The Debtwatch Manifesto

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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.

Figure 1

US private debt clearly rose faster than GDP from the end of World War II (when the debt to GDP ratio was 43%) until 2009 (when it peaked at 303%), but there is no intrinsic reason why it (or the public sector debt to GDP ratio) has to rise over time. I give a theoretical explanation elsewhere (Keen 2010), but an empirical comparison will suffice here: 1945 till 1965 were the best years of the Australian economy—with unemployment averaging 2 percent—and during that time the private debt ratio remained relatively constant at 25% of GDP (see Figure 2).

Figure 2

America's minimum private debt ratio in 1945 may have been artificially low in the aftermath of both the Great Depression and World War II (and there are good reasons why the US economy should have a higher sustainable debt ratio than does Australia), but at some time between 1945 and America's first post-WWII financial crisis in 1966 (Minsky 1982, p. xiii), it passed this level.

The explosion in speculative debt drove asset prices to all-time highs—relative to consumer prices—from which they are now inexorably collapsing (see Figure 3 and Figure 4).

Figure 3

Figure 4

The debt and asset price bubbles were ignored by conventional "Neoclassical" economists on the basis of a set of a priori beliefs about the nature of a market economy that are spurious, but deeply entrenched. Understanding how this crisis came about will require a new, dynamic, monetary approach to economic theory that contradicts the neat, plausible and false Neoclassical model that currently dominates academic economics and popular political debate.

Escaping from the debt trap we are now in will require either a "Lost Generation", or policies that run counter to conventional economic thought and the short-term interests of the financial sector.

Preventing a future crisis will require a redefinition of financial claims upon the real economy which eliminates the appeal of leveraged speculation.

These three observations lead to the three primary objectives of Debtwatch:

  1. To develop a realistic, empirically based, dynamic monetary approach to economic theory and policy;
  2. To develop and promote a "modern Jubilee" by which private debt can be reduced while doing the minimum possible harm to aggregate demand and social equity; and
  3. To develop and promote new definitions of shares and property ownership that will minimize the destructive instabilities of capitalism and promote its creative instabilities.

A realistic economics

The economic and financial crisis has been caused by unenlightened self-interest and fraudulent behaviour on an unprecedented scale. But this behaviour could not have grown so large were it not for the cover given to this behaviour by the dominant theory of economics, which is known as "Neoclassical Economics".

Though many commentators call this theory "Keynesian", one of Keynes's objectives in the 1930s was to overthrow this theory, but instead, as the memory of the Great Depression receded, academic economists gradually constructed an even more extreme version of Neoclassical economics than that against which Keynes had fought. This began with Hicks's "IS-LM" model, which is still accepted as representing "Keynesian" economics today, but which was in fact a Neoclassical model derived two years before the General Theory was published:

The IS-LM diagram, which is widely, but not universally, accepted as a convenient synopsis of Keynesian theory, is a thing for which I cannot deny that I have some responsibility... "Mr. Keynes and the Classics" (Hicks 1937) was actually the fourth of the relevant papers which I wrote during those years… But there were two others that I had written before I saw The General Theory… "Wages and Interest: the Dynamic Problem" (Hicks 1935) was a first sketch of what was to become the "dynamic" model of Value and Capital (Hicks 1939). It is important here, because it shows (I think quite conclusively) that that [IS-LM] model was already in my mind before I wrote even the first of my papers on Keynes. (Hicks 1981, pp. 139-140; emphasis added; see also Keen 2011)

As it grew more virulent, neoclassical theory encouraged politicians to remove the barriers to fraud that were erected in the wake of the last great economic crisis, the Great Depression, in the naïve belief that a deregulated economy necessarily reaches a harmonious equilibrium:

'Macroeconomics was born as a distinct field in the 1940's, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.' (Lucas 2003 , p. 1 ; emphasis added)

Regulators in its thrall—such as Greenspan and Bernanke—rescued the financial sector from a series of crises, with each one leading to yet another until ultimately this one, from which no return to "business as usual" is possible.

Neoclassical economics therefore played an important role in making this crisis as extreme as it became. It is time to succeed where Keynes failed, by both eliminating this theory and replacing it with a realistic alternative.

Critiquing Neoclassical economics

Keynes was scathing about what he called "Classical Economics", and what we today call Neoclassical Economics, lambasting its treatment of time, expectations, uncertainty and money, and the stability or otherwise of capitalism:

I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future…. a classical economist … has overlooked the precise nature of the difference which his abstraction makes between theory and practice … particularly the case in his treatment of Money…

This that I offer is, therefore, a theory of why output and employment are so liable to fluctuation.

The orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess… The hypothesis of a calculable future leads to a wrong interpretation of the principles of behavior which the need for action compels us to adopt, and to an underestimation of the concealed factors of utter doubt, precariousness, hope and fear (Keynes 1937, pp. 215-222)

Keynes's failure to overthrow Neoclassical economics led instead to its reconstruction after the Great Depression in an even more extreme form. This process culminated in "Rational Expectations" macroeconomics in which, rather than dealing with the present "by abstracting from the fact that we know very little about the future", deals with it by assuming we can accurately predict the future!:

I should like to suggest that expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory. (Muth 1961, p. 316)

In the preceding section, the hypothesis of adaptive expectations was rejected as a component of the natural rate hypothesis on the grounds that, under some policy [the gap between actual and expected inflation] is non-zero. If the impossibility of a non-zero value … is taken as an essential feature of the natural rate theory, one is led simply to adding the assumption that [the gap between actual and expected inflation] is zero as an additional axiom… or to assume that expectations are rational in the sense of Muth. (Lucas 1972, p. 54; emphasis added)

I wrote Debunking Economics (Keen 2001; Keen 2011) to help prevent a Neoclassical revival recurring after our current crisis is over. Here I have the advantage of time over Keynes: when he wrote The General Theory, the flaws in neoclassical economics were only vaguely specified—and Keynes himself kept many of those concepts alive, such as the marginal productivity theory of income distribution:

For every value of [total employment] there is a corresponding marginal productivity of labour in the wage-goods industries; and it is this which determines the real wage. (Keynes 1936, p. 27)

Since then, the flaws have been fully detailed, by critics like Sraffa (Sraffa 1960) at one extreme to "own goals" like the Sonnenschein-Mantel-Debreu conditions at the other (Sonnenschein 1973; Shafer and Sonnenschein 1993). The ambition of Debunking Economics was to make the many flaws in neoclassical economics so well known that, should the economy ever experience another Great Depression, it would be that much harder for Neoclassical economics to survive (for more, see Debunking Economics: the naked emperor dethroned?;or buy the book: Amazon USA; Amazon UK; Kindle USA; Kindle UK; Abbey's Australia).

I also provide critiques of conventional economic theory in my lectures, which I make more broadly available via Youtube videos.

Developing an alternative

The seeds of an alternative, realistic theory were developed by Hyman Minsky in the Financial Instability Hypothesis (FIH), which itself reflected the wisdom of the great non-neoclassical economists Marx, Veblen, Schumpeter, Fisher and Keynes, and the historical record of capitalism that had included periodic Depressions (as well as the dramatic technological transformation of production). As Minsky argued, an economic theory could not claim to represent capitalism unless it could explain those periodic crises:

Can "It"—a Great Depression—happen again? And if "It" can happen, why didn't "It" occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself. (Minsky 1982, p. 5)

Minsky developed a coherent verbal model of his hypothesis, but his own attempt to develop a mathematical model in his PhD (Minsky 1957) was unsuccessful (Keen 2000), and he subsequently abandoned that endeavour.

Using insights from complexity theory, I developed models on the FIH that capture its fundamental proposition, that a market economy can experience a debt-deflation (Fisher 1933) after a series of debt-financed cycles (Keen 1995; Keen 1996; Keen 1997; Keen 2000). These models generated a period of declining volatility in employment and wages with a rising ration of debt to GDP, followed by a period of rising volatility before an eventual debt-induced breakdown. They led me to caution that:

From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind which Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm. (Keen, 1995, p. 634; emphasis added)

The empirical data and the implications of these models led me to expect and warn of an impending serious economic crisis (Keen 2006; Keen 2007) at a time when Neoclassical economists were waxing lyrical about "The Great Moderation"(Bernanke 2004; Bernanke 2004; Summers 2005; Campbell 2007; Benati 2008; D'Agostino and Whelan 2008; Gian­none, Lenza et al. 2008; Canova 2009; Gali and Gam­betti 2009; Wood­ford 2009; Bean 2010).

The cri­sis itself emphat­i­cally makes the point that a new the­ory of eco­nom­ics is needed, in which cap­i­tal­ism is seen as a dynamic, mon­e­tary sys­tem with both cre­ative and destruc­tive insta­bil­i­ties, where those destruc­tive insta­bil­i­ties emanate over­whelm­ingly from the finan­cial sector.

Spe­cific projects

The Cen­ter for Eco­nomic Sta­bil­ity Incorporated

With the sup­port of blog mem­bers, I have formed the Cen­ter for Eco­nomic Sta­bil­ity Incor­po­rated. Our objec­tive is to develop CfESI into an empirically-oriented think-tank on eco­nom­ics that will develop real­is­tic analy­sis of cap­i­tal­ism, and pro­mote poli­cies based upon that analy­sis. The suc­cess of CfESI is depen­dent upon rais­ing suf­fi­cient fund­ing to enable staff to be hired who can take over the admin­is­tra­tive and web duties from me, and sup­ple­ment my research efforts.


