The naivety of the UK eco­nomic debate

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I was inter­viewed by Chris Menon from Every Investor last week and asked to com­ment on the eco­nomic poli­cies of the two major par­ties in the UK elec­tion. Chris’s intro­duc­tion to the inter­view is below; click here to see the inter­view itself.

In an exclu­sive inter­view with Every Investor, Pro­fes­sor Steve Keen from Kingston Uni­ver­sity has warned that politi­cians who pro­mote aus­ter­ity eco­nom­ics are naïve.

The econ­o­mist, who was one of the few who pre­dicted the Great Reces­sion, warned last year that the US and UK economies wouldn’t make a sus­tain­able recov­ery due to the prob­lem of high lev­els of pri­vate debt – pub­lic debt being more a symp­tom than a cause of this eco­nomic malaise.

In this inter­view he gives a detailed expla­na­tion as to why the aus­ter­ity-heavy eco­nomic pol­icy of the Con­ser­v­a­tives (and the Lib­eral Democ­rats), and the aus­ter­ity-lite ver­sion from Lab is naïve and will lead not to eco­nomic growth but to eco­nomic stag­na­tion.

Indeed, while not endors­ing any polit­i­cal party, he does acknowl­edge that the eco­nomic poli­cies of the SNP and Greens make more sense.

This is a video that needs to be watched. It will give you insights that most pro­fes­sional econ­o­mists appear to lack. (Hence, their evi­dent sur­prise at news that the UK and US are slow­ing down).

It should also encour­age investors to be in ‘risk-off’ mode, which seems very sen­si­ble given likely mar­ket volatil­ity that will fol­low the elec­tion and the grave eco­nomic news that we can expect this year.


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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  • TruthIs­ThereIs­NoTruth

    The prob­lem with call­ing peo­ple naïve is that it leaves you open for other peo­ple to judge your state­ments in the same way. I won’t go as far as call­ing it naïve, but it is dis­ap­point­ing to hear the alter­na­tive to the ‘naive’ view be a sim­plis­tic model which cap­tures some aspect of real­ity but nowhere near enough to actu­ally explain it. As a start­ing point a real­is­tic pic­ture con­sid­ers cost of debt and very impor­tantly credit risk includ­ing sov­er­eign credit risk which I’m sure is what is being con­sid­ers by the par­ties in the UK. To the naïve pub­lic this is the daddy knows best approach to explain­ing eco­nom­ics.

  • Andrew Rab­bitt

    Your rec­tan­gle model of the econ­omy that you describe in the inter­view ignores the fact that gov­ern­ment using sur­pluses to pay down debt causes money to flow back into the “pub­lic square” half of your model, so a gov­ern­ment sur­plus that is used to pay down debt does not enforce the need for the pub­lic to bor­row more money into exis­tence as you pro­pose.

    In fact, if, as the gov­ern­ment rolls over debt, there is less debt to be repur­chased, the mar­ket demand for this debt will drive the price of bonds up and the yield down. Are we not see­ing that hap­pen these days? (Unfor­tu­nately low inter­est rates hides com­mer­cial risk really well which is not such a good thing in the long term)

    In extremis, where the gov­ern­ment were to go cold-turkey on bor­row­ing and revert directly to a sur­plus spend­ing pro­file, the money that the gov­ern­ment returns by retir­ing debt will head off look­ing for other — pre­sum­ably pro­duc­tive — invest­ments in the pri­vate sec­tor (the “pub­lic square” of your model) because the avail­able new debt to buy dis­ap­pears. If this didn’t stim­u­late the econ­omy some and return inter­est rates to com­mer­cial real­ity, what would?

    Alter­na­tively, it might (in the case of Aus­tralia) prob­a­bly head off shore chas­ing other gov­ern­ment debt around the world and cause the AUD to col­lapse in value which is what the RBA seems to wish for (not being too care­ful in its wish­ing poli­cies…) At least it could poten­tially relieve the symp­toms of Joe Hockey’s bud­get headache when iron ore priced in AUD sud­denly looks like gold again and make Glenn Stevens a happy man.

  • Farnorth5

    The Andrew Rab­bitt com­ment is well taken ‚but the Canada exam­ple is dif­fer­ent.
    The Cana­dian Gov­ern­ment in its 165 year his­tory has never bud­geted a Prin­ci­pal Pay­ment on the National Debt,except for a brief 12 year period start­ing in 1994. This was an excep­tion brought on by adding a $3Bil­lion con­tin­gency for those years cre­at­ing a year end cash sur­plus in order to make a cash pay­ment for the next Bond issue com­ing due for redemption.It was clear at the time that indi­vid­ual cit­i­zens did not own those bonds,but pen­sion funds and other agencies.The end result was a low­er­ing of the annual GDP clculation..The rea­son the pro­gram was a suc­cess was due to the coun­try not being in reces­sion when the restraint was prac­ticed.

