What if my analy­sis is used for evil pur­poses?

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One of my Patrons posed a very good ques­tion to me: in a nut­shell, how would I respond to a politi­cian who took my ideas and per­verted them for polit­i­cal gain? Here’s Andre’s full query:

Hi Steve, thank you, you’ve given me the gift of some of the most impor­tant ideas and expla­na­tions I’ve come across in my life­time.

I was won­der­ing how you might respond to a politi­cian who mis­reads your lat­est book, and then declares:

1.  Peo­ple will love me, because Steve Keen says I can become known as a mas­ter of man­ag­ing my country’s econ­omy by engi­neer­ing a pri­vate debt boom

2.  Peo­ple will love me, because when pri­vate debt even­tu­ally fal­ters, Steve Keen says I get to tell every­one they get more gov­ern­ment spend­ing on them, because pub­lic debt is jus­ti­fied to off­set lack of accel­er­at­ing pri­vate debt

3.  Even if some peo­ple grum­ble about me enlarg­ing the state, they’ll def­i­nitely love me when I tell them they’re all get­ting tons of free money in a debt Jubilee straight into their bank account and/or their debts par­tially repaid for them.

4.  Best of all, after a few days of announc­ing every­one gets more pub­lic spend­ing and free money in their bank account, the country’s pri­vate debt load will be reduced enough that we can start another pri­vate debt boom!

a.   And this debt boom will make my coun­try even more pros­per­ous for even longer because no one will be afraid — after all they now know that the worst thing that can hap­pen is that I have to announce to them again that they’ll be get­ting more free money in another debt jubilee!

b.  Free money from spec­u­lat­ing on assets in a pri­vate debt boom, fol­lowed by free gov­ern­ment money for pub­lic ser­vices, fol­lowed by free money in a debt jubilee, over and over again until we’re the rich­est nation the Earth has ever known!

The short answer is that it’s already hap­pened. The long answer is that I don’t believe that con­scious pol­icy will get us out of this cri­sis: instead we’ll get out of it the same way we got out of the last one (the Great Depres­sion): as the acci­den­tal side-effect of respond­ing to an exis­ten­tial cri­sis.

Now I’ll back­ground both those answers.

The (Long) Short Answer: Kevin Rudd

I first realised that this cri­sis was inevitable as a con­se­quence of check­ing the Aus­tralian pri­vate debt to GDP data in rela­tion to a court case on preda­tory lend­ing, in which the NSW Legal Aid Com­mis­sion had asked to be an Expert Wit­ness.

As I explain in Can we avoid another finan­cial cri­sis?, while draft­ing my report (in late Decem­ber 2005) I wrote the line “Australia’s pri­vate debt to GDP ratio has been ris­ing expo­nen­tially”, and then realised that, as an Expert, I couldn’t just use hyperbole—that was the Barrister’s job! I’d have to research the data, and I’d need to replace “expo­nen­tially” with another expres­sion. “Increas­ing sharply” per­haps.

So I down­loaded the pri­vate debt data from the Reserve Bank of Australia’s web­site, grabbed the nom­i­nal GDP data from the same place, wrote a few import and data pro­cess­ing rou­tines in Math­Cad (my favourite math­e­mat­i­cal and sta­tis­ti­cal program—I loathe spread­sheets) to match the monthly debt data to the quar­terly GDP data, imported the data, graphed it, and instantly realised that call­ing the trend expo­nen­tial wasn’t hyper­bole: it was an accu­rate descrip­tion of the trend. The chart shown in Fig­ure 1 was ulti­mately a cen­tre­piece of my Expert Wit­ness report.

Fig­ure 1: Australia’s expo­nen­tial increase in its pri­vate debt to GDP ratio from 1952 till 2006.

 

Granted the data are non-sta­tion­ary, but the obvi­ous cor­re­la­tion of this with a sim­ple expo­nen­tial func­tion was so strong as to be almost ridicu­lous. I used a non­lin­ear fit­ting func­tion to find that the cor­re­la­tion coef­fi­cient of the actual debt to GDP data to a sim­ple expo­nen­tial func­tion (with an ini­tial value of 0.23 and a growth rate of 3.4% per year) was a stag­ger­ing 0.978.

