chicago School boys like to STEAL credit for the "miracle of Chile" under Pinochet and similar economic development worldwide - but, what do you know, you didn't need Hoover Inst. economist in your pockets to use 20th century technology to build beautiful cities and provide the goods consumers and citizens wanted, you just needed to be free of the crushing debt of war and military spending, and to be free of the crushing debt of "Economic hit-men" predatory capitalism.
The 1973 Arab-Israel war & subsequent oil embargo hit America like a ton of bricks, and soaring foreign oil costs, like the Vietnam war before, put a crimp on America's upwardly mobile economics. Oh yeah, 1969 was the year of the LEAST INCOME DISPARITY in American history, and had it not been for Vietnam War, Pres Johnson & his "New Deal" might have made even more progress in the "war on poverty" - but Carter was the victim of his own economic inexperience, the outflow of US dollars, the dependence on foreign oil, and don't forget Paul Volker's KILLER 20%+ interest rates!
(also, there was the whole "Repub treason, dealing with Iran to HOLD US HOSTAGES PAST the 1980 election," but that's a whole, nother story.)
Reagan had the good sense to realize that nuclear war was unwinnable, and, despite spending billions on new weapons & Star Wars, Reagan _insisted_ on those PEACE NEGOTIATIONS with Gorbachev.
(Neither American Righties, NOR American Lefties, give Reagan & Gorbachev the credit the deserve; both sides like to imply "we would have won the Cold War regardless," for their various structural, ideological arguments);
but the facts are, those Pershing & Soviet MRBM missiles hanging over Europe like a cloud of doom had a 2 minute launch-to-impact time - a truely horrifying hair-trigger - and _every_ time US & Sov forces went to alert status, doubled the chances that a "rogue launch" would trigger a massive reprisal.
Anways, after Reagan and the Bush-1 "international alliance" crowd got that "dissolution of USSR & mighty Warsaw Pact without a shot fired in anger" end of the Cold War, Bush-1, Cheney, and Rumsfeld promptly SQUANDERED the "Peace Dividend" - in TWO YEARS, FLAT!
(because of
#1. The Reagan-Bush Deficits; and,
#2.) the S&L DEREGULATION debacle, which corrupt S&L owners bribed Congress to BAIL OUT _their_ "PRIVATE" losses; and #3. an ironic huge part of the BUSH-1 S&L RECESSION was Cheney and Rumsfeld SLASHING DEFENSE SPENDING contracts, and CLOSING US military BASES in America, with NO "Soft Letdown" or alternative economics for those contracts-cancelled defense contracts communities, especially Boston & CA.
Due to that BUSH-1 RECESSION, dark horse Bill Clinton ousted mighty, Iraq-war winning, 87% approval rating Bush Sr., and following the common sense business notions of Ross Perot's 1992 Independent campaign "DEFICITS are KILLING the US Economy" charts, Clintons 1993 Dem majority Congress passed the DEFICITS REDUCTION budget.... WITHOUT ONE SINGLE REPUB vote!
Removing the BURDEN of PREDATORY CAPITALISM's insider, crony-corruption DEFICITS, honest entrepreneurs were able to grow their businesses, and, with the PC & internet booms, the US economy took off - but not before Timmy McVeigh, listening to Right-Wing "tax & spend, too much Regulation Democrats caused this Recession!" hate-radio, blew up the Oklahoma City fed. govt. building.
As explained above, the Bush-1 recession was caused by TOO LITTLE regulation -the DEREGULATION of the Savings & Loans, followed by the CORRUPTION of Congress "BAILING OUT" fraudulent, failed, and often CRIMINALLY RUN Savings & Loans (in addition to the pre-existing Reagan-Bush Cold War spending DEFICITS, AND the SLASHING of the VERY SOCIALIZED defense industry contracts, which had created so many SOCIALIZED big-government jobs during Reagan's Cold War military spending.
Bush-2 & Cheny were able to STEAL the election of 2000, because VP Al Gore was too worried about his Vice Presidential dignity, and didn't point out that the TWO Bush governor brothers had BOTH run their states' budgets INTO THE GROUND - from Democrat (Lawton Chiles in Florida, & Gov. Ann Richards in Texas), to BUSH DEFICITS, just like daddy Bush did the the US deficits!
Even with Bushies OWN T-sec, Paul O'Neill, WARNING that Bush & Cheney's "TAX CUTS FOR RICH" would eventuallY WRECK the economy (O'Neill's warnings came before 9-11), the US economy took its 9-11 hit, which camoflaged the impact of the BUSH-2 DEFICITS. But stockholders were saavy - they fled the stock market en masse in 2002, and DUMPED their cash into SAFE, quality REAL ESTATE. All this money POURING into real estate, though, CREATED ANOTHER BUBBLE, this time in BIG FINANCE AS WELL as real, real estate, which, through loan-sharking and other blatantly fraudulent accounting methods ("ENRON ACCOUNTING"!) sustained itself RIGHT UP TO 2008, when Fannie & Freddie needed BAIL OUTS, because the PRIVATE mortgage writers were WRITING OVERPRICED GARBAGE that they had NO stake in, preceeding the Lehman, Bear Stearns, and even Merrill Lynch collapses!
