Capital Account Interview on the Keen-Krugman Brawl

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Lauren Lyster and Demetri Kofinas at Russia Today’s Capital Account did their usual brilliant job in this interview with me about the Krugman brawl, and I’ve been somewhat remiss in not posting it here earlier. I’ve given enough links on this topic in earlier posts not to bother now, so look to those if you want to follow the debate in more detail.

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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128 Responses to Capital Account Interview on the Keen-Krugman Brawl

  1. centerline says:

    Nicely done.

  2. alainton says:

    Blatant and out of place plug for a theoretical peice on the interlationship between Hoyts and Minky’s ideas and the relationship between asset prices, liquidity and credit

    Hoyt, Minsky and the Asset Price/Credit Cycle wp.me/pNECF-3g0

  3. tonyferreira says:

    Hey Steve, I do not know Simone Foxman, but he just wrote a article about your dispute with Paul Krugman, and here is what he had to say.

    http://www.businessinsider.com/paul-krugman-vs-steve-keen-2012-4

  4. Derek R says:

    Simone is a girl’s name. And to prove it there’s a nice picture of her at the bottom of the article.

  5. Frank says:

    Roubini Global Economics caught it too in an article by one Edward Harrison

    http://www.economonitor.com/blog/2012/04/video-steve-keen-on-modelling-and-the-krugman-debate/

  6. ken says:

    The problem with Simone Foxman’s view is that the fed is not fixing things through monetary policy, they are fixing things by creating new debt together with the US government which is also creating debt. So all they are doing is taking the place of the private debtors. I think Steve has mentioned somewhere that this only works because of irrationality in the markets, everyone should see where this is going and stop borrowing or even better dump their US dollars.

  7. RJ says:

    “everyone should see where this is going and stop borrowing or even better dump their US dollars.”

    Completely wrong

    Debt is essential. We need it to back

    Money and
    Our savings

    Govt debt is a liability but the other side is a non Govt interest bearing ASSET. Monetary sovereign Govts like the US NEED A LOT MORE GOVT DEBT.

    The main problem at present is too much non Govt debt and too little Govt debt. In fact Govt debt is miles too low. It should support a large chunk of savings required for pensions and health cover for old age.

    Monetary sovereign countries that increase Govt debt will prosper. Those that do not will suffer.

    Euro countries are not monetary sovereign so will suffer unless they run trade surpluses (Germany). Trade deficit countries (like Greece) are stuffed.

  8. alainton says:

    The problems with the business insider piece is that it assumes the argument is between Krugman saying central banks can control the monetary base and therefore the money supply and Keen saying it doesn’t

    That isnt the argument at all – it is about
    a) whether a central bank is forced to accommodate endogenous monetary growth whatever the interest rate and
    b) how strong the interest rate mechanism is in controlling monetary growth and inflation

    Krugman set up a straw man that noone was arguing and journos should know better.

    Are a and b contradictory? – No – Because investment decisions are made in the light of an interest rate – the term structure of interest rates sets the line through the curve of all possible profitable investments and turnovers that entrprenuers will undertake ( Keynes – back through Fisher to John Rae)

    But central banks arnt just there to set interest rates at some ‘sweet spot’ of maximising growth – indeed they never were – they have mandates on price stability and have to set rates which attract funding for government sector deficits (which because of public spending and payment to creditors always returns in the circuit -over a financial year- to the private sector).

    The key effect then of high real interest rates is to lead to a fall in the credit impulse/accelerator and slow down endogenous monetary creation. But the converse is not true at the zero bound – as Krugman acknowledges.

    Wiki – ‘In its original conception, a liquidity trap refers to the phenomenon when increased money supply fails to lower interest rates’

    But Krugman has acknowledged that the causation can be the other way around – lower interest rates have failed to increase money supply – M3 is the issue not MO.

    Rather than a flat LM curve and sloping IS curve you get a flat IS curve – a rightward shift in the LM curve has no impact on investments because of a lack of effective demand and a desire to keep high monetary buffer stocks at times of high uncertainty, lack of safe investments. However assuming a line of equilibrium points for an disequilibrium phenomena is not the best way of looking at it – ISLM has to go.

