Max Keiser & me & the UK’s 950% Debt to GDP Level

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It’s always a plea­sure to talk with Max, and in this inter­view he drops a bomb­shell that I still have a hard time even con­tem­plat­ing: the claim that the UK’s pri­vate debt to GDP ratio is 950%, and the finance sec­tor alone has a debt ratio of 600% of GDP. Our dis­cus­sion starts at the 14 minute mark.

I still have to see the data for myself, and until then I’ll remain skep­ti­cal, but here’s a chart allegedly sourced from Mor­gan Stan­ley that makes that claim.

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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  • Lyon­wiss

    Eco­nom­ics is in a mess. No one has all the answers, not Steve, not Ron Paul and
    cer­tainly not any­one in charge. Hence get­ting on a band­wagon, tak­ing sides, belong­ing to schools or par­ties etc. is a sure way of clos­ing your mind.

    It is silly to judge Ron Paul by what he appears to say on TV on in debates, as many things are said inac­cu­rately, wrongly or clum­sily. This allowance must be made to all peo­ple in pub­lic appear­ances. I inter­pret Ron Paul by his lit­tle book, “The Rev­o­lu­tion: A Man­i­festo”, where he made a strong case for the idea that Amer­i­can gov­ern­ments have acted against the US Con­sti­tu­tion of their found­ing fathers.

    Regard­less of any details of his pol­i­tics or eco­nom­ics, he is the only politi­cian he
    clearly opposes the cor­rup­tion between the US gov­ern­ment and Wall Street, the bailouts and the manip­u­la­tions of the Fed. This is his main appeal to a new gen­er­a­tion of US vot­ers.

    Few peo­ple under­stand gov­ern­ment and for most of my life, I didn’t either. This
    changed after work­ing for 10 years in gov­ern­ment, where I had hoped to make a dif­fer­ence. Now I accept the pub­lic choice the­ory (of Buchanan, Olsen etc.) where gov­ern­ment is merely indi­vid­u­als pur­su­ing self-inter­est in the con­text of pub­lic func­tion. This con­clu­sion comes from the only coher­ent expla­na­tion of my per­sonal expe­ri­ences. I can­not now accept any sim­ple-minded Key­ne­sian style eco­nom­ics, which is based on a mis­con­cep­tion of gov­ern­ment.

    This does not mean either that I believe in free mar­kets, which have proven to be dys­func­tional in many cases, par­tic­u­larly in finance. Neo­clas­si­cal eco­nom­ics is based on a mis­con­cep­tion of mar­kets.

    The worst of all evils is to com­bine cor­rupt gov­ern­ment with free-wheel­ing mar­kets. This is what we have at the moment. If Ron Paul can break up the fas­cist nexus between the gov­ern­ment and the mar­ket, then that would be a good start.

  • koonyeow

    Title: koonyeow Is Impressed by Lyon­wiss

    Your most com­pre­hen­sive piece I have read thus far, cov­er­ing human nature and epis­te­mol­ogy.

  • Pingback: News: Max Keiser On The Shocking Real Debt To GDP Ratio Of Britain | News 25/7! Delivering news in real time()

  • Michael Hoex­ter


    Yes, nei­ther Steve nor any other econ­o­mist or thinker has all the answers. But your analy­sis in your last com­ment cuts Ron Paul a huge amount of slack while, in my opin­ion, degrad­ing Steve’s and other seri­ous crit­i­cal econ­o­mists’ efforts to cre­ate a bet­ter eco­nomic science/knowledge base. In my opin­ion, they sim­ply can­not be lumped together in these mat­ters, even though , super­fi­cially they both are crit­i­cal of the sta­tus quo. I’m sur­prised that you are group­ing them together given that you are a fre­quent com­menter here and I have assumed have devel­oped some under­stand­ing of Steve’s approach and method­ol­ogy.

