How Modern Monetary Theory addresses economic dilemmas | Interview with Dr. Steve Keen

How Modern Monetary Theory addresses economic dilemmas | Interview with Dr. Steve Keen

We met again with Dr. Steve Keen to discuss modern monetary theory, economic trends resulting from the pandemic, and much more. Enjoy!

In this follow-up to his previous interview, self-proclaimed economic “heretic” Dr. Steve Keen shares more of his economic modeling software, Minsky, and demonstrates how it can simulate economic variables. He examines economic trends in light of COVID-19, its eventual negative impact on the United States through corporate debt, how the deficit now differs from what we managed during World War II, and the impact of Modern Monetary Theory. Honorary professor and Distinguished Research Fellow for the Institute for Strategy, Resilience, and Security at University College London, Dr. Keen talks with Dr. Jed Macosko, academic director of and professor of physics at Wake Forest University.

…how do you pay for attacking COVID? ... There are many movements in America, the deficit hawks, as they're called by some people, saying, "We've got to get the deficit back to zero, etcetera, etcetera, because we're burdening future generations." This again, is one of the reasons I designed Minsky, because are we burdening future generations? It depends upon what are the monetary dynamics.” – Dr. Steve Keen

See Dr. Keen’s Academic Influence profile

See additional leading economists in our article
Top Influential Economists Today

Interview with Economist Dr. Steve Keen

Interview Transcript

(Editor’s Note: The following transcript has been lightly edited to improve clarity.)

00:29What makes you different?

Jed Macosko: Hi, I’m Jed Macosko at and Wake Forest University. And today we have a returning guest, Professor Steve Keen, coming to us this time from Bangkok. And we are so glad you’re here today, there’s more things that I wanted to ask you about, and let’s just start in with the way that you see yourself as different from other "heretics" in economics, for example, we just interviewed Herman Daly.

Tell us how you and he differ in the heresies that you talk about with regard to economics.

Steve Keen: Firstly, him and I are very compatible, in fact, Herman is somebody I read very, very regularly in the ’70s and ’80s when I was working in overseas aid, and in development issues in general. And, of course, his work on ecology as well, so we’re very compatible on that front.

It’s more where the emphases lie, and what I’ve really been in... And my initial emphasis was on modeling financial instability. So that gave me a role in complex systems analysis but applied mainly to the impact of having a financial sector in capitalism where, in mainstream economics, the financial sector is hermetically sealed and pushed off to a totally independent subject called finance.

And finance itself, meaning levels of debt, equity and so on, aren’t seen as being important in economics. I categorically rejected that. So that’s what I’ve been working on, and that’s a different field of emphasis to Herman, but otherwise very compatible. The real thing is I’d like to see us getting an overall, if you like, a general theory of heterodox economics, and that would have to incorporate both money and ecology, and that’s one thing I’m working on now.

02:12Generating systems of differential equations: Minsky

Jed: And that would perfectly marry the heresy you’re proclaiming, which is money, and his heresy, which is ecologies, into one theory, so that would be great.

So speaking of your theories and models, do you want to go ahead and share your screen and talk through some more of the things that you’ve got going on there?

Steve: Okay. Now, what I’m going to show you is my Minksy, or you’ll pardon me. This is, by the way, we had a discussion earlier about whether we can continue consuming a huge amount of energy on the planet, then this is a paper that I... Or rather a blog post, I highly recommend you read, written by a physicist, as you can see. And talking about can we actually use infinite amounts of energy on a finite planet. That’s more for the benefit of you, Jed, than the audience necessarily. What I meant to show...

Jed: Appreciate that.

Steve: What I meant to show is... This is my software I call "Minsky", named in honor of Hyman Minsky , not Marvin Minsky, whom I know, