Author Archive

An open letter to Brussels

July 1, 2014 3 comments

from Steve Keen

The European Stability and Growth Pact is based on the principle that stability and growth are enhanced when government deficits are either minimised or eliminated. I want you to dispassionately consider an argument that reaches a different conclusion. It may sound like something you have heard before from others and already dismissed. But bear with me.

When considered from a strictly monetary point of view, an economy can be regarded as having five major sectors: households, firms, the government, the banks, and the external sector. To focus on money flows, I will diverge from mainstream economic theory by treating households as consisting exclusively of workers, while I will combine firms and their owners into the firm sector, and do likewise with banks and their owners. I also treat the central bank as part of the government sector, and I ignore capital and income flows between nations in this simple exposition.

Neither households nor firms can produce money, while the other three sectors are potential sources of money. As is now well known (though this fact is still contested by academic economists), banks create money by making loans:

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. (Bank of England Quarterly Report 2014 Q1, Money creation in the modern economy.)

Governments can also create money by running a deficit (if it is financed by the central bank, or by bonds sold to banks in return for excess reserves). Money can also be created by running a balance of payments surplus (which in this simple exposition is exclusively a balance of trade surplus).

Read more…

Categories: The Economy

Why Europe’s austerity experiment is doomed to fail (7 graphs)

June 24, 2014 3 comments

from Steve Keen

I’ve spent the past two weeks in Europe, with speaking engagements in Italy, Greece and Austria. This was my first visit to Greece, and my first chance to get an admittedly superficial tourist’s view of what a country with Great Depression levels of unemployment looks like.

It didn’t look like anything in particular until the drive from Athens, Greece’s capital and largest city, to Thessaloniki, its second largest. Then it struck me: the roads were near empty — as the toll booth shown in Figure 1 illustrates. My host Nikos reckons he has done a million kilometers over the years on this 500km drive, and he confirmed that roads which were now virtually empty were once full of cars, and especially trucks — that mobile sign of a thriving economy.

Figure 1: A toll booth on Greece’s main highway at about 5pm: no vehicles in either direction
Graph for Why Europe's austerity experiment is doomed to fail

This is a very different manifestation of economic stagnation than the mental picture I had of it from the historical record of the Great Depression, when the overwhelming impression was of crowds: crowds lined up at soup kitchens, crowds outside dole offices. Today, the 28 per cent of Greek’s workforce that is unemployed is mainly at home (if they have homes), and surviving on electronically transmitted dole payments. The social organisation of the unemployed that marked the Great Depression is not apparent today — though the political shifts are beginning. Read more…

Categories: The Economy

Taking stock of Wall Street’s boom (1)

May 15, 2014 1 comment

from Steve Keen

If the US economy was performing as well as the US stockmarket, even Walmart workers would be breaking out the champagne.

Since 2009, the S&P has risen over 250 per cent in nominal terms, and almost 230 per cent in inflation adjusted terms. In nominal figures, it is at its highest value ever, though when you adjust for inflation, it is still 10 per cent below its peak in 2000 (see Figure 1).

The $64 question is: will it keep on going up?

Figure 1: The S&P 500 before and after inflation
Graph for Taking stock of Wall Street's boom

There are good reasons for the stockmarket index rising over time in inflation-adjusted terms. These include sound ones like the reinvestment of earnings (think Berkshire Hathaway),  but also misleading ones like survivor bias. Read more…

Categories: The Economy

Paul Krugman, the champion of inertia

April 28, 2014 4 comments

from Steve Keen

In his latest blog, Paul Krugman slings off at non-mainstream economists — and the students at Manchester University campaigning for change to the economics curriculum — for wanting fundamental change in economics. The status quo is fine, he reckons: move along folks, nothing to see here. Says Krugman in his latest post, Frustrations of the Heterodox:

“Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook — and give other schools of thought equal time.

“Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong. Read more…

How not to win an economic argument

April 7, 2014 9 comments

from Steve Keen

A critique of a yet-to-be-published paper of mine (“Loanable Funds, Endogenous Money and Aggregate Demand”, forthcoming in the Review of Keynesian Economics later this year; the link is to a partial blog post of that paper) by non-mainstream economist Tom Palley reminds me of one of my favourite ripostes by a politician, back in the days before spin doctors stopped them saying anything offensive — or indeed anything interesting.