    Ron Paul, on a reg­u­lar basis makes claims for free mar­kets and claims against gov­ern­ment that are empir­i­cally false or are so improb­a­ble as to be laugh­able. For instance, Paul believes that with­out the effect of gov­ern­ment sub­si­dies and reg­u­la­tion, the price of gas would be be sub­stan­tially reduced. This piece from 2005 is sim­ply a state­ment of faith in mar­kets:
    This is an exam­ple of purely induc­tive rea­son­ing that also starts from false premises. Paul would say the same about any market…it’s all rote rea­son­ing from (sim­plis­tic and often false) prin­ci­ples.

    Steve, though he has, I’m sure, per­sonal biases, tries to arrive at a truer rep­re­sen­ta­tion of the eco­nomic sys­tem that we live in and he is pretty con­sci­en­tious about that. I think he is open to the data and to learn­ing from oth­ers. He makes some state­ments that are based on induc­tive rea­son­ing but here he gen­er­ally sticks to pretty “low level” and there­fore uncon­tro­ver­sial con­cepts in math, logic, and account­ing. Paul is pretty much sealed up in his own ide­ol­ogy and is almost always mak­ing induc­tive leaps at “high” lev­els that are fraught with ques­tion­able assump­tions.

    Re: pub­lic choice the­ory and your expe­ri­ence in gov­ern­ment

    Remem­ber that your expe­ri­ence is, as social sci­en­tists say an “n” of 1. Mov­ing from that expe­ri­ence to reduc­ing gov­ern­ment to the actions of self-inter­ested indi­vid­u­als is an “induc­tive” act that may involve “not see­ing the for­est for the trees”. Unfor­tu­nately pub­lic choice the­ory is another way that neo­clas­si­cal eco­nomic assump­tions have impe­ri­al­ized other social sci­ences. It is method­olog­i­cally indi­vid­u­al­is­tic there­fore blind to emer­gent prop­er­ties in com­plex sys­tems (like gov­ern­ment and the econ­omy). Even if every indi­vid­ual in gov­ern­ment can be con­strued as act­ing in a self-inter­ested man­ner it doesn’t mean that the net effects of gov­ern­ment as an insti­tu­tion will be iden­ti­cal to those of, for instance, a mar­ket com­posed of self-inter­ested indi­vid­u­als. There­fore the exer­cise of reduc­ing those insti­tu­tions to the actions of self-inter­ested indi­vid­u­als starts to appear to serve ide­o­log­i­cal func­tions of under­min­ing the notion and util­ity of group action via gov­ern­ment or group action via another insti­tu­tion.

    I don’t know what you mean by “sim­ple minded Keynesianism”…there are so many Key­ne­sianisms, some of which aren’t really Key­ne­sian. Keynes, how­ever, did rec­og­nize some emer­gent prop­er­ties in the macro­econ­omy that couldn’t be reduced to the actions of self-inter­ested indi­vid­u­als, thereby found­ing mod­ern macro­eco­nom­ics. Keynes didn’t fin­ish his work and left a lot of loose ends, some of which have led to some of the research and mod­el­ing that Steve does as well as oth­ers in the post-Key­ne­sian area of eco­nom­ics.

  • Lyon­wiss

    @ Michael Hoex­ter Decem­ber 26, 2011 at 4:10 am

    I do not need to defend Ron Paul or any school of eco­nom­ics, which all have flaws (as well as use­ful insights). Steve’s approach is best for some aspects of eco­nom­ics. But nei­ther his nor any­one else’s ideas are enti­tled to uncrit­i­cal accep­tance, which accounts for much of malaise in eco­nom­ics.

    There is no need to triv­i­al­ize anyone’s expe­ri­ence. By def­i­n­i­tion, there is no escap­ing that everyone’s expe­ri­ence is a sam­ple of “n” of 1. The idea that sta­tis­tics is only way to arrive at the truth is another com­mon fal­lacy.

    Of course, my own expe­ri­ence has to be checked against those of oth­ers by talk­ing to friends and col­leagues work­ing in gov­ern­ment. Indi­vid­ual expe­ri­ences can also be found in many books (eg Con­fes­sions of a gov­ern­ment man by Green­berg among oth­ers) and col­lec­tive expe­ri­ences can be found in social sci­ence research papers. I under­stand the fal­lacy of com­po­si­tion.