Named in honor of Hyman Min­sky, this is a com­puter pro­gram that enables a com­plex mon­e­tary sys­tem to be mod­elled with rel­a­tive ease. The pro­gram imple­ments the tab­u­lar approach to mod­el­ling finan­cial flows devel­oped in (Keen 2008; Keen 2010; Keen 2011), and com­bines this with the “flow­chart” par­a­digm devel­oped by engi­neers to model phys­i­cal processes, and imple­mented in numer­ous soft­ware pro­grams (Simulink, Vis­sim, Ven­sim, Ithink, Stella, etc.). It will be both a ped­a­gogic tool to make dynamic mon­e­tary mod­el­ling easy and attrac­tive to new stu­dents, and a pow­er­ful research tool that will enable the con­struc­tion of real­is­tic, mon­e­tary mod­els of capitalism.

Fig­ure 5

  • A first ver­sion of Min­sky is already under devel­op­ment, with fund­ing pro­vided by a grant from the Insti­tute for New Eco­nomic Think­ing. This ver­sion, to be com­pleted in mid-2012, will enable the mod­el­ling of the econ­omy as a mon­e­tary dynamic sin­gle com­mod­ity sys­tem. A pro­to­type will be released in early 2012. A Source­forge page is now oper­at­ing, and we will shortly be open­ing it up for col­lab­o­ra­tion by Open Source developers.
  • Ver­sion 2.0 will enable multi-commodity input-output dynam­ics to be mod­elled, as well as a dis­ag­gre­gated bank­ing sec­tor. A seed­ing grant to help develop ver­sion 2.0 has been recently been received from the Insti­tute for New Eco­nomic Think­ing. This will be com­bined with grants from other pri­vate enti­ties to make an appli­ca­tion for sup­port under the Aus­tralian Research Council’s Link­age pro­gram for up to A$500,000 p.a. of fur­ther fund­ing. One Aus­tralian firm has already com­mit­ted to be an Indus­try Part­ner in this appli­ca­tion, and I wel­come addi­tional sup­port from other firms, whether Aus­tralian or oth­er­wise (a min­i­mum con­tri­bu­tion of A$50,000 over 3 years is required to qual­ify as an Indus­try Part­ner under ARC rules).
  • Ver­sion 3.0 will add the capa­bil­ity to model inter­na­tional trade and finan­cial flows.

The pro­gram will be plat­form inde­pen­dent, and freely avail­able under the GPL licence.

Inte­grat­ing Min­sky with bio­phys­i­cal data

Min­sky as it stands is purely a sim­u­la­tion tool. How­ever, as part of a United Nations Envi­ron­ment Pro­gram projectResource Effi­ciency: Eco­nom­ics and Out­look for Asia-Pacific”, a pre­cur­sor to Min­sky has been linked to a bio­phys­i­cal data­base known as ASFF (for “Aus­tralian Stocks and Flows Foun­da­tion”) devel­oped by the CSIRO (Turner, Hoff­man et al. 2011),. Our long term ambi­tion is to com­bine the two sys­tems seam­lessly, so that the phys­i­cal para­me­ters of Min­sky will be derived directly from empir­i­cal data (which can be derived for any national econ­omy) and so that Minsky’s fit to empir­i­cal data can be tested.



Fig­ure 6
The sec­ond stage of this process is part of the pro­posal for which I have just received fur­ther fund­ing from INET.

Finance and Eco­nomic Breakdown

This will be a book-length treat­ment of the Finan­cial Insta­bil­ity Hypoth­e­sis that I hope will form one of the foun­da­tions of a post-Neoclassical macro­eco­nom­ics. Writ­ing a book like this takes time and iso­la­tion, two things I have had very lit­tle of in the past six years since I first started warn­ing of an impend­ing eco­nomic cri­sis (Keen 2005). I have delayed the writ­ing of this “mag­num opus” for over a decade; in 2012–13 I intend devot­ing as much time as I can to writ­ing it, which neces­si­tates min­imis­ing time spent on other activ­i­ties such as the main­te­nance of this blog.


Cur­rently I pull in data from over 1500 dif­fer­ent sources into a Math­cad work­sheet on my PC. Math­cad, with a lit­tle help from my pro­gram­ming, does a won­der­ful job of analysing and dis­play­ing the data. But the nam­ing con­ven­tions in my pseudo-database are … a joke, there are none. Con­se­quently, only some­one inti­mately acquainted with the data can use my sys­tem, and at the moment that’s just me. I also have to man­u­ally down­load files when they are updated. Thanks to Mathcad’s vis­i­ble equa­tions, audit­ing the data is cer­tainly eas­ier than with a spread­sheet, but it is still dif­fi­cult com­pared to a well-structured rela­tional database.

A sup­porter has devel­oped an online sys­tem, cur­rently called Econ­o­data, to over­come these limitations:

  • The data is stored in a “Ruby on Rails” rela­tional database;
  • The sys­tem auto­mat­i­cally updates data when it is altered by providers;
  • The rela­tional data­base sys­tem and a 4GL for derived data series makes audit­ing straight­for­ward, and the sys­tem gen­er­ates a tinyURL so that a com­plex data series or chart can be eas­ily repli­cated by any­one; and
  • It will be eas­ily acces­si­ble and usable by sub­scribers to Debt­watch and CfESI.

Econ­o­data is cur­rently unavail­able since it is being ported to a new server, and the data­base is rel­a­tively unpop­u­lated. The data­base will also sup­port my book Finance and Eco­nomic Break­down, by mak­ing it pos­si­ble for read­ers to ver­ify any empir­i­cal charts for them­selves sim­ply by typ­ing its TinyURL into a browser.

Credit-aware Eco­nomic Indicators

My debt-aware per­spec­tive on eco­nom­ics makes it easy to explain what Bernanke has admit­ted is still inex­plic­a­ble to him: where the cri­sis came from, and why it is persisting:

Part of the slow­down is tem­po­rary, and part of it may be longer-lasting. We do believe that growth is going to pick up going into 2012 but at a some­what slower pace than we had antic­i­pated in April. We don’t have a pre­cise read on why this slower pace of growth is per­sist­ing… ” His admis­sion of igno­rance reflects gen­uine puz­zle­ment with the economy’s fail­ure to reach what he likes to call escape veloc­ity. (G.I. 2011)

In a nut­shell, the change in total pri­vate debt is a key deter­mi­nant of aggre­gate demand, and the turn­around from increas­ing debt boost­ing demand from incomes alone by 28% in 2008 to reduc­ing demand below this level by 20 per­cent in early 2010 was the cause of the crisis.

Fig­ure 7

Sim­i­larly, the slow­down in the rate of decline of debt from its max­i­mum rate of decline of almost US$3 tril­lion p.a. to a mere $340 bil­lion p.a. is—along with the growth in gov­ern­ment debt—the main rea­son why the cri­sis has atten­u­ated slightly, rather than plung­ing into Great Depres­sion depths of unemployment.

Fig­ure 8

One indi­ca­tor that has arisen out of my work—building on orig­i­nal work by Biggs, Mayer and Pick (Biggs and Mayer 2010; Biggs, Mayer et al. 2010)—is the “Credit Accel­er­a­tor” (Keen 2011, pp. 160–165), which was first called the “Credit Impulse”. Both the change in income and the accel­er­a­tion of credit deter­mine the rate of change of eco­nomic activ­ity, and these are cor­re­lated with each other (the R2 since 1980 is 0.56), but the eco­nom­ics col­lapse in late 2007 was clearly dri­ven pri­mar­ily by the rapid and unprece­dented decel­er­a­tion of debt.

Fig­ure 9

Debt accel­er­a­tion is the main fac­tor in deter­min­ing asset prices. Asset bub­bles there­fore have to burst, because debt accel­er­a­tion can­not remain pos­i­tive forever.

Fig­ure 10

This causal rela­tion­ship is much more obvi­ous with mort­gage debt and change in house prices (see Fig­ure 11).

Fig­ure 11

Fur­ther devel­op­ment of this indi­ca­tor is there­fore highly warranted—both as an indi­ca­tor of what trends can be expected in asset prices now, and as a means to iden­tify whether a bub­ble is devel­op­ing in future. At present, the Credit Accelerator’s def­i­n­i­tion is quite simple—the change in change in debt over a time period, divided by GDP at the mid­point of that period—and the nois­i­ness of finan­cial data makes it dif­fi­cult to use short time peri­ods, which would obvi­ously be supe­rior for fore­cast­ing. A sophis­ti­cated fil­ter­ing process and for­ward indi­ca­tors for credit would make the Credit Accel­er­a­tor a much more pow­er­ful tool.

A Mod­ern Jubilee

Michael Hudson’s sim­ple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the eco­nomic dilemma of our times. This does not involve sanc­tion­ing “moral haz­ard”, since the real moral haz­ard was in the behav­iour of the finance sec­tor in cre­at­ing this debt in the first place. Most of this debt should never have been cre­ated, since all it did was fund dis­guised Ponzi Schemes that inflated asset val­ues with­out adding to society’s pro­duc­tiv­ity. Here the irresponsibility—and Moral Hazard—clearly lay with the lenders rather than the borrowers.

