Secular stagnation and endogenous money

Steve Keen,Secular stagnation and endogenous money, real-world economics review, issue no. 66, 13 January  2014, pp. 2-12.

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  1. January 15, 2014 at 8:12 pm

    Paul Krugman uses the Loanable Funds model which fails to take into account that most money is created by the demand of borrowers for credit from retail banks. Steve Keen uses the endogenous money model which recognizes this, which is correct.

    But let’s not stop there. Funds lent in either model accumulate in the hands of the economically powerful and are subsequently only available to the general circulation as a second loan of the same money. And there is nothing to prevent the same money being lent as loanable funds N times in series. So BOTH models are currently operative with banks creating money, much of which is subsequently only available as the Nth loan of itself from a non-bank actor, where N > 2.

    The only way to avoid default in this situation is to borrow from Peter to pay Paul and vice versa forever. P < NP leads to a Perpetual Debt of P that can never decrease nor slow down in its delivery by lenders, or demand by borrowers, without causing mathematically inevitable defaults.

    It creates the growth imperative because, through the mathematical design of the system, every time the economy slows down even a little, people lose their homes and businesses.

    When Perpetual Debt is high as it continues to be, money is in short supply to borrowers, no matter how much money is created to solve the problem. Bubbles and government stimuli only make the situation worse over the long run. The fundamental cause is our concept of money as a quantity in limited supply which inevitably gets monopolized by the powerful via income disparity.

    The chart of M1 and M2 ( link below ) provides evidence that this theory correlates with observation. (

    The causation I have explained here and in my paper published by the WEA

    and in a variety of ways at my website:

    As I have for the past several years now, every economist in the world is invited to refute my theorem. One has tried and conceded. Professor Keen was personally invited long ago.

  2. January 16, 2014 at 6:45 pm

    ‘Secular stagnation’ or ‘structural liquidity traps’ are perfectly compatible with endogenous money. The Japanese stagnation since the early 1990s can be explained along these lines (Nakatani and Skott, Structural Change and Economic Dynamics, 2007, The analysis of functional finance and the role of public debt raise similar issues: public debt may be needed to avoid structural liquidity traps (Ryoo and Skott, Journal of Post Keynesian Economics, 2013,

    What I find striking in the recent comments by Summers and Krugman is mainly that they seem to be re-discovering ideas that have been around in the (post-) Keynesian literature. But perhaps we don’t disagree on this.

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