Unfortunately, Obama is even more in the thrall of his insanely corrupt BIG FINANCE handlers than even Bushie was, he (Obama) has GIVEN AWAY to the Big Financials SOME PORTION of TWENTY TRILLION DOLLARS extorted from taxpayers, which cushions of BAILOUT cash ALLOWS the banks to FORECLOSE on homeowners, they otherwise would TRY to keep in their homes (by renegotiating the loans, or even writing down principle, etc.).
So there it is - the BIG FINANCIALS have ALWAYS run the show, except for brief interludes during the worst parts of various Recessions, when the damn Congress is FORCED to address those deficits - the DEFICITS that are soaring, because of NEW INTEREST on the already outstanding deficits.
AT EVERY STEP OF THE WAY, Right-Wing Big Finance MASKS PREDATORY, MONOPOLY extortion as "free enterprise capitalism" - whether the Dems or Repubs are in power, it doesn't make much difference.
Actually, Americans have a 200+ year history of this process: the big complaint from American Colonials in 1770s was not so much English taxes, but the fact that THE EAST INDIA TEA COMPANY had a MONOPOLY on US shipping to India and English colonies; and that similar royal decrees dictated that Americans could not build their industry, they must ship raw goods to England, and import them back as finished goods; and of course London had a MONOPOLY On MONEY CREATION.
"Taxation without representation" was a far easier colonial slogan, however.
When John Hancock's men tossed East India Co. tea into Boston Harbor, Mr. Hancock was not only protesting the import taxes that many suspect drove him to be a smuggler, but he was also protesting the royal dictates that prohibited his own shipping company from competing in the India tea trade held by the EITco monopoly.
Naomi, is that you?
The Klein Doctrine: The Rise of Disaster Polemics
http://www.cato.org/pubs/bp/bp102.pdf
Some people should fact check the ramblings of their heroes, before they swallow revisionist history whole cloth.
Close...not Naomi but David Kaczynski.
You clearly haven't watched the video or read any of Keen's work
Actually I did, but clearly you don't like criticism of him or do not understand what he is saying. His slavish devotion to Minsky is telling. Also, pause the video when he first quotes Friedman and see what part of his own slide he does not read. He misreprsents Friedman's own words. Here, take a gander at this brief video from a PBS show (Free to Choose) done by Friedman and staring Friedman:
http://www.youtube.com/watch?v=J2yLzISKKHA
Then we have the famous statement by Friedman concerning what is and is not inflation:
" Inflation is always and everywhere a monetary phenomenon.'
Then we have Minsky's economic theories, which are based in Keynesianism..
http://en.wikipedia.org/wiki/Hyman_Minsky
Snippet:
Hyman Philip Minsky (September 23, 1919 – October 24, 1996), was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post-Keynesian economist, because, in the Keynesian tradition, he supported some government intervention in financial markets* and opposed some of the popular deregulation policies in the 1980s, and argued against the accumulation of debt. His research was noticed by Wall Street.
As too the dominace of Keynesian economic up until the late seventies:
http://en.wikipedia.org/wiki/Keynesian_economics
Postwar Keynesianism
Through the 1950s, moderate degrees of government demand leading industrial development, and use of fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go go" 1960s, where it seemed to many Keynesians that prosperity was now permanent. In 1971, Republican US President Richard Nixon even proclaimed "we are all Keynesians now".[15] However, with the oil shock of 1973, and the economic problems of the 1970s, modern liberal economics began to fall out of favor*. During this time, many economies experienced high and rising unemployment, coupled with high and rising inflation, contradicting the Phillips curve's prediction. This stagflation meant that the simultaneous application of expansionary (anti-recession) and contractionary (anti-inflation) policies appeared to be necessary, a clear impossibility. This dilemma led to the end of the Keynesian near-consensus of the 1960s, and the rise throughout the 1970s of ideas based upon more classical analysis, including monetarism, supply-side economics[15] and new classical economics.
As to the contention that there is little difference between the monetary policies of Keynesians and Monetarist, from the Austrian perspective. From the Austrian econonmist, Murray Rothbard:
http://www.lewrockwell.com/rothbard/rothbard43.html
Milton Friedman Unraveled
In common with their Keynesian colleagues, the Friedmanites wish to give to the central government absolute control over these macro areas, in order to manipulate the economy for social ends, while maintaining that the micro world can still remain free. In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.