The only real ques­tion we face is not whether we should or should not repay this debt, but how are we going to go about not repay­ing it?

The stan­dard means of reduc­ing debt—personal and cor­po­rate bank­rupt­cies for some, slow repay­ment of debt in depressed eco­nomic con­di­tions for others—could have us mired in delever­ag­ing for one and a half decades, given its cur­rent rate (see Fig­ure 12).

Fig­ure 12

That fate would in turn mean one and a half decades where the boost to demand that ris­ing debt should provide—when it finances invest­ment rather than speculation—will not be there. The econ­omy will tend to grow more slowly than is needed to absorb new entrants into the work­force, inno­va­tion will slow down, and jus­ti­fied polit­i­cal unrest will rise—with poten­tially unjus­ti­fied social consequences.

We don’t need to spec­u­late about the eco­nomic and social dam­age such a future his­tory will cause—all we have to do is remem­ber the last time.

We should, there­fore, find a means to reduce the pri­vate debt bur­den now, and reduce the length of time we spend in this dam­ag­ing process of delever­ag­ing. Pre-capitalist soci­eties insti­tuted the prac­tice of the Jubilee to escape from sim­i­lar traps (Hud­son 2000; Hud­son 2004), and debt defaults have been a reg­u­lar expe­ri­ence in the his­tory of cap­i­tal­ism too (Rein­hart and Rogoff 2008). So a prima facie alter­na­tive to 15 years of delever­ag­ing would be an old-fashioned debt Jubilee.

But a Jubilee in our mod­ern cap­i­tal­ist sys­tem faces two dilem­mas. Firstly, in any cap­i­tal­ist sys­tem, a debt Jubilee would paral­yse the finan­cial sec­tor by destroy­ing bank assets. Sec­ondly, in our era of secu­ri­tized finance, the own­er­ship of debt per­me­ates soci­ety in the form of asset based secu­ri­ties (ABS) that gen­er­ate income streams on which a mul­ti­tude of non-bank recip­i­ents depend, from indi­vid­u­als to coun­cils to pen­sion funds.

Debt abo­li­tion would inevitably also destroy both the assets and the income streams of own­ers of ABSs, most of whom are inno­cent bystanders to the delu­sion and fraud that gave us the Sub­prime Cri­sis, and the myr­iad fias­cos that Wall Street has per­pe­trated in the 2 decades since the 1987 Stock Mar­ket Crash.

We there­fore need a way to short-circuit the process of debt-deleveraging, while not destroy­ing the assets of both the bank­ing sec­tor and the mem­bers of the non-banking pub­lic who pur­chased ABSs. One fea­si­ble means to do this is a “Mod­ern Jubilee”, which could also be described as “Quan­ti­ta­tive Eas­ing for the public”.

Quan­ti­ta­tive Eas­ing was under­taken in the false belief that this would “kick start” the econ­omy by spurring bank lending.

And although there are a lot of Amer­i­cans who under­stand­ably think that gov­ern­ment money would be bet­ter spent going directly to fam­i­lies and busi­nesses instead of banks – “where’s our bailout?,” they ask – the truth is that a dol­lar of cap­i­tal in a bank can actu­ally result in eight or ten dol­lars of loans to fam­i­lies and busi­nesses, a mul­ti­plier effect that can ulti­mately lead to a faster pace of eco­nomic growth. (Obama 2009, p. 3; empha­sis added)

Instead, its main effect was to dra­mat­i­cally increase the idle reserves of the bank­ing sec­tor while the broad money sup­ply stag­nated or fell, (see Fig­ure 13), for the obvi­ous rea­sons that there is already too much pri­vate sec­tor debt, and nei­ther lenders nor the pub­lic want to take on more debt.

Fig­ure 13

A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts.

The broad effects of a Mod­ern Jubilee would be:

  1. Debtors would have their debt level reduced;
  2. Non-debtors would receive a cash injection;
  3. The value of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instruments declin­ing in value and cash assets rising;
  4. Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
  5. The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt back­ing such secu­ri­ties would be paid off; and
  6. Mem­bers of the pub­lic (both indi­vid­u­als and cor­po­ra­tions) who owned asset-backed-securities would have increased cash hold­ings out of which they could spend in lieu of the income stream from ABS’s on which they were pre­vi­ously dependent.

Clearly there are numer­ous com­plex issues to be con­sid­ered in such a pol­icy: the scale of money cre­ation needed to have a sig­nif­i­cant pos­i­tive impact (with­out exces­sive neg­a­tive effects—there will obvi­ously be such effects, but their impor­tance should be judged against the alter­na­tive of con­tin­ued delever­ag­ing); the mechan­ics of the money cre­ation process itself (which could repli­cate those of Quan­ti­ta­tive Eas­ing, but may also require changes to the legal pro­hi­bi­tion of Reserve Banks from buy­ing gov­ern­ment bonds directly from the Trea­sury); the basis on which the funds would be dis­trib­uted to the pub­lic; man­ag­ing bank liq­uid­ity prob­lems (since though banks would not be made insol­vent by such a pol­icy, they would suf­fer sig­nif­i­cant drops in their income streams); and ensur­ing that the pro­gram did not sim­ply start another asset bubble.

Tam­ing the Finance Sector

Finance per­forms gen­uine, essen­tial ser­vices in a cap­i­tal­ist econ­omy when it lim­its itself to (a) pro­vid­ing work­ing cap­i­tal to non-financial cor­po­ra­tions; (b) fund­ing invest­ment and entre­pre­neur­ial activ­ity, whether directly or indi­rectly; © fund­ing hous­ing pur­chase for strictly res­i­den­tial pur­poses, whether to owner-occupiers for pur­chase or to investors for the pro­vi­sion of rental prop­er­ties; and (d) pro­vid­ing finance to house­holds for large expen­di­tures such as auto­mo­biles, home ren­o­va­tions, etc.

It is a destruc­tive force in cap­i­tal­ism when it pro­motes lever­aged spec­u­la­tion on asset or com­mod­ity prices, and funds activ­i­ties (like lev­ered buy­outs) that drive debt lev­els up and rely upon ris­ing asset prices for their suc­cess. Such activ­i­ties are the over­whelm­ing focus of the non-bank finan­cial sec­tor today, and are the pri­mary rea­son why finan­cial sec­tor debt has risen from triv­ial lev­els of below 10 per­cent of GDP before the 1970s to the peak of over 120 per­cent in early 2009.

Fig­ure 14

Return­ing cap­i­tal­ism to a finan­cially robust state must involve a dra­matic fall in the level of pri­vate debt—and the size of the finan­cial sec­tor— as well as poli­cies that return the finan­cial sec­tor to a ser­vice role to the real economy.

The size of the finan­cial sec­tor is directly related to the level of pri­vate debt, which in Amer­ica peaked at 303% of GDP in early 2009 (see Fig­ure 15). Using his­tory as our guide, Amer­ica will only return to being a finan­cially robust soci­ety when this ratio falls back to below 100% of GDP. Most other OECD coun­tries like­wise need to dras­ti­cally reduce their lev­els of pri­vate debt.

Fig­ure 15

The per­cent­age of total wages and prof­its earned by the FIRE sec­tor (as defined in the NIPA tables) gives another guide. America’s period of robust eco­nomic growth coin­cided with FIRE sec­tor prof­its being between 10 and 20 per­cent of total prof­its, and wages in the FIRE sec­tor being below 5 per­cent of total wages. Finance sec­tor prof­its peaked at over 50% of total prof­its in 2001, while wages in the FIRE sec­tor peaked at over 9 per­cent of total wages.

Fig­ure 16

Since finance sec­tor prof­its are pri­mar­ily a func­tion of the level of pri­vate debt, this implies that the level of debt needs to shrink by a fac­tor of 3–4, while employ­ment in the finance sec­tor needs to roughly halve. At the max­i­mum, the finance sec­tor should be no more than 50% of its cur­rent size.

Fig­ure 17

Such a large con­trac­tion in the size of the sec­tor means that the major­ity of those who cur­rently work there will need to find gain­ful employ­ment else­where. Indi­vid­u­als who can actu­ally eval­u­ate invest­ment proposals—generally speak­ing, engi­neers rather than finan­cial engineers—will need to be hired in their place. Many of the stan­dard prac­tices of that sec­tor today will have to be elim­i­nated or dras­ti­cally cur­tailed, while many prac­tices that have been largely aban­doned will have to be reinstated.

Tam­ing the Credit Accelerator

Capitalism’s crises have always been a prod­uct of the finan­cial sec­tor fund­ing spec­u­la­tion on asset prices rather than fund­ing busi­ness and inno­va­tion. This allows finan­cial sec­tor prof­its to grow far larger than is war­ranted, on the foun­da­tion of a far larger level of pri­vate debt than soci­ety can sup­port. This lend­ing causes a pos­i­tive feed­back loop between accel­er­at­ing debt and ris­ing asset prices, lead­ing to both a debt and asset price bub­ble. The asset price bub­ble must burst—because it relies upon accel­er­at­ing debt for its maintenance—but once it bursts, soci­ety is still left with the debt.

