Levy Paper

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This is just a very quick post to make my paper at the Levy Insti­tute avail­able. Later I’ll add a post of the paper itself and a video of the pre­sen­ta­tion.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Hi, Steve

    As a non-pro I have read your paper with great inter­est and attempted to sum­marise it for the lay­man (my clients) here: http://broadoakblog.blogspot.com/2010/06/keen-debt-and-deflation.html — have I fairly rep­re­sented your views?

  • spike

    proof read­ing the pdf;
    p33 — Error! Ref­er­ence source not found.

  • Lyon­wiss


    Impres­sive (even if a bit rough on some details): way ahead of any­thing else I’ve seen includ­ing God­ley and Lavoie (2007). Cer­tainly, it is a very promis­ing frame­work, capa­ble of describ­ing and pre­dict­ing events that no other the­ory (as far as I know) has the poten­tial to even describe. But it has a long way to go in terms of empir­i­cal ver­i­fi­ca­tion and out-of-sam­ple pre­dic­tion. My instinct for progress is to work on sub-mod­els of your frame­work to get styl­ized post­dic­tions of asset bub­bles and the GFC.

  • Thanks Lyonwiss–much appre­ci­ated. I agree re the empir­i­cal work.

    Spike, that is prob­a­bly a ref­er­ence that got lost in editing–I’ll fix it soon.

    Sack­er­son, I’m still caught up in the Levy con­fer­ence right now, but I’ll try to check this on Thurs­day this week. Thanks for doing this!

  • rob­joh

    First thanks for your paper, I wait for the pre­sen­ta­tion.

    Sec­ond, Some ques­tions:
    You write:
    “Here some credit may be due to “Heli­copter Ben”.6 Though Bernanke and Greenspan clearly
    played a role in encour­ag­ing pri­vate debt to reach the heights it did, it is cer­tainly con­ceiv­able
    that his enor­mous injec­tion of base money into the sys­tem in late 2008 averted a nascent
    defla­tion (Fig­ure 10).”

    1, This base money sup­ply was given to the banks. If you should use the money press would it not be bet­ter to give the money to the pub­lic.

    2, How far should you go with the print­ing press? Yes defla­tion is dan­ger­ous how­ever so are infla­tion, and infla­tion may in the long result in that aggre­gate demand from the poor goes down, when food prices and energy prices goes through the roof.

    3, If it was eas­ier to default on your debt, which would cause mas­sive defla­tion in the hous­ing mar­ket, and com­bine that with the print­ing press to secure the sav­ings for the savers. Would not that solve some of the major prob­lems, too expen­sive to save up to a house and too much debt in the soci­ety?

  • Lyon­wiss

    Below is a good sum­mary of the cur­rent eco­nomic real­ity by Robert Samuel­son (free reg­is­tra­tion with Wash­ing­ton Post may be nec­es­sary):


    Dif­fer­ent eco­nomic reli­gions will not agree on what to do next. Steve, we need a com­pelling the­ory along your line.

  • noah cross
  • Lyon­wiss

    noah cross

    Yea, every­one else is stu­pid except Dean Baker. He should be run­ning the world. But he needs to con­vince oth­ers first.

  • noah cross

    Perhaps…mostly Baker’s argu­ments against the MSM are cogent and cred­i­ble.

    Here is the Economist’s per­spec­tive on debt with some nice charts. Aus­tralia is not cov­ered in the data

    A spe­cial report on debt
    Repent at leisure

  • greg_g

    Hi Steve, I find your paper quite amaz­ing. Though, as a math­e­mati­cian, I can­not help notic­ing that the deriva­tion of the equa­tions for your model is not as ele­gant and straight­for­ward as it could be. For instance in Table 1, why hav­ing row B “Com­pound debt”? Either the firm pays the inter­est (row 2) or bor­rows more money (row 1). By the way, since the term B is equal to C, row B and row C van­ish. I also find the dis­tinc­tion cash/vault/bank equity quite con­fus­ing through­out the paper.

    I think the mis­un­der­stand­ing comes from the assump­tion that “each row sums to one”, while in real­ity some of those entries rep­re­sent asset and some lia­bil­i­ties of a bank bal­ance sheet and can­not just be summed.
    This is also the rea­son that forces to use fic­tional “ledger entries”.

