Kim Hill Inter­view

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Kim Hill inter­viewed me about Debunk­ing Eco­nom­ics on her Radio New Zealand National pro­gram “Sat­ur­day Morn­ing” today. It was prob­a­bly the most in-depth inter­view I’ve yet done on the top­ics cov­ered by the book. This was my first expe­ri­ence of Kim as an inter­viewer, and I can rec­om­mend her pro­gram unre­servedly after it.

Steve Keen’s Debt­watch Pod­cast

 

You can also down­load the pod­cast from here:

Kim Hill inter­view about Debunk­ing Eco­nom­ics

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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  • RJ

    I expect some­thing like this will have to be tried when the ecol­ogy is obvi­ously near-ter­mi­nally screwed by over-pro­duc­tion:

    IF Steve. There have been many end of world pre­dic­tions in the past. All wrong as I pre­dict the cur­rent ones will be.

  • cliffy

    I have to side strongly with Steve on that one, RJ.

    The dif­fer­ence between now and then is that then devel­op­ment into higher lev­els of resource uti­liza­tion effi­ciency was more of a cho­sen path.

    Today for the gen­eral point Steve makes it is more of the only path.

    The expan­sion into nat­ural resources has always been with us linked to pop­u­la­tion growth and trans-for­ma­tive capa­bil­ity — yes.

    But this is dra­mat­i­cally dif­fer­ent now.

  • RJ

    Cliffy

    We will be fine in 50 or 100 years from now. But there will still be peo­ple pre­dict­ing the end (very likely for sim­i­lar rea­sons) and try­ing to make money from it.

  • alain­ton

    @LCTesla

    The sim­plest answer to your ques­tion is that like any other cap­i­tal­ist firm banks use money to make more money.

    You and I can­not make money out of thin air if we are broke, but a well cap­i­talised bank can. 

    Banks in the jar­gon ‘endoge­nously’ cre­ate money through a jour­nal entry, the debtor is cred­ited the loan and the bank has a jour­nal asset in the form of reg­u­lar repay­ments with inter­est to realise a profit. In a very evoca­tive phrase Schum­peter used the term ‘out of thin air’ but it has con­fused peo­ple ever since because it is rather cre­ated out of money soaked air.

    It is use­ful to con­sider how banks learned they could do this — fiat bank­ing — learn­ing that they had money in their vaults which at times of growth was accu­mu­lat­ing. All deposit with a bank was a lia­bil­ity to them, the money wasnt theirs, but they learned that as they paid out loans the money they needed to keep on hand on any day was much less than in their vault. The more money stored in their vaults the less the like­li­hood that any indi­vid­ual cus­tomer, unless the loan amount was very large, would exhaust the vault. Hence banks learned that they could lend out far more than they had in their vault in any par­tic­u­lar day. If any any day they did receive unusu­ally large with­drawls they could always bor­row short term from other banks. This always works fine and dandy until their is a finan­cial cri­sis and a run on banks, hence the need recog­nised since the 16th Cen­tury (in the­ory) for a cen­tral bank to act as lender of last resort. 

    Most of the con­fu­sion about banks comes from fail­ure to define stock /flow rela­tion­ships in time.

    Keen / Wil­son have devel­oped a model of ‘poten­tial lend­ing capac­ity’ based on these cash flow con­straints here http://www.debtdeflation.com/blogs/2012/01/11/guest-post-a-double-entry-view-on-the-keen-circuit-model/

    It has been around in ver­bal form for 150 years but this is I think the first attempt to for­malise it in accounting/mathematical terms (quite aston­ish­ing really it took so long).