    Indeed you don’t just have to look at spot interest rates, the slope of the yield curve is the critical factor.

    Indeed I think the best way of looking at the situation is not through Hick’s bastardised version of Keynes ‘Liquidity trap’ but Hawtry’s ‘Credit Deadlock’

    Prof Roger Sandilands 2010 in FT

    Sir, The focus of all three letters by some 80 or so distinguished economists – a majority of a Keynesian bent – has been on when to initiate fiscal retrenchment. There has been little mention of the method of financing.

    In the 1930s, John Maynard Keynes’ friendly adversary, Sir Ralph Hawtrey, insisted that deficit finance would not normally be needed as a counter-cyclical weapon so long as the potentially unstable money supply was kept under firm control. However, in the event of poor control followed by an unusually severe depression like today, Hawtrey diagnosed what he called a “credit deadlock”, in which a collapse of confidence made banks fear to lend to the private sector and the private sector fear to borrow from the banks.

    In such conditions he agreed that fiscal policy should come to the rescue to break the deadlock. But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.

    Therefore what is needed is for government to expand the money supply (hence net monetary expenditures) by itself spending an adequate amount of newly issued money directly into circulation rather than borrowing from the existing (and declining) circulation. This borrowing from the private sector adds unnecessarily to the national debt.

    Quantitative easing will not do the trick if the Bank of England’s net purchase of debt from the private sector largely ends up as increased bank reserves. That is why the money supply in circulation (this excludes bank reserves) has registered sluggish, sometimes negative, growth through our deep recession. And that is why recovery has been equally sluggish despite a soaring public debt.
    Yours etc

  9. Steve Hummel says:

    Precisely. Directly into circulation is the key. Think citizen’s dividend. And today where you could issue it in a pre-programmed debit card that also directed it only toward retail purchases and/or personal/business debt….its the solution to the crisis AND the freedom of the individual in perpetuity. Velocity is nil also and the discount balances against inflation.

  10. RJ says:

    “But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.”

    This has no almost no relevance today.

    US deficits (and UK and Aust) are financed by Govt bonds. They are not paid for. A monetary sovereign Govt just issues Govt bonds (created by journal entries) to finance goods and service purchases.

    These Govt do not need the money first. Unlike me or you or Euro countries. The US for example initially issues Fed reserves and then bonds to drain these reserves.

    Now the extra money / financial assets may not have an impact if say a large tax cut was all saved and not spend. But the Govt can spend or cut tax even more until the extra non Govt wealth encourages non Govt spending.

  11. RJ says:

    “Steve Hummel
    April 11, 2012 at 12:49 am | #

    Precisely. Directly into circulation is the key. Think citizen’s dividend. And today where you could issue it in a pre-programmed debit card”

    So you want a larger Govt deficit and more Govt debt. It’s a bit like Steve’s debt write off. What he really wants is the Govt to run larger deficits. But for some reason people want to hide this proposal (that I support) behind names like a people’s dividend. Or a debt jubilee.

    Fair enough I guess but I prefer honesty. If you want more Govt debt say so.

  12. RJ says:

    alainton
    April 10, 2012 at 10:23 pm | #

    I think you need to read this again

    http://www.debtdeflation.com/blogs/2012/04/02/ptolemaic-economics-in-the-age-of-einstein/

  13. Frank says:

    It’s a good thing that the ECB has advisers and analysts far in advance of the likes of Krugman and co. It is one reason why I have great hope for the future of the EU compared to the USA and others:

    http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2011-035.pdf
    There are many more like this. Note how they say quite plainly in section 7 that borrowing constraints for banks are less obvious than they appear.

    With this kind of advice and insight into the architecture of their banking system, and with the plain acceptance of the banking infrastructure as a fundamental component of the EU’s governance system, by Merkel, Sarkozy and others, selling the idea that banking and debt creation is somehow key to economics is a bit like teaching grandma to not only blow eggs but also how to take her false teeth out before she does it. (Pardon the expression)

    In stark contrast however we have the USA. A paralysed bipartisan deadlock, and a country that respects the likes of Krugman, who has now become the namesake for any who teaches broken economics, and believes that a recovery is on the cards back to a life of unlimited consumption of debt-funded junk. I wonder for how long the Chinese will be tempted to cast an eye in that corner, in the tentative hope that he might not be totally insane.