    May I pro­pose a table for­mat that lets you derive the same dynamic in a way that looks a bit sim­pler? First, the quan­ti­ties should clearly cor­re­spond to actual bal­ance sheet entries for the bank­ing sys­tem:

    1) Firm deposits (Fd)
    2) Work­ers deposits (Wd)
    3) Bank cap­i­tal and bankers deposits (B)
    4) Firm loans (Fl)
    5) Cash ©

    Then each oper­a­tion in the table is rep­re­sented exactly as a bank would write it in its bal­ance sheet:

    | Fd | Wd | B | Fl | C |
    ———————————————————————–1. Lend money | +A | | | +A | |
    2. Pay Inter­est | –C | | +C | | |
    3. Deposit inter­est (firm) | +D | | –D | | |
    4. Wages | –E | +E | | | |
    5. Deposit inter­est (work­ers)| | +F | –F | | |
    6. Con­sump­tion | +G+H | –H | –G | | |
    7. Repay loan | –I | | | –I | |

    The cash entry is never touched: as in real­ity, no sig­nif­i­cant cash really exchanges hands when a sin­gle bank deals with its clients, all changes are made to bal­ance sheet entries.
    The assump­tion that each row sums to zero is sub­sti­tuted with the assump­tion that assets and lia­bil­i­ties remain bal­anced: math­e­mat­i­cally, you can say that the table M (as matrix) is such that M times the vec­tor (-1 –1 –1 +1 +1) equals zero.
    Note that the equa­tions that are derived are the same, so the sys­tem dynam­ics do not change. By the way, the matrix has rank three, so it pro­duces a set of three lin­early inde­pen­dent dif­fer­en­tial equa­tions,
    the fourth can be derived by the bal­ance sheet iden­tity.

    The only dif­fer­ence is the dynamic for Bv in your paper: your results can be repro­duced here by set­ting “A = bV * (MaxLoans — Fl)”, instead of “A = bV * BV”.
    “MaxLoans” is the max­i­mum quan­tity of loans that the bank can make (max­i­mum bal­ance sheet expan­sion). MaxLoans has the same value as the ini­tial value of what you call “Vault”, but I think it is more clear to treat it as “max­i­mum loans” than to “Vault”, since the lat­ter can be con­fused with actual cash (which remains con­stant).

    More­over, this table for­mat can stay the same for the other sec­tions of your paper. For instance for table 7 you can just sub­sti­tute “A” with the term “J = 1/tauM Fl(t)” which accounts for a con­tin­u­ous increase in the bank’s bal­ance sheet.
    Gov­ern­ment pol­icy would be an entry with +K in Bank cap­i­tal and +K in Cash (bank bailout) or +K in Work­ers deposits and +K in Cash (work­ers help), and so on. You can even sim­u­late reg­u­la­tory pol­icy by set­ting the max­i­mum bal­ance sheet expan­sion as a mul­ti­ple of Bank cap­i­tal.

    Thanks for your work, I really think the con­clu­sions of your paper are bril­liant, and I just wanted to make sure the deriva­tion is as solid as pos­si­ble.

  • Lyon­wiss

    Here is a less “one-eye” view and analy­sis of the sit­u­a­tion by Edward Har­ri­son:


    con­tain­ing char­tal­ist account­ing and Aus­trian mal­in­vest­ments.

  • ak


    The state­ment that “mar­ginal rate of GDP return is ever-decreas­ing” is not Aus­trian but Marx­ist to me. Per­haps von Mises learned some­thing from Oskar Lange.

    I agree that just pour­ing money into the leaky bucket of the cur­rent West­ern eco­nomic sys­tem can only cause bub­bles and prob­a­bly a cur­rency cri­sis down that path — when “finan­cial mar­kets” bolt. 

    So let’s fix that leaky bucket. This is the miss­ing (or under-empha­sised) part of MMT for me. Cap­i­tal gains tax and resources rental tax could help. Instead of hoard­ing money and spec­u­lat­ing peo­ple should be “gen­tly” encour­aged (by a 90% cap­i­tal gains tax on real estate and 10% annual tax on wealth above $10mln for exam­ple) to invest in mod­ern pro­duc­tive tech­nolo­gies and move us away from depen­dency on fos­sil fuels. At the same time the state has to guar­an­tee decent pen­sions to every­one (as the super­an­nu­a­tion scams will col­lapse) and print enough money to fill the gap caused by all our bub­bles pop­ping.