  • Farnorth5

    Fur­ther to the above com­ment .It should be noted at the time the
    National Debt ratio stood at 72,5 % and Stan­dard & Poors etc had just taken away the Fed­eral Govt Triple A credit rat­ing .At the twelve year end the National debt had fallen from $525 Bil­lion to $425 Billion,as well the ratio had dropped from 72.5% to 30% .
    A very sat­is­fac­tory out­come. Paul Mar­tin ‚the Cana­dian Finance Min­is­ter was rewarded by becom­ing the Prime Min­is­ter. So Restraint has a place IF the coun­try is not in reces­sion when the Coun­try uses a bal­anced bud­get. plus a con­tin­gency.

  • TruthIs­ThereIs­NoTruth

    Agree with Andrew, that’s exactly right. Add per­ceived credit risk into the fray as well. 

    Even in the sim­ple box model Steve states, when the gov­ern­ment goes into sur­plus that money has to come from some­where right? Well when the gov­ern­ment goes into deficit that money also has to come from some­where, the argu­ment works both ways.

    Maybe the prob­lem is the way it is framed. Aus­ter­ity to me really means a bal­anced bud­get, the actual sur­plus is a small pro­por­tion of the total income and expen­di­ture. It is because the gov­ern­ment is in high debt right now going back to a more bal­anced bud­get is posi­tioned as aus­ter­ity.

  • Bhaskara II

    If the gov­ern­ment would be able to have a reg­u­lar bud­get sur­plus…

    I think most peo­ple would like to see the it spend less and tax less.

  • Farnorth5

    There is another issue involved here ‚and that is the financ­ing of large cap­i­tal projects.Unfortunately with the sin­gle bud­get sys­tem prac­ticed by all Federal/State /Provincial Govts world wide,the ques­tion is how do you finance a Major Cap­i­tal Project with­out adopt­ing a deficit bud­get ?
    The answer is unless the Govt adopts a stand alone Financ­ing Author­ity ‚it is forced to con­tinue to adopt Bud­gets with small annual deficits on aver­age to finance same.
    This is a real prob­lem for the pub­lic as it looks like no one is being responsible.The facts are different,as long as the Debt to GDP ratio remains con­stant, no harm is being done and the Major Cap­i­tal Projects are being financed,similar to a house­hold financ­ing with a Home Mort­gage.

  • Tim Ward

    Gov­ern­ment deficits are fine when the power, priv­i­lege, prop­erty & prof­its of the plu­to­crats are in jeop­ardy. When the social wel­fare of ordi­nary peo­ple is in dan­ger, deficits are bad. When the exis­tence of a sov­er­eign nation is in dan­ger, no one wor­ries about deficits. 

    The idea that the finances/budgeting of a sov­er­eign national gov­ern­ment are any­thing like those of an ordi­nary fam­ily is one of those fault of com­po­si­tion fal­lac­ies. (and so it is naive) Gov­ern­ment spend­ing is not rev­enue con­strained. The priv­i­lege of banks to cre­ate money is not theirs alone, gov­ern­ments can cre­ate money and spend it into the econ­omy. The US gov­ern­ment, and oth­ers, have done this sev­eral times in his­tory. And it doesn’t have to be infla­tion­ary.

    But pol­i­tics being what it is,
    Deficits are for plu­to­crats,
    Aus­ter­ity is for plebs.

  • Farnorth5

    Well said Tim Ward.
    It is true the abil­ity of Fed­eral Gov­ern­ments to cre­ate arti­fi­cial debt money by issu­ing Bonds is lit­tle under­stood. If the Bond is not pur­chased from the gov­ern­ment in three weeks time by pub­lic sub­scrip­tion in today,s world a Cen­tral Bank will pur­chase it by
    using their abil­ity to set up an accounts receiv­able with a Retail Bank
    to finance same.No one under­stands or cares it is a debt owed to the Cen­tral Bank..The whole idea that the National Debt of a coun­try is in fact a revolv­ing line of credit is not under­stood, as no Fed­eral Govt bud­gets to make prin­ci­pal pay­ments on the out­stand­ing debt.It is sim­ply rolled over in per­pe­tu­ity or until the coun­try goes into bank­ruptcy

  • Bhaskara II

    RE: Far­morth5: ” to set up an accounts receiv­able with a Retail Bank”

    You must not and can­not make any one debtor in your book with­out per­mis­sion or con­sent of the per­son that has to appear as debtor ; if you should, that account would be con­sid­ered false. Like­wise you can not add terms or con­di­tions to a credit with­out per­mis­sion and con­sent of the cred­i­tor.” — Luca Paci­oli

  • Bhaskara II


    I won­der what coun­tries have done that? And, what were the results?