  14. Frank says:

    Tangential, but MMT related. Thinking about why, if the EU leadership is as enlightened as I think they are, is austerity so evangelised?

    Before, when there were various national elections a few years ago, suddenly and inexplicably we had right-wing parties appear from nowhere and get into power. It happened in several countries. The whole political balance was shifted. At the same time we had a media campaign attacking sovereign imbalances and about how the state was too large, socialist left wing parties were no good etc etc.

    Now the right wing parties are losing power, corruption and bribery charges are appearing. In different countries it is slowly emerging that these new right wing parties were proxies for financial institutions etc. etc. (see Sk and Cz, but also check Scandinavian countries and later I think we’ll see more).

    At the time, austerity was part of their ticket into power.

    However, Merkel and co are also on the austerity ticket, and it seems that EU technocrats are still espousing the concept of states living very,very tightly within their means.

    With their priviliged position of not only having insight into the bank-government (monetary union) mechanisms, but being the architects of it, it seemed a little surprising that they’d be so keen to push the austerity thing so far.

    Then something went bing in my head, which is not saying very much really, and I thought “I wonder if they are basically taking an MMT stance on things and trying to control the banking system centrally?” What I mean is….aren’t they, by restricting national government bond issuance, simply moving power to the ECB-eurosystem and ensuring that national banks are not simply ‘sinks’ accelerating deleveraging? If the MMT perspective is right in that governments are a fountain of money, and that when the whole national population is hell bent on paying down debt, being a fountain of money is going to do absolutely nothing other than cause government costs to skyrise while the vast majority goes into the profit side of a commercial bank balance sheet?

    Does this make sense?

  15. RJ says:

    “Frank
    April 11, 2012 at 7:28 am | #

    It’s a good thing that the ECB has advisers and analysts far in advance of the likes of Krugman and co. It is one reason why I have great hope for the future of the EU compared to the USA and others:”

    I assume (hope?) you are not being serious?

  16. RJ says:

    “If the MMT perspective is right in that governments are a fountain of money, and that when the whole national population is hell bent on paying down debt, being a fountain of money is going to do absolutely nothing other than cause government costs to skyrise”

    It would help if you knew the first thing about MMT. Or at least how Govts pay their expenses in a monetary sovereign country. As explained very clearly by MMT economists.

  17. Frank says:

    RJ

    You haven’t actually said anything yet.

  18. Steve Hummel says:

    RJ,

    “Fair enough I guess but I prefer honesty. If you want more Govt debt say so.”

    How’s this for honesty?

    Credit – National Credit Account

    Based on both our productive capacity and our willingness and ability to produce

    Debit – Individual dividend accounts of all citizens.

    That makes us all capitalists earning our national dividends, or more precisely Distributist inheritors of the new consumer financial paradigm.

  19. alainton says:

    @RJ

    Hawtrey was talking of a world where government issues bonds/treasuries much as today, and where central banks also undertook open market operations – also as today – indeed the latter were almost forgotten in the great moderation – until Richard Werner (who invented the term QE) and other scholars of Hawtrey and the pre war theory of banking (after the war economist neglected banking aforethought except for a few souls such as David Laidler) re popularised them.

    Now a better argument I would have expected you might have made from an MMT perspective is that Hawtrys famous ‘Treasury View’ http://en.wikipedia.org/wiki/Treasury_view is flawed

    Winston Churchill budget speech 1929, “The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.”

    But of course if your prism is solely from national income accounts then as an accounting identity it has to be true – see Barro http://online.wsj.com/article/SB123258618204604599.html

    But of course as you can see from the above and professor Sandilands paper here http://ideas.repec.org/p/str/wpaper/0904.html as the Great Depression advanced Hawtrey increasingly realised that unauthodox times required unauthodox theory – in particular he made the great conceptual leap that at what we would today call the zero bound there is limited competition because firms arnt investing and companies have idle balance sheets and are looking for a place to invest that hedges against inflation & uncertainty – hence bonds.

