Steve Keen: Why 2012 is Shaping Up to be a Particularly Ugly Year

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.

Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.

Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation. 

Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt -- so debt is slowing down more rapidly at this time rather than accelerating -- that is going to mean falling asset markets.

Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down -- which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.

He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:

Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.

I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.

And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.

America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt -- for a while you were accelerating very rapidly and that's what gave you a boost in employment --  so you are falling back down again.

Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.

China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.

Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.

In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have to end:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

And he offers an unconventional proposal for how this can be achieved:

I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying "who is responsible for bad debt?" you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.

They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.

Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create 'central bank money' (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down -- no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.

Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.

The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller.  That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered. 

Click the play button below to listen to Chris' interview with Steve Keen (48m:50s)

This is a companion discussion topic for the original entry at

CM and Steve Keen are two of the best analysts and communicators of the worlds economic predicaments. To have both in one interview was excellent.
The first time I heard Steve Keen was in a national news radio broadcast here in Oz in 2006. At that time the world economy was pumping and he was a loud but lone voice trying to warn from his soap box that a financial crash was a mathematical certainty. He was trying to explain his graphs of debt to gdp ratios and compared the US and Aus with Japan in the late 80’s. Most laughed or ignored him. Until quite recently many main stream media commentators were still trying to make a laughing stock of him because Australia is yet to really feel the pain. But his work is getting much more traction away from home.

Of all the thousands of economists in the world, Dirk Bezemer could find only 12 who (accurately with proper reason) predicted the GFC and Steve was one. As he says, his solutions are not likely to be favoured by the politicians but they make more sense than anything else I have read.

Thanks for a high quality interview.

 CM and Steve Keen are two of the best analysts and communicators of the worlds economic predicaments. To have both in one interview was excellent.

 I’ve been a huge fan of Steve’s since I first encountered him at the launch of his Debunking Economics book However, his Jubilee proposal has a couple of key flaws.
The first is that we have specifically written out of our governments in the west, the ability for them to create money. They can sell bonds or take loans but both are just new debt which cannot be usedf to pay off old debt.

Despite all the yap about governments "printing money" it is not the case, ALL of the QE and its cousins, all the bailouts, have been in the form of new debt to replace old. The debt has only been transferred from one place to another.

Before the Jubilee can be implemented, legislation needs to be passed that enables governments to actually print the money and force the banks to accept it. Given that banks currently hold said goverments by the balls, that will take levels of courage that is far beyond any of them, except, perhaps, for the Malaysians. Beyond that, general financial and economic understanding is so trivial that the financial sector will have no trouble manufacturing outrage against it under some clever slogan to spike the political process anyway.

So regardless of the perils of the situation, I don’t see it happening.

The second is that, if it were done, the size of the jubilee payment would have to be large enough to make a difference to the debt load, ie, over $100,000, probably it would need to be set at the average of the household debt of people with mortgages.

That would, however, dump a huge amount of money into the hands of renters who would certainly be able to clear their personal debts, but then what? The usual crew of sharks and financial predators will be waiting to rip off the least able, but in any case, all that money will have to go somewhere. Much of it will go into consumption causing an inflation spike, or into retirmeent accounts, once again goosing the incomes of the financial sector to no actual benefit. So there would also have to be some kind of sequestering process, such as Malaysia’s exchange controls, where that part of the money not used to pay down debt (or to buy medical sevices maybe) had to be deposited in a savings account and could not be drawn down at more than 10% or so per annum.

So again, the sharks will be offering to lend us the money using the jubilee funds as collateral, which will have to be outlawed as well. We can’t solve such a complex provblem with even more complex systems, the complexity is a key part of the problem.

Frankly, as one who has no debts and owns my own home, I could live with other people’s debts just being forgiven provided only that they never be permitted to pass on their property nor incur new debt in their lifetimes. They could sell and buy, but only at par or better to allow downsizing or releasing cash for other purposes, but they could never leverage again while they live. It would have to be voluntary of course.

That way we would remove the debt burden and delay it coming back for at least a generation while we broke the leverage habit.

The fact that I would not directly benefit and others would be left with nicer homes than mine would be more than compensated for by knowing that I lived in a less stressed, more rational society and that, unlike those in the flash homes, should I wish, I COULD incur new debt because I had shown myself to be sufficiently responsible to do it sanely.

However, since all of this will entail the end of the advantages for powerful vested interests, it can’t happen. In Jared Diamond’s Collapse he talks about how the Greenland Norse refused to learn how to live sustainably on their land, preferring instead to maintain their old hierarchies until the chiefs had stolen all the food from the last of the subordinates and earned for themselves the right "to be the last to die of starvation" Our commitment to our social norms is THAT powerful, that is what we are up against.

The Norse maintained their heirarchy because they lived during a bientum (2 centuries) when all of humanity was obsessed with hierarchy.  See my book ‘The Secret Language of Eras’ by Benjamin Rule.

