Krugman on (or maybe off) Keen

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Paul Krug­man has just com­mented (twice) on my most recent blog about my paper for INET. In one sense, I’m delighted. The Neo­clas­si­cal Estab­lish­ment (yes Paul, you’re part of the Estab­lish­ment) has ignored non-Neoclassical researchers like me for decades, so it’s good to see engage­ment rather than wil­ful (or more prob­a­bly blind) igno­rance of alter­na­tive approaches.

Click here for this post in PDF

Fig­ure 1: Krugman’s first piece

There is a bizarre asym­me­try in eco­nom­ics: crit­ics of Neo­clas­si­cal eco­nom­ics like myself read Neo­clas­si­cal lit­er­a­ture avidly, no because we agree with it—far from it—but because we feel obliged to under­stand why they hold to their coun­ter­fac­tual views on the economy.

Most Neo­clas­si­cal econ­o­mists, on the other hand, don’t even bother to con­sider crit­ics within their own ranks—let alone crit­ics from with­out. So to have a paper referred to is def­i­nitely a plus.

In another sense, I’m appalled, because Krugman’s com­ments put on dis­play that very igno­rance of Neo­clas­si­cal literature—let alone of alter­na­tive eco­nomic thought.

For instance, Paul refers to many of the propo­si­tions in my blog (it’s clear that he hadn’t read the paper on which it is based) as “asser­tions about what is cru­cial, with­out much expla­na­tion of why these things are crucial.”

One of these “asser­tions” is the key role of the change in debt—rather than sav­ing out of cur­rent income—in financ­ing investment.

Well Paul, in that paper you will find ref­er­ences to the exten­sive the­o­ret­i­cal and empir­i­cal lit­er­a­ture from which that asser­tion was derived. I could start with non-Neoclassical authors like Schum­peter, but let’s lead with some­one from within The Citadel (as Alan Kir­man once called the Neo­clas­si­cal ortho­doxy: Alan Kir­man, 1989, p. 126): Eugene Fama. The “asser­tion” that the change in debt was the main source of fund­ing for invest­ment was con­firmed by Fama and French in a pair of empir­i­cal papers:

The source of financ­ing most cor­re­lated with invest­ment is long term debt. The cor­re­la­tion between I and dLTD is 0.79… These cor­re­la­tions con­firm the impres­sion … that debt plays a key role in accom­mo­dat­ing year-by-year vari­a­tion in invest­ment.” (Eugene F. Fama and Ken­neth R. French, 1999, p. 1954)

Debt seems to be the resid­ual vari­able in financ­ing deci­sions. Invest­ment increases debt, and higher earn­ings tend to reduce debt.” (in an unpub­lished draft of the same paper).

Or con­sider Alan Holmes’s cru­cial paper in 1969, in which he fought an unsuc­cess­ful cam­paign against the later exper­i­ment in Mon­e­tarism (far from being a “strict Mon­e­tarist”, as Paul jibes at one point, I and my Post-Keynesian col­leagues and fore­bears take money seri­ously while simul­ta­ne­ously being tren­chant crit­ics of Friedman’s sim­plis­tic Monetarism—see for exam­ple Nicholas Kaldor, 1982). Holmes, then Senior Vice-President of the New York Fed­eral Reserve, noted that the key Mon­e­tarist pol­icy pre­scrip­tion of reg­u­lat­ing the econ­omy by “a reg­u­lar injec­tion of reserves” was based on “a naïve assump­tion” about the nature of the money cre­ation process:

The idea of a reg­u­lar injec­tion of reserves—in some approaches at least—also suf­fers from a naïve assump­tion that the bank­ing sys­tem only expands loans after the Sys­tem (or mar­ket fac­tors) have put reserves in the bank­ing sys­tem. In the real world, banks extend credit, cre­at­ing deposits in the process, and look for the reserves later. (Alan R. Holmes, 1969, p. 73)

Holmes would turn in his grave at Krugman’s naïve asser­tion, half a cen­tury later, that banks need deposits before they can lend:

