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.

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

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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.

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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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Lucas, R. E., Jr. (2003). “Macro­eco­nomic Pri­or­i­ties.” Amer­i­can Eco­nomic Review
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Mead­ows, D. H., D. Mead­ows, et al. (2005). Lim­its to growth : the 30-year update. Lon­don, Earthscan.

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

Min­sky, H. P. (1957). “Mon­e­tary Sys­tems and Accel­er­a­tor Mod­els.” The Amer­i­can Eco­nomic Review
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Muth, J. F. (1961). “Ratio­nal Expec­ta­tions and the The­ory of Price Move­ments.” Econo­met­rica
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. RJ says:

    Gov­ern­ment spend­ing
    DR Cen­tral bank reserves 1 mil­lion
    CR Cus­tomer deposit 1 million

    Cus­tomer sav­ing
    DR Cus­tomer deposit 1 mil­lion
    CR Cus­tomer long term sav­ings 1 million

    from which you can then lend

    DR Loans 1 mil­lion
    CR Loan cus­tomer deposit 1 million



    Reserves 1 mil­lion
    Bank Loan 1 million


    Cus­tomer deposit 1 mil­lion
    Cus­tomer long term deposit 1 million

    Only the deposit is backed not the term deposit

    Now the cus­tomer uses the deposit to buy a house from a seller at another bank


    Reserves 0 mil­lion
    Bank Loan 1 million


    Cus­tomer deposit 0 mil­lion
    Cus­tomer long term loan 1 million


    The long term loan is not backed by any reserves. So how does this stop the banks in any way. Just reclas­si­fy­ing a deposit to a LT deposit. The money sup­ply can expand

    The next bank now has

    Reserves 1 mil­lion
    Cus­tomer Deposit 1 million

    and the process starts again

    move to LT deposit. Loan the money again. Cre­ates another deposit etc

  2. Dannyb2b says:

    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…”

    The cus­tomer deposits are the reserves. They are all held in fidu­ciary trust off the bal­ance sheet of the com­mer­cial bank. The com­mer­cial bank can­not lend out any of the funds deposited. The bank acts as an inter­me­di­ary sourc­ing funds by bor­row­ing, from retained earn­ings and also from share­hold­ers not cus­tomer deposits.

  3. RJ says:

    Jan­u­ary 7, 2012 at 9:28 pm | #

    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”

    Frac­tional bank­ing is just a method to try and restrict bank lend­ing. Noth­ing more

    MONEY is a FINANCIAL ASSET. Always sup­ported by a FINANCIAL LIABILITY held by another party

    Both are cre­ated by a JOURNAL ENTRY

    There is no other money apart from credit. Not today or ever. If gold or sil­ver is used this is barter not a money exchange

  4. RJ says:

    The cus­tomer deposits are the reserves.”

    WRONG. (are you being serious?)

    Cus­tomer deposits are a bank LIABILITY.


  5. Mary-Ellen Large says:

    Thanks Matthew K for rebut­tle to RJ.
    RJ, your com­ment re: full reserve bank­ing reminds me of my sister-in-law. I was qui­etly dis­cussing the con­cerns I had with the lack of choice between the three main polit­i­cal par­ties in the UK (2008) and men­tioned that I was con­sid­er­ing not vot­ing in protest. The next thing I knew my sister-in-law came fly­ing out of the liv­ing room, spit­ting with fury, and pro­ceeded to regale me with rea­sons why I should vote. Her main point being that peo­ple have died to get the vote, and I should know bet­ter as women had fought so hard for enfran­chise­ment. What really annoyed me was the poverty of her argu­ments. The points she made were the argu­ments of a teenager, from the per­spec­tive of an edu­cated adult they are taken as read and under­scored my con­cern over vot­ing.
    Your argu­ments re full reserve bank­ing fall into the same cat­e­gory. If the prob­lem with full reserve bank­ing is as sim­ple as you make out, do you not think this would be as obvi­ous to peo­ple like Den­nis Kucinich, Richard Werner, amongst oth­ers?
    Also, I am nei­ther for or against full reserve bank­ing, for the sim­ple rea­son that I am aware that I do not quite yet under­stand the full ram­i­fi­ca­tions of such as sys­tem from a macro-economic per­spec­tive. This is why I visit and read blogs such as Steve’s, to learn, not to shout.

