Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year

Tyler Durden's picture

Submitted by Chris Martenson

Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.

Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.


Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation.


Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt -- so debt is slowing down more rapidly at this time rather than accelerating -- that is going to mean falling asset markets.


Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down -- which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.

He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:

Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.


I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.


And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.


America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt -- for a while you were accelerating very rapidly and that's what gave you a boost in employment --  so you are falling back down again.


Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.


China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.


Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.

In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have end:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

And he offers an unconventional proposal for how this can be achieved:

I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying "who is responsible for bad debt?" you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.


They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.


Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create 'central bank money' (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down -- no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.


Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.


The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller.  That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered. 

Click the play button below to listen to Chris' interview with Steve Keen (48m:50s):


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veyron's picture

2008 was a particularly ugly year

2009 was a particularly ugly year

2010 was a particularly ugly year

2011 was a particularly ugly year

Applying Birinyi's Ruler on my time series of ugliness

2012 will be a particularly ugly year

2013 will be a particularly ugly year

2014 will be a particularly ugly year



Wake me up when a year isn't particularly ugly 

CPL's picture

Frogs being boiled slowly alive are also skeptical of their situation and over estimate their resilience.  Every one of them ends up with butter on their legs.  Wouldn't even doubt the last one in the pot mistakes an empty pot as an invitation that things have settled down.

ElvisDog's picture

I've read that frog analogy is an urban myth, that a frog will not stay in a pot of rising temperature water and be oblivious to what is happening.

thiscreepingmalaise's picture

yeah, well I read there was no Santa Claus and I know that is a bunch of crap.

withnmeans's picture

BBC says that the Spanish Bailout is internationally WELCOMED!  


Hmmm, GREEN LIGHT ON MONDAYS MARKETS. Tuesday, "HA" is when they figure out that there is no money to fund it all !!!



Go and smoke some HOPIUM boys !

Michael's picture

Declare, "Universal Bankruptcy Act of 2012".

markmotive's picture

This is what the long descent looks like. The end of the industrial age. 

Welcome to the other side...

The Big Ching-aso's picture



Mayan calendars are going 4 next to nothing in 2013.

Rip van Wrinkle's picture

There's a surprise. The BBC backing the socilaist option.


Where have you been the last decade and a half? The BBC IS the Blolshevik Broadcasting Corporation.

Chaffinch's picture

Internationally welcomed - and that is before they know how much it is going to cost! Any guesses how much the 'independent auditors' are going to be asking for in 2 weeks time (after adding on their fees of course)?

Now there's a thought - do you reckon the auditors have requested cash up-front?
; ))

Rich Bagg's picture

There is no cost Bro.  Free money created by the printing press.  Don't short the stock market.



Overfed's picture

I'm hoping that PMs are gonna get hammered next week so I can stack up some more.

koperniuk666's picture

You listen to the beeb?

RT turns out better stuff these days, or Irish Times, or Haaretz or Handelsblatt.

The Beeb is just europhile marxist spin. No content.

But that Emily is quite hot though.... and I quite fancy the skinny Pakistani anchor.


The Monkey's picture

What do you mean by, "there is no Santa Claus"?

Sudden Debt's picture

Sorry... The easter bunny killed him...

Michael's picture

Why do I not see;

"Anybody but Gordon Gecko Romney for President" bumper stickers everywhere?

WP45's picture

Pay no attention! There is always a jackass or two on every forum trying to start rumors or spreading lies.

Stuck on Zero's picture

If the frog analogy is a myth then that only proves that frogs are smarter than people. 


PS You are referring to the little green flippered critters and not the French, right?


RafterManFMJ's picture

It is an Urban Myth. But research shows a White Man will sit in a pot till everything he has worked for is burning.

Olympia's picture

Due to the German behaviour, Europe has become the “bedroom” where Jewish loan sharks rape the Europeans. The first time, they have served the Americans at the expense of the Europeans and the second time round they serve the Asian Jews at the expense of the European people again. It is because of them that in 1945 the American occupation of Europe started and in 2012 –again it is them to blame- the Jewish occupation begins …An occupation that did not come out of the blue but it was the result of a war attack. In 1989, Jew Greenspan levelled his “assault” against both USA and Europe from his position in FED …the cheap money “assault”, the result of which is now obvious. Cheap money destroyed the productivity of the western countries and forced them into unemployment. Peoples without employment got involved in huge debts and now, loan sharks are infesting their countries.

…Germany betrayed Europe once again. Germany handed all the European countries over to the Jewish loan sharks, by naively believing that this way they would let Germany free. Germany put the European family at the “target” of the “markets” and it is collecting profits every time one of its members gets “executed”. The loan sharks who pretend to be the “hunters” are shooting safely in the European “hen house” because Germany has managed to “raise walls around” Europe. One after the other, Europeans are destroyed so that Merkel can pay the stupid and artificial German debts to the loan sharks. 