If I decide to cut back on my spend­ing and stash the funds in a bank, which lends them out to some­one else, this doesn’t have to rep­re­sent a net increase in demand. (Paul Krug­man, 2012)

As Randy Wray observed, that is “the descrip­tion of a loan shark, not a bank”—or of a hypo­thet­i­cal world in which banks need deposits before they can lend. In the real world, as Holmes points out above, bank lend­ing cre­ates deposits. That’s why banks mat­ter in macro­eco­nom­ics, and it’s not “Bank­ing Mys­ti­cism” to point this out: it is “Bank­ing Arm­chair The­o­rism” to ignore them in macroeconomics.

Neo­clas­si­cal econ­o­mists have ignored this point for decades, which is why you have to look to the non-Neoclassical lit­er­a­ture to truly under­stand money cre­ation and the cru­cial role of banks. Schum­peter put it clearly dur­ing the last Depres­sion: he described the view that Krug­man puts today, that invest­ment (which is what the most impor­tant class of bor­row­ers do) is financed by sav­ings, as “not obvi­ously absurd”, but clearly sec­ondary to the main way that invest­ment was financed, by the “cre­ation of pur­chas­ing power by banks … out of noth­ing“. This is not “Bank­ing Mys­ti­cism”: this is double-entry bookkeeping:

Even though the con­ven­tional answer to our ques­tion is not obvi­ously absurd, yet there is another method of obtain­ing money for this pur­pose, which … does not pre­sup­pose the exis­tence of accu­mu­lated results of pre­vi­ous devel­op­ment, and hence may be con­sid­ered as the only one which is avail­able in strict logic. This method of obtain­ing money is the cre­ation of pur­chas­ing power by banks… It is always a ques­tion, not of trans­form­ing pur­chas­ing power which already exists in someone’s pos­ses­sion, but of the cre­ation of new pur­chas­ing power out of noth­ing. (Joseph Alois Schum­peter, 1934, p. 73)

Fig­ure 2: Krugman’s sec­ond piece

Why does it mat­ter that “once you include banks, lend­ing increases the money sup­ply”? Sim­ply, because the endoge­nous increase in the stock of money caused by the bank­ing sec­tor cre­at­ing new money is a far larger deter­mi­nant of changes in aggre­gate demand than changes in the veloc­ity of an unchang­ing stock of money. And in reverse, the reduc­tion in demand caused by bor­row­ers repay­ing debt rather than spend­ing is the cause of the down­turn we are now in—and of the Great Depres­sion too.

Fig­ure 3 shows the ratios of pri­vate and pub­lic debt to GDP in Amer­ica from 1920 till now. Non-neoclassical econ­o­mists like myself, Michael Hud­son, Ann Pet­ti­for, the late Wynne God­ley, Randy Wray and many oth­ers (see Dirk J Beze­mer, 2009, and Edward Full­brook, 2010 for fuller lists of those who warned of this cri­sis before it happened–including of course Nouriel Roubini, Dean Baker, Robert Shiller, and Peter Schiff) were shout­ing that the post-1993 explo­sion in pri­vate debt was unsus­tain­able, and would nec­es­sar­ily lead to a cri­sis when its rate of growth slowed (let alone turned neg­a­tive), for years before the cri­sis began (my first aca­d­e­mic warn­ing of the dan­gers of ris­ing pri­vate debt is shown as SK1, and my first pub­lic warn­ing that a cri­sis was immi­nent is shown as SK2 on Fig­ure 3). We were ignored, in large part because only Neo­clas­si­cal econ­o­mists like Krug­man, Bernanke and Greenspan had the ear of the pub­lic and politicians.

Now the cri­sis is the defin­ing eco­nomic event of our times, and years after it began, the only period to which the recent boom and bust in the pri­vate debt to GDP ratio can be com­pared is the Great Depression.