  6. Dannyb2b says:


    The deposits are a bank lia­bil­ity at the present yes. The pro­posal for change is that banks hold 100% of reserves off their bal­ance sheet in fidu­ciary trust. If a bank col­lapses the accounts sim­ply get trans­fered to another bank of the cus­tomers choice. Do you realise that alot of the arrange­ments in place for the finan­cial sys­tem can be changed for the better?

  7. RJ says:

    Also, I am nei­ther for or against full reserve banking,”

    How can you be for or against some­thing unless you know how it works. And if you do then explain it in sim­ple terms as asked above

    Or accept that you do not under­stand what is being pro­posed so can not form an opinion.

  8. RJ says:

    Jan­u­ary 7, 2012 at 9:49 pm | #


    The deposits are a bank lia­bil­ity at the present yes.

    So do you now agree they are NOT reserves. And never can be

    A lia­bil­ity can not mag­i­cally become an ASSET

    there is a lot of mis­in­for­ma­tion out there. DONE BELIEVE EVERYTHING YOU READ

    Many who seem to be on the side of the peo­ple are not.

  9. Dannyb2b says:


    The deposits of cus­tomers are held in fidu­ciary trust. They arent on the bal­ance sheet of the bank at all under this pro­posal. If not on the bal­ance sheet it aint any­thing, not an asset not lia­bil­ity, noth­ing to the bank.

  10. RJ says:

    It is a bank liability.

    Unless dodgy cre­ative account­ing is used that would be a home with the likes of Enron

  11. Dannyb2b says:


    Frac­tional reserve bank­ing is dodgy, cant get more dodgy.

  12. RJ says:

    Frac­tional reserve bank­ing is dodgy, cant get more dodgy.”

    Do you know that reserve frac­tional bank­ing restric­tions no longer applies?

  13. Dannyb2b says:


    Even worse then. They should hold all the reserves 100%. They less they hold the more mon­e­tary expan­sion and finan­cial power large banks have.

  14. Matthew K says:

    RJ banks can eas­ily be con­duits for lend­ing from sav­ings. The account­ing con­struct doesn’t limit the event. You con­sis­tantly fail to realise that the account­ing con­struct is not the event! Jour­nal entries can NEVER do any­thing. They are a record of the exten­sion of credit from the sign­ing of a con­tract — the jour­nal entry is the EX-POST record­ing of that!

    Once you realise that the ledger entry comes after the event you can see that there is no need to be ham­pered by the account­ing sys­tem that is in place because the entry will be dif­fer­ent just as the event is dif­fer­ent. No one stops what they are doing in busi­ness because they don’t know how to record the entry at a later date! This is what i

    In regard to how a bank would exist under full-reserve bank­ing (think long and hard about this) but there are finan­cial insti­tu­tions in exis­tence, right now, who extend credit with­out issu­ing new money, see if you can think who they might be??

  15. Matthew K says:

    Alain­ton– On your his­tor­i­cal FRB post –I don’t see any­thing in there that isn’t applic­a­ble to a ‘term deposit’/‘at loan’ sys­tem. The dif­fer­ence to the assumed frac­tional reserve bank­ing being that when you put your deposit in an at loan account it becomes an asset of deposit at the bank, rather than remain as demand acces­si­ble cash at the bank.

    You can see how this works under cur­rent term deposit accounts.

  16. John Regan says:


    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).”

    First of all, “per­fectly legal con­tracts” are in fact mod­i­fied or left unen­forced all the time. There’s noth­ing unusual about it. And it’s impor­tant for you to real­ize this aspect of debts: ulti­mately the gov­ern­ment enforces them at the behest of the cred­i­tor. It seems incon­sis­tent to com­plain about the gov­ern­ment this and the gov­ern­ment that, when what is really going on is that peo­ple want the gov­ern­ment to do incon­sis­tent things: debtors want the gov­ern­ment to let them off the hook; cred­i­tors want the gov­ern­ment to enforce con­tracts to the let­ter. This is irrec­on­cil­able con­flict. We have to choose one or the other or bridge the gap some other way.