    It needs to develop fur­ther the lend­ing capac­ity will depend on future inflows from prof­itable loans, but will also depend on start­ing equity in found­ing the bank which is then lent out, lend­ing capac­ity can also be extended by attract­ing deposits which are then lent out on fiat terms. If lend­ing capac­ity tem­porar­ily as a stock vari­able hits neg­a­tive but the bank has future sound income streams then its cred­it­wor­thi­ness will enable it to bor­row short term. So the mantra you here so often on the net that the con­ven­tional wis­dom that banks are reserve con­strained in lend­ing is wrong and instead they are equity con­strained is only par­tially true. It is true for a newly formed bank but in the long run banks poten­tial lend­ing capac­ity is deter­mined by prof­its on equity put to use (loan repay­ments) & reserves & bank cred­it­wor­thi­ness. Reserves will depend on what deals they can offer poten­tial savers which in the long run is depen­dent on prof­itabil­ity, sim­i­larly bank cred­it­wor­thi­ness is long run depen­dent on prof­itabil­ity. So I would say the long run con­straint on bank lend­ing is bank prof­itabil­ity- rather than equity or reserves etc. by them­selves. Although banks have many ways of manip­u­lat­ing the appear­ance of short run prof­itabil­ity to attract invest­ment in finan­cial prod­ucts which is the source of many of our woes.

    Banks are like any other busi­ness, profit=cost of pro­duc­tion-sale price

    Only here we are talk­ing of the cost of money to banks and costs of risks of default whilst sale price is the loan inter­est rate. 

    The clas­si­cal econ­o­mist thought if the rate of profit was higher amongst one sec­tor was higher than another cap­i­tal would flow to the higher sec­tor. Thought for the day, what hap­pens if the higher profit sec­tor is the FIRE sec­tor and the lower profit sec­tor the real econ­omy? Answers on a post­card.

  • RJ

    It is use­ful to con­sider how banks learned they could do this – fiat bank­ing – learn­ing that they had money in their vaults which at times of growth was accu­mu­lat­ing.”

    Money is BANK CREDIT. It is today and always has been

    There is not some (myth­i­cal) real money and bank credit cre­ated if the bank has enough of this real money.

    Real money = bank credit. Notes and coins are a token to rep­re­sent bank credit (or real money).

    The banks and trea­suries money = Cen­tral bank reserves

  • alain­ton

    RJ
    Your usual incan­ta­tion is not an argu­ment just an only an incan­ta­tion; shorn of all his­tor­i­cal con­text or causal­ity as to how that social rela­tion­ship arose.

    I would rather say that all money is credit money but that his­tor­i­cally credit money has had many sources. Fiat bank­ing credit money being just one of them, today we also have ver­ti­cal state money and back in time specie. Your argu­ment does not work as an his­tor­i­cal argu­ment.

  • RJ

    So we agree that today real money is bank credit 

    So what do you think real money was then in the past. What are these sources.

    Coins?? Even coins that had some metal value were val­ued based on the credit link not the metal value 

    The other option is cen­tral bank reserves. But this can not be spend in the real econ­omy. Try for exam­ple open­ing an account at your local cen­tral bank. I doubt if you will have much luck today. Like­wise in the past

    Tally sticks were just an exam­ple of a debt based money sys­tem.

  • Joe Blow

    Hey RJ (aka Kiwi) — have you worked out what a neg­a­tive bal­ance means yet? Maybe you’d like to respond to me post on “that” other forum.

  • g yas

    Great inter­view Dr. Keen. In the past I’ve mostly agreed with your analy­sis, but this detailed inter­view really filled in my men­tal gaps and pro­vided the most cogent expla­na­tion of eco­nom­ics I’ve ever heard. 

    I’d like to offer a corol­lary to your notion of jubilee shares: once shares can no longer be traded they are not worth­less, but rather they will have reached their true value which will be paid as div­i­dends to the share­holder. The true value of shares is div­i­dends from real prof­its of a thriv­ing enter­prise, not value extracted by spec­u­lat­ing on the gul­la­bil­ity of a future share buyer.

  • That’s pre­cisely the idea g yas. Cheers, Steve

  • koonyeow

    Title: Steve — The Poten­tial Ein­stein of Eco­nom­ics

    Wasn’t it Einstein’s obses­sion with space­time that gave us the more truth­ful under­stand­ing of space­time.

    Sav­ing means redun­dancy, like hav­ing two lungs and two kid­neys, so that we are more robust against the unex­pected.

  • Sav­ings is a mis­nomer, both here and in gen­eral in macro­eco­nom­ics. What mat­ters for robust­ness is how much of the money in exis­tence is debt-based ver­sus gov­ern­ment based, and whether it is financ­ing real invest­ment of Ponzi Schemes