Fig­ure 3: Aggre­gate Pri­vate and Pub­lic Debt

Yet Neo­clas­si­cal econ­o­mists like Krug­man con­tinue to assert that the aggre­gate level of pri­vate debt, and changes in that level, are macro­eco­nom­i­cally irrel­e­vant, when even casual empiri­cism implies that changes in the aggre­gate level of pri­vate debt are asso­ci­ated with Depressions.

So while I wel­come any Neo­clas­si­cal econ­o­mist at the forth­com­ing INET con­fer­ence tak­ing up Krugman’s call (“I hope some­one in Berlin presses Keen on all this”), in real­ity Paul, empir­i­cally ori­ented non-Neoclassical econ­o­mists like myself are the ones chal­leng­ing the unsup­ported asser­tions of Neo­clas­si­cal economics—not the other way round.

Beze­mer, Dirk J. 2009. “”No One Saw This Com­ing”: Under­stand­ing Finan­cial Cri­sis through Account­ing Mod­els,” Gronin­gen, The Nether­lands: Fac­ulty of Eco­nom­ics Uni­ver­sity of Groningen,

Fama, Eugene F. and Ken­neth R. French. 1999. “The Cor­po­rate Cost of Cap­i­tal and the Return on Cor­po­rate Invest­ment.” Jour­nal of Finance, 54(6), 1939–67.

Full­brook, Edward. 2010. “Keen, Roubini and Baker Win Revere Award for Eco­nom­ics,” E. Full­brook, Real World Eco­nom­ics Review Blog. New York: Real World Eco­nom­ics Review,

Holmes, Alan R. 1969. “Oper­a­tional Con­straints on the Sta­bi­liza­tion of Money Sup­ply Growth,” F. E. Mor­ris, Con­trol­ling Mon­e­tary Aggre­gates. Nan­tucket Island: The Fed­eral Reserve Bank of Boston, 65–77.

Kaldor, Nicholas. 1982. The Scourge of Mon­e­tarism. Oxford: Oxford Uni­ver­sity Press.

Kir­man, Alan. 1989. “The Intrin­sic Lim­its of Mod­ern Eco­nomic The­ory: The Emperor Has No Clothes.” Eco­nomic Jour­nal, 99(395), 126–39.

Krug­man, Paul. 2012. “Min­sky and Method­ol­ogy (Wonk­ish),” The Con­science of a Lib­eral. New York: New York Times,

Schum­peter, Joseph Alois. 1934. The The­ory of Eco­nomic Devel­op­ment : An Inquiry into Prof­its, Cap­i­tal, Credit, Inter­est and the Busi­ness Cycle. Cam­bridge, Mass­a­chu­setts: Har­vard Uni­ver­sity Press.


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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174 Responses to Krugman on (or maybe off) Keen

  1. RJ says:

    The true back­ing of money is the faith or trust peo­ple place in it.” 

    Sorry but this is com­plete non­sense. Non­sense that for some rea­son you want hold onto.

    (Would you deposit money with some­one or a bank that held no assets to back your deposit — the banks lia­bil­ity– whatsoever.)

  2. Dannyb2b says:

    They have value because if you don’t pay your taxes with them you go to jail, and the state can enforce that. Believ­ing the ‘medium of exchange’ myth helps oil the works, but it is not nec­es­sary and often vio­lated. You can be forced to work for what­ever the state deter­mines in our state system.”

    Note and coins have value in part because peo­ple trust the these to be a sta­ble unit of account, store of value and medium of exchange. Yes you have to pay taxes in this cur­rency which cre­ates a demand for it. Agreed. Still no need to cre­ate money as debt though.

    Money is always the lia­bil­ity of a third party as a mat­ter of account­ing – and there­fore tech­ni­cally a debt. Try­ing to sug­gest that it can be any­thing else means that you haven’t under­stood the accounting.”

    That is only how we choose to account for money in our cur­rent unsta­ble sys­tem. We can improve upon this and treat money sim­i­lar to a nor­mal asset because it would rep­re­sent a sta­bi­liz­ing benefit.

    The prob­lem is not who issues the lia­bil­i­ties. It is the mech­a­nism that con­trols the quan­tity of lend­ing that mat­ters. Cen­tralised quan­tity man­age­ment is too rigid for a dynamic economy.”