    To the extent you are claim­ing that the tax­payer picks up the tab, I have to agree, but that is not so much a func­tion of what is done with any par­tic­u­lar debt or debts, as it is that in the mon­e­tary sys­tem we have all debt is ulti­mately the taxpayer’s. It’s the way the sys­tem is designed.

    Speak­ing for myself I would rather change the sys­tem into one where money itself is ulti­mately an asset, not a lia­bil­ity of the tax­payer. A tan­gi­ble thing rather than an enforce­able claim on the efforts of oth­ers. But I also rec­og­nize the extreme upheaval of such a change and the urgency of debt relief.

    Care­less investors” is a con­clu­sion only deter­mined after the fact. At this point, any­one who places ulti­mate reliance on the com­plete ful­fill­ment of a debt instru­ment of any kind could eas­ily be char­ac­ter­ized as a “care­less investor” in the event the debt is not hon­ored, when it is quite clear that many debts aren’t going to be hon­ored. You seem to think that only those who make faulty promises are “care­less”, not those who incite them and then spread them around to oth­ers like a finan­cial disease.

    There is plenty of fault to go around in the cur­rent mess. We should get past it.

  17. John Regan says:


    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%.”

    Actu­ally, you might find this inter­est­ing. I have floated the idea that what is called for is a return not to the “gold stan­dard”, as such, but gold redeemability/convertibility. This would require a very high dol­lar price for gold at the out­set — let’s just call it about $30,000/oz. It could actu­ally be sig­nif­i­cantly higher.

    In any case, what winds up hap­pen­ing is that peo­ple hold­ing gold or pro­duc­ing gold have no mar­ket for it other than to sell it to the gov­ern­ment, which then issues the cur­rency to pur­chase it. But the gov­ern­ment can charge a fee — seignior­age — that in prac­ti­cal terms could be very substantial.

    This would put the gov­ern­ment in the posi­tion of hav­ing 100% redeema­bil­ity with funds avail­able for lending.

    Pri­vate banks could do the same thing: charge seignior­age and use the pro­ceeds for loans, while main­tain­ing 100% con­vert­ibil­ity. Then they could com­pete for busi­ness, some banks charg­ing more seignior­age, some less, some charg­ing more inter­est on loans, some less.

    You might look at this and fol­low the links:

  18. NeilW says:

    Only the deposit is backed not the term deposit”

    Cor­rect. The term deposit(s) are matu­rity matched with the term loan(s). Those deposits stand the risk of losses as well as the prof­its from interest.

    Essen­tially all banks become repli­cas — match­ing savers and borrowers.

    ” So how does this stop the banks in any way. Just reclas­si­fy­ing a deposit to a LT deposit. ”

    They are required to attract long term savers before they can lend — which means there can never be loans made in excess of nom­i­nal LT sav­ings avail­able at the same matu­ri­ties. Any other ‘sav­ings’ are just stor­age of actual state money with somebody’s name on it rather than an FDIC promise (or other state guar­an­tee) to pay state money on insol­vency as at present

    In other words the dis­count win­dow is closed at the cen­tral bank and banks can fail due to lack of cash flow (liq­uid­ity) as well as lack of cap­i­tal (solvency).

    The cur­rent sys­tem allows loans in excess of sav­ings and sav­ings in excess of loans because the dis­count win­dow backs the sys­tem up on the liq­uid­ity side.

    The banks then use matu­rity trans­for­ma­tion to make the process even more excit­ing. How­ever matu­rity trans­for­ma­tion has been the basis for build­ing soci­eties for 150 years and is proven to work if con­trolled properly.

    If you leave the dis­count win­dow open or fail to shut down banks on a cash flow fail­ure, then there is no mate­r­ial dif­fer­ence I can see between a 100% sys­tem and a 0% sys­tem. With the first sim­ple deposits are backed with ‘in-specie’ state cash and the sec­ond with a state insur­ance policy.

