Monday, November 16, 2009

A Sobering Dose of Reality from Economist Steve Keen

Tired of the same old US-based bears such as Nouriel Roubini, Peter Schiff and Doug Kass? Sick of hearing the US is in deep trouble argument from Marc Faber and ex-pat Jim Rogers? Then, for those of you who are not familiar with the most outspoken Australian Nostradamus, let me introduce you to economist Steve Keen. Keen is one person who can legitimately contend that he saw the crisis coming and even warned about the potential impacts extensively on his website. Keen’s writings serve as another example of how nonsensical the claim is that “no one could have seen this coming;” a refrain that you hear from politicians around the world who want to remain blameless for the current economic calamity. Keen is a straight shooter who pulls no punches in his criticisms of other economists, political leaders, and central bankers all over the globe. The reason it is important to listen to him now is that he is still pounding the table about the debt overhang that is plaguing the Anglo-Saxon world. Unlike the bubble-perpetuating pundits you see on CNBC, Keen does not believe economies can recover from the implosion of a debt bubble by printing money or through just the passage of time. As such, he happens to believe that both the US and Australia are on an unsustainable path that may lead to an even larger crash.

I have embedded a video below of a must watch presentation from Keen. Here is a preview of some of the topics covered and associated commentary:

· Amusing and condescending explanation of the fact that Milton Friedman was not a Keynesian economist (as some professor named Joshua Gans had stated the day before)

o In fact, according to Keen calling Friedman a Keynesian is like calling the devil one of God’s angels

§ Calling Friedman a Keynesian is an insult to real Keynesians such as Minsky

· Discussion of the delusional theories espoused by Friedman and the other neo-classical economists who completely missed the crisis and whose ideas do not share anything in common with reality

o Neo-classical models cannot endogenously produce a financial crisis

§ Need a meteor strike or something

o Inability of the neo-classical models to reflect actual market conditions

· Commentary on the prescience of Minsky and how his theories on instability, banking, and crises are essential to understanding what the global economy is facing

o Minsky’s idea of the euphoric economy that leads to instability

o Ponzi financiers failure when the bubble bursts

§ Darlings of the stock market one day and in jail the next

· Reminder of the fact that there were in fact 2 bubbles in the US, a stock market and a housing bubble, both of which were driven by excess debt

o US Debt to GDP before the Great Depression: 170%

o Current US debt to GDP: 300%

§ Same dynamics that existed before the Great Depression are exaggerated now

o Failure to attack the underlying problem (too much debt) and only focusing on the symptoms (limited liquidity) by printing money and enacting stimulus will only prolong the day of reckoning

§ Can’t just paper over the debt overhang that is nothing like we have seen in history

· France is the only country that did not have a debt crisis and that is why it has shown growth

· Foolishness of the Kangaroo Theory of Economics that believes that Australia is different and is not facing a crisis

o But if there is any correlation between excess debt and impending crises the situation in Australia is not as stable as people assume

o Just because Australia’s debt to GDP is less than that of the US does not mean the country is out of the woods

· Helicopter Ben Bernanke’s ignoring of Minsky’s ideas in favor of the idea of the rational investor in his writings

o How scary is that a man who believes that human beings act rationally under uncertainty is the one trying to navigate the US out of this mess?

o Bernanke’s lack of understanding of the credit system and money creation

· Step by step explanation of how money is created by banks

o Suggestion that is better to give money to debtors than banks that just hold money as reserves

· Need for deleveraging in the Australia and in the US

o In Australia, 8% debt reduction occurred in the 1930s

§ Took a world war to get debt levels down

§ Would cause a 12% reduction in GDP if that rate were reached again

§ 4% debt reduction occurred in the 1890s during that depression

· Would take 30 years to get back to 1980 levels at this rate

o America’s problem is even worse due to larger debt load

§ Unemployment is being driven by deleveraging

· $2.5 trillion rate of deleveraging in US this year

o In 2006 the US was adding $4.5 trillion dollars in private debt

o Total demand was $18.5 trillion ($14 trillion in GDP+ $4.5 trillion in debt) so US demand was close to 25% debt driven

(Picture of Steve Keen courtesy of