    Both who issues money and the mech­a­nism are impor­tant. You can cen­tral­ize deci­sion mak­ing which increases account­abil­ity and at the same you can make money enter the sys­tem in a bal­anced decen­tral­ized manner.

  3. NeilW says:

    We can improve upon this and treat money sim­i­lar to a nor­mal asset ”

    Even a ‘nor­mal asset’ has a lia­bil­ity. That is the accounting.

  4. alainton says:

    I posted on the lat­est NYT thread

    Paul I think many of us can see who is the true bank­ing fan­ta­sist here — and the empir­i­cal data proves it. Your view of sav­ing not only belongs to the old school loan­able funds days but even back to the mid 19th cen­tury wages fund days where banks as seen as being lim­ited by the wages of their depositors.

    If it were the case the bank were lim­ited by deliv­er­ies from the ‘armoured car’ of the fed then how come there is no cor­re­la­tion between phys­i­cal money base and M3? Why doesn’t the fed con­trol infla­tion by lim­it­ing print­ing of phys­i­cal money? Of course if it did the ATMs would won dry in a cou­ple of days and we would have a rev­o­lu­tion. These days the cau­sa­tion runs the other way, mon­e­tary base of is set by issues of reg­u­la­tion and finan­cial insta­bil­ity so that funds deposited with the fed are dri­ven by the endoge­nous growth of M3.
    Your ideas are full of stock flow con­fu­sions. It is the flow of future deposits that limit the rate of future expan­sions of of the power to lend not the ini­tial wages or prof­its stock. Go back and read some Taussig.

    Steve Keen being a cen­tral fig­ure on the emerg­ing Stock Flow Con­sis­tency school doesn’t make that mis­take. Indeed he is work­ing on a model which inte­grates hor­i­zon­tal and ver­ti­cal money and has inter­bank inter­ac­tion — ini­tially to prove that the MMT’r were only 80% right but im sure will now have a much big­ger and much more eas­ily dis­proven target. 

    Build your own model of finan­cial inter­me­di­a­tion and we will make our own minds up about empir­i­cal cor­re­la­tion. His­tory will judge.

  5. Dannyb2b says:

    Even a ‘nor­mal asset’ has a lia­bil­ity. That is the accounting.”

    What lia­bil­ity does an asset like my bicy­cle have?

  6. NeilW says:

    Put sim­ply armoured cars from the Fed con­trol the money sup­ply!! Has any­body really argues a cash con­straint since the Gold Stan­dard went, or even in a 100 years.”

    No, and for the sim­ple rea­son that for there to be a con­straint there has to be a mech­a­nism for enforc­ing that constraint.

    There is no law with­out enforcement.

    What Krug­man misses is that reserves and cash man­age the *pay­ment* sys­tem, not the lend­ing sys­tem. And there­fore if the cen­tral bank tries to enforce a con­straint there, the pay­ment sys­tem starts to break down.

    If you have a cash con­straint then peo­ple can’t get cash, or ATMs start to run out. And you would likely cause panic in that sit­u­a­tion — as the level of cash is at or near the min­i­mum required to clear the cash pay­ment sys­tem any­way. So it is the same prob­lem as reserves — if you restrict those reserves (a quan­tity restric­tion) you have to expect your inter­est rate to blow out and for one or other of the banks to go bust due to cash­flow issues.

    And we know that none of the cen­tral banks would allow that dur­ing the GFC and that there has been no reg­u­la­tion or res­o­lu­tion pro­ce­dure put in place to deal with banks that can’t clear their pay­ment system. 

    So the cen­tral bank is con­trolled on the pay­ment sys­tem by the sim­ply polit­i­cal fact that the pub­lic will not allow them to enforce their con­straints on the pay­ment sys­tem even if they wanted to.

    The only enforce­ment the cen­tral bank can do is on cap­i­tal ratios, and even then they are reluc­tant to put a bank into admin­is­tra­tion for rule violations.