The under­ly­ing cause is the rela­tion­ship between debt and asset prices in a credit-based econ­omy. As I explain in numer­ous places (“A much more neb­u­lous con­cep­tion”, “Debunk­ing Macro­eco­nom­ics”), aggre­gate demand is the sum of income (Y) plus the change in debt , and this is expended on both newly pro­duced goods and ser­vices and buy­ing finan­cial claims on exist­ing assets—which I call “Net Asset Turnover” . At a very gen­eral level, this implies the fol­low­ing relationship:

Net Asset Turnover can be bro­ken down into the price index for assets , times their quan­tity , times the turnover —expressed as a frac­tion of the num­ber of assets

It there­fore fol­lows that there is a rela­tion­ship between the accel­er­a­tion of debt and change in asset prices.

Some accel­er­a­tion of debt is vital for a grow­ing econ­omy. As good empir­i­cal work by Fama and French has con­firmed (Fama and French 1999; Fama and French 2002), change in debt is the main source of funds for invest­ment, and as Schum­peter explains (Schum­peter 1934, pp. 95–107), the inter­play between invest­ment and the endoge­nous cre­ation of spend­ing power by the bank­ing sys­tem ensures that this will be a cycli­cal process. Debt accel­er­a­tion dur­ing a boom and decel­er­a­tion dur­ing a slump are thus essen­tial aspects of capitalism.

How­ever this rela­tion also implies that the accel­er­a­tion of debt is a fac­tor in the rate of change of asset prices (along with the change in income) and that when asset prices grow faster than incomes and con­sumer prices, the motive force behind it will be the accel­er­a­tion of debt. At the same time, the growth in asset prices is the major incen­tive to accel­er­at­ing debt: this is the pos­i­tive feed­back loop on which all asset bub­bles are based, and it is why they must ulti­mately burst (see Fig­ure 10 and Fig­ure 11). This is the foun­da­tion of Ponzi Finance (Min­sky 1982, p. 29), and it is this aspect of finance that has to be tamed to reduce the destruc­tive impact of finance on capitalism.

I do not believe that reg­u­la­tion alone will achieve this aim, for two reasons.

  • Minsky’s propo­si­tion that “sta­bil­ity is desta­bi­liz­ing” applies to reg­u­la­tors as well as to mar­kets. If reg­u­la­tions actu­ally suc­ceed in enforc­ing respon­si­ble finance, the rel­a­tive tran­quil­lity that results from that will lead to the belief that such tran­quil­lity is the norm, and the reg­u­la­tions will ulti­mately be abol­ished. After all, this is what hap­pened after the last Great Depression.
  • Banks profit by cre­at­ing debt, and they are always going to want to cre­ate more debt. This is sim­ply the nature of bank­ing. Reg­u­la­tions are always going to be attempt­ing to restrain this ten­dency, and in this strug­gle between an “immov­ably object” and an “irre­sistible force”, I have no doubt that the force will ulti­mately win.

If we rely on reg­u­la­tion alone to tame the finan­cial sec­tor, then it will be tamed while the mem­ory of the cri­sis it caused per­sists, only to be over­thrown by a resur­gent finan­cial sec­tor some decades hence (scep­tics on this point should take a close look at Fig­ure 2, show­ing the debt to GDP graph for Aus­tralia from 1860 till today).

There are thus only two options to limit capitalism’s ten­den­cies to finan­cial crises: to change the nature of either lenders or bor­row­ers in a fun­da­men­tal way. There are pro­pos­als for the for­mer, which I’ll dis­cuss later, but (for rea­sons I’ll dis­cuss now) my pref­er­ence is to address the lat­ter by reduc­ing the appeal of lever­aged spec­u­la­tion on asset prices.

There are, I believe, no prospects for fun­da­men­tally alter­ing the behav­iour of the finan­cial sec­tor because, as already noted, the key deter­mi­nant of prof­its in the finance sec­tor is the level of debt it can gen­er­ate. How­ever it is organ­ised and what­ever lim­its are put upon its behav­iour, it will want to cre­ate more debt.

There are prospects for alter­ing the behav­iour of the non-financial sec­tor towards debt because, fun­da­men­tally, debt is a bad thing for the bor­rower: the spend­ing power of debt now is an entice­ment, but with it comes the draw­back of ser­vic­ing debt in the future. For that rea­son, when either invest­ment or con­sump­tion is the rea­son for tak­ing on debt, bor­row­ers will be restrained in how much they will accept. Only when they suc­cumb to the entice­ment of lever­aged spec­u­la­tion will bor­row­ers take on a level of debt that can become sys­tem­i­cally dangerous.

This can eas­ily be illus­trated using dis­ag­gre­gated bor­row­ing data for Aus­tralia. At first glance, though per­sonal debt appears quite volatile, and strongly related to the busi­ness cycle—rising dur­ing booms and falling dur­ing slumps—there is clearly no trend across busi­ness cycles (see Fig­ure 18; “R90” refers to the start of the 1990s reces­sion, and “GFC” to the start of the cur­rent eco­nomic cri­sis for which Aus­tralians use the acronym “GFC”—or “Global Finan­cial Crisis”).

Fig­ure 18

How­ever there clearly is a trend in mort­gage debt across busi­ness cycles, and when rescaled by this trend, the volatil­ity of per­sonal debt is a non-event (see Fig­ure 19).

Fig­ure 19

The dif­fer­ence between the two series is obvi­ous. Regard­less of the end­less induce­ments from the finance sec­tor to enter into per­sonal debt, com­mit­ments by the pub­lic to per­sonal debt are gen­er­ally related to and reg­u­lated by income. Com­mit­ments to debt for the pur­chase of assets, on the other hand, are related not to income, but to expec­ta­tions of lever­aged prof­its on ris­ing asset prices—when the fac­tor most respon­si­ble for caus­ing growth in asset prices is accel­er­at­ing debt.

This rela­tion­ship between debt accel­er­a­tion and change in asset prices is espe­cially appar­ent for mort­gage debt. The R2 between mort­gage debt accel­er­a­tion and change in real house prices is 0.78 in the USA over 25 years, and 0.6 in Aus­tralia over 30 years (see Fig­ure 11 and Fig­ure 22). Though debt accel­er­a­tion can enable increased con­struc­tion or turnover , the far greater flex­i­bil­ity of prices, and the treat­ment of hous­ing as a vehi­cle for spec­u­la­tion rather than accom­mo­da­tion, means that the brunt of the accel­er­a­tion dri­ves house price appre­ci­a­tion. The same effect applies in the far more volatile share mar­ket: accel­er­at­ing debt leads to ris­ing asset prices, which encour­ages more debt acceleration.

Fig­ure 20

Fig­ure 21

The link between accel­er­at­ing debt lev­els and ris­ing asset prices is there­fore the basis of capitalism’s ten­dency to expe­ri­ence finan­cial crises. That link has to be bro­ken if finan­cial crises are to be made less likely—if not avoided entirely. This requires a rede­f­i­n­i­tion of finan­cial assets in such a way that the temp­ta­tions of Ponzi Finance can be eliminated.

Jubilee Shares

The key fac­tor that allows Ponzi Schemes to work in asset mar­kets is the “Greater Fool” promise that a share bought today for $1 can be sold tomor­row for $10. No inter­est rate, no reg­u­la­tion, can hold against the charge to insan­ity that such a fea­si­ble promise fer­ments, and on such a foun­da­tion the now almost for­got­ten folly of the Dot­Com Bub­ble was built. Both the promise and the folly are well illus­trated in Yahoo’s share price (see Fig­ure 22).

Fig­ure 22

I pro­pose the rede­f­i­n­i­tion of shares in such a way that the entice­ment of lim­it­less price appre­ci­a­tion can be removed, and the pri­mary mar­ket can take prece­dence over the sec­ondary mar­ket. A share bought in an IPO or rights offer would last for­ever (for as long as the com­pany exists) as now with all the rights it cur­rently con­fers. It could be sold once onto the sec­ondary mar­ket with all the same priv­i­leges. But on its next sale it would have a life span of 50 years, at which point it would terminate.

The objec­tive of this pro­posal is to elim­i­nate the appeal of using debt to buy exist­ing shares, while still mak­ing it attrac­tive to fund inno­v­a­tive firms or star­tups via the pri­mary mar­ket, and still mak­ing pur­chase of the share of an estab­lished com­pany on the sec­ondary mar­ket attrac­tive to those seek­ing an annu­ity income.

I can envis­age ways in which this basic pro­posal might be refined, while still main­tain­ing the pri­mary objec­tive of mak­ing lever­aged spec­u­la­tion on the price of exist­ing share unat­trac­tive. The ter­mi­na­tion date could be made a func­tion of how long a share was held; the num­ber of sales on the sec­ondary mar­ket before the Jubilee effect applied could be more than one. But the basic idea has to be to make bor­row­ing money to gam­ble on the prices of exist­ing shares a very unat­trac­tive proposition.

The Pill”

At present, if two indi­vid­u­als with the same sav­ings and income are com­pet­ing for a prop­erty, then the one who can secure a larger loan wins. This real­ity gives bor­row­ers an incen­tive to want to have the loan to val­u­a­tion ratio increased, which under­pins the finance sector’s abil­ity to expand debt for prop­erty purchases.

Since the accel­er­a­tion of debt dri­ves the rise in house prices, we get both the bub­ble and the bust. But since houses turn over much more slowly than do shares, this process can go on for a lot longer.

Fig­ure 23

The buildup of mort­gage debt there­fore also goes on for much longer (see Fig­ure 24 and Fig­ure 25).