    Exam­ples of fail­ure of gov­ern­ment (as an entity) are evi­dent every­day. The global finan­cial cri­sis is sub­stan­tially a fail­ure of gov­ern­ment reg­u­la­tion. Neo­clas­si­cal eco­nom­ics dis­placed Key­ne­sian eco­nom­ics in the early 1980s due to the fail­ure of gov­ern­ment of man­age eco­nomic shocks. Gov­ern­ment (“we are all Key­ne­sians now”) is exer­cis­ing greater power now than ever to address the GFC with enor­mous gov­ern­ment spend­ing, mon­e­tary stim­u­lus, bailouts, re-reg­u­la­tion etc. The de-facto Key­ne­sian eco­nom­ics we have now is look­ing worse, not bet­ter.

    By “sim­ple minded Key­ne­sian­ism” I mean the belief that the “right” gov­ern­ment pol­icy or ini­tia­tive will lead to sal­va­tion. It is the fal­lacy of divi­sion (assum­ing every­thing else will be right). For exam­ple, ear­lier in the GFC, the Aus­tralian gov­ern­ment had the bril­liant idea (with­out irony) of pro­vid­ing Key­ne­sian stim­u­lus by sub­sid­ing home insu­la­tion to reduce energy con­sump­tion. The pro­gram led to house fires, deaths from elec­tri­cu­tion, rorts, scams etc. and had to be ter­mi­nated, with the gov­ern­ment hav­ing to pay out com­pen­sa­tion to injured par­ties. Sim­ple minded Key­ne­sians would ignore this episode and claim over­all ben­e­fit to the econ­omy.

    A the­ory may be nice, neat and con­vinc­ing, but it has to ignore and neglect some
    aspects of real­ity (oth­er­wise it is not the­ory), which may turned out to be essen­tial to the use­ful­ness of the the­ory. This is the case for all eco­nomic the­o­ries I have exam­ined so far. I would not offer solu­tions until I under­stand fully what the prob­lem really is; to do this, an open mind is nec­es­sary.

  • ” I would not offer solu­tions until I under­stand fully what the prob­lem really is”

    Then you will fall into the trap of what we call in the sys­tems world ‘analy­sis paral­y­sis’.

    The bet­ter method is to roughly under­stand some­thing as quickly as you can view­ing the avail­able evi­dence and then design some­thing to try and try it, but make sure that it is designed in such a way that it can be backed out. Incre­men­tal open changes rather than big bang.

    You are right, I believe, that gov­ern­ment suf­fers from the agency prob­lem and that there is a lit­tle too much blind faith in the won­ders of democ­racy as a deci­sion mak­ing approach. There­fore any­thing that requires a ‘Wis­dom of Solomon’ deci­sion by politi­cians is prob­a­bly best avoided. 

    Our best hope is prob­a­bly the auto­matic sta­biliser sys­tem, which has at least showed that it can catch a falling ele­va­tor and stop it slam­ming hard into the ground. But we’ve seen that it is insuf­fi­ciently devel­oped and that led to the dis­cre­tionary deci­sions to res­cue the banks. 

    Peo­ple need to have faith that they will be caught by the safety net, so that enti­ties and organ­i­sa­tional struc­tures that have out­lived their use­ful­ness can be allowed to die.

  • RickW

    I under­stand the ana­lyt­i­cal basis of Steve’s work but he is a long way from hav­ing wide accep­tance and even fur­ther away from guid­ing pol­icy in devel­oped economies. I have not even seen any ana­lyt­i­cal proof that his debt jubilee will be an expe­di­ent solu­tion. In this con­text sim­ple minded solu­tions, as pro­posed by Ron Paul, could pro­vide the shock to open the door for new ideas to flour­ish.