    A guy with a PhD has been recently employed as a soft­ware tester in a com­pany which writes trad­ing soft­ware. This is the best exam­ple of a real resource mis­al­lo­ca­tion in our soci­ety to me. Nobody will tell me that this brings any ben­e­fits to the human­ity. “We pro­vide liq­uid­ity …” — you know what I mean. If you look at the IT jobs in Syd­ney there are a very few which are not related to the FIRE “indus­try”.

    We should be doing exactly the oppo­site to we were told over the last 30 years by mon­e­tarist, Aus­trian and neo­clas­si­cal econ­o­mists.

    But West­ern soci­eties are not ready yet to wres­tle power back from the hands of cor­po­ra­tions, banks, spec­u­la­tors and neolib­eral brain­wash­ers. Our democ­racy is defunct and peo­ple don’t believe in the insti­tu­tion of the demo­c­ra­tic state act­ing in their inter­est.

    The Chi­nese Com­mu­nist Party under­stands this very well. Even if their sys­tem is ini­tially less effi­cient and always tainted with cor­rup­tion this is more than com­pen­sated by the fact that they have a direc­tion on what they are doing. And their soci­ety is ruled by engi­neers not by econ­o­mists or lawyers. 

    Round three will go to Oskar Lange I would say.

  • TruthIs­ThereIs­NoTruth

    A guy with a PhD has been recently employed as a soft­ware tester in a com­pany which writes trad­ing soft­ware. This is the best exam­ple of a real resource mis­al­lo­ca­tion in our soci­ety to me. Nobody will tell me that this brings any ben­e­fits to the human­ity. “We pro­vide liq­uid­ity …” – you know what I mean. If you look at the IT jobs in Syd­ney there are a very few which are not related to the FIRE “indus­try”.”

    Firstly most of the IT infra­struc­ture in finance is asso­ci­ated with trans­ac­tional bank­ing and finan­cial account­ing. With­out these things, as effi­cient as they are in Aus­tralia, you could not have a mod­ern econ­omy. Your state­ment is a pretty long extrap­o­la­tion, find­ing one exam­ple of alledged mis­al­lo­ca­tion and cast­ing all IT jobs in Syd­ney in this light.

    In terms of trad­ing soft­ware… The fact that you need a PhD to test it could tell you some­thing about the level of sophis­ti­ca­tion. The high fre­quency trad­ing you are refer­ring to is essen­tially gam­ing the sys­tem using pow­er­ful com­put­ers, one strat­egy for exam­ple is to flood the mar­ket with quotes to dis­ad­van­tage other guys doing high fre­quency by chew­ing up their com­put­ing time. I agree it should not be allowed, but look at where it is hap­pen­ing — the land of lax reg­u­la­tion.

  • ak


    1. So do a ser­ach for IT job offers, please — if you find some­thing decent not related to the FIRE indus­try in R&D please let me know.

    2. I am sorry but I prob­a­bly know a bit more than you think about issues related to HFT but I may not be able to com­ment for dif­fer­ent rea­sons. Believe me there is no sophis­ti­ca­tion at that level.

  • TruthIs­ThereIs­NoTruth


    What I am say­ing is that the IT jobs in finance at least in Syd­ney have lit­tle to do with trad­ing soft­ware and mainly revolve around the infra­struc­ture needed to sup­port mil­lions of daily trans­ac­tions which really under­pins what we call the econ­omy.

    Sophis­ti­ca­tion is a mat­ter per­spec­tive, maybe you are just very clever… I don’t actu­ally know any details about trad­ing sys­tems but I know broadly how they work and I’m pretty sure it is not very big in Aus­tralia, but if it takes a PhD qual­i­fi­ca­tion to do the test­ing it can’t be that sim­ple…

    You will be hard pressed to find IT jobs in R&D in Aus­tralia, may I sug­gest a move to India per­haps. You are in a coun­try with a high stan­dard of liv­ing because it can sell it’s resources on a mas­sive scale, so if you want to do what you enjoy intel­lec­tu­ally you might have to give up on your claim to your por­tion of the resource wealth. Can’t have the best of both worlds.

  • noah cross

    Time to shut down the US Fed­eral Reserve?


    Like a mad aunt, the Fed is slowly los­ing its mar­bles.