Excellent interview.

Handy to throw up a few of his graphs. Particularly the graph indicating the size of private debt to GDP peaking at $43t compared to public debt at $13t.

PRIVATE debt deleveraging.




G’day rlmrdl,My understanding of a Jubilee is that it is NOT a payment…  it’s the CANCELLATION of the debts.  No new money involved.
As far as I’m concerned, there are no other possible outcomes.  It’s not IF it happens, but WHEN…
Oh and one other thing…  this is the first time I’ve ever heard SK maention Peak Oil.  great to hear he’s on the ball here, because virtually no other economists are, and it is the giant elephant in the room.

Here’s the BBC link mentioned at the end of the CM interview.

Paul Mason interviews Steve Keen at the London School of Economics

DTM, i believe its cash. Quantative easing for the public… BBC Interview point 19:00 min mark

[quote=mrobinson]DTM, i believe its cash. Quantative easing for the public… BBC Interview point 19:00 min mark[/quote]A Jubileee is NOT a bailout…
Ultimately, a loan is a social arrangement and, like any other contract, it can be renegotiated. A few decades ago, archaeologists discovered the first ever legal contract in Lagash in modern-day Iraq. Dated back 4,400 years and carved into the bricks of a Mesopotamian temple, it was for the cancellation of debt. It’s claimed that countries that don’t repay their loans will be frozen out by lenders. Yet, as I wrote here last year, IMF economists have recently argued that "the economic costs are generally significant but short-lived . . . we almost never can detect effects beyond one or two years."
In his recent, brilliant history Debt: the First 5,000 Years, the anthropologist David Graeber calls for a modern-day debt jubilee, a cancellation of all debts, just as they had in Mesopotamia. His suggestion is provocative, but it should be taken seriously. Because the longer we keep protecting the haves over the have-nots and honouring the past while destroying the future, the worse this debt crisis will get.

Steve Keen and Charles Smith with Mish sound as though they have the same handle on things. I relate to their way of thinking. However, as Chris says, "we will do everything else", and this too is true.
Mr. Keen also expresses a sort of in Depression out of Depression type response also, and I am banking on this as I wholly agree that as stimulas works off that a lull is created where you can short things, then buy on these dips as more stimulas is poured in. Wash, rinse and repeat.

We must eliminate debt that is a certainty, and with all things there is unintended consequences. Even Mr. Keens "Jubilee" must have some of those. Why not just let the market determine the winners and losers?

Wouldn’t that be the true test?

Why is it so wrong to just let the consumer decide what is necessary or not? After all it will be the consumer who actually purchases what is necessary.

 I know this, I understand best what is critical to my homes business so why mandate anything as if you know what’s best for me. Let this beast shake out for a few years, we downsize and then move on? If everything is being propped up for fear of derivitives why not create a clearing house for the removal of this infectous desease?

So many here have simular thoughts or concerns but the participation in answering them is normally lacking except when Erik T. gets involved. He generates dialogue and is why (I suppose) he generates so many open discussions. I would put him on the payroll just for the important roll he plays in getting everyone thinking and juiced up.



"The first is that we have specifically written out of our governments in the west, the ability for them to create money"I’m not sure where you have that impression from. It is very straightforward for governments to print new currency (notes and coins or, these days, e-notes). I have proposed a different approach to this, which I call "Monetary Dialysis". 
Simply put, the government "prints" new money and spends it directly into circulation via infrastructure investment. At the same time, to ward off any inflationary effects, they limit new bank credit, thus keeping the growth in the money supply at an acceptable level. They can do this right away by focusing on public debt levels, simply not issuing any new bonds beyond a certain level. 
It’s a win/win situation and will save money in terms of interest costs on bond financing.

Liquidation of assets in a crisis is wrong per se because one should have accumulated assets that are USEFUL in a crisis (knowledge, tools to do your job, societal relationships, etc). If people are liquidating their assets when the economy turns down, then what did they accumulate in the first place that they can so easily discharge it?
A farmer that sells her assets is no longer a farmer.

On debts: A monetary debt is a promise by the borrower to consume resources somewhere in the future in order to pay back the money. A personal debt is a promise of only the amount plus interest. A government debt is a promise that authority will somehow be able to get 4 times as many people (at a 25% tax rate) to consume 4 times as many resources in order to be taxed to pay back the government loan plus interest. The current crop of robots are playing at only paying the interest, as though their spending is a personal, direct debt rather than an exponential accelerant of the fires of consumption.

The problem is the growth phase of the boom and bust cycle: not the bust phase. We are long past the point of remedy for the unreasonable idea of a Consumer Economy built on Perpetual Growth.

Get used to living without much. You will have what you can create with your local resources. Get to know your neighbors and your land and your skills.

Best of luck to you all.