    My feel­ing read­ing the 100%ers mate­r­ial is that they are ter­ri­bly con­fused about how it all works. The safety ele­ments in their design seem to come from matu­rity trans­for­ma­tion elim­i­na­tion and the sub­se­quent clo­sure of the dis­count win­dow at the cen­tral bank, or vague promises that the whole thing will be eas­ier to regulate.

    The reserve thing appears to be a side-show used to sell the deal to the great unwashed. After all does it really mat­ter if the state cre­ates the money up front for ‘stor­age’ or after insol­vency as an insur­ance pay­out? Only to an ide­o­logue — sys­tem­i­cally they are identical.

  19. RJ says:

    The cur­rent sys­tem allows loans in excess of sav­ings and sav­ings in excess of loans because the dis­count win­dow backs the sys­tem up on the liq­uid­ity side.”


    New money comes from

    Govt spend­ing and
    bank loans

    If you are refer­ring just to bank loans then loans must always with­out excep­tion equal savings.

    More debt = more savings

  20. RJ says:

    My feel­ing read­ing the 100%ers mate­r­ial is that they are ter­ri­bly con­fused about how it all works.”

    They are. They do not under­stand money and bank­ing at all. Oth­er­wise they could eas­ily explain how it would work in sim­ple terms. Yet they can not

  21. Dannyb2b says:

    “They are. They do not under­stand money and bank­ing at all. Oth­er­wise they could eas­ily explain how it would work in sim­ple terms. Yet they can not”

    You are con­fused and like being con­fused. You dont want to under­stand. You have a fixed mind­set that cant adapt to new ideas.

  22. Matthew K says:

    Neil — “If you leave the dis­count win­dow open or fail to shut down banks on a cash flow fail­ure, then there is no mate­r­ial dif­fer­ence I can see between a 100% sys­tem and a 0% system. ”

    You really can’t see the dif­fer­ence between a con­trolled money sup­ply issued by the state and not backed by debt and a 100% elas­tic money sup­ply pri­vately con­trolled through debt issuance and back­stopped by the state counter to the prin­ci­ples it was formed under, or do you just not want to?

    Ter­ri­bly con­fused my @rse. More like hav­ing beliefs and posi­tions that don’t match your agenda.

    Same goes for RJ — he has fallen in love with the sliver of knowl­edge he has spe­cialised in and has seri­ous con­fir­ma­tion bias inorder to pro­long it. All of which is fine except that he tells oth­ers they don’t know what they are talk­ing about„ RJ doesn’t even under­stand the account­ing he is so fond as he must have missed Account­ing 101 where the teacher informed the class what account­ing is, and more impor­tantly, what account­ing is not.

  23. RJ says:

    Same goes for RJ – he has fallen in love with the sliver of knowledge”


    Sto­ries based on fic­tion that can not be backed up can be a lot more fun to post on though.

  24. NeilW says:

    You really can’t see the dif­fer­ence between a con­trolled money sup­ply issued by the state and not backed by debt and a 100% elas­tic money sup­ply pri­vately con­trolled through debt issuance and back­stopped by the state counter to the prin­ci­ples it was formed under, or do you just not want to?”

    You might want to dis­ci­pline that thought with a few bal­ance sheets.

    It doesn’t do what you think it does — as RJ’s bal­ance sheets show. And that’s before you get into repo arrangements.

    The increased safety comes pri­mar­ily from elim­i­nat­ing matu­rity trans­for­ma­tion — but we could do that under the cur­rent sys­tem. And even then we have over a cen­tury of data that shows MT works very well and has allowed many peo­ple to own their own home.

    I’m not con­vinced that clos­ing the dis­count win­dow would help either. The author­i­ties have shown no desire to shut down and resolve insol­vent banks never mind illiq­uid ones.

  25. Matthew K says:

    Remem­ber RJ –You know jour­nal entries but you know noth­ing of account­ing, you are hope­lessly out of your depth on the slither of knowl­edge you cling too. In fact, you know so lit­tle that you are still yet to realise you know nothing!

    I think we could really to a whole lot for our econ­omy if we could just move away from frac­tional reserve bank­ing and back towards full reserve bank­ing“
    Her­man Daly Snr Econ­o­mist from World Bank

    Ahh opps RJ is wrong again!!

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