    It is clear the entrenched view in eco­nom­ics that debt does not mat­ter remains firm. Accord­ing to Roger Farmer, the cur­rent eco­nomic issues in the US can be eas­ily resolved by the US Fed­eral Reserve hav­ing a sec­ond lever in addi­tion to inter­est rate con­trol. They sim­ply need to be active in the share mar­ket so they main­tain a floor price. That will ensure con­fi­dence and will keep things hum­ming. This new the­ory stems from the strong cor­re­la­tion he has found between unem­ploy­ment and the share mar­ket:
    See debt doesn’t mat­ter! Note the paper was pre­sented dur­ing a ple­nary ses­sion at the US Fed­eral Reserve Bank (san Fran­cisco). I recall it was around this time that “cri­sis of con­fi­dence” was first uttered by Bernanke:
    Is that coin­ci­dence or is it the new com­mon wis­dom?

    So clearly Steve is wrong about the sig­nif­i­cance of debt. Debt does not fig­ure in eco­nomic pol­icy. Just jack up the share prices to restore con­fi­dence and all will be good.

    Point of this is to pose the ques­tion who has the best approach to restor­ing US employ­ment — Ron Paul or Bernanke using advice from eco­nomic experts like Roger Farmer. Any other GOP can­di­date or Obama will not chal­lenge the eco­nomic sta­tus quo.

  • LCTesla

    I notice that the UK is not the only coun­try that accord­ing to Mor­gan Stanley’s fig­ures has a much higher debt level than is more com­monly claimed. Aus­tralia is sur­pris­ingly listed as hav­ing a debt level on par with the USA, con­trary to the data that Steve tends to use which says it’s nearly half as high. Is there so much ambi­gu­ity in the report­ing on debt lev­els that such extreme dis­crep­an­cies can occur?

    Any­way, this data should offer addi­tional fuel for the the­sis that Aus­tralia has a debt prob­lem if it is cor­rect.

  • Lyon­wiss

    @ NeilW Decem­ber 26, 2011 at 9:27 pm

    In the­ory there is the pos­si­bil­ity of “analy­sis paral­y­sis”. But in real­ity, it is just
    the oppo­site, as there is a vast num­ber of false prophets, who have “answers” to our cur­rent prob­lems. All they do is to add noise and con­fu­sion, so that no one knows what’s the right answer or what to do — lead­ing to true paral­y­sis. In this con­fu­sion, the only con­ve­nient option for gov­ern­ments is the sta­tus quo, con­tin­u­a­tion of mar­ket fun­da­men­tal­ism, as we are wit­ness­ing. (Ex Gold­man Sachs tech­nocrats are now run­ning Europe.) 

    Once we under­stand what the prob­lem really is, we do not waste time eg in per­suad­ing the gov­ern­ment the “cor­rect” eco­nomic the­ory, which is where 90 per­cent of the effort of econ­o­mists, activists etc have been directed. For exam­ple, the “dis­cre­tionary deci­sions to res­cue the banks” is not based on any eco­nomic the­ory, rather it is based on polit­i­cal expe­di­ency of cor­rupt gov­ern­ments, which did not even bother to take eco­nom­ics seri­ously.

    Both gov­ern­ment and mar­ket need reform, which has to be worked out. But the cor­rupt nexus between the gov­ern­ment and the mar­ket needs to be bro­ken. This view is con­sis­tent with those of many mar­ket com­men­ta­tors. This deci­sion for action is hardly “analy­sis paral­y­sis” or a waste of time, whereas telling gov­ern­ments that they have no bud­get con­straints is.

  • RickW

    I dare you to read Farmer’s paper and not laugh out loud!!!

    It shows how silly oth­er­wise sen­si­ble peo­ple can be so deluded when their belief sys­tem is screwed by their poor edu­ca­tion. Can you believe these ideas have cur­rency in the cor­ri­dors of eco­nomic pol­icy mak­ers.

  • Steve,

    I’ve updated the sheet and split out the base data, and the aggre­gates you require. Sheet ‘Accel­er­a­tor Data’ should have what you require.

    I couldn’t locate any non-sea­son­ally adjusted labour force data. I hope the sea­son­ally adjusted data doesn’t affect the cal­cu­la­tions too much.

    Link here

  • I’ll check it out over break­fast Rick, thanks.

    Lov­ing the dis­cus­sion here at the moment, BTW.