Fig­ure 24

Fig­ure 25

Lim­its on bank lend­ing for mort­gage finance are obvi­ously nec­es­sary, but while those con­trols focus on the income of the bor­rower, both the lender and the bor­rower have an incen­tive to relax those lim­its over time. This relax­ation is in turn the fac­tor that enables a house price bub­ble to form while dri­ving up the level of mort­gage debt per head.

Fig­ure 26

I instead pro­pose bas­ing the max­i­mum debt that can be used to pur­chase a prop­erty on the income (actual or imputed) of the prop­erty itself. Lenders would only be able to lend up to a fixed mul­ti­ple of the income-earning capac­ity of the prop­erty being purchased—regardless of the income of the bor­rower. A use­ful mul­ti­ple would be 10, so that if a prop­erty rented for $30,000 p.a., the max­i­mum amount of money that could be bor­rowed to pur­chase it would be $300,000.

Under this regime, if two par­ties were vying for the same prop­erty, the one that raised more money via sav­ings would win. There would there­fore be a neg­a­tive feed­back rela­tion­ship between lever­age and house prices: an gen­eral increase in house prices would mean a gen­eral fall in leverage.

I call this pro­posal The Pill, for “Prop­erty Income Lim­ited Lever­age”. This pro­posal is a lot sim­pler than Jubilee Shares, and I think less in need of tin­ker­ing before it could be final­ized. Its real prob­lem is in the imple­men­ta­tion phase, since if it were intro­duced in a coun­try where the prop­erty bub­ble had not fully burst, it could cause a sharp fall in prices. It would there­fore need to be phased in slowly over time—except in a coun­try like Japan where the house price bub­ble is well and truly over (even though house prices are still falling).

There are many other pro­pos­als for reform­ing finance, most of which focus on chang­ing the nature of the mon­e­tary sys­tem itself. The best of these focus on insti­tut­ing a sys­tem that removes the capac­ity of the bank­ing sys­tem to cre­ate money via “Full Reserve Banking”.

Full Reserve Banking

The for­mer could be done by remov­ing the capac­ity of the pri­vate bank­ing sys­tem to cre­ate money. This is the sub­stance of the Amer­i­can Mon­e­tary Insti­tute’s pro­pos­als, which are now embod­ied in the National Emer­gency Employ­ment Defense Act of 2011 (HR 2990), a Bill which was sub­mit­ted to Con­gress by Con­gress­man Den­nis Kucinich on Sep­tem­ber 21st 2011. This bill would remove the capac­ity of the bank­ing sec­tor to cre­ate money, along the lines the the 100% reserve pro­pos­als first cham­pi­oned by Irv­ing Fisher dur­ing the Great Depres­sion (Fisher 1936), and vest the capac­ity for money cre­ation in the gov­ern­ment alone.

A sim­i­lar sys­tem is pro­posed by the UK’s New Eco­nomic Foun­da­tion with its Pos­i­tive Money proposal.

Tech­ni­cally, both these pro­pos­als would work. I won’t go into great detail on them here, other than to note my reser­va­tion about them, which is that I don’t see the bank­ing system’s capac­ity to cre­ate money as the causa cau­sans of crises, so much as the uses to which that money is put. As Schum­peter explains so well, the endoge­nous cre­ation of money by the bank­ing sec­tor gives entre­pre­neurs spend­ing power that exceeds that com­ing out of “the cir­cu­lar flow” alone. When the money cre­ated is put to Schum­peter­ian uses, it is an inte­gral part of the inher­ent dynamic of cap­i­tal­ism. The prob­lem comes when that money is cre­ated instead for Ponzi Finance rea­sons, and inflates asset prices rather than enabling the cre­ation of new assets.

My cau­tion with respect to full reserve bank­ing sys­tems is that this endoge­nous expan­sion of spend­ing power would become the respon­si­bil­ity of the State alone. Here, though I am a pro­po­nent of gov­ern­ment counter-cyclical spend­ing, I am scep­ti­cal about the capac­ity of gov­ern­ment agen­cies to get the cre­ation of money right at all times. This is not to say that the pri­vate sec­tor has done a bet­ter job—far from it! But the pri­vate bank­ing sys­tem will always be there—even if changed in nature—ready to exploit any slipups in gov­ern­ment behav­iour that can be used to jus­tify a return to the sys­tem we are cur­rently in. Slipups will surely occur, espe­cially if the new sys­tem still enables spec­u­la­tion on asset prices to occur.

Since in the real world, peo­ple for­get and die, the mem­ory of the chaos we are liv­ing through now won’t be part of the mind­set when those slipups occur, espe­cially if the end of the Age of Delever­ag­ing ush­ers in a period of eco­nomic tran­quil­lity like the 1950s. We could well have 100% money reforms “reformed” out of exis­tence once more.

Schum­peter­ian bank­ing also inher­ently includes the capac­ity to make mis­takes: to fund a ven­ture that doesn’t suc­ceed, and yet to be will­ing to take that risk again in the hope of fund­ing one that suc­ceeds spec­tac­u­larly. I am wary of the capac­ity of that mind­set to co-exist with the bureau­cratic one that dom­i­nates government.

So though I am not opposed to the 100% Reserve Bank­ing pro­posal, I am not enthu­si­as­tic either. I believe they need curbs on the capac­ity to finance asset price spec­u­la­tion like Jubilee Shares and The Pill, and if they have them, these alone might achieve most of what mon­e­tary reform­ers hope to achieve with far more exten­sive change to the finan­cial system.

Other issues

As Dou­glas Adams once bril­liantly remarked, most of our solu­tions to human prob­lems involve move­ments of small green pieces of paper, and my solu­tions clearly fall into that camp:

This planet has—or rather had—a prob­lem, which was this: most of the peo­ple liv­ing on it were unhappy for pretty much of the time. Many solu­tions were sug­gested for this prob­lem, but most of these were largely con­cerned with the move­ments of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy. (Adams 1988)

I have said noth­ing here about Global Warm­ing and Peak Oil. Clearly these fac­tors will shape the post-Great Con­trac­tion world far more pow­er­fully than would my reforms. The rea­sons for not men­tion­ing them include specialisation—I am an econ­o­mist after all, not a spe­cial­ist on the cli­mate or energy—and the fact that these issues will ulti­mately make the finan­cial cri­sis look triv­ial by com­par­i­son. Dis­cussing them while dis­cussing the finan­cial cri­sis would have swamped the lat­ter topic almost entirely.

End­ing the dom­i­nance of the FIRE sec­tor will also expose the extent to which Amer­ica and the UK in par­tic­u­lar have been de-industrialised in the last 30 years. Though the relo­ca­tion of pro­duc­tion from the West­ern OECD to devel­op­ing nations could have occurred inde­pen­dently of the growth of Ponzi Finance, Ponzi Finance enabled this trend to go on for much longer than it could have oth­er­wise done. It is highly likely that reforms to end Ponzi Finance will be blamed for caus­ing the cri­sis in unem­ploy­ment that has in fact existed for decades, and would merely be exposed by sud­denly reduc­ing the size of the FIRE sector.

On the bright side

All of the above makes for bleak read­ing. I cer­tainly do expect a bleak future his­tory for humankind in most of the rest of this cen­tury, which I believe will bear out the pre­dic­tions first made by the “Lim­its to Growth” report in 1972 (Mead­ows, Ran­ders et al. 1972; Mead­ows, Mead­ows et al. 2005; Turner 2008).

Fig­ure 27: From Turner 2008. 2 solid cir­cle series rep­re­sent upper and lower bound esti­mates respec­tively

Despite this, I am a long term opti­mist for human­ity. We have a depress­ing ten­dency to learn about the unsus­tain­abil­ity of cumu­la­tive processes only after a cri­sis (Dia­mond 2005), but we also have an extra­or­di­nary intel­li­gence, and a species nature that val­ues empathy—along with our equally obvi­ous ten­dency to let hier­ar­chy and per­sonal gain take the ascen­dancy in human affairs. Ulti­mately I believe we’ll work out a means to live sus­tain­ably on this planet and, in the very dis­tant future, to live beyond it as well. But to do so, we have to under­stand our cur­rent sit­u­a­tion prop­erly. There is no chance to move towards a bet­ter future if we mis­un­der­stand the sit­u­a­tion we are cur­rently in. That’s why I keep on going.

In this work, I find myself fol­low­ing the lead of the physi­cist and applied math­e­mati­cian Pro­fes­sor John Blatt—a fel­low Aus­tralian (a Syd­neysider even!) whom I never met, but whose writ­ings were the foun­da­tion of my first for­ays into eco­nomic dynam­ics and complexity:

We close this intro­duc­tion with a philo­soph­i­cal point. Karl Marx said: “The philoso­phers hith­erto have only inter­preted the world in var­i­ous ways; the thing, how­ever, is to change it.” There have been many changes in the world since this was writ­ten… But only the fool­hardy could claim that these changes have all, or even mostly, been for the better.

It is not the task of this book to change the world. Let us try to under­stand just a small part of it, namely the dynam­ics of com­pet­i­tive cap­i­tal­ism. It is by no means cer­tain that the human race has a future at all. But if it does, that future can not be harmed, and may even be aided, by an hon­est attempt to under­stand our past. (Blatt 1983, p. 15)


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Keen, S. (1997). “From Sto­chas­tics to Com­plex­ity in Mod­els of Eco­nomic Insta­bil­ity.” Non­lin­ear Dynam­ics, Psy­chol­ogy, and Life Sci­ences
1(2): 151–172.