As Sir Robert Menzies, former Australian prime minister and leader of the conservative Liberal Party, was giving a campaign speech in 1954, a heckler called out “Mr Menzies, I wouldn’t vote for you if you were the Archangel Gabriel”. Menzies shot back: “Madam, if I were the Archangel Gabriel, you would not be in my constituency.”

So it is with Tom’s critique. He criticises me for a whole range of things that I didn’t discuss, that he thinks I should have discussed, and for techniques I used that he thinks I shouldn’t have used. But Tom wasn’t in my intended audience for this paper — and not because he “wouldn’t be in my constituency”, but because he is. We have our differences, but we’re generally on the same side on the topic of this paper — and I didn’t write it for people who agree with me, but for those who don’t on two key issues: the role of banks, debt and money in the economy, and the role of the change in debt in aggregate demand. Read more…

Modeling financial instability

February 7, 2014 5 comments

from Steve Keen

This paper will be published in a forthcoming book on the crisis edited by Malliaris, Shaw and Shefrin. In what follows, I derive a corrected formula for the role of the change in debt in aggregate demand, which is that ex-post aggregate demand equals ex-ante income plus the circulation of new debt, where the latter term is the velocity of money times the ex-post creation of new debt.

The PDF is available here: Keen2014ModelingFinancialInstability. The Minsky models used in this paper are here in a ZIP file. The latest version of Minsky can be downloaded from here.

  • Introduction

Literally no-one disputes that the financial sector was the cause of the post-2007 economic crisis: disputation instead centers on the causal mechanisms. I follow Fisher (Fisher 1933) and Minsky (Minsky 1980) in assigning key roles to the growth and contraction of aggregate private debt (Keen 1995; Keen 2000), but this perspective is rejected by New Keynesian economists on the a priori basis that private debts are “pure redistributions” that “should have no significant macro-economic effects” (Bernanke 2000p. 24), and as a corollary to the oft-repeated truism that “one person’s debt is another person’s asset” (Krugman 2012c, p. 43).

My analysis also follows the Post Keynesian tradition of Read more…

Economics’ odd couple highlights a Nobel folly

October 28, 2013 15 comments

from Steve Keen

I would love to be in the audience watching the body language at this year’s “Nobel” ceremony for economics. Robert Shiller, who is far too polite a person to make it obvious, will nonetheless at least fidget as he listens to Eugene Fama’s speech, since Fama continues to dispute that bubbles in asset prices can even be defined. Shiller, in contrast, first came to public prominence with his warnings in the early 2000s that the stock and housing markets in the States were displaying signs of “irrational exuberance”.

Fama came to prominence within economics – though not in the wider body politic – in the 1970s with his PhD research that argued that asset markets were “efficient” not just a first order (getting the actual values right) but even to a second order (picking the turning points in valuation as well).

How can two such diametrically opposed views receive the Nobel Prize in one year? The equivalent in physics would be to award the prize to one research team that proved that the Higgs Boson existed, and another that proved it didn’t.  Read more…

The Neoclassical conspiracy against Post Keynesian Economics (1)

June 11, 2013 77 comments

from Steve Keen

Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:

So as I see it, we should first of all be evaluating models, not individuals; obviously we need people to interpret those entrails models, but we’re looking for the right economic framework, not the dismal Nostradamus.

Second, we should be evaluating models and the individuals who claim to have these models based on broad performance, not single events; if your approach (say) predicted the housing crash but then also predicted runaway inflation from Fed expansion — I assume everyone knows who we’re talking about [for those that don’t, Krugman is referring to Peter Schiff] — it’s not a good approach.

Finally, I think we’re looking for conditional predictions — what happens given events that are themselves not part of the model — not absolute predictions. It was, for example, very hard in the fall of 2011 to know how the ECB would respond to the escalating financial crisis in Europe; failing to predict that Mario Draghi would find a way to funnel vast sums to debtor nations through discounting would have lost you a lot of money, but wasn’t really a failure of the economic model.

This is an excellent set of criteria—all I would add is one more in a similar spirit, Read more…

Help kickstart Minsky

December 20, 2012 5 comments

from Steve Keen

As regular readers would know, I have been developing a computer program for building strictly monetary dynamic macroeconomic models. New readers might have seen this article in The Economist:

Reforming macroeconomics: Claudio Borio on the financial cycle

where my work received the following mention:

Steve Keen, an Australian economist, has long argued that macro needs to incorporate these ideas, and has developed a prototype of a computer program, called “Minsky,” that can be used to model economies as monetary systems. So while most economists have not embraced Mr Borio’s agenda for the reformation of macro, some have. That is encouraging news. (Click here for Claudio Borio’s paper)

The program is called Minsky in honor of the late and great monetary economist Hyman Minsky. It is not a model of the economy as such, but a visual tool by which models can be developed.