Hav­ing seen this data, there was no doubt in my mind that, when the rate of growth of pri­vate debt stopped, Aus­tralia was in for its biggest eco­nomic cri­sis since the Great Depres­sion. The only ques­tion was whether this was just an Aus­tralian phe­nom­e­non, or a global one.

The only rea­sons the fit was less per­fect were two super-expo­nen­tial bub­bles in the mid-1970s and 1980s—both of which I knew caused severe booms and busts at the time, since they occurred at sig­nif­i­cant points in my own life…

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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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  • neiljhar­vey

    Kevin’s politi­cian seems like an odi­ous char­ac­ter, am not sure how he came up with such a vil­lain­ous rogue. although look­ing at that graph it does seem like some­body has beat him to the idea.

  • ak

    It has been a while since I last com­mented here but the topic is in my opin­ion worth a bit more than casual atten­tion. I haven’t read the new book yet as it is not avail­able in elec­tronic for­mat, I will do it as soon as it arrives.

    I think that the knowl­edge about debt-fuelled booms has been actu­ally put to good not to bad use in China. 

    The Kevin Rudd’s episode in Aus­tralia is not very sig­nif­i­cant from the global per­spec­tive. We need to under­stand what CCP wants to achieve and what means are avail­able. I still think that they want to use the short win­dow of oppor­tu­nity to rapidly develop the coun­try at any cost, no mat­ter what. The win­dow of oppor­tu­nity will close when real nat­ural resources run out (one of them is the abil­ity of the Earth to absorb pol­lu­tion). Blow­ing hous­ing bub­bles is not more unsus­tain­able in the long run as pro­duc­ing 30% of the all CO2 released glob­ally. But there is no other way of build­ing tech­no­log­i­cally advanced econ­omy in a com­pet­i­tive and hos­tile global envi­ron­ment when the time is run­ning out. The Chi­nese have already started mas­sive invest­ment in renew­able tech­nolo­gies. We need to under­stand the global polit­i­cal and mil­i­tary sit­u­a­tion. The US would not have tol­er­ated the rapid indus­tri­al­i­sa­tion of China achieved by other means, it had to be done “under the radar”. Brib­ing multi­na­tional cor­po­ra­tions by let­ting them freely exploit Chi­nese work­ers has been the ulti­mate insur­ance pol­icy in our glob­alised world. 

    Another impor­tant issue is higher sav­ing propen­sity of Asians in gen­eral. Export sur­pluses are not only caus­ing fric­tions with the US, they would never be big enough to set (bias) the oper­at­ing point of the sys­tem high enough what applies to both the sav­ing and invest­ment func­tions. The real issue is run­ning the econ­omy close to full capac­ity util­i­sa­tion and at the same time invest­ing heav­ily to grow the pro­duc­tive cap­i­tal stock. Let’s com­pare Rus­sia and China. The Rus­sians are imple­ment­ing very con­ser­v­a­tive poli­cies taken from a neo­clas­si­cal text­book. Their pri­vate and pub­lic debt lev­els don’t change much. Once their trade sur­plus faded the sys­tem set­tled at a low rate of invest­ment and abysmal rate of growth. (There is some impact of recent West­ern sanc­tions, too). The share of invest­ment in GDP is 18% while in China it is 43% (source: http://www.economywatch.com ). Is this what is good for Rus­sia? What will the sit­u­a­tion be in let’s say 2025 or 2030 when the credit bub­ble finally bursts in China? The Chi­nese will have a lot of hous­ing stock for their 1.45 bil­lion of peo­ple and new shiny infra­struc­ture, the Rus­sians may have a few more Tu-160 bombers because this is all their fis­cally con­ser­v­a­tive gov­ern­ment can afford to pay for. 