    Banks cheat, because it is in their inter­ests to do so — as is hold­ing as much of the econ­omy to hostage as they can get away with.

  7. NeilW says:

    What lia­bil­ity does an asset like my bicy­cle have?”

    A val­u­a­tion ‘reserve’ in the unit of account.

    That’s why bank reserves are called bank reserves even though from the bank’s point of view they are assets. What they really mean is ‘cen­tral bank reserve account’.

  8. Dannyb2b says:

    A val­u­a­tion ‘reserve’ in the unit of account.

    Just in case the value of my bike changes in dollars?

  9. NeilW says:

    Just in case the value of my bike changes in dollars?”

    Yep, which it will because like most assets it depreciates.

    Even­tu­ally it is use­less and you move the asset to the lia­bil­ity account to elim­i­nate it.

    Think mat­ter and anti-matter — equal and oppo­site that anni­hi­late each other when brought together.

  10. Dannyb2b says:

    Just in case the value of my bike changes in dollars?”
    Yep, which it will because like most assets it depreciates.

    Then its not rel­e­vant to count money as a lia­bil­ity because it always has the same nom­i­nal value. Unlike a bike which might depre­ci­ate in mon­e­tary terms. Right?

  11. alainton says:

    I should say that the evi­dence is that Krug­man did read Steve’s INET paper if only at a skim.

    There is no evi­dence that he reads this blog, but he might have skimmed through the Berlin con­fer­ence papers after pulling out and Steves would have jumped out as it was writ­ten as a repost to Krug­man and Egger­ston. That the blog post is an attack on this paper is less obvious.

    Kroug­mans orig­i­nal blog reads as hey I cant be there, don’t have time to read up and riposte, so some­one do it for me to main­tain my reputation.

  12. centerline says:

    Banks cheat, because it is in their inter­ests to do so – as is hold­ing as much of the econ­omy to hostage as they can get away with.”

    This was the basis of my propo­si­tion a few days ago (there­abouts) in ques­tion­ing the struc­ture of cen­tral banks — and the sig­nif­i­cant poten­tial for a con­flict of inter­est therein. With­out address­ing a clear and socially respon­si­ble mechanism/regulation for the the cre­ation of money we are unfor­tu­nately going to see any given sys­tem corrupted. 

    I know that I am off on a dif­fer­ent tan­gent than the mod­el­ing and the­ory you guys reg­u­larly flog so well. But, I have to insist how impor­tant it is to rec­og­nize what lies out­side the equa­tions that is influ­enc­ing them. The com­pli­ment to this of course is more accu­rate mod­el­ing of the how sys­tem func­tions, reduc­ing the poten­tial for exploitation. 

    I have a sus­pi­cion that work like Steve’s is going to gain much more press in the com­ing years.

  13. alainton says:

    Steves paper — page 5 (Har­vard num­ber­ing please :)

    [bank lend­ing] increases the aggre­gate amount of money in cir­cu­la­tion, increas­ing aggre­gate demand in the process—and pre­dom­i­nantly financ­ing invest­ment or spec­u­la­tion rather than consumption’

    Of course if the ris­ing price of an asset is used to lever­age a fur­ther loan then it does finance con­sump­tion as peo­ple are spend­ing money they assume they will get in the future from ris­ing asset prices — the clas­sic exam­ple being sec­ond mort­gages before a prop­erty crash. The increased con­sump­tion has a tem­po­rary income effect on those in the con­sumer goods and per­sonal ser­vice sec­tors — as well as the above wealth effect — who then try and ‘get in on the act’ of divert­ing their increased sav­ings to asset speculation.

  14. Dannyb2b says:


    In other words every asset in our sys­tem of account­ing has a lia­bil­ity in the sense thats its val­u­a­tion may change. But that doesnt make it lia­bil­ity. There­fore there is no rea­son to issue the cur­rency as debt either. If peo­ple that hold cash wish to adjust for its change in pur­chas­ing power in their accounts because the value of their money may change thats fine. But when money is cre­ated its not use­ful to rec­og­nize it as debt.

