Zom­bies-To-Be and the Walk­ing Dead of Debt

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Using the dynam­ics of credit–which most other econ­o­mists ignore–I explain why Japan, the USA and UK are among the “Walk­ing Dead of Debt” and why China, Canada, Aus­tralia and South Korea are on their way to join­ing the Debt Zom­bies. This pre­sen­ta­tion is based on work I’m doing for a new 25000 word book for Polity Press enti­tled “Can we avoid another finan­cial cri­sis?”, which should be pub­lished later 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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  • Bhaskara II

    Snoopy car­toon: Snoopy plays Pro­fes­sor Keen?

    Charly Brown:
    I hear your writ­ing a book on the­ol­ogy.

    CB: I hope you have a good title.

    Snoopy: I have the per­fect title…

    S: “Has it ever occurred to you that you might be wrong.”

    (This came up with a google search related to dog­matic.)

    http://www.judexjones.com/wp-content/uploads/2012/08/Snoopy2.jpg

  • Tim Ward

    Sur­pris­ing that Wray isn’t get­ting this. Expen­di­tures from some exist­ing money plus new money. The flow of incomes doesn’t all go back into cir­cu­la­tion for sub­se­quent expen­di­tures (because of sav­ings, cap­i­tal flight, &c what­ever) , which means that a flow of new money has to be cre­ated to main­tain spend­ing at the pre­vi­ous level, or to increase it. The big savers are the oli­garchs, large pools of money taken out of the econ­omy, means that con­tin­ual credit cre­ation has to occur to over­come the demand losses by oli­garch sav­ing. (Unless I’m mis­un­der­stand­ing what the dis­cus­sion is about.)

  • Bhaskara II
  • Bhaskara II
  • twowith­inthree­thati­sone

    Noth­ing at all wrong with stock/flow con­sis­tency, but what all eco­nomic the­o­rists miss is the inher­ent cost infla­tion­ary nature of the econ­omy. Keynes missed it. All DSGE the­o­rists of course miss it by virtue of their stub­born adher­ence to gen­eral equi­lib­rium.

    As the econ­omy has become more and more tech­no­log­i­cally advanced and cap­i­tal inten­sive the depre­ci­a­tion costs of replac­ing all of the means of pro­duc­tion dynam­i­cally and increas­ingly de-sta­bi­lize the econ­omy.

    As all costs must go into price by cost account­ing con­ven­tion and depre­ci­a­tion allowances for busi­nesses are only a stay of exe­cu­tion of costs not a for­give­ness or elim­i­na­tion of them the rate of flow of total costs in such an econ­omy will always tend to exceed the rate of flow of total indi­vid­ual incomes simul­ta­ne­ously dis­trib­uted by busi­nesses.

  • twowith­inthree­thati­sone

    The actual prob­lem in eco­nomic the­ory is the fail­ure to account dynamic costs hon­estly and accu­rately and deci­pher­ing the macro-eco­nomic effects of same. As Dr. Keen has said an econ­o­mist can get his degree in eco­nom­ics with­out hav­ing taken even an ele­men­tary course in account­ing. Few busi­ness­men have much knowl­edge or prob­a­bly con­cern with the minuti­nae of account­ing and few accoun­tants are trained econ­o­mists and so to think about the eco­nomic con­se­quences of the data they work with every­day. Finally, prob­a­bly few econ­o­mists are “hands on” enough busi­ness­men to be
    aware of the nec­es­sary, ever present and so dynamic nature of the costing/pricing sys­tem as it relates to the lower bound of prices. 

    If the lower bound of cost and so price is infla­tion­ary then no mat­ter how much one tin­kers, tweaks and econ­o­mizes on the upper bound of same.…the sys­tem will never be sta­ble.

    Don’t get me wrong, I’m not for aus­ter­ity to “solve” the prob­lem. That is sim­ply ortho­dox and mis­taken DSGE. But sys­temic cost infla­tion will erode both prof­its and indi­vid­ual pur­chas­ing power, and merely pump­ing more money at addi­tional cost into such an already inher­ently infla­tion­ary sys­tem can­not solve the actual and (so far) unde­tected prob­lem.

    In fact the only valid eco­nomic way to resolve such a sys­temic prob­lem is to gift the indi­vid­ual with income/purchasing power and busi­nesses with rev­enue that they pri­orly gift to the con­sumer because to inject money into the sys­tem first merely to have it gen­er­ate less indi­vid­ual income than costs only re-ini­ti­ates the cost
    infla­tion.