    Now here is the cru­cial point. China is not a coun­try ruled by a plu­toc­racy like the US. Rich peo­ple, the oli­garchs, don’t rule the coun­try. There will be no depres­sion in China. A depres­sion has to be engi­neered like in Greece. Mar­kets don’t rule the soci­eties, there is noth­ing “objec­tive” here. This is a myth ped­dled by some “neo-vul­gar” econ­o­mists espe­cially the Aus­tri­ans. Absolute prop­erty rights haven’t been given by God, quite the oppo­site, stu­pid peo­ple made the golden calf and started wor­ship­ping it. The prin­ci­ples of fis­cal pol­icy are a social con­struct in the same way as prop­erty rights and the mon­e­tary sys­tem. The alter­na­tive does exist — the Chi­nese know they won’t run out of fiat cur­rency. The Chi­nese gov­ern­ment will stim­u­late like in 2009 when the true bud­get deficit as a per­cent­age of GDP (includ­ing local gov­ern­ments) was dou­ble-digit. State-owned banks could oper­ate with neg­a­tive equity. If a cap­i­tal flight devel­ops (what could have been seen on a small scale last year) they will impose strict cap­i­tal con­trols. Rich peo­ple are merely the cus­to­di­ans of nation’s wealth not sov­er­eign over­lords like in the West. All of them have red phones on their desks (see “The Party The Secret World of China’s Com­mu­nist Rulers” by Richard McGre­gor). At some point of time the nom­i­nal wealth of some peo­ple (effec­tively the claims on the fruits of other’s labour) stored in finan­cial assets may tem­porar­ily fade, but so what? Prop­erty rights are not absolute in China as they are a social con­struct which may change when nec­es­sar­ily.

    Neo­clas­si­cal eco­nomic the­o­ries are not taken at a face value, the Chi­nese are prag­ma­tists even if some senior eco­nomic advis­ers are infected (or pre­tend to be) with the main­stream eco­nomic the­o­ries. The pseudo-Marx­ist Soviet eco­nom­ics of was sim­ply ignored in 1978. The same will hap­pen with the main­stream when such a need arises. 

    Once the per capita GDP reaches the sat­u­ra­tion level sim­i­lar to what is in other devel­oped coun­tries the cur­rent strat­egy will obvi­ously have to change as all the low-hang­ing fruits will have been har­vested. But the liv­ing con­di­tions of the work­ing class in China will be far bet­ter than in the US by then. It is inter­est­ing whether it will still be pos­si­ble then to effec­tively brain­wash peo­ple in the West to sup­port neolib­eral democ­racy despite the recent great advance in brain­wash­ing achieved when the social net­works arrived.

    How is the rul­ing party, the equiv­a­lent of CCP, called in the US? It is called Gold­man Sachs. But there is a fun­da­men­tal dif­fer­ence because the Chi­nese organ is more inter­ested in bring­ing wealth to the whole nation not only to its own mem­bers. (Maybe only because they know what hap­pened to these emper­ors who allowed for exces­sive exploita­tion of the peas­ants, their dynas­ties were over­thrown when they lost the Man­date of Heaven). In China power brings wealth not wealth brings power. We may see this as a cor­rupt sys­tem but from the whole society’s inter­est point of view it is “our” West­ern neolib­eral democ­racy sys­tem what is far more cor­rupt. The global “investors” are cheer­ing Macron’s (or rather Gapon’s) Pyrrhic vic­tory in France. “There is No Alter­na­tive”. Almost like elec­tions in pre-1989 Soviet bloc coun­tries where we could only cast votes on a sin­gle list of can­di­dates.

    The only risk to China is the weak­en­ing of the iron grip of the CCP over the oli­garchy (the rich) in the long term or a mutu­ally assured nuclear destruc­tion if the Amer­i­can pres­i­dent presses “Nuke” instead of “Nurse” try­ing to send another tweet offend­ing a well-known Mid­dle-East­ern oph­thal­mol­o­gist.

    So maybe, just maybe, in the world where build­ing the sys­tem based on a mod­er­ate level of social jus­tice (obvi­ously with Chi­nese char­ac­ter­is­tics) is not pos­si­ble out­right, we should learn to stop wor­ry­ing and love the bub­bles.

  • james­g11

    So this now has a pay­wall … after all these years …

  • Yep, because in 1 year I will no longer have a uni­ver­sity income under­writ­ing my role as a pub­lic intel­lec­tual.