So it seems the FACTS support my original contention.
* - emphasis mine
I have no idea why you bolded this:
"Minsky was sometimes described as a post-Keynesian economist, because, in the Keynesian tradition, he supported some government intervention in financial markets*"
And ignored this:
"...and opposed some of the popular deregulation policies in the 1980s, and argued against the accumulation of debt"
Stop trying to put people into narrow categories.
Minsky was a bright dude.
Also, I stated in my first post:
Both have their own ideological commitment to fiat currency and construct all sorts of self-rationalizing equations which are nothing more than exercises in confirmation bias; which are meant to justify a ruling political elite having say over the money supply for their own political ends.
So both the part I highlighted and the part you selected support my observation that Keynesians have little problem with management of the economy and monetary policies by the political class. That, more than anything else, has placed us in the currrent dilemma that we are now facing.
"When buying and selling are controlled by legislation, the first things to be bought and sold are legislators." - P. J. O'Rourke
+1 billion
The idea of a centrally planned planned economy, fiat currency, and a corrupt aristocracy makes me wanna puke!!!
G. Marx:
You nailed it wrt Keen.
I love Keen's blog and have learned much from it, but you have found the flaw there and explained it admirably. Thank you. I could see this was it but I don't have the economist training to be able to think it through and articulate it the way you have.
+1 in gold (no inflation needed!)
+100
I highlighted that section which was most relevant to my first post. Minsky was a Keynesian, Keen labels himself as a post-Keynesian, hence his attack on the Monetarist, so as to defend Minsky. Try applying some reasoning and logic next time.
bravo bravo!
keynesianism and monetarism are two sides of the
same coin - both teams produce incomprehensible
mathematical voodoo with no grounding in reality....
the only difference is that one side preferred
to manage the economy through the fisc and the
other through the central bank....
the statist argument is the most powerful
indictment of these quack systems....
nothing to see here move along...
Wonderful stuff.Good to hear counter argument to giving money to the banks instead of usual attacks on GS/JPM etc.He states giving money to the debtors would have been a better option(agreed) , in practice the banks were so far underwater having lent out 30x asset values that the banking system would have collapsed - result end of economy as we know it.When the shit hit the fan where would he have placed government bail out money? None to the banks?
Herein is the crux of the problem!
Bankers have convinced EVERYONE that their system of debtmoney is coextensive with "economy" in the absolute. It's not. Banks sell a particular product and it is in their interest to convince everyone that they cannot live without this product.
JFC, the US became the richest nation on earth on a freakin metals standard. No Fed, no income tax, none of this bull. Adam Smith was smarter than any of these clowns. All they provide is apologia for parasitic banking regimes and marxist plutocracies.
Christ almighty, money? We can't have money without these banks? Bullshit. We have a Constitutional provision awarding plenary monetary authority to Congress. The mint bangs this shit out by the pallet load. We have money. SO WHAT if these particular banks failed? We cannot capitalize NEW banks with fictitious capital? LOLZ
Paper and fiat do not fundamentally matter; they are a state of mind. Real things matter. Sooner we collectively realize that, the sooner we can cast off this godawful caste system.
The entire banking system we have is a fiction now, inarguably. These bankers do not want THEIR system and THEIR banks to fail. If they did, far as I know, power plants would still operate, cars would still move, water would still run. Even truly collapsed societies like the USSR and Argentina or warzones like Beirut, goddamn, life goes ON for cryin out loud. People will self-organize a different monetary regime if confidence is lost in the present one. But the pimps who hustle the old money are out of work and ruined. They struggle like a ruble dealer in 1989.
"The mint bangs this shit out by the pallet load." I love that sentence.
Bankers and politicians are self centered. From their twisted perspective, if their world collapses then the whole world does as well.
[Paper and fiat do not fundamentally matter; they are a state of mind. Real things matter.]
Whole comment is brilliant. Huzzah.
cougar
I think it is more simple than that ... to stay in power, the Statist must not let the banks fail as it would be perceived as 'their' failure (i.e. not GWB fault). If they lose power how would their agenda be accomplished. From a previous post of mine:
If our duly elected representatives are either aligned with or profit from Wall Street's success by additional power then we will always be plundered.
This is simply a replay of history ... there has always been collusion between the money lenders and the power brokers at the expense of the producer class. The lenders spend resources to put the brokers in power who then repay them by mortgaging the producer's labor. When a truly powerful regime arrives, it creates wars (to increase their influence) which are financed by the lenders. Whether the power is strong or weak, it facilitates the transfer of wealth from the producer class to the lenders. The brokers usually are satisfied with power alone ... the lenders are usually satisfied with money alone ... the producers are usually unsatisfied.
It's hearing the likes of Steve Keen and reading the likes of Zerohedge and others (Chris Martenson, Karl Denninger, John Mauldin et al) that keep me feeling that my own thoughts on this are valid, when one sees the 'out of recession' pundits in/on the media and markets rallying (on low volume) on the back of bad or internally conflicted figures.
DavidC
Relevance timeout but, at least in Judeo-Christian belief, the devil was one of God's angels.
Caught that, too.
Though Lucifer was cast out of heaven as Milton Friedman was cast out of Keynesianism.
Keen it awesome. A couple points to add....
1) How I saw the US housing collapse ....sold all in 2005....Avg price for a home/Income (seems too simple right?) Well that's when I rang the bell...guess what AUS...10-15x (even worse than USA)
2) 85% of all mortgage debt floats!!! Yep you read that right...so all the cheer leaders that are rushing into the AUS/USD well...we all know how group think works...every uptick in rates coincides with higher and higher interest payments. Exactly what Ben is trying to prevent here...
For those who are visual this chart says it all...
http://www.whocrashedtheeconomy.com/ausrealhomeprices.gif
But who really cares about facts anyway....
Keyer, you aren't Aussie, are you? Hot damn!!
Yaay Zero Hedge for shining the spotlight on other economists, not only from the US. I am a Keen disciple for sure although I don't always agree with his take on the RBA - he seems to be against their raising rates, while I think it is the right thing to do even if it's postponing the demise of a doomed fiat. Isn't that how Volker rescued the States back in the '80s?
I love the Who Crashed the Economy blog...
http://www.whocrashedtheeconomy.com
...have recommended it to everyone I know. My only complaint is that the blog owner does not allow comments to post for, like, days and sometimes WEEKS. I have a couple questions I posted on there, at least lo a fortnight ago, that haven't even been posted let alone answered. Kind of puts a damper on any discussion about the graphs or the articles.
I also recommend the Contrarian Investor's Journal blog, here:
http://cij.inspiriting.com
I think the owner is Chinese or something; his syntax occasionally suggests English isn't his first language. But he is a true teacher of Austrian economics vis-a-vis the Aus and global economy, and always gives full replies to questions/discussion.
We have a few ROCKING blogs here in Aus. Too bad more people don't know about them. I recommend them whenever I can, but too many people would rather read the hopelessly propagandist AFR...! And don't even get me started on our pathetic mainstream dailies...make the US Murdoch papers look like Project Censored by comparison.
Keen is the only guy in Australia who gets it, really like the fella...the only attachment I have to Australia (unfortunately) is a skydive in Darwin, AUS. And of course the hot Aussy lady's....my god what is in the water down there!? Oh and I did have most of my money in there for the better part of the year....finished shifting out of AUD into "other things" :o)
I visit Bronte Capital every now and then but when he called out TD on the HFT...(I guess a little opposition is a good thing) but then it got a little crazy...hard to argue with the half human/cyborg durden....total recall.
I wish Australia had a ZH...although Cornelius does do some currency update mostly on the NZD...but that's about it here....Love to see some more stuff from Australia perhaps we can get someone to contribute from there...(someone who doesn't own a set of pom poms)
Cheers
Technical analysis can tell us where the economy is headed.
MORE:
http://www.zerohedge.com/forum/market-outlook-0
Steve Keen is my favorite economist/economic predictor because: 1) he has sound global understanding of economies and has correctly predicted general trends (this he shares with others like Krugman and Roubini), 2) he seems non-partisan, not wedded to traditional ideological economist camps but rather acts like practical applied scientist letting the expirement results/facts inform him (unlike partisans like Krugman or Schiff) and 3) he has what appears to be fairly straightforward mathmatical models that explain and predict everyday economic behavior correctly, kind of like Newton was to physics back in the day, 4) he has straightforward solutions, 5) his talks are the opposite of Bernake speak because his words have some meaning, it's like the difference between listening to a philosopy of religions professor talk about God's Will compared to an engineering professor explain how to design steel beams for buildings.
Steve is good, wish he was our Sec of Treasury, even if he is an Aussie.
Steve Keen is one of my favorite economists.
Me, too. He is a Circuitist. Recently, Keen and Bill Mitchell, and Neo-Chartalist, conducted a debate.
In the spirit of debate
http://bilbo.economicoutlook.net/blog/?p=5194
In the spirit of debate... my [Bill Mitchell] reply-Part 1
http://bilbo.economicoutlook.net/blog/?p=5199
In the spirit of debate... my reply Part 2
http://bilbo.economicoutlook.net/blog/?p=5224
In the spirit of debate … my reply Part 3
http://bilbo.economicoutlook.net/blog/?p=5234
Steve and others reply in the comments.
Check out his predictions!
I agree - saw him first on Max Keiser and loved him.