    The other great argument of course that Keynes popularised is that public investment has a khan like multiplier – raising the velocity of money – and therefore through profits actually rises the amount of investment not crowding it out – im with Krugman on that. Of course private investment also has a multiplier but when private forms arnt investing idle balances there is no opportunity cost.

    Now the really interesting issue is whether taxation of idle balances for public expenditure can provide a net boost to aggregate demand – ignoring multiplier effects for a moment – if it were a monetary flow rather than a stock it cant as tax is just a transfer payment – government expenditure puts credit money back into into circulation (whether bank created or government money) and taxation cancels in accountancy terms the same transaction – the two balance when budgets are balanced. When they don’t balance their is a temporal shift in sectoral balances – but taxing to pay off a deficit simply reduces aggregate demand as paying off a loan destroys the principal money. For that reason the line of economists that lobbied FDR in 1937 argued that it was crazy to run down deficits through extra taxation at a time of weak demand, rather the national deficit had to be monetised through creation of additional government money – to create the aggregate demand that both Keynes and Hawtrey thought was the missing link.

    Given the crisis in Spain that threatens to cause a European liquidity crisis and second great financial crisis as global banks collapse in domino fashion its a lesson from history well worth relearning.

  20. Steve Hummel says:

    The new consumer financial paradigm distinguishes financial credit from REAL credit the latter of which is exactly the definition given it in my last post, i.e. our national capacity to produce and our willingness and consequent ability to do so.

    We own our own inherited progress, not the Banks. Thus we are entitled to a dividend based on this incredibly valuable asset/productive factor.

    This will make each citizen economically free, and sovereign with their sufficient purchasing power money-vote. Economic policy is best placed in “the many hands” of individuals, not too big to fail Banks, too big domestic and trans-national producers or lap dog to financial powers government.

    Everybody wins including even the Banks and their mortgage and credit card divisions because now everyone is creditable again….even on the loans on houses they made bubblicious. And of course just to hasten the return of true economic balance with a whopping dose of poetic justice we could do the
    DIVIDEND!!!!!! program by debiting $50k to every houshold every 6 months until they had 50% equity in whatever they owned. That will downsize finance sufficiently to be controllable again, and might enable a lot more politicians to become statesmen. The same debt pre-programmed debit card could be used in this crisis busting prelude to the new consumer financial paradigm.

    Its time we got back to evolving instead of blindly repeating our dead end homo economicus cycles.

  21. mahaish says:

    “But central banks arnt just there to set interest rates at some ‘sweet spot’ of maximising growth – indeed they never were – they have mandates on price stability and have to set rates which attract funding for government sector deficits (which because of public spending and payment to creditors always returns in the circuit -over a financial year- to the private sector).”

    right now , the fed is actually charging a premium to park ones money in various treasury maturities.

    thats right , they are not paying us, we have to pay them, so much is the demand.

    thats how bad the world looks, elsewhere

    humble pie for anybody whos arguing that the US currency is going to collapse and the government is going to have a problem meeting its debt obligations.

    clearly the market doesnt think so

  22. RJ says:

    “humble pie for anybody whos arguing that the US currency is going to collapse and the government is going to have a problem meeting its debt obligations.”

    People who think this are unbelievably ignorant about simple money and banking. And people like this will argue that their timing is just out.

  23. RJ says:

    “Now a better argument I would have expected you might have made from an MMT perspective is that Hawtrys famous ‘Treasury View’ http://en.wikipedia.org/wiki/Treasury_view is flawed”

    This is a poor argument. That has no relevance today in a monetary sovereign country.

    Since 1971 many countries are now monetary sovereign. The euro countries though are not. Nor is any country that does not have a floating currency.

  24. RJ says:

    “Steve Hummel
    April 11, 2012 at 10:13 am | #

    How’s this for honesty?

    Credit – National Credit Account ”

    Equals more Govt debt.

  25. Steve Hummel says:

    Credit – National Credit Account

    “Equals more Govt debt.”

    I won’t quibble with you about it being either collateral or a backing for financial outlays/dividends i.e. debt. All I’m trying to get others to understand is that intent and actual effect of policy is everything, and the intention to set individuals free economically with policies that axiomatically do just that….is exactly what we need.

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