    Kar­tik Athreya, senior econ­o­mist for the Rich­mond Fed, has writ­ten a paper con­demn­ing eco­nomic blog­gers as chron­i­cally stu­pid and a threat to pub­lic order.

    Mat­ters of eco­nomic pol­icy should be reserved to a priest­hood with the cor­rect post-doc­toral cre­den­tials, which would of course have excluded David Hume, Adam Smith, and arguably John May­nard Keynes (a math­e­mat­ics grad­u­ate, with a tri­pos foray in moral sci­ences).

    Writ­ers who have not taken a year of PhD course­work in a decent eco­nom­ics depart­ment (and passed their PhD qual­i­fy­ing exams), can­not mean­ing­fully advance the dis­cus­sion on eco­nomic pol­icy.”

    Con­tact him here and express your igno­rant and ill informed views


  • ak


    Smart peo­ple are used to do dumb work but don’t worry when the finan­cial sec­tor can­cer is finally ampu­tated we’ll bounce back.

    Mov­ing vir­tual money around doesn’t add any real value to any­thing. I am not against mar­ket econ­omy but there must be good rea­sons why the Chi­nese didn’t let the for­eign traders to trade in Shang­hai or why we can­not buy real Gazprom shares (not the shares of a proxy com­pany).

  • Many thanks greg_g, I’m trav­el­ling now but will check this through very care­fully and sim­u­late it when I return to Oz–and pos­si­bly before. Look­ing for­ward to more con­tri­bu­tions from you here–and have you con­sid­ered down­load­ing QED and giv­ing this a try there?

  • sj

    Writ­ers who have not taken a year of PHD course­work in a decent Uni­ver­sity should shut up now!
    I’m self edu­cated never gone to any Uni­ver­sity, so I should shut up now.
    Dumb peo­ple become smart because they know their lim­i­ta­tions.
    Why I like Nas­sim Taleb embraces igno­rance lack of knowl­edge as cor­ner stone of good invest­ment.
    Com­pe­tence verses over­con­fi­dence Dun­ning-Kruger effect.
    Only think worse than mak­ing a bad deci­sion is to make a bad deci­sion and think it’s good.
    Who are you really going to lis­ten too a per­son with a sta­ble salary or bil­lion­aire who will never go broke or a self edu­cated bat­tler who is bet­ting the farm?
    I will bet on the self edu­cated bat­tler any­day.

  • TruthIs­ThereIs­NoTruth


    vir­tual money? — what do you con­sider non-vir­tual money? Coins, notes? What is truly unap­pre­ci­ated is a well func­tion­ing trans­ac­tion sys­tem and how impor­tant that is to the effi­cient func­tion­ing of an econ­omy, con­sumer con­fi­dence, investor con­fi­dence. It reduces the need for tedious account­ing, by not car­ry­ing cash around the risk of per­sonal assault goes down, I could go on… To appre­ci­ate these kind of things you have to step down from the heights of the ivory tow­ers and think about real tan­gi­ble prag­matic real­ity.

    Money has always been tokenis­tic, even when it was lim­ited by phys­i­cal con­straints such as the speed at which gold could be processed from the ground. Please tell me you don’t think that we should all be car­ry­ing around sacks of gold coins.

  • ak


    Money in deriv­a­tive trad­ing or short sell­ing is more vir­tual than in my pocket. 

    These are often con­di­tional claims on claims on future goods and ser­vices.

    Just think about the value of CDS or other OTC instru­ments.

    One may say that there is cer­tain risk asso­ci­ated with these oblig­a­tions on vir­tual objects. This is a kind of mea­sure of the vir­tu­al­ity.

    I think that what looks like a cheap com­puter game will end up like a game when the power goes off.

  • TruthIs­ThereIs­NoTruth


    we’ve gone from say­ing that IT jobs in Aus­tralia are not con­tribut­ing to soci­ety because they only exist in finance to trans­ac­tions of vir­tual money to deriv­a­tives. At least your con­sis­tent with your approach, you take one exam­ple which plau­si­bly enforces your view and you apply the con­clu­sion to the entire argu­ment. The world could be do with­out some of the deriv­a­tives that are around, but at the same time a lot of deriv­a­tives per­form an impor­tant role in the econ­omy, but that’s another topic and is not what I was refer­ring to in my ques­tions.

