In his upcoming text ‘Can We Avoid Another Financial Crisis’, renegade economist Steve Keen demonstrates he has the credentials and the critical reasoning so sorely lacking in the central banking world, to address the global discontent of a world caught in a permanent rolling cycle of financial crisis.
Professor of Economics at Kingston University and the author of Debunking Economics, Keen has a huge following among anti-system groups, starved of independent thinking, like the Post Crash Economic Society in Manchester and the initiative for Pluralism in Economics.
After eight years of firefighting by central banks, including negative interest rates, there’s no argument that it’s time for a new approach, which he spelled out to Real Vision TV
. Keen advocates a variation of helicopter money, which would be used by consumers to pay down debt first.
Could this be the reform needed to reduce accumulated private debt and prevent the financial system financing bubbles?
Mainstream Economics Just Doesn’t Get It
What mainstream economists and central banks can’t get to grips with, is that demand is declining even with both debt and GDP rising, because the turnover of existing money isn’t being recorded, just GDP. It’s time to throw away the equilibrium mathematics, Keen says, and focus on capitalism as a great disequilibrium and the adaptive, dynamic evolutionary system it is.
“Most of the demand in GDP comes out of turnover of existing money, some comes out of credit, but most of the additional credit goes to buy assets. So you can roughly add the two together to say that’s your total demand in the economy,” he said. “So they are now finding ourselves in a dilemma caused by this slowdown in credit, but their analysis tells them credit doesn’t matter. So they’re doing everything they can to try to get people to continue borrowing money. That’s a huge part of the whole idea about quantitative easing.”
It’s all about helicopter money.
His variation on helicopter money uses the government’s capacity to create money to cancel private debt. Once injected into people’s bank accounts, it is first used to pay down debt, but if people don’t have debt they get the cash instead. It would take quite a significant sum to reduce private debt in England from 1.7 times GDP to a more sustainable 50% to 70% of GDP, but could be done quite effectively, according to Keen.
“The reason we have the slowdown in Europe and America and England to some degree, is that we have too much private debt and people don’t want to take any more debt on, so credit growth is very low and therefore, demand is low because credit has been a component of demand from the 1940s all the way through to now.
“So you can get out of that problem by using the government’s capacity to create money to cancel that private debt and effectively go from having a strongly credit-based money system to more fiat based.”
What Would You Do With a $1000 Cash Injection, or even $10,000?
There’s some evidence to back up his theory. In 2008, when his native Australia gave $1,000 to anybody who had paid their taxes, people went out and spent the money because it was injected directly into their bank accounts by the government and the economy avoided a recession.
“So practically it’s quite easy to do. It could be done in such a way that it’s backed by creation of government assets, not backed by government debt. Because again, people think the government has to borrow money in order to be able to spend. No, it doesn’t. The government creates money by its spending,” Keen said.
“We pull out the bank notes we’ve got in our pockets out of here. They were created by the government. The central bank just deciding to create an asset on one side and a liability on the other and put that money into circulation. So the government can create money quite easily. It doesn’t have to be backed by debt alone.”
Whether the $1000 from the Australian experience would be enough to make a difference, or it would take more like $10,000 to get things moving again is a matter of debate, but Keen would start off in small doses and see what the impact was on society and demand in the economy.
“If you had people who’ve got $1 million in debt and they got the $10,000 injection, they’d have $990,000 in debt. In other words, they’d get zero cash. The people who’d get the money in their bank account would be the savers who had no debt and whatever they had in cash plus $10,000 more,” Keen said.
A Financial System Revolution
Helicopter money is just part of the solution. Keen’s ultimate vision includes a banking system revolution that no longer creates money to finance asset bubbles, which is really how banks have created money for the last 30 or 40 years. Eminently more sensible reasons to create money, than giving it to people to buy assets, include providing working capital for companies or money for entrepreneurs to invest. It’s the difference between funding consumers for houses to live in rather than houses to speculate on.
“I see a whole range of changes that are needed,” Keen said, “We have to tame the financial sector. And when you look at what central banks have been doing, they haven’t been talking about taming the financial sector, they have been talking about preserving the financial sector from its own mistakes. Now, I think we have to see the financial sector as a good servant but a lousy master of capitalism, and we have to, therefore, reform it in such a way that we get it back to doing what it should do, which is provide the money we need for commerce and the physical economy.”
Get Rid of the Elephant Dung
What he is really focused on is here is reducing the debt burden and is inspired by US philanthropist Richard Vague, who started two US credit card companies, First USA and Juniper Financial — and now campaigns against excessive debt.
“We have to cope with the residue, and it’s created this enormous pile of elephant dung of debt. We have to get rid of it. I’m simply being practical about how do we get rid of it,” Keen said.
“He’s a totally realistic man (Vague), totally feet-on-the-ground personality. And he said, when you look at history, there has never been a successful episode of de-leveraging by growing out of it. It’s been debt write offs every last time. Somehow debts have been written off whether it’s being done at the individual scale by individual bankruptcies or some sort of collective action. We can’t get rid of it by market mechanisms, and we can’t grow our way out of it.
“So we’ve got this pile of elephant dung we need to get rid of. Let’s work out a way of doing it. Richard’s way is to let the banks write debt off over like a 30-year amortization period. So you have somebody who has got a $1million dollar mortgage, you write it down to half a million, in one year, that half a million loss by the bank would wipe the bank out. You let them out of that over 30 years. That why they can cope with it, and you get a recovery that way.
“Mine is to say let’s use the state’s capacity to create money to do the cancellation. But whatever way you go about it, you’ve got to reduce that pile of elephant dung we call accumulated private debt.”