It has been under development for roughly a year now, thanks to a US$128,000 grant from the Institute for New Economic Thinking. That has enabled me to hire one brilliant programmer, Dr. Russell Standish, for about 10-20 hours a week–the most that a contract programmer can afford to devote to a single project. Consequently, the program as it currently exists represents about 3-4 months of programming time. That’s produced a functional program, but it is still in its infancy. I want to take it to adulthood, and for that I need serious funding that will enable me to hire several top-notch programmers for several years.

That’s where you come in–if you are willing. Next Wednesday I will launch a campaign on Kickstarter to raise development funding for Minsky.   Read more…

Deregulation and market failure

November 13, 2012 6 comments

from Steve Keen

The older I get, the more cynical I become about government intervention in the economy.

That statement might appear to be either a recantation of everything I’ve ever argued, or a sign of the usual tale of left-wingers moving to the right, and right-wingers to the left, as life experience tempers youthful exuberance. It’s neither (well, okay, maybe it’s a bit of the latter), because my developing position reflects the complexities of a mixed economy.

The latest real world experience that has pushed me further into cynicism about government is a very personal one: an attempt by the Australian government to increase competition in education via deregulation is the direct cause of the proposal to terminate the economics program at my university. The policy change will actually reduce competition in the education marketplace in Australia: the market was more competitive with the preceding regulations in place.

An update though: Read more…

The IMF gets radical?

November 12, 2012 10 comments

from Steve Keen

An IMF working paper has received a lot of attention recently – and not for the usual reasons. Whereas the IMF is usually criticised for being dogmatic about free market economics and effectively beholden to the banks, this paper is being both praised and criticised for wanting to radically reform them.

This clearly isn’t official IMF policy, but the fact that it has been released by the IMF is noteworthy, and the paper deserves careful attention. It is an enormous paper, not just in length (56 pages of text) but also in the range of topics covered, and it will take at least three posts to do it justice. In this one, I’ll focus on its analysis of today’s monetary system.

I had better declare an interest at the outset. I have met chief author of the paper, Michael Kumhof, at several conferences now – twice at the American Monetary Institute, once at INET in Berlin, and once at Ireland’s Institute for International Affairs – and I consider him a friend. What I especially like about Michael is his intellectual openness. Though he works strictly in the neoclassical paradigm, unlike the vast majority of neoclassical economists, Michael is open to other approaches. Most importantly, Kumhof takes money, debt and banks seriously, whereas most neclassical economists delude themselves about banks with the naive “loanable funds” modelRead more…

Studying economics at UWS

September 6, 2012 16 comments

from Steve Keen

I gave the talk below last Sunday at UWS’s Open Day, as an intoduction to economics for prospective university students. Preparing it made me reflect on the great good fortune I had to be appointed to UWS.

This might evoke a “Huh?” response from the usual suspects on such issues–why be pleased about being appointed to a second-rate University (and in an out-of-the-way place like Sydney to boot)? It’s because the Economics & Finance program at UWS has been almost unique amongst economics departments around the world in deliberately pursuing a “pluralist” approach to economics.  Read more…

Many Happy Returns? 5 years of crisis

August 9, 2012 6 comments

from Steve Keen

On this day 5 years ago, the global economic crisis began. The trigger was the decision by BNP to suspend redemptions from funds that were linked to the US housing market. Those of us who had been expecting a debt-deflationary crisis
and warning about it
for some time (see also here and here) could never have picked the trigger itself—that would have been prophecy, not prediction—but very rapidly it was clear that this was it.   Read more…

On the Grass with Genevieve Tran

July 27, 2012 2 comments

from Steve Keen

As noted in an earlier blog post (A Galilean Gesture: Eating with Dr. Steve Keen), one of the attendees at the talk Jim Stanford and the Canadian Centre for Policy Alternatives organized for me in Toronto was the blogger Genevieve Tran, whose cause is improving financial literacy. She persuaded me to take one day off from the Fields Institute while to visit Toronto’s Centre Island–a combined park and nature reserve just a kilometre or so offshore. As we wandered among the ducks and geese (but completely failed to connect with the peacocks), she grilled me about strange species of which I am undeniably one–the Tyranosaurus Economist. Here’s her take on the conversation (you can read more of Genevieve’s take on money, the universe, and everything at her blog Money Big and Small).