Keen, S. (2000). The Non­lin­ear Eco­nom­ics of Debt Defla­tion. Com­merce, com­plex­ity, and evo­lu­tion: Top­ics in eco­nom­ics, finance, mar­ket­ing, and man­age­ment: Pro­ceed­ings of the Twelfth Inter­na­tional Sym­po­sium in Eco­nomic The­ory and Econo­met­rics. W. A. Bar­nett, C. Chiarella, S. Keen, R. Marks and H. Schn­abl. New York, Cam­bridge Uni­ver­sity Press: 83–110.

Keen, S. (2001). Debunk­ing eco­nom­ics: The naked emperor of the social sci­ences. Annan­dale Syd­ney & Lon­don UK, Pluto Press Aus­tralia & Zed Books UK.

Keen, S. (2005). Expert Opin­ion, Per­ma­nent Mort­gages vs Cooks. Syd­ney, Legal Aid NSW.

Keen, S. (2006). Steve Keen’s Monthly Debt Report Novem­ber 2006 “The Reces­sion We Can’t Avoid?”. Steve Keen’s Debt­watch. Syd­ney. 1: 21.

Keen, S. (2007). Deeper in Debt: Australia’s addic­tion to bor­rowed money. Occa­sional Papers. Syd­ney, Cen­tre for Pol­icy Development.

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Keen, S. (2010). “Solv­ing the Para­dox of Mon­e­tary Prof­its.” Eco­nom­ics: The Open-Access, Open Assess­ment E-Journal

Keen, S. (2011). Debunk­ing eco­nom­ics: The naked emperor dethroned? Lon­don, Zed Books.

Keen, S. (2011). “Debunk­ing Macro­eco­nom­ics.” Eco­nomic Analy­sis & Pol­icy
41(3): 147–167.

Keen, S. (2011). “A mon­e­tary Min­sky model of the Great Mod­er­a­tion and the Great Reces­sion.” Jour­nal of Eco­nomic Behav­ior & Orga­ni­za­tion
In Press, Cor­rected Proof.

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51(2): 209–223.

Lucas, R. E., Jr. (1972). Econo­met­ric Test­ing of the Nat­ural Rate Hypoth­e­sis. The Econo­met­rics of Price Deter­mi­na­tion Con­fer­ence, Octo­ber 30–31 1970. O. Eck­stein. Wash­ing­ton, D.C., Board of Gov­er­nors of the Fed­eral Reserve Sys­tem and Social Sci­ence Research Coun­cil: 50–59.

Lucas, R. E., Jr. (2003). “Macro­eco­nomic Pri­or­i­ties.” Amer­i­can Eco­nomic Review
93(1): 1–14.

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Mead­ows, D. H., J. Ran­ders, et al. (1972). The lim­its to growth. New York, Signet.

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47(6): 860–883.

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29(3): 315–335.

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Rein­hart, C. M. and K. S. Rogoff (2008). This Time is Dif­fer­ent: A Panoramic View of Eight Cen­turies of Finan­cial Crises, National Bureau of Eco­nomic Research, Inc, NBER Work­ing Papers: 13882.

Schum­peter, J. A. (1934). The the­ory of eco­nomic devel­op­ment : an inquiry into prof­its, cap­i­tal, credit, inter­est and the busi­ness cycle. Cam­bridge, Mass­a­chu­setts, Har­vard Uni­ver­sity Press.

Shafer, W. and H. Son­nen­schein (1993). Mar­ket demand and excess demand func­tions. Hand­book of Math­e­mat­i­cal Eco­nom­ics. K. J. Arrow and M. D. Intrili­ga­tor, Else­vier. 2: 671–693.

Son­nen­schein, H. (1973). “Do Wal­ras’ Iden­tity and Con­ti­nu­ity Char­ac­ter­ize the Class of Com­mu­nity Excess Demand Func­tions?” Jour­nal of Eco­nomic The­ory
6(4): 345–354.

Sraffa, P. (1960). Pro­duc­tion of com­modi­ties by means of com­modi­ties :pre­lude to a cri­tique of eco­nomic the­ory. Cam­bridge, Cam­bridge Uni­ver­sity Press.

Sum­mers, P. M. (2005). “What Caused the Great Mod­er­a­tion? Some Cross-Country Evi­dence.” Fed­eral Reserve Bank of Kansas City Eco­nomic Review
90(3): 5–32.

Turner, G. M. (2008). “A com­par­i­son of The Lim­its to Growth with 30 years of real­ity.” Global Envi­ron­men­tal Change
18(3): 397–411.

Turner, G. M., R. Hoff­man, et al. (2011). “A tool for strate­gic bio­phys­i­cal assess­ment of a national econ­omy — The Aus­tralian stocks and flows frame­work.” Envi­ron­men­tal Mod­el­ling & Soft­ware
In Press, Cor­rected Proof.

Wood­ford, M. (2009). “Con­ver­gence in Macro­eco­nom­ics: Ele­ments of the New Syn­the­sis.” Amer­i­can Eco­nomic Jour­nal: Macro­eco­nom­ics
1(1): 267–279.

Essen­tial Read­ings from Debtwatch

Finan­cial Instability

Rov­ing Cav­a­liers of Credit
Read Some Min­sky
Mon­e­tary Prof­its Para­dox
Are We “It” Yet?
Mon­e­tary Mul­ti­sec­toral Model

The New Depression

“No-one saw this com­ing”?
Why the Cri­sis is not over
Delever­ag­ing with a twist
Bernanke doesn’t under­stand the Great Depres­sion
The Case Against Bernanke

Aus­tralian Housing

Res­cu­ing the Bub­ble
Aus­tralian house prices
Com­pe­ti­tion No Panacea
House Prices & Banks I
House Prices & Banks II

Video overview

Lec­tures on Endoge­nous Money
Debt and Aus­tralian hous­ing
HARDtalk inter­view
INET Inter­view on why I saw “It” coming

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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159 Responses to The Debtwatch Manifesto

  1. Matthew K says:

    RJ you seem to oper­ate under the assump­tion that gov­ern­ment debt is inher­ently pro­duc­tive. You are fail­ing to realise that gov­ern­ment debt is only used for pro­duc­tive pur­poses irreg­u­larly & the more cen­trally planned your econ­omy is (ie gov­ern­men­tally focussed), the less likely that debt issuance will be pro­duc­tive. If the debt doesn’t increase over­all pro­duc­tiv­ity than the eco­nomic cycle required to ser­vice the debt will break down.

    Value is earnt, not printed.

  2. NeilW says:

    if you think dis­tort­ing your econ­omy through cur­rency debase­ment is a path to riches your more fool­ish than even i gave you credit for.”

    You can’t debase some­thing that hasn’t got a base to start with.

    Con­vert­ible cur­rency think­ing in a non-convertible sys­tem is one of the causes of the cur­rent mess.

  3. sirius says:


    Food for thought (I think there is some util­ity within)


    Gary North has a per­spec­tive on this

    The Rem­nant Goes Surf­ing

  4. Matthew K says:

    Neil, If a cur­rency this is used as a ref­er­ence point for the exchang­ing of value is diluted so as to dis­tort the pric­ing mech­a­nism, then i call it debase­ment. Now please refer back to my com­ment using this definition.

  5. NeilW says:

    Because today peo­ple need FINANCIAL ASSETS for their retirement.”

    No. They need an income for their retire­ment so they can claim their share of pro­duc­tion at a future time. That share being deter­mined by the polit­i­cal struc­tures in place at that future time.

    So finan­cial assets are irrel­e­vant for retire­ment. They are based on the the­ory that what is in place now will con­tinue in the future. That is not nec­es­sar­ily the case. What is to be pro­duced in the future will be pro­duced in the future, and the amount that can be claimed by retirees will be deter­mined in the future, not by ref­er­ence to finan­cial assets accrued now.

  6. NeilW says:

    If a cur­rency this is used as a ref­er­ence point for the exchang­ing of value is diluted so as to dis­tort the pric­ing mech­a­nism, then i call it debasement.”

    You can call it what­ever you like. That doesn’t make it so — as the empir­i­cal work of John T Har­vey shows.

  7. Lyonwiss says:

    Fiat money is money founded on fiat, author­ity or force. On what basis is this force exer­cised? Who has the right to take the wealth from one group of peo­ple to give it to another? Who has such wis­dom? What­ever the jus­ti­fi­ca­tion of this (no doubt “for the good of all”), has there been any objec­tive evi­dence to show its effectiveness?

    His­tor­i­cal evi­dence sug­gests that fiat money is the instru­ment of the self-serving
    tyrant and had always failed even­tu­ally. The les­son had been repeat­edly for­got­ten and had to be relearned, from gen­er­a­tion to gen­er­a­tion. We are in a period of relearn­ing now.

  8. Matthew K says:

    You can call it what­ever you like. That doesn’t make it so – as the empir­i­cal work of John T Har­vey shows.

    I don’t have time to research now but i’d appre­ci­ate your sum­mary expla­na­tion if possible.