Professor Keen makes the point that the finance sector needs to be reduced by about two thirds. Perhaps a start could be made by making the finance sector grow up and do some real work instead of the rather silly behaviour that we witness at present. When one looks at the way the finance sector currently operates, one can only shake one’s head in sorrow. Society does not need ‘call’ and ‘put’ options, derivatives, ridiculous mergers with their attendant fees by the mergers and acquisitions departments only to be followed by subsequent restructuring with their attendant fees again, etc. etc. Society needs loans, bank accounts and advice on real world financial matters. Leave the gambling to the bookies and betting shops etc. <o:p></o:p>

Why, oh why don’t we take the finance sector back to basics? For example loans should only be made after due diligence checks on the prospective borrower, shares and other financial instruments that cannot be redeemed or sold on until twelve months have elapsed (unless genuine need can be shown); dividends only paid to AGM attendees i.e. shareholders should take an interest in the business, they do, afterall, employ real people with a real need for wages generated by the work they do; bonuses only earned for exceptional performance, not simply for doing what their salary is supposed to cover; no fractional reserve system of creating money. If a bank or other financial institution does not have the funds, it should not be allowed to make a loan.<o:p></o:p>

These are only a taste of what is possible. If applied, I’ll bet that Professor Keen’s desired reduction in size would be achieved and then some. The only downside would be the need for the public to find another target for their anger at the mess we are currently in. Perhaps the politicians had better brace themselves, though I expect they are used to it, heaven knows, they are a deserving case.

Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create 'central bank money' (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down -- no choice.
Is this not foreclosure by another name? mortgage debt in the USA is going down. The foreclosed upon have their debt extinguished, and the banks are propped up thru QE/asset purchases. State money is essentially used to pay down the public's debt... with perhaps the difference that the people do not get to retain the asset (the house).

rlmrdl I don’t know what you are on about with new debt not being able to replace old. It happens every day as treasuries are rolled over. It also happens when new treasury proceeds are used for asset purchases, however that is public debt replacing private.


I prefer Bob Mugabe’s financial plan.

 funglestrumpetI think a lot of people still believe that your back to basics vision of the finance sector is how it actually does operate. For an explanation of how it really is and for a great read check out the book Extreme Money by Satyajit Das. He shows how finance companies employ phD mathematicians to create financially repackaged "products" than even their bosses can’t understand. Most "investment" in the finance industry is not actually in development of real world products and services but in the financial casino. When investment has been made in real companies very often it is in the form of things like the leveraged buyout - a more or less hostile takeover of a good company followed by camouflaged asset stripping and dumping the hollowed result back into the market. His book contains example after example of this sort of thing. It’s immoral imho. 


... It got through the financial crisis by figuratively kicking the can down the road...


Here’s the BBC link mentioned at the end of the CM interview.
Paul Mason interviews Steve Keen at the London School of Economics
DTM, i believe it’s cash. Quantative easing for the public… BBC Interview point 19:00 min mark
Right…  now I get it, thanks for posting that.  SK’s "modern jubilee" isn’t like a traditional jubilee.  Interesting concept, though SK, as much as I love him, doesn’t understand the implications of the other two E’s, especially the Energy bit.  He mentions PO in the podcast with Chris, but seems unaware that Australia will be totally out of oil before 2020!
"Saving" the economy, even at the expense of the finacial sector, is a waste of time if growth never makes a comeback due to insufficient energy.

 Good comment, rlmrdl. That’s very much how I see the debt jubilee proposal, flaws and all. 

You must be Aussie to think that clearly. Steve is definilty on the right track with his acceptance of inflation, specifically printed cash given to the people as being a way of reducing the total debt load. But I can't see debt write offs being done in an efficient or even corruption free way. Inflation all the way for me thanks, get it over with, I know how to protect any savings but I dred living through a forced depression so bank owners can aquire the Earth at fire sale prices.One point that I differ is "it can't happen" . It can and it will but not by government decree. Its pointless for a prisoner to be begging the prison guards for a fairer system if its against the wardens interest ie debt forgiveness. Thankfully we don't need the guards to change their minds, we only have to make it unprofitable for the warden to keep us imprisoned.
Take away his leverage of our productivity and we become unprofitable for him to keep us imprisoned. Keep your bank account empty by converting wages or even government payments to printed cash to spend and demand unleveraged printed cash from your elected representatives when the bank runs dry. If they refuse, we find our own currencies to trade in that don't involve government.
Fractional reserve banking is the monopoly men's most powerful tool to control the world but it is also their most vunerable weak point that individuals without forming into collectives can participate in to take the power of money creation away from banks. Even an Aussie Yobo down the pub could understand that if he has a gripe against banks, he should take his money out as cash and tell the banks to F… off. I wonder how many people realise the link between the timing of the global roller coaster of ponzi schemes and wages starting to be paid as bank credits by default. We only need 20%? or less of the population to start keeping their bank accounts empty to reverse the trend and shrink governments in the process.
Its an easy task if you try. Whats your slogan?