  15. alainton says:

    And a fol­low up to the above — it is not the con­sumers who are behav­ing irra­tionally — (although his­tor­i­cally unwisely) — con­tra Bernanke. 

    Rather it is the mis­e­val­u­a­tion of risk by banks in valu­ing the coun­ter­party to the loan — such as prop­erty assets. If we have a steady ratio of pur­chases to sales then the val­u­a­tions are low risk, but the uncer­tain pos­si­bil­ity of a prop­erty crash makes this less and less likely. Of course if every­one tries to sell the same type of asset at the same time to pay off a loan then the mar­ket crashes. Now banks seems to have priced in this uncer­tainty as a ‘risk’ of a fur­ther prop­erty price down­turn, but it becomes self ful­fill­ing as it restricts expan­sion of the money sup­ply and restricts expan­sion of the asset (house­build­ing) set­ting up the poten­tial for a fur­ther house price boom. Each bank behav­ing ‘ratio­nally’ increases volatil­ity. There can be no ratio­nal expec­ta­tions when asset prices are rad­i­cally uncertain. 

    There is a solu­tion to this, insur­ance, under­writ­ing an asset price floor. And states can enforce this through pro­vid­ing such insur­ance or requir­ing it through reg­u­la­tion. How­ever this insur­ance can itself become a source of finan­cial insta­bil­ity if it is used an asset to secure fur­ther loans. This is the main rea­son why the Euro­pean CDR mar­ket is like a pack of cards. Ulti­mately the only way a fire­wall can be cre­ated is through a state backed debt write off with mon­e­tary expan­sion being used to secure the bal­ance sheets of banks that would oth­er­wise go to the wall. Observers will note that despite vio­lent protes­ta­tions to the oppo­site that is just what the euro­zone has been forced to do in the last year — and the one to watch at the moment is a Dutch bank look­ing likely to go belly up from a green enforced hair­cut. Of course so far state mon­e­tary mea­sures have been used as bank wel­fare rather than to write off house­holder debt, and steves con­clu­sion is called ‘cranky’!

  16. RJ says:

    Dou­ble entry book keep­ing means that asset = lia­bil­i­ties + SHF

    So a bike (an asset) as part of total assets WITHIN ONE COMPANY will be sup­ported by total lia­bil­i­ties + SHF’s

    This is dif­fer­ent to a FINANCIAL ASSET that is always backed by a finan­cial lia­bil­ity HELD BY ANOTHER PARTY.

  17. Dannyb2b says:

    “This is dif­fer­ent to a FINANCIAL ASSET that is always backed by a finan­cial lia­bil­ity HELD BY ANOTHER PARTY.”

    A finan­cial asset such as note or coin does not need to be backed by a finan­cial lia­bil­ity to any party. There is no need for this pri­mal idea it is coun­ter­pro­duc­tive to issue money as debt. Its just how the sys­tem is struc­tured at present but this needs to change.

  18. Steve Hummel says:

    So make an account­ing of the national assets. Then, because the indi­vid­u­als of the nation are the inher­i­tors not only of their cul­tural her­itage of pro­duc­tive capac­ity, but are also the indi­vid­u­als who do the work which enables the REAL credit that results, you’ll have a nation of 330 mil­lion cap­i­tal­ists. Dis­trib­ute the div­i­dend and com­pen­sate the busi­nesses who dis­count their prices to con­sumers and money will become what it most essen­tially is, a ticket for the dis­tri­b­u­tion of goods and ser­vices. And of course those who work and cre­ate things will have their addi­tional remu­ner­a­tion, and Banks will no longer have their monop­oly on credit, in all like­li­hood their “tail wag­ging the dog” con­trol of the gov­ern­ment, their abil­ity to extort the indi­vid­ual by their usurpa­tion of his/her REAL credit and democ­racy will have finally actu­ally come to economics.

  19. NeilW says:

    Then its not rel­e­vant to count money as a lia­bil­ity because it always has the same nom­i­nal value. Unlike a bike which might depre­ci­ate in mon­e­tary terms. Right?”