  9. Matthew K says:

    Just read some John T Har­vey and have but one response:

  10. Mary-Ellen Large says:

    On full reserve bank­ing
    ‘We could well have 100% money reforms “reformed” out of exis­tence once more.’
    The same could be said of any pro­posed reform of the finan­cial sec­tor. In fact that argu­ment could be used against any reforms made by a gov­ern­ment, espe­cially when con­sid­ered over gen­er­a­tional cycles. The point of reform is that it changes cul­tural val­ues. For exam­ple, con­sider smok­ing bans in pub­lic spaces. This was unthink­able in the 80’s, but these days, it is com­mon to find smok­ers vol­un­tar­ily smok­ing out­side their own homes.

    Schum­peter­ian bank­ing also inher­ently includes the capac­ity to make mis­takes: to fund a ven­ture that doesn’t suc­ceed, and yet to be will­ing to take that risk again in the hope of fund­ing one that suc­ceeds spec­tac­u­larly. I am wary of the capac­ity of that mind­set to co-exist with the bureau­cratic one that dom­i­nates government.’

    This argu­ment against full reserve bank­ing car­ries more weight. Cre­ativ­ity and inno­va­tion are inher­ently risky; fail­ure is more fre­quent than suc­cess. I haven’t read Schumpter, so can­not cri­tique the assump­tion that reserve bank­ing is a pre­req­ui­site for inno­va­tion and vital­ity in econ­omy. I sus­pect that an anthro­pol­o­gist would argue dif­fer­ently. So, the value of reserve bank­ing sup­port­ing eco­nomic vital­ity is an idea well worth thrash­ing out, in light of devel­op­ments in other disciplines.

  11. John Regan says:

    @RJ: Just as it is a fact that one person’s debt is another’s asset, so it is that debt that can’t be repaid won’t be. Steve is mak­ing a detailed effort to address both facts. You may not be ignor­ing the sec­ond, exactly, but you’re will­fully obliv­i­ous to real­ity. No power on earth can avoid the loss if the debt can­not be paid. You do not advo­cate pay­ing unpayable debt — that’s a con­tra­dic­tion. Rather, your posi­tion seems to be that the only alter­na­tive is to extract as much as pos­si­ble from the debtors while in the end real­iz­ing huge losses any­way. This is such a dis­as­trous result for every­one, debtors and cred­i­tors alike, that it’s aston­ish­ing to me that any­one seri­ously con­tem­plates it. It doesn’t take a lot of imag­i­na­tion to under­stand just what this involves: you may be a 100% cred­i­tor with no debts, but your life and the life of every­one who mat­ters to you would be utterly mis­er­able, even as you inflex­i­bly press your ulti­mately futile demands to be made whole.

    Not to men­tion it is never going to hap­pen, at least not with any sem­blance of civ­i­lized life remain­ing in coun­tries that pur­sued such a mind­less course.

    There comes a point where plac­ing demands on oth­ers is not just unrea­son­able but inde­cent, and a so-called cred­i­tors’ overblown sense of enti­tle­ment is no bet­ter, and in many ways far worse, than a debtor’s plea for leniency or relief. Extract­ing by what­ever means a promise to pay car­ries with it the risk that the promise can­not be kept. In that sense cred­i­tors are no dif­fer­ent than any other kind of investor: they risk a loss and some­times that risk is real­ized. This is going to hap­pen. It is happening.

    Peo­ple like Steve Keen are address­ing this real­ity and you’re hid­ing from it. He’s doing the decent thing. You can shoot the mes­sen­ger but it doesn’t change the under­ly­ing real­ity one bit.

  12. Steve Keen says:

    Agreed on both points Mary.

  13. RJ says:

    John R

    But you still have not said who should pick up this equal lose

    Although if a Govt steps in to force a bank etc to write of debt result­ing from a per­fectly legal con­tract. It is very obvi­ous who should pick up the loss.

    The tax­payer. And you have not said why this option of reward­ing a few care­less investors should be used when another supe­rior option is avail­able (a tax decrease where all benefit).

  14. RJ says:

    Mary-Ellen Large
    Jan­u­ary 6, 2012 at 10:42 pm | #

    On full reserve banking

    This idea is non­sense. Ask any­one who backs this how it will work and they duck for cover. If for exam­ple banks must hold 100% cen­tral bank reserves (as an asset) to cus­tomer deposits (their lia­bil­ity) . Then the bank can not loan any money. As as soon as they do their money is not backed 100%.

  15. David Colquitt says:

    Steve, great arti­cle. Just a com­ment on embrac­ing Lim­its to Growth. I remem­ber read­ing it 40 years ago. The basic pre­dic­tion was that if the world didn’t stop what it was doing it would all be over in 20 years(1990). Not only did the world not reverse it’s course its added a few bil­lion more peo­ple and con­sumed mate­ri­als at a greater pace. The pre­dic­tions may come true even­tu­ally but it’s a bit like pre­dict­ing rain in a pro­longed drought. Don’t under­es­ti­mate human capac­ity to respond to change; usu­ally before it’s to late.

  16. Matthew K says:

    RJ (Ridicu­lous AGAIN)- On full reserve bank­ing
    “This idea is non­sense. Ask any­one who backs this how it will work and they duck for cover”

    I’m begin­ning to find your strength of con­vic­tion com­bined with your sheer igno­rance actu­ally impressive.

    Seri­ously — i knew you didnt know what you were talk­ing about, but are you actu­ally that poorly informed? It stag­gers belief

    Sep­tem­ber 21, 2011: Con­gress­man Den­nis Kucinich intro­duced an employ­ment bill reform­ing our money sys­tem: The NEED Act pro­poses a his­toric money reform, con­tain­ing all the mon­e­tary pro­vi­sions of the Amer­i­can Mon­e­tary Act includ­ing end­ing “frac­tional reserve” bank­ing.

    Between Octo­ber 2009 and May 2011, a small team includ­ing mem­bers of the Pos­i­tive Money team worked on draft­ing com­pre­hen­sive leg­is­la­tion that would imple­ment ‘full reserve bank­ing’ in the UK. Whilst we are not cur­rently focussed on pro­mot­ing spe­cific leg­is­la­tion, the full text of the bill can be read here for those who are inter­ested.

    A pro­gram for mon­e­tary reform — Irv­ing Fisher, amongst oth­ers
    3.14 How to Estab­lish the 100% Reserve Sys­tem

    In chap­ter 9 of my book, Money, Bank Credit, and Eco­nomic Cycles (pp. 789–803), I design a process of tran­si­tion toward the only world finan­cial order that, being fully com­pat­i­ble with the free-enterprise sys­tem, can elim­i­nate the finan­cial crises and eco­nomic reces­sions that cycli­cally affect the world’s economies. .…the reestab­lish­ment of a 100% reserve require­ment on all bank demand deposits and equiv­a­lents;
    Jesús Huerta de Soto, pro­fes­sor of eco­nom­ics at King Juan Car­los Uni­ver­sity

    That list took me 15 minutes.

    Bet­ter luck next time RJ!!

  17. Dannyb2b says:

    Under full reserve bank­ing banks still act as inter­me­di­aries. They chan­nel bor­row­ings, retained earn­ings, or money raised from share­hold­ers and lend to oth­ers. So the most pro­duc­tive aspect of bank­ing is left intact.

    On the other hand the abil­ity to expand money is taken away entirely from banks and trans­fered to the cen­tral bank which deals directly with the pub­lic not just the finan­cial sector.

    Heres a pretty good pro­posal Steve linked

  18. Ernest says:


    It is obvi­ous that this under­ly­ing ponzi finance bank­ing sys­tem is a con­tribut­ing fac­tor to many other prob­lems in our polit­i­cal eco­nomic sys­tem; I’m think­ing par­tic­u­larly of the exten­sive con­sol­i­da­tion and con­cen­tra­tion of indus­try. It seems to me that the exces­sive M&A activ­ity behind this extreme con­cen­tra­tion would not have been pos­si­ble with­out the pres­ence of a credit bub­ble to finance it. In your reforms of the bank­ing sys­tem, would you also include lend­ing to finance acqui­si­tions as a “no-no” for the bank­ing sys­tem? I guess this would be sim­i­lar to pro­hibit­ing LBO financing?

    It seems to me that some­thing like this would be needed to pre­vent exces­sive con­cen­tra­tion in non-natural monop­oly indus­tries, espe­cially since anti-trust laws alone seem pow­er­less to stop it.

  19. Lyonwiss says:

    Much of the dis­cus­sions on reme­dies need a proper diag­no­sis of the causes of the cri­sis. The finan­cial sys­tem was con­stantly tin­kered with over the years by gov­ern­ments respond­ing to spe­cial inter­est groups. Even if we had a new sys­tem, the­o­ret­i­cally per­fect, how do we pre­vent it from changes or not oper­at­ing as planned.

    In fact, if you look back over the his­tory of the last sev­eral decades, all changes
    appeared nec­es­sary to improve things or to solve some prob­lem, but later only to cre­ate more seri­ous prob­lems. Most solu­tions are sim­ply not robust, where any devi­a­tion from per­fect oper­a­tion as planned will lead to insta­bil­ity. A frag­ile solu­tion leads to con­stant tin­ker­ing and even­tual chaos.