  • The empir­i­cal sec­tion of that paper rep­re­sents a valiant attempt to under­stand some­thing that has thus far been inex­plic­a­ble to neoclassicals–the Great Reces­sion itself. Of course from my ana­lytic point of view he’s cor­re­lat­ing two vari­ables (unem­ploy­ment and asset prices) that are both dri­ven by the same causal vari­able (change in debt) which he’s not analysing at all. So it’s a clas­sic “cor­re­la­tion not cau­sa­tion” argu­ment.

    Then his attempt to develop a causal mech­a­nism… the same old “rep­re­sen­ta­tive house­hold” non­sense! Yep Rick, now I am laugh­ing out loud!

  • RJ

    Excel­lent dis­cus­sion


    Your account­ing is cor­rect. But like much of the dis­cus­sion on mon­e­tary eco­nom­ics (eg MMT) it is beside the point. Any sav­ing or equity can be lever­aged only up to cap­i­tal lim­its (about 12 times) under reg­u­la­tion in tra­di­tional bank­ing. But in de-reg­u­lated invest­ment bank­ing with secu­ri­ti­za­tion, hypoth­ica­tion and re-hypoth­ica­tion etc, there is vir­tu­ally no limit to lever­age, ie there is no limit to risk taken in the finan­cial sec­tor.”

    The Steve Keens response

    But Lyonwiss’s point ear­lier in this dis­cus­sion is the cru­cial one: banks are sub­ject to var­i­ous rules that limit their gear­ing; non-banks are not.

    My point is that the com­bi­na­tion of lim­ited banks and unlim­ited non-banks gives the sys­tem to cre­ate as much debt/money as it wants to.”

    is it besides the point though?

    Yes debt can increase but money can not. Please cor­rect me if I am wrong as it is a com­ment that I have read before and can not see how. Stop banks lend­ing money (or Govt run­ning deficits) and then non banks can only do so much

    Money can only be increased by

    –Com­mer­cial bank loans
    –Gov­ern­ment spend­ing
    –Govt bonds decrease

    Other points I have an issue with are

    Loans are cre­ated out of equity”. Not cor­rect. In fact this is com­pletely wrong. Loans are in fact cre­ated out of thin air by a sim­ple jour­nal entry. Cap­i­tal restric­tion do no more than try and restrict the amount of bank loans. But loans are NOT cre­ated from equity. Or from reserves or deposits. And never were. It is sim­ple fact that many refuse to accept. 

    There is poten­tially infi­nite money. This is an impor­tant point. As money is sim­ple cre­ated by a jour­nal entry there is no limit. But the harm too much addi­tional money would do means that con­trols are intro­duced to stop this occur­ring.

  • Hav­ing read the whole paper now, I expect that Farmer will be one of the front-run­ners among neo­clas­si­cals in the attempt to rede­fine their the­ory so that it appears to know what’s hap­pen­ing to the econ­omy. He’s cer­tainly more palat­able to most of them than Krug­man and Eggerston’s work, which does include debt, though in a very awk­ward neo­clas­si­cal way.

    The irony is that Farmer’s pol­icy pre­scrip­tion of try­ing to sus­tain the stock market’s value has to work against the debt-delever­ag­ing that is dri­ving asset mar­kets down, but of course debt doesn’t appear in his analy­sis at all. Bernanke has also argued for QE as a means to inflate asset prices and boost con­sumer con­fi­dence, so though his analy­sis is dif­fer­ent, he’s in the same pol­icy camp.

  • Wow. Impres­sive work Neil, thanks. I’ll import it and put out a blog entry on this in the next few days.

    I’ll make your data pub­licly avail­able too, if that’s OK–of course you’ve made it avail­able to blog mem­bers here already. Would you be OK if I gave your name & email, or would you rather anonymity when I post?

    Cheers, Steve

  • Whoops. Just checked out your blog for the first time! Of course I’ll link to it when I pub­lish.