BlankfeinDiamond's picture

Go sell crazy somewhere else.

CPL's picture

I've heard that myth from all three sides of the "winner".  It just not that interesting blaming religious wackadoos for the state of the economy.  It would be like blaming the Universal Life Church for the collapse of health care.


Go peddle that crap to someone that cares on one of the numerous poorly managed stormfront-faggotry boards.  You assholes ruin perfectly good news forums that are fun, until one of you loons show up because you end up dragging along the Jewish community into the groups and it all breaks down into a sky god arguement eventually.  I'm sick of it, 20 years of both side of batshit crazy.

Go Tribe's picture

Nobody boils frogs alive. We gig them and then saute their legs in butter and garlic.

LFMayor's picture

This is very true, you have to take some pliers and pull the skin off the legs before you fry them.  That's after they're cut off, too.

Oh regional Indian's picture

According to one of my teachers, the cruelty to frogs prior to eating their legs is a prime "bad karma" animal kinetic action, if there ever was one.

Ponder that. Frog's legs are the epitome of "Jump", of movement. Plus, they de-insectisize.

Anyway, 2012 has been shaped up to be a particularly ugly year. We could all have been working together to create innovative solutions that would help people survive this current series of earth-changes (LOT WORSE COMING).

Instead, world is having  the rug pulled from under it's feet so there is no place or time to be steady, forget prepared.

And time is running faster. Anyone doubt that, ponder this: We are at near mid-june 2012.

2008 seems like yesterday.


Ahmeexnal's picture


It is indeed a cruel process.  While they are still alive, they "take the pants off" the little fellows. Then they are tossed into salted water before slowly turning on the heat.

Word on the street is the Annunaki are coming back.  They will skin alive the power elite and cover their exposed flesh with salt.



Oh regional Indian's picture

Ugh! The things we do to satiate our "tastes". I watched one episode of Iron Chef, years ago (perhaps 6-7 years ago).

The day's dish was eel, which was pressure cooked live.

It was a bunch of Japanese Iron-chefs. When the cookers were opened (with much fanfair, then they nail them to the table or some such), it was a horribel sight, all the eels reaching up...tch.

I have never seen anything like it.

Karma... it comes around. 


BluePill's picture

VIVEK BABA , how is your doomsday business going along?, baba saheb  why dont you walk naked on street and pay some money to stupid indians , you can create publicity man


He is your inspiration Vivek

You can fool millions of indians and illiterate women and bone them


You fool lost your job and wife because you are impotent and have no skills



taraxias's picture

I red arrow every asshole who puts up garbage like this and immediately green arrows himself.

You should have at least waited a couple of minutes to make it believable but I guess you were afraid of a flood of red coming your way after posting that shit.

Oh regional Indian's picture

If this is what it descends to, then I'm actually done here.


Good luck everyone, you're going to need it.

If any of you guys want to play, make something happen, you know where to find me.

Vivek aka ori

ACP's picture

There's a simpler answer as to who 2012 will be ugly...DOOMSDAY BITCHEZ!

RockyRacoon's picture

Maybe 2015 will be better?  

Barry Ritholtz:

June 3, 2015

Dear Banker,

Thank you for your cooperation in our most recent series of bank stress tests. We had hoped that these would not be necessary, but after the credit crises of 2007-08 and the banking crises of 2014, the FDIC simply had no choice.

The results of these stress tests, especially as applied to our largest banks, are terribly troubling. Trading losses of billions of dollars have made it apparent that nearly every major depository bank is in a far more precarious financial condition than previously believed. It is as if many of our largest banks never fully recovered from the earlier crisis and now lack sufficient capital to withstand any further pressure.

This is especially concerning if the economy takes yet another turn for the worse or housing begins its third leg down.

Capital reserves are insufficient to support the trillions of insured deposits at these banks. Ever since interest rates hit record lows and the 10-year Treasury bond broke 1.5 percent, leveraged speculation has become the primary business of the largest FDIC-insured banks. We have grave concerns about the safety and soundness of these insured depositories. The ongoing collapse in Europe, the wild currency swings around the world, and that recent turmoil in China have all made the current state of finance extremely risky.

Following the most recent bank failures, the reserve position of the FDIC Deposit Insurance Fund (DIF) has fallen to perilously low levels. This pool of capital is the backstop for public money deposited in demand accounts at large and small banks around the nation. Given these exigent circumstances, the FDIC cannot sit idly by while speculation in derivatives and other complex financial instruments exhausts the DIF, thus putting taxpayers’ money at great risk. Nor can we assume unlimited liability in guaranteeing deposits at firms where trading in derivatives is creating additional liabilities to the FDIC (and taxpayers) that is measured in the trillions of dollars.