    In the age of sur­plus infor­ma­tion we apply a fil­ter­ing algo­rithm to what we seek and decide to digest. One of the con­clu­sions from my obser­va­tions of the com­ments on this blog is that the algo­rithm applied is to seek any­thing that con­firms ones the­o­ret­i­cal point of view and dis­card or not seek any­thing that could destroy those the­o­ret­i­cal beliefs. I feel at a great advan­tage by apply­ing an algo­rithm which seeks, first and fore­most to prove myself wrong, because I appre­ci­ate that every­time I do that I have advanced my knowl­edge at the cost of not inflat­ing my ego…

  • slaphappy

    In 1930 the aver­age life expectancy for a white aus­tralian male was 59 years — in 2005 it was 79 years.
    One’s life expectancy would surely have an impact one’s abil­ity to repay debt and the terms upon which it is offered by bor­row­ers.

  • ak


    I am not inter­ested in per­sonal attacks or ques­tion­ing anybody’s inten­tions. Please do not insert the world “all” into these sen­tences I inten­tion­ally did not put it. 

    Just because I work on com­mu­ni­ca­tion soft­ware used in trad­ing doesn’t mean that I need to iden­tify myself with the cur­rent global finan­cial sys­tem.

    Where did I say that all the credit cre­ation by com­mer­cial banks and all the trad­ing of deriv­a­tives is bad for the econ­omy? But what if that level of hedg­ing which was com­mon in the 1960-ties was good enough?

    Vir­tu­ally nobody ques­tions the con­tri­bu­tion of banks and stock exchanges to help­ing in smooth oper­a­tion of the real pro­duc­tive sec­tors of the econ­omy. But if one part of the body starts grow­ing at a cost of the oth­ers this is usu­ally not good. 

    Or what is the dif­fer­ence between hav­ing one beer and drink­ing a bot­tle of vodka at once?

    The point which I was try­ing to make was that the finan­cial sec­tor in some West­ern coun­tries became a kind of tumour maybe even a can­cer because it started over­grow­ing the real econ­omy.

    Finance and insur­ance is the fourth largest sec­tor in Australia’s econ­omy, gen­er­at­ing 8.1 per cent or A$81 bil­lion of real gross value added in 2008-09. This con­tri­bu­tion is up from 6.6 per cent two decades ago (Source: Aus­tralian Bureau of Sta­tis­tics, can.no.5206.0, National Income, Expen­di­ture and Prod­uct, Time Series Work­book (released 2 Sep­tem­ber 2009). The finance and insur­ance indus­try is almost as big as the min­ing sec­tor (the indus­try tra­di­tion­ally asso­ci­ated with Australia’s eco­nomic well­be­ing) and its expan­sion has also aided growth in related sec­tors such as com­mu­ni­ca­tions, prop­erty and busi­ness ser­vices.”


    I am not entirely con­vinced that the “expan­sion of prop­erty and busi­ness ser­vices” is so good for every­one in our soci­ety and there will be no side effects of the amount of pri­vate debt owed by Aus­tralians in the future.

  • TruthIs­ThereIs­NoTruth

    ak — in essence all I was say­ing was that the largest pro­por­tion of the bank­ing infra­struc­ture revolves around the func­tion­ing of the elec­tronic trans­ac­tion sys­tem and the asso­ci­ated account­ing. The trans­ac­tions range from peo­ple buy­ing gro­ceries to com­pa­nies set­tling com­mod­ity con­tracts. Whereas you tried to cast this in the same light as high fre­quency trad­ing and in the end deriv­a­tives.

    beer bet­ter than vodka? have you been on this spirit for­saken island for too long?!

    I am curi­ous how they mea­sure “real gross value added” — but it must include wages. So if the finan­cial sec­tor is employ­ing more peo­ple to deal with the increased level of tran­ac­tions and invest­ment that’s a bad thing? 

    Clearly what we are wor­ried about on this site is the high lev­els of debt, which the finan­cial sec­tor facil­i­tates and even prof­its from. The finan­cial sec­tor is by law required to act in the best inter­ests of the share­hold­ers — I per­son­ally believe this is a good thing. It includes going after profit but stay­ing within reg­u­la­tory con­straints. The sec­tor is con­trolled via reg­u­la­tion and this is where the solu­tions are.