    Solu­tions which are over reliant on gov­ern­ments are not robust, because gov­ern­ments have pow­ers to be secre­tive and cor­rupt, not doing what peo­ple expect and often remain unde­tected and unac­count­able. For exam­ple, there is abun­dant evi­dence now that the US gov­ern­ment was com­plicit in fraud­u­lent activ­i­ties of the finan­cial sec­tor, which appeared not to have overtly breached any rigged laws. How much is this respon­si­ble for the fail­ure of the system?

    Was the sys­tem not work­ing, because it had flaws, which were intrin­si­cally struc­tural or were intro­duced incon­sis­tently later. Or was the sys­tem not work­ing, because it was not allowed to work, due to cor­rup­tion and/or reg­u­la­tory neglect?

    Debt and lever­age are instru­ments or tools. As the say­ing goes, a bad craft­man blames his tools. The cause of the cri­sis was not debt or lever­age, where exces­sive lev­els were symp­toms of over-use, mis-use and abuse. Gov­ern­ments and reg­u­la­tors could have pre­vented this, but have allowed this to hap­pen for a host of reasons.

    To shift from a posi­tion of exces­sive lever­age of the mon­e­tary sys­tem to one of no lever­age, one has to be con­vinced that lever­age has no place in the mon­e­tary sys­tem. This extreme case has not been made with any conviction.

    For this rea­son, full-reserve bank­ing is a frag­ile solu­tion, where if pre­tend­ing full-reserve, a pri­vate bank­ing sys­tem actu­ally, in the words of de Soto him­self, “con­tin­ued to oper­ate with a frac­tional reserve (orches­trated by the cor­re­spond­ing cen­tral banks), would gen­er­ate — in a cas­cad­ing effect, and based on the cash cre­ated to back deposits — an infla­tion­ary expan­sion like none other in his­tory, one which would even­tu­ally fin­ish off our entire eco­nomic system”.

    Some imple­men­ta­tions of full-reserve bank­ing may actu­ally amplify the risk of total disaster.

  20. Steve Keen says:

    David Colquitt, your com­ment here is (I am afraid) typ­i­cal of the mis-information that (largely) econ­o­mists spread about the Lim­its to Growth. You had bet­ter read the report again: if you can iden­tify a clear cri­sis point in the graphs (largely by human pop­u­la­tion peak­ing and then falling), then the ear­li­est such date in their stan­dard run was 2050–still almost 4 decades away.

    I chose just one graph from Gra­ham Turner’s paper, but the abstract gives a fuller picture:

    In 1972, the Club of Rome’s infa­mous report “The Lim­its to Growth” [Mead­ows, D.H., Mead­ows, D.L., Ran­ders, J., Behrens_III, W. W. (1972). The Lim­its to Growth: A Report for the Club of Rome’s Project on the Predica­ment of Mankind. Uni­verse Books, New York] pre­sented some chal­leng­ing sce­nar­ios for global sus­tain­abil­ity, based on a sys­tem dynam­ics com­puter model to sim­u­late the inter­ac­tions of five global eco­nomic sub­sys­tems, namely: pop­u­la­tion, food pro­duc­tion, indus­trial pro­duc­tion, pol­lu­tion, and con­sump­tion of non-renewable nat­ural resources. Con­trary to pop­u­lar belief, The Lim­its to Growth sce­nar­ios by the team of ana­lysts from the Mass­a­chu­setts Insti­tute of Tech­nol­ogy did not pre­dict world col­lapse by the end of the 20th cen­tury. This paper focuses on a com­par­i­son of recently col­lated his­tor­i­cal data for 1970–2000 with sce­nar­ios pre­sented in the Lim­its to Growth. The analy­sis shows that 30 years of his­tor­i­cal data com­pare favor­ably with key fea­tures of a business-as-usual sce­nario called the “stan­dard run” sce­nario, which results in col­lapse of the global sys­tem mid­way through the 21st cen­tury. The data do not com­pare well with other sce­nar­ios involv­ing com­pre­hen­sive use of tech­nol­ogy or sta­bi­liz­ing behav­iour and poli­cies. The results indi­cate the par­tic­u­lar impor­tance of under­stand­ing and con­trol­ling global pollution.

  21. RJ says:

    Matthew K
    “Jan­u­ary 7, 2012 at 11:03 am | #

    RJ (Ridicu­lous AGAIN)- On full reserve bank­ing
    “This idea is non­sense. Ask any­one who backs this how it will work and they duck for cover””

    And so you duck for cover. Hid­ing behind books or sites with­out fronting up your­self to explain in sim­ple terms how it will work.

    Re pos­i­tive money. I have debated this with them and they can not explain how math­e­mat­i­cally it can work. Their expla­na­tions fall well short.

    100% reserve bank­ing is not pos­si­ble (and many econ­o­mists know this) if it means the bank must hold 100% reserves as an asset (cen­tral bank reserves and vault notes and coins) to back cus­tomer deposits (the banks lia­bil­ity) unless…

    Any­one with even basic under­stand­ing of bank­ing and sim­ple math­e­mat­ics can work this out.

    So I chal­lenge you to front up. Not refer me to other web sites or book.s

    In SIMPLE (and I mean this. Don’t hide behind con­fus­ing non­sense as many do) terms how will it work

    What do you mean by bank reserves
    What will you include in bank reserves
    What does 100% reserve require­ment mean ie what is being divided by what.

    I never get a sat­is­fac­tory answer when I ask this. And then if you can explain how the bank can achieve 100% if they ever loan money.

    Once (or if) done I will ask future questions.

  22. RJ says:

    I have read part of the wike­pe­dia arti­cle. and come across non­sense like this and then stopped. I haven’t time to plough through more fic­tion like this on money and banking.

    The 100% reserve sys­tem was the orig­i­nal sys­tem of deposit bank­ing, but the frac­tional reserve sys­tem was intro­duced by pri­vate Venet­ian bankers not later than the mid­dle of the Four­teenth century. ”

    Money has always been credit backed by debt. As it is today. There never was this mys­ti­cal real money. Where do you think this so called real money (deposits) comes from in the first place.

    Money is cre­ated from account­ing entries today and always has been. From a sim­ple com­puter bank jour­nal entry today

    Debit Bank loans
    Credit Cus­tomer deposit

  23. NeilW says:


    100% is very sim­ple. The money is cre­ated by the cen­tral bank and spent into the econ­omy by the gov­ern­ment — where it gen­er­ates tax­a­tion and saving.

    The banks are then only allowed to lend the sav­ing bit.

    So from the pri­vate bank’s point of view you get:

    Gov­ern­ment spend­ing
    DR Cen­tral bank reserves
    CR Cus­tomer deposit

    Cus­tomer sav­ing
    DR Cus­tomer deposit
    CR Cus­tomer long term savings

    from which you can then lend

    DR Loans
    CR Loan cus­tomer deposit

    With Loans lim­ited to the total in Cus­tomer long term sav­ings and the amount of Cen­tral bank reserves back­ing that.

  24. Dannyb2b says:

    Money has always been credit backed by debt. As it is today. There never was this mys­ti­cal real money. Where do you think this so called real money (deposits) comes from in the first place.
    Money is cre­ated from account­ing entries today and always has been. From a sim­ple com­puter bank jour­nal entry today.”

    Maybe you re right. maybe money always has been credit backed by debt. This page of his­tory needs to end and the sys­tem needs to change. The sta­tus quo is not a good thing.

  25. alainton says:

    No frac­tional reserve bank­ing was prac­tised by the Romans — venice & the Knights Tem­lar through its con­tacts with Byzan­tium helped rein­tro­duce it — and rein­tro­duce cap­i­tal­ism. Credit money goes back at least to ancient Egypt and Mesopotamia, frac­tional reserve bank­ing is prob­a­bly as old as credit money as it sim­ply is a mat­ter of cash flow.

    Roman bankers did indeed lend – much of the exten­sive evi­dence was gath­ered by Andreau [viz., Andreau 1987]. It can also be demon­strated, in case it needs to be, that clas­si­cal banks prac­tised frac­tional reserve bank­ing – for oth­er­wise there would have been no need in the cri­sis of 85 B.C. to give the bankers of Eph­esus ten years to pay back their depos­i­tors. We have no evi­dence as to how large their reserves were nor­mally … It has recently been asserted that ‘any inter­est gained on [bank] clients’ deposits had to be cred­ited to the account of the client’, with the impli­ca­tion that it would have been point­less, most of the time, for them to loan such funds. But that is extremely mis­lead­ing: the writer in ques­tion failed to notice that what was tech­ni­cally known as a deposi­tum was only one kind of bank-deposit, gen­er­ally non-interest-bearing, whereas if you wanted inter­est, the form of your bank-deposit would be a loan” (Har­ris 2006: 11; Har­ris 2011: 236).

    Har­ris, W. V. 2006. “A Revi­sion­ist View of Roman Money,” Jour­nal of Roman Stud­ies 96: 1–24.
    Andreau, J. 1987. La vie finan­cière dans le monde romain: les métiers de manieurs d’argent: (4e siè­cle av. J.-C.–3e siè­cle ap. J.-C.), Ecole Française de Rome, Rome

    Of course the inven­tion of dou­ble entry bookeep­ing made the process much eas­ier remov­ing the need for a com­plex series of mul­ti­ple accounts.

    Those is favour of full reserve bank­ing are effec­tively say­ing that the wealth of the rich can lie idle in bank vaults and entre­pre­neurs can­not make use of it.

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