  • Tim Ward

    For over a cen­tury is has been known that pri­vate sec­tor cap­i­tal­ism has prob­lems at the cap­i­tal &/or labour inten­sive mar­gin. And the solu­tion has been known for over a cen­tury too.

  • twowith­inthree­thati­sone

    For over a cen­tury is has been known that pri­vate sec­tor cap­i­tal­ism has prob­lems at the cap­i­tal &/or labour inten­sive mar­gin. And the solu­tion has been known for over a cen­tury too.”

    Per­haps on the upper bound of price, but not on the lower bound which is a dynamic force itself.

  • Tim Ward

    Finance is not a fac­tor of pro­duc­tion. Fic­tional prob­lems are polit­i­cal.

  • twowith­inthree­thati­sone

    Depre­ci­a­tion is an empir­i­cal flow of costs and a sys­temic fac­tor of pro­duc­tion, espe­cially in high tech cap­i­tal inten­sive economies, and even if there were no addi­tional costs asso­ci­ated with finance what­so­ever would desta­bi­lize the econ­omy.

    Dou­ble entry book­keep­ing is one of the great­est empir­i­cal inven­tions of the last 500 years and a won­der­ful tool, but it was con­ceived before high tech­nol­ogy cap­i­tal inten­sive economies were a real­ity. Thus its sub­tle and so missed cost account­ing con­ven­tion that “all costs must go into price” has become an anachro­nism that increas­ingly desta­bi­lizes mod­ern economies. That is an empir­i­cal and dynamic real­ity not a polit­i­cal fic­tion, and will require those who under­stand dynam­ics and the dig­i­tal nature of the money sys­tem to join forces to fight the cur­rent finan­cial and polit­i­cal pow­ers with an
    idea even more pow­er­ful than Debt, namely mon­e­tary grace as in gift­ing.

  • Tim Ward

    If pro­duc­tion is less than the phys­i­cal depre­ci­a­tion of pro­duc­tive tan­gi­ble cap­i­tal, then the tan­gi­ble cap­i­tal is not replaced. By fic­tion was meant legal fic­tion, finance, account­ing, money, finan­cial instru­ments are all legal fic­tions. Finan­cial cap­i­tal is fic­ti­tious. Finan­cial instru­ments are rou­tinely voided in courts, eg on bank­ruptcy. Account books can be voided by law. Real fac­tors of pro­duc­tion can not be voided in courts, like the laws of ther­mo­dy­nam­ics can not be voided in courts. Polit­i­cal solu­tions are also brought to bear on fic­tional prob­lems. The real terms costs of tan­gi­ble cap­i­tal, com­mod­ity inputs, labour, pub­lic infra­struc­ture, can not ever exceed the out­put, else pro­duc­tion ceases. This oper­ates on low cost energy. When energy runs out, or gets expen­sive, that’s the end. Those real terms costs include the phys­i­cal depre­ci­a­tion. And of course there are real costs of pol­lu­tion, envi­ron­men­tal degra­da­tion, resource deple­tion, and such, that are real terms issues, that are not cur­rently ade­quately accounted for. Those are not anachro­nisms. But you have not stated any of those things, you have left it as uniden­ti­fied flow of costs, and uniden­ti­fied book­keep­ing depre­ci­a­tion. Iden­tify, spec­ify those cost flows, oth­er­wise no one will lis­ten. You will not “gift” your way out of entropy, resource deple­tion, or envi­ron­men­tal degra­da­tion by nuclear pol­lu­tion, and some other such prob­lems. “Gift­ing” of legal fic­tions is nei­ther nec­es­sary, nor suf­fi­cient to solve real terms prob­lems.

    And Debt, also is a legal fic­tion. It is never the real terms prob­lem. It’s a polit­i­cal prob­lem. That which can be cre­ated with the stroke of a pen may be voided with the stroke of a pen.

  • twowith­inthree­thati­sone

    Real terms costs” is an ortho­doxy the same as gen­eral equi­lib­rium is, and the econ­omy will be for­ever and increas­ingly halt­ing if we adhere to it because depre­ci­a­tion of cap­i­tal is fac­tored into the costs of con­sumer prices moment to moment. The clas­si­cal and cor­rect goal of eco­nomic sys­tems is flow/free flow­ing­ness no mat­ter that the econ­omy is in an inher­ent state of dis­e­qui­lib­rium due to the rate of flow of total costs exceed­ing the rate of flow of total indi­vid­ual incomes with which to liq­ui­date them. Pol­icy must address that real­ity with that clas­si­cal goal in mind. 