  • Hi Neil,

    I needed the unem­ploy­ment rate as well, and I thought I’d locate it myself rather than bother you (and wait till UK day­time as well). Bloody hell–what a com­pli­cated mess ONS is! I finally located what I wanted, after maybe an hour of false leads, only to find a table (a01dec2011.xls) that, when loaded, showed the last 6 quar­ters of data with pre­vi­ous quar­ters hid­den! Of course it was no great prob­lem to unhide them, but then the data has hid­den rows through­out, incom­pat­i­ble data series stacked on top of each other… A total dis­as­ter com­pared to the US and Aus­tralian sta­tis­ti­cal agen­cies.

    Just a gripe at the UK! It appears that Sir Humphrey Appelby is alive and well: “they want data? Sure, let’s give them every­thing! They’ll spend so long try­ing to find what they want that they won’t ever bother us again…”

  • Michael Hoex­ter

    To say that Steve’s model and writ­ings are much, much bet­ter eco­nom­ics and social sci­ence than Ron Paul’s monot­o­nic mar­ket fun­da­men­tal­ist pol­icy pro­pos­als and speechi­fy­ing is not “uncrit­i­cal accep­tance”. You are argu­ing against a straw­man. There is a dif­fer­ence between some­thing that is much bet­ter and a much surer guide to action and some­thing or per­son that is wor­shiped as the paragon or sum­mit of all human devel­op­ment. You seem to be con­fus­ing the two. I am say­ing the for­mer is true, i.e. Steve’s work is a far, far bet­ter guide to pol­icy and action than Ron Paul’s ide­o­log­i­cal cant. It isn’t per­fect or com­plete but it is much bet­ter.

    It is you that are glo­ri­fy­ing Ron Paul’s pro­nounce­ments as “eco­nom­ics” co-equal with Steve’s (or other seri­ous thought­ful economists/social sci­en­tists) rel­a­tively care­ful life­long work in study­ing the dynam­ics of economies. Paul is not using sta­tis­ti­cal tests as Steve has done to show that for instance, the credit accel­er­a­tor is very highly cor­re­lated with unem­ploy­ment. If I have crit­i­cisms of Steve, one of them is that he, at least lately, seems to focus more energy on mod­el­ing rather than on this type of empir­i­cal analy­sis. Of course he is extremely over­worked any­way.

    One of the prob­lems in eco­nom­ics is exactly exem­pli­fied by the lack of explicit cri­te­ria for judg­ing eco­nomic state­ments and opin­ions using empir­i­cal analy­sis. It becomes a mat­ter of sub­jec­tively choos­ing “fla­vors” accord­ing to obscure, often per­sonal cri­te­ria. Each of us has our “bespoke” eco­nomic fla­vor which we favor or not depend­ing on our own self-image plus edu­ca­tion and expe­ri­ence. It sounds to me that your ele­va­tion of Ron Paul as a co-equal to Steve or maybe Min­sky or God­ley is one of those sub­jec­tive deci­sions that may be based, I believe, on over­ex­po­sure to neo­clas­si­cal eco­nom­ics at a young age. There is a shared mar­ket fun­da­men­tal­ism between the Ron Paul-Aus­trian view and neo­clas­si­cal eco­nom­ics which is a rea­son why peo­ple seem to take Ron Paul seriously…Econ 101 has soft­ened up people’s minds to be recep­tive to his sopho­moric ideas about how the econ­omy and soci­ety works.

    Re: Government’s role and Key­ne­sian­ism

    Again as above, we are look­ing at the issue of mak­ing the Per­fect the enemy of the Good. Gov­ern­ment isn’t per­fect and in many coun­tries gov­ern­ments have been degraded as an instru­ment of pop­u­lar will in part because of the cant put out by peo­ple like Ron Paul, Mil­ton Fried­man and pub­lic choice the­o­rists, which sug­gest that group human action is not opti­mal.

    How­ever, try­ing to restruc­ture the finan­cial sys­tem and the role of gov­ern­ment in the finan­cial sys­tem (which is inevitable), will involve, drum­roll please, gov­ern­ment plus pop­u­lar move­ments that demand that gov­ern­ment and bank­ing serve the pub­lic good. With­out move­ments like the Occupy move­ments, it is for the most part incon­ceiv­able that gov­ern­ment offi­cials will be able to do the dif­fi­cult tasks required in restruc­tur­ing debt, reg­u­lat­ing bank­ing fairly. 