    Every asset has an equal and oppo­site lia­bil­ity in accounting. 

    You want to call some­thing an asset, then there is a lia­bil­ity some­where in the same account­ing sys­tem to bal­ance it.

    All the time, every time. With­out fail.

  20. NeilW says:

    A finan­cial asset such as note or coin does not need to be backed by a finan­cial lia­bil­ity to any party. ”

    Yes it does. The account­ing demands it. When a cen­tral bank note is issued the cen­tral bank note reserve account goes up by the same amount. 

    When that note is banked at a pri­vate bank, then the note goes back to the cen­tral bank to be swapped for ‘bank reserves’. Then the cen­tral bank pays inter­est on those reserves to con­trol mon­e­tary policy.

    Notes and coins are just like Gov­ern­ment Bonds to a pri­vate bank.

  21. Steve Hummel says:

    Money, other than for one’s legit­i­mate inher­i­tance, needs to be issued for pro­duc­tion and then extin­guished as a result of con­sump­tion. Any spec­u­la­tive finan­cial out­lay that can­not be bound back to actual pro­duc­tion of SOMETHING OTHER THAN SIMPLY MORE MONEY needs to be either VERY tightly reg­u­lated or declared ille­gal. No more Rov­ing Cav­a­liers of Credit.

  22. RJ says:


    Debt backs

    –Money and it also back
    –Our savings

    So money (a finan­cial asset)= debt (a finan­cial liability)

    but we need money to save. This money can then be con­verted to Govt bonds. So

    bonds (a finan­cial asset) needed for sav­ings (as we age) = debt (a finan­cial liability)

    This is why Govt debt is so impor­tant. With­out it it is almost impos­si­ble for every­one to save for their retire­ment. Because the bur­den of debt for the non govt sec­tor becomes too large. Whereas for Govt it is almost totally irrel­e­vant esp at cur­rent low levels.

    But until peo­ple take the time to under­stand dou­ble entry book keep­ing this will not be understood.

  23. Steve Hummel says:


    Okay, but why not cre­ate an entirely sep­a­rate account­ing and dis­trib­ut­ing entity which is fire­walled off from the gov­ern­ment by all due sep­a­ra­tion of pow­ers etc. and con­se­quently less manip­u­la­ble by the finan­cial and pro­duc­ing pow­ers that be? Then man­date it to dis­trib­ute the monies for the div­i­dend and the retail busi­ness com­pen­sa­tion as well as to the Banks, all at 0%, and with the pro­viso that they only lend it within very strict reg­u­lated guide­lines. Any already exist­ing monies can be lent as Bank and bor­row­ers see fit. We’ll call it The National Credit Office.

  24. RJ says:


    The prob­lem with many (includ­ing mon­e­tary reform sites) who want to change to another bank­ing sys­tem is

    They no not under­stand the cur­rent system
    They do not know what money is and mon­eys rela­tion­ship to debt
    They do not under­stand dou­ble entry book keep­ing or finan­cial accounting
    When pressed on exactly how the new sys­tem would work (includ­ing the JEs) they hide behind mean­ing­less statements

    But just one point. Inter­est is an expense to the Govt but REVENUE to the non Govt sector.

    So 0% inter­est would smash the non Govt sec­tor. Inter­est expense is mean­ing­less to the Govt (its just a jour­nal entry) but crit­i­cally impor­tant to savers and pen­sion funds.

  25. alainton says:

    Demock­racy on the NYT blog

    As Will Rogers used to say: “A remark gen­er­ally hurts in pro­por­tion to its truth.”

    After all, Keen is, in effect, say­ing what Krug­man has believed, taught, and writ­ten about is fun­da­men­tally wrong. He’s say­ing Krug­man has believed, in effect, in the geo­cen­tric solar system. …
    The real ques­tion is whether a Nobel Lau­re­ate / Prince­ton Pro­fes­sor / respected pun­dit can say some­thing like “Holy Mack­eral! All that stuff I believed was not accurate.” 

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