Rock Star Economists: Read more…

Categories: economics profession

The Euro as the SDR of Europe?

July 26, 2012 13 comments

from Steve Keen

The Euro is the national currency of a country that does not exist. Though there is a continent of Europe, as there is of America, there has never been a country of the United States of Europe, and there probably never will be.

The Euro is therefore not a currency as is the American dollar, and yet it is forced to masquerade as one—badly—by the Maastricht Treaty, in which the countries of Europe abandoned the right to produce their own genuine national currencies.

With the volume of the Euro being controlled by a supra-national authority (the ECB), and member states punished for breaching rules on government spending (the 3% maximum deficit and 60% accumulated deficit rules), the Euro is closer in function not to a currency, but to Special Drawing Rights as they were conceived of by Keynes at Bretton Woods. In his plan for a post-WWII international monetary system, Keynes proposed that common supranational currency be used for international trade (the “Bancor“), while domestic currencies should used for internal trade. The exchange rates between national currencies and the Bancor were to be fixed, with persistent trade deficit countries being forced to impose austerity and devalue, while persistent surplus countries were taxed Bancors, and required to stimulate their economies to increase imports. Read more…

Categories: Eurozone Crisis, Keynes

The Crisis in 1000 words—or less

July 24, 2012 8 comments

from Steve Keen

URPE–The Union for Radical Political Economics–is holding a Summer School for the Occupy movement, and as part of that invited papers that explained the crisis in 1000 words or less (so that they can be printed on one double-sided sheet). Here’s my effort in somewhat less than 1,000 words (though with 2 figures). In the interests of URPE’s objective in this exercise, here’s the PDF of this blog post for general download.  

Both the crisis and the apparent boom before it were caused by the change in private debt. Rising aggregate private debt adds to demand, and falling debt subtracts from it. This point is vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across recession, boom and bust between 1990 and 2012, the correlation between the annual change in private debt and the unemployment rate was -0.92.  Read more…

Categories: crisis

European disunion and endogenous money

July 11, 2012 13 comments

from Steve Keen

Click here for this data in Excel: Debtwatch; CfESI
Click here for this post in PDF: Debtwatch; CfESI

Steve Keen, University of Western Sydney
Matheus Grasselli, Fields Institute, Toronto

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” (Mark Twain)


That the Euro has fallen into crisis a mere decade after its introduction is hardly surprising. The intrinsic problems in its design were evident to economists as widely separated intellectually as Wynne Godley and Milton Friedman. Writing in 1992, Godley observed that  Read more…

What utter self-serving drivel, Brad Delong!

July 2, 2012 15 comments

from Steve Keen

I can scarcely believe what Brad Delong has dared to publish on Project Syndicate:

We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been.

In particular, we understood that the rapid run-up of house prices, coupled with the extension of leverage, posed macroeconomic dangers. We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort….

So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.

What utter hubris and drivel!

Where to begin? For starters, . . . Read more…

Correction to “What House Price Falls Really Look Like”

June 6, 2012 1 comment

from Steve Keen

Who says Twitter is just fluff? Well, I did before Max Keiser and Stacy Herbert persuaded me to sign up. I’ve since realized that it’s rather like a modern version of the old-fashioned news wire services for the public. Choose who to follow, and they’ll keep you updated on things that interest you. If that happens to be Kylie’s waistline or Kurt’s fidelity, that’s your problem, not Twitter’s.

One Tweet that I received told me something that didn’t seem right from my own data: that CPI-deflated US house prices were now within reach of their long-term average (i.e., 1890 till now). From my figures—which I had cobbled together from Robert Shiller’s first edition “Irrational Exuberance” data supplemented by the S&P Case-Shiller Index, adjusted for inflation—prices had fallen a lot, but still had a long way to go.

So I went Read more…

Categories: debt

The Debtwatch Manifesto

January 3, 2012 7 comments

from Steve Keen


Click here for this post in PDF

The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century (see Figure 1). Its unwinding now is the primary cause of the sustained slump in economic growth. The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging. Read more…


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