    Are any doing that now? Should we con­sider short­ing the bank stocks, bank bonds, bank depos­i­tors, or their cur­ren­cies?

  • Bhaskara II


    I’m not sure I have inferred the miss­ing infor­ma­tion cor­rectly. Or, I missed some thing.

    If the Bond is not pur­chased from the gov­ern­ment in three weeks time by pub­lic sub­scrip­tion in today,s world a Cen­tral Bank will pur­chase it by using their abil­ity to set up an accounts receiv­able with a Retail Bank to finance same.”

    Which entity has the accounts receiv­able? The cen­tral bank’s books have an accounts receiv­able to receive from the retail bank? Or; The retail bank’s books have an accounts receiv­able from the cen­tral bank?

    Was any value given to the debtor for the lia­bil­ity to the cred­i­tor entity with an accounts receiv­able? A bill of exchange is given for “value received.”

  • Farnorth5

    Sorry for the confusion.The sim­ple mat­ter is the Cen­tral Banks have always had the legal right to cre­ate what to a per­son trained in com­mer­cial account­ing an unusual account­ing entry .Instead of the stan­dard Debit Accounts Receiv­able
    Credit Sales (which means the first entry is on the bal­ance sheet and the sec­ond on the profit /loss statement).The Cen­tral banks have always had the abil­ity to Debit Accounts Receiv­able
    and Credit Checking/Savings accounts (Both which are on the bal­ance sheet.) This allows the
    Cen­tral Bank to “Expand its bal­ance sheet” or put another way, cre­ate unlim­ited amounts of arti­fi­cial debt money, which is what Ben Bernanke did in the extreme dur­ing his man­date. I dont know how you judge this action because it has never been done before in such quan­ti­ties ‚in the his­tory of the world.

  • Farnorth5

    Bhaskara II
    Fur­ther to the above.The 7 Major National banks in Canada have always had the same abil­ity. If you have a checking/savings account,they are also able to Debit Accounts Receiv­able Credit
    your account ( ‚pro­vid­ing your credit record per­mits it)
    In other words also cre­ate arti­fi­cial debt money,which to you has the same pur­chas­ing power as cash money in the sys­tem.
    This fun­da­men­tal abil­ity is what Steve Keen is get­ting at with his illus­tra­tions. He is tech­ni­cally cor­rect that both the central/regular banks through the dou­ble entry account­ing sys­tem have had this abil­ity for 600 years now . It is only rel­a­tively recent that coun­tries cre­ated a cen­tral bank in order to fund other finan­cial insti­tu­tions when they ran into trou­ble. Not nec­es­sar­ily a very good rea­son .

  • Bhaskara II


    Thank you for expound­ing.

    The fact is, bank cred­its have dif­fer­ent pur­chas­ing power than cur­rency, is known by the expe­ri­ences of many peo­ple. The small expe­ri­ences are many and a few more sig­nif­i­cant. Many, also know of numer­ous sig­nif­i­cant his­to­ries where bank cred­its have failed. So, we know it intu­itively.

    Let me be spe­cific. Most of us all know the dif­fer­ence between accept­ing a check or accept­ing cur­rency.

    (But, Some times credit money has more pur­chas­ing power or bet­ter par­tic­u­lar prop­er­ties than cur­rency, which is why use cred­its with banks.)

  • Bhaskara II

    I saw this com­ment in a Bernanke arti­cle, “Bernanke Inc.: Lucra­tive Life of a For­mer Fed Chair­man”

    Nicholas Colas, chief mar­ket strate­gist at Con­vergex Group, a bro­ker­age firm based in New York, said Bernanke’s insights are well known — and free — through his blog on Brook­ings’ web­site. He says the rea­son for Citadel and Pimco to pay him big bucks is to find out what he — and by exten­sion the Fed — doesn’t know or has got­ten wrong. As Stan Druck­en­miller, the bil­lion­aire money man­ager has said, the biggest invest­ment gains often come from bet­ting on the mis­takes of cen­tral banks.“[1]

    A claim of the “Peter Prin­ci­ple” to the max!


  • James Charles

    While we can­not rule out coin­ci­dences, seven sur­pluses fol­lowed by six and a half depres­sions (with some pos­si­bil­ity for mak­ing it the per­fect seven) should raise some eye­brows. And, by the way, our less seri­ous down­turns have almost always been pre­ceded by reduc­tions of fed­eral bud­get deficits.”