    Most gov­ern­ment pol­icy as regards the econ­omy has a Key­ne­sian ele­ment to it. Some Key­ne­sian stim­u­lus is mis­di­rected and ill-con­ceived, espe­cially when it is designed to avoid hard choices. Keynes’s work is not a Bible. Still, we ignore Keynes and the use of Key­ne­sian tools at our peril espe­cially in the depths, at least here in the US of a debt defla­tion.

    So liv­ing in sort of an anar­cho-cap­i­tal­ist fan­tasy world with Ron Paul, will not get us any closer to ask­ing which kind of gov­ern­ment (and which kind of “Key­ne­sian­ism”) we need to design and/or ref­eree a bet­ter finan­cial sys­tem.

  • Lyon­wiss

    @ RJ Decem­ber 27, 2011 at 8:48 am

    As most dis­cus­sions by econ­o­mists were about the tra­di­tional bank­ing sys­tem, not about the shadow bank­ing sys­tem, I wanted set the facts straight about the cause of high lever­age. The tra­di­tional bank­ing sys­tem is reg­u­lated and hence it can­not “lend out of thin air”, with­out being lim­ited by lever­age.

    It is the shadow bank­ing sys­tem which allows the sys­tem to escape credit growth restaint from reg­u­la­tion. It would be untrue to say that reg­u­la­tors did not know about the shadow bank­ing sys­tem. Their view is that dis­in­ter­midi­ated lend­ing is sub­ject to mar­ket dis­ci­pline and there­fore can be dereg­u­lated.

    This clar­i­fi­ca­tion is impor­tant for sev­eral rea­sons. As you said now: “There is poten­tially infi­nite money”. But this poten­tial does not orig­i­nate from how the tra­di­tional bank­ing sys­tem works (as many econ­o­mists claim). The con­se­quences of this under­stand­ing are

    1. Improv­ing reg­u­la­tion of the tra­di­tional bank­ing sys­tem as in Basel III reforms does not address this prob­lem.
    2. Tra­di­tional bank­ing expand­ing into shadow bank­ing is largely the cause of exces­sive lever­age and credit growth. This is due to repeal of Glass-Stea­gall Act, which needs to be restored.
    3. Shadow bank­ing, being unreg­u­lated, is the eco-sys­tem for wide­spread fraud and gov­ern­ment cor­rup­tion.
    4. The shadow bank­ing sys­tem orig­i­nated from the belief in the effi­cient mar­ket hypoth­e­sis, which should be repu­di­ated and the shadow sys­tem should be curbed.
    5. Gov­ern­ment spend­ing and print­ing money do not solve such prob­lems and in fact have made mat­ters worse, the shadow bank­ing sys­tem was not only saved, but enhanced.

    This analy­sis is con­sis­tent with Max Keiser’s GIABO (Global Insur­rec­tion Against Banker Occu­pa­tion) move­ment. The bankers have taken over gov­ern­ment, which can­not now be the solu­tion to our prob­lems.

  • RickW

    @Steve Keen
    Decem­ber 27, 2011 at 9:15 am | #
    Hav­ing read the whole paper now, I expect that Farmer will be one of the front-run­ners among neo­clas­si­cals in the attempt to rede­fine their the­ory so that it appears to know what’s hap­pen­ing to the econ­omy.
    End Quote

    For pol­icy mak­ers this pro­found blindspot to debt bor­ders on crim­i­nal neg­li­gence. They will con­tinue to wreak havoc until the whole sys­tem blows up. For them there is no notion of kick­ing the debt can down the road because debt does not mat­ter. Every­thing will be fixed by restor­ing con­fi­dence — plau­si­bly naive. 