    The costs of pol­lu­tion, envi­ron­men­tal degra­da­tion and resource deple­tion are cer­tainly real, but do you think these would be more likely ratio­nally dealt with if we didn’t have finan­cial dom­i­nance, eco­nomic stag­na­tion (at best) and the indi­vid­ual pinned to a frus­trat­ing and exhaust­ing aus­ter­ity?

    Inte­grat­ing mon­e­tary gift­ing into the debt based sys­tem would enable an inte­gra­tion of left­ist Key­ne­sian and right­ist Aus­trian eco­nom­ics and accom­plish more of their sep­a­rate agen­das than they have accom­plished rail­ing at each other for a hun­dred years. You could actu­ally have what I refer to as “the higher dis­e­qui­lib­rium” where of the rate of flow of total indi­vid­ual incomes exceeds the rate of flow of total costs and we had proac­tive price defla­tion and yet such poli­cies still fit seam­lessly within profit mak­ing sys­tems.

  • Tim Ward

    “Real terms costs” is an ortho­doxy the same as gen­eral equi­lib­rium is…” No, I don’t believe so, real costs refers to the real labour units, tan­gi­ble cap­i­tal units, real com­mod­ity inputs, energy, &c, these are not any kind of ortho­doxy, but the phys­i­cal real costs. The tech­no­log­i­cally deter­mined costs. It’s not ide­ol­ogy.

    BTW, I’m a stu­dent of eco­nom­ics, I’m try­ing to deter­mine by first prin­ci­ple kind of analy­sis whether what you’re say­ing holds water.

    Tan­gi­ble pro­duc­tive cap­i­tal has to be repro­duced to cover phys­i­cal, real depre­ci­a­tion in the over­all pro­duc­tion scheme, oth­er­wise pro­duc­tion will decline, or cease. “Gift­ing” won’t resolve this. For those indus­tries or sec­tors that run at a loss (per­haps deemed essen­tial) there is already a sub­sidy sys­tem in place, they oper­ate out of an allo­ca­tion of sur­plus from high pro­duc­tiv­ity sec­tors. No “gift­ing” is required. 

    The rea­son for going on about real vs legal fic­tion is that you write about costs and use the phrase ‘mon­e­tary grace’. Mon­e­tary is in the realm of legal fic­tions. Finance & other legal fic­tions can always be made to suit at the stroke of a pen. Polit­i­cal will may be required. But if the real issues are insol­u­ble, legal fic­tions will not fix the prob­lem, “gift­ing” won’t. It isn’t clear from your writ­ing whether you are writ­ing about the tech­no­log­i­cally deter­mined costs, (the real costs, in labour, com­modi­ties, tan­gi­ble cap­i­tal, energy, pub­lic infra­struc­ture, &al,) or finan­cial, account­ing, mon­e­tary or other legal fic­tion realm costs. (Except for the term mon­e­tary grace, which does not appear that it can be in the real realm ) Or some con­fused mix­ture. Do you see why I’m mak­ing the dis­tinc­tion between real (tech­no­log­i­cally deter­mined) and legal fic­tion?

    The clas­si­cal and cor­rect goal of eco­nomic sys­tems is flow/free flow­ing­ness no mat­ter that the econ­omy is in an inher­ent state of dis­e­qui­lib­rium… ” That is not my under­stand­ing of the mat­ters, though I’m aware of the clas­si­cal inter­est in a func­tional cir­cu­la­tion, in the econ­omy, as dis­cussed by the Phys­iocrats. I believe that cir­cu­la­tion must func­tion prop­erly, but in cur­rent sys­tems, dys­func­tional extrac­tion of eco­nomic sur­plus pre­vents proper cir­cu­la­tion. “Gift­ing” won’t solve that. The extrac­tion has to be stopped. My under­stand­ing, is that cen­tral to the clas­si­cal view is iso­la­tion and elim­i­na­tion eco­nomic rent (which is not a tech­no­log­i­cally deter­mined cost). Pol­icy is not touch­ing that because the rent extrac­tors con­trol pol­icy.

    As far as ratio­nally deal­ing with the true costs of pol­lu­tion and other so called “exter­nal­i­ties” that are any­thing but exter­nal­i­ties, these will not be dwelt with in an hon­est fash­ion, any­time soon, but will be used for spe­cial inter­est pur­poses, con­trary to the actual con­cerns. So I don’t believe that the true costs will be accounted for. Can­cer rates will sim­ply go up, and other med­ical prob­lems and other rip­ple effect prob­lems caused by those exter­nal­i­ties will sim­ply increase.

