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 a professional economist 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 debts accumulated in Australia, 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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