    Steve — I have been silently crit­i­cal of your con­stant attack on neo­clas­si­cal econ­o­mists as I think it detracts from the wis­dom of your own eco­nomic analy­sis. I have seen a sim­i­lar view expressed in a review of Debunk­ing. Your attacks on lesser lights reduce your own cur­rency. How­ever when I see such ill con­ceived “analy­sis” as Farmer’s work, from the insight of your mod­el­ing, I do get an inkling of the frus­tra­tion you must endure.

    I emailed Farmer a link to your Youtube lec­ture series in the hope that he might enlighten him­self on the role of debt — don’t laugh there might be a tiny spark of curios­ity.

    Farmer explains his magic solu­tion here:
    Some­one needs to stand in front of this fel­low and scream “IT IS ALL ABOUT DEBT”.

    If I google debt I get about half a bil­lion hits. For it not to get a sin­gle men­tion in a the­ory that pur­ports to explain “How Economies Work” is beyond laugh­able. At least wealth gets con­sid­er­a­tion. Wealth could be viewed as the other side of the same coin to debt so maybe a glim­mer of enlight­en­ment.

  • cliffy


    Money can only be increased by

    –Com­mer­cial bank loans
    –Gov­ern­ment spend­ing
    –Govt bonds decrease”

    This is always a con­fus­ing debate because state­ments don’t always spec­ify whether or not the state­ment is being made in the con­text of the rules of a reg­u­la­tory sys­tem in a par­tic­u­lar juris­dic­tion or on the basis that those rules are regarded as not in force.

    Sec­ondly the account­ing rules and clas­si­fi­ca­tions, and the def­i­n­i­tions of tech­ni­cal def­i­n­i­tions of debt and money, can vary.

    Thirdly money is like any other mar­ket and so com­mer­cial real­i­ties influ­ence deci­sions to expand or con­tract sales [speed of change of quan­ti­ties have their own costs, mar­ket share etc etc etc]. 

    Tak­ing an exam­ple with no com­mer­cial mar­ket influ­ence and no reg­u­la­tion:

    Say an econ­omy has 4 banks [B1, B2 etc] that have 80% of the mar­ket.

    Say Money today is $5bil­lion.

    Say tomor­row I go into Bank 1 in the morn­ing and bor­row $1bil­lion and buy a new wid­get from a Bank 2 deposit account holder with the money.

    And in the after­noon I bor­row $1bil­lion from Bank 2 and buy a wid­get from a Bank 1 deposit account holder.

    And in the evening the trans­ac­tions clear­ing cen­ter flags Bank 1 owes Bank 2 $1bil­lion, but then flags Bank 2 owes Bank 1 $1bil­lionr.

    Then the banks don’t have to hand over any money.

    And money started off $5bil­lion and wound up $7bil­lion.

    But adding US reg­u­la­tions and prac­ti­cal com­mer­cial con­straints non-com­mer­cial banks can­not engage in the activ­ity described in the above exam­ple but com­mer­cial banks can.

    Is that the way you see it?

  • A quick query re the data Neil. Your total debt fig­ure (col­umn R) com­pounds and sub­tracts many of the inter­me­di­ate data series (D to Q). When I use that I get an astro­nom­i­cal debt to GDP ratio–rising from 5 times in 1987 to about 18 times in 2009.

    My focus is really on debt cre­ation as a proxy for credit money cre­ation. That appears to relate to sim­ply col­umn E. When I use that, I get fig­ures that are within the ball­park of the recent fig­ures pub­lished by the UK Trea­sury, though not quite the same. They pub­lish a peak pri­vate debt to GDP ratio of 450%; I get one of 380% in March 2009 (with a fall since then to 326%).

    Can you clar­ify which data series in your file would be aggre­gated to derive the fig­ure shown here for aggre­gate pri­vate debt?:

  • sean­brose­ley

    I’m glad I’m not the only per­son to find the ONS web­site dif­fi­cult to get around. I come across things I’m look­ing for more by luck than judge­ment.

  • Quick PS Neil: The col­umn in your data that makes the most sense–in terms of aggre­gate level roughly within reach of the Bud­get paper fig­ures, and cor­re­la­tion of a derived credit accel­er­a­tor to change in unem­ploy­ment reasonable–is col­umn H.