    As far as the Aus­tri­ans are con­cerned, I’m not inter­ested in inte­grat­ing their the­o­ries with any­one else the­o­ret­i­cal frame­work. They seem to think devel­op­ment has to be funded out of sav­ings, that credit funded devel­op­ment is bad. Unless I’m mis­read­ing them. And Keynes, well I have some issues with the aggre­gates approach vis a vis dis­tor­tions and polar­iza­tions in the econ­omy that the aggre­gates approach is blind to. There are some other seri­ous issues that the two schools have, that seem to be obso­lete.

    And now two ques­tions: 1) What is money? 2) What is the cen­tral pur­pose of clas­si­cal value the­ory?

  • twowith­inthree­thati­sone

    Money is a lot of dif­fer­ent things to dif­fer­ent peo­ple, but presently it is an abstract agree­ment based on trust. The money sys­tem is dig­i­tal, that is it is capa­ble of cre­ation and destruc­tion of money and prices, and that is why mon­e­tary grace as in mon­e­tary gift­ing will work.

    Right off the top of my head I don’t know what the cen­tral pur­pose of clas­si­cal value the­ory is. I’m more con­cerned that both the­ory and pol­icy be aligned with free­dom so as to effect imma­nent eco­nomic free­dom for the indi­vid­ual and free flow­ing­ness for the sys­tem. Debt which is cost and bur­den can be bal­anced by mon­e­tary gift­ing which is cost­less and free. The inte­gra­tion of Debt and Gift­ing will result in a third uni­fied eco­nomic par­a­digm. Par­a­digms are always absurd until they are uni­ver­sal truth, and new ones are gen­er­ally an inte­gra­tion that sim­ply reverses or inverts the power and hyp­notic per­cep­tions of the present par­a­digm. So it was with Coper­ni­cus and Ptolemy, so it will be with Marx and Smith, Keynes and Von Mises.

  • twowith­inthree­thati­sone

    Again, the fact is that every one of the lead­ing reform move­ments and cut­ting edge the­o­ries has one or more of the aspects of the philo­soph­i­cal concept/personal experience/psychological flow state known as Grace which is syn­ony­mous with con­scious­ness itself. 

    Exam­ples and their advo­cates:

    A debt jubilee is equiv­a­lent to mon­e­tary grace. (Steve Keen)

    The econ­omy is a dynamic flow of fac­tors that inevitably will have cycles and fluc­tu­a­tions is reflec­tive of the flow state of Grace in that it is being and becom­ing at the same time and yet is a sta­ble and more focused con­scious state of aware­ness of and in the present moment of the myr­iad exter­nal per­cep­tions and inter­nal con­sid­er­a­tions pos­si­ble. (Dis­e­qui­lib­rium The­ory)

    A bank­ing sys­tem that is tem­po­rally ever present, eth­i­cal in the sense that it is not dom­i­nat­ing, manip­u­la­tive, biased toward cronies etc. and has the indi­vid­ual and com­mer­cial enti­ties that want to do pro­duc­tive things with money as opposed to a craven desire to merely make money as the cur­rent one has become is reflec­tive of Bud­dhist mind­ful­ness, con­scious aware­ness in the present moment and its ethic of fair­ness, doing no harm and the recog­ni­tion that even the enlight­ened still need to “chop wood and carry water”. (Pub­lic Bank­ing)

    A cen­tral mon­e­tary author­ity that actu­ally con­trols and rules eth­i­cally and benev­o­lently over its sub­jects. This includes the pri­vate banks in a bank­ing sys­tem that oper­ates in the actual inter­ests of the indi­vid­ual and com­mer­cial enti­ties and so is a part­ner in com­merce instead of a dom­i­nant busi­ness model. (Pos­i­tive and Sov­er­eign Money)

    Grace-Con­scious­ness-the flow state is the thread that binds each and all of these and oth­ers together. We sim­ply need to become more con­scious of all of its aspects as they relate to eco­nom­ics and money sys­tems, inte­grate them and make sure that poli­cies are actu­ally and fully aligned with that phi­los­o­phy.

  • Tim Ward

    In the US, real depre­ci­a­tion is not the same as book value depre­ci­a­tion. Book depre­ci­a­tion is accel­er­ated, 27½ years for res­i­dences and 39 years for com­mer­cial non-res­i­den­tial prop­er­ties. Book value depre­ci­a­tion is inflated, fic­ti­tious, and does not rep­re­sent real costs, and so is not part of the fac­tors of pro­duc­tion. The answer for rent extrac­tion is not “gift­ing”.

    Pub­lic bank­ing is a good idea, because it can par­tially solve rent extrac­tion. Addi­tional mea­sures are required.