Therefore, as chairman of the FDIC, with the full support of my board of directors, we have decided upon the changes in the regulations covering federal deposit insurance:

1. Effectively immediately, we have increased the FDIC deposit insurance for any U.S. bank that engages in ANY trading of derivatives or underwriting securities or other investment banking activities by threefold. This threefold fee increase goes into effect immediately. It applies whether these trades are hedges for proprietary trades or are made on behalf of clients.

2. Effective in 90 days, we are LOWERING the maximum insured deposit liability to $100,000 per account for derivative trading firms. Effective in 180 days, the insured maximum insured deposit liability will drop to $50,000 per account.

3. Effective one year from today, on May 23, 2016, we will no longer offer deposit insurance for any firm that engages in derivative trading or securities underwriting or that engages in investment banking.

4. Any bank with fewer than 1,000 depositors or less than $1 billion in assets may apply for a discretionary waiver of these rules.

We have been forced to make these changes because of the very real risks that your leveraged derivative trading has created. One or more of you may suffer an enormous loss, and that poses a risk to the DIF. Our governing statute requires the FDIC to act in such circumstances.

It is not our position to tell you what sort of non-depository banking activities you may engage in. Those are business choices you and your firm are free to make. However, it is our position not to engage in foolish insurance underwriting. We have elected to be more conservative in our risk management as well as the underwriting assumptions we make. Therefore, we cannot guarantee the kinds of risks that your firms have been undertaking.

This action should delight many of you. In the recent speeches of several bank CEOs, many of you have longed for a return to the days of less regulation and a truer free market. Once you no longer qualify for our insurance due to your other businesses, you will be freed up from all of the onerous bank reviews and regulations that are part and parcel of FDIC insurance.

As a bonus, without the intervention of government guarantees, those of you who continue to have depositors will finally be able to compete in a free and open market. Without FDIC insurance, your depositors will be making their decisions based on your reputation and their assessment of the safety and security of your operations — and not Uncle Sam’s willingness to continually bail you out.

You have the FDIC’s best wishes for success in the future — just not our insurance.

If you have any further questions, feel free to contact my office.

Thomas Hoenig

Chairman, Federal Deposit Insurance Corporation

grid-b-gone's picture

Perfect. Now find 534 like-minded people spread across all 50 states who excel at fundraising and campaigning to eventually change the balance of power.

The fact is, Congress is generally content with the current situation. If they weren't, they would have made Finreg look more like this sensible proposal years ago. 

mtomato2's picture

Effing Ayy, Rocco.

Effing Ayy.

AnAnonymous's picture

Wake me up when a year isn't particularly ugly

You will be woken up. Some year, it will be ugly.

It has to be. Over a life time, there is at least one ugly year.

Being 69 times wrong does not mean the 70th will be not right.

That is how US citizen economics work: attrition.

CPL's picture

...and systemic entropy as the conductor.

darkpool2's picture

So remind me now....why am i personally deleveraging? Yes its the sensible strategy, but if i re- leverage to the hilt, wont these ass-wipes and inflation ( in that order) bail me out with some kind of debt jubilee. Oh the conundrum!
( the answer however is clear i think )

Monk's picture

Likely, it will be a permanent global recession, with any "recovery" temporary and based on credit added to the system then vaporized. Thus, the trend line in the long term is downward.

It's similar to the Zero Hedge motto.


CPL's picture

No body has finished counting tax recipts yet.  Won't either, all that offshored processing has been in a rolling black out for the last six months.


I'm particularily skeptical that anything happens but the obvious.  Payments and paychecks will start to bounce well before the ceiling limit...of every country with a central bank.

zorba THE GREEK's picture

If you think 2012 is going to be ugly, 2013 will make the elephant man look like Johnny Depp.

Cursive's picture

@zorba THE GREEK

There are a lot of option ARM and interest-only ARM's that reset in 2013.  Even with interest rates currently at historic lows, the special introductory interest rates on these loans are still lower than the probable reset.  Should be interesting.

zorba THE GREEK's picture

@ Cursive

 And if Congress doesn't act soon, there will be massive spending cuts and Bush era tax cuts will expire

reducing GDP and putting us back in recession, even with bogus BLS numbers.

Lucius Cornelius Sulla's picture

There is no doubt in my mind that Congress will find a way to kick the can.

The Monkey's picture

Agreed on stimulus. The roadmap is clear.

Sockeye's picture

Congress? What capacity does Congress have to kick the can?

Lucius Cornelius Sulla's picture

Congress must create and approve all spending bills.  They will blink on the fiscal cliff and postpone tax and spending cuts.  There will be plenty of deception as usual. so I'm not sure how, but it is a certainty.

RockyRacoon's picture

There will be much wailing, gnashing of teeth, and partisan finger-pointing, but you are undoubtedly right.