  • twowith­inthree­thati­sone

    Depre­ci­a­tion remains an addi­tional cost no mat­ter whether accel­er­ated or not. And of course you also have the diminu­tions from the cir­cu­lar flow that Keynes etc. fig­ured out. Finally, waste is another huge com­po­nent that widens the scarcity ratio between the flow of total indi­vid­ual incomes and total costs/prices.

    The answer for asset infla­tion and rent extrac­tion is rec­i­p­ro­cal gift­ing strate­gi­cally placed at the ter­mi­nal end of the pro­duc­tive process at retail sale. A busi­ness dis­cov­ers its best price then it is discounted/gifted 30–40% to con­sumers. After the actual sale the busi­ness is rebated/re-gifted the dis­count amount back by the mon­e­tary author­ity. Voila! A roar­ingly prof­itable econ­omy and both imme­di­ate and a vec­tor toward price defla­tion to boot. If some sen­si­ble reg­u­la­tion is fur­ther required to limit/end rent extraction.…so be it. I’ve always admired Henry George, but his insights were not as com­plete as sub­se­quent the­o­ries.

    Every busi­ness has a retail prod­uct from candy stores to lawyers to home builders. A uni­ver­sal div­i­dend cost­lessly inter­pen­e­trates the econ­omy with indi­vid­ual income and a retail discount’s gift­ing effect encom­passes the entirety of the economic/productive process from begin­ning to end. 

    Inter­pen­e­tra­tion and encom­pass­ment are aspects of the con­cept and psy­cho­log­i­cal expe­ri­ence of Grace by the way.

    What we need is Con­scious­ness Eco­nom­ics or as I call it Wisdomics/Gracenomics. Then we will awaken to the wis­dom of pru­dence, which is just another word for bal­ance, in both eco­nom­ics and per­sonal devel­op­ment, and leave scarcity, the prof­li­gate night­mares of obses­sion with profit (while still uti­liz­ing a profit mak­ing sys­tem) and the half assed view of human­ity as homo eco­nom­i­cus that half assed the­o­ries and sys­tems have foisted on us
    all.

  • Tim Ward

    As the econ­omy has become more and more tech­no­log­i­cally advanced and cap­i­tal inten­sive the depre­ci­a­tion costs of replac­ing all of the means of pro­duc­tion dynam­i­cally and increas­ingly de-sta­bi­lize the econ­omy. ”

    I’m not sure you’re get­ting the point, that it is not real, tech­no­log­i­cally deter­mined depre­ci­a­tion that is the prob­lem, and other real costs, but exces­sive markups & eco­nomic rent extrac­tion. Goug­ing, and fraud. Replac­ing the tan­gi­ble pro­duc­tive cap­i­tal is not the prob­lem, the real costs of cap­i­tal repro­duc­tion are not desta­bi­liz­ing. The markups, the fic­ti­tious costs, non-tech­no­log­i­cally deter­mined extra charges are desta­bi­liz­ing. The real costs of tan­gi­ble cap­i­tal replace­ment are a small frac­tion of pro­duc­tion. Infla­tion of book depre­ci­a­tion is not sim­ply a prob­lem with build­ings, but also applies to other cap­i­tal. Other fic­ti­tious markups occur for other book val­ues besides depre­ci­a­tion. The real, tech­no­log­i­cally deter­mined arena is not where the prob­lem lies. 

    Within your con­tention con­cern­ing “… the scarcity ratio between the flow of total indi­vid­ual incomes and total costs/prices.” it is not ade­quately revealed the extent to which “total costs/prices” are fal­si­fied. The desta­bi­liza­tion is not tech­no­log­i­cally deter­mined costs.

  • twowith­inthree­thati­sone

    There are costs that are sys­temic and addi­tional to the costs of finance and you’re label­ing them fic­ti­tious is errant IMO because it means that they can be altered or (par­tially) elim­i­nated by decree. They exist as a dynamic flow of costs and not every busi­ness goes bank­rupt and not all of their ADDITIONAL nature is equated in some gen­eral equi­lib­rium belief. I prob­a­bly won’t con­vince you of that, so fine. 

    Per­haps as a pre­lude to craft­ing intel­li­gent and eth­i­cal poli­cies we should con­sider how inno­va­tion and AI, as dis­rup­tive eco­nomic forces that are not going to go away soon and are in fact only get­ting started, will reduce aggre­gate demand and cre­ate the same scarcity ratio and so the neces­sity of mon­e­tary gift­ing.

  • twowith­inthree­thati­sone
  • twowith­inthree­thati­sone

    Buy Human” by the way is the reac­tionary, Lud­dite and uncon­sciously social­ist sen­ti­ment.

    All econ­o­mists are nascent adher­ents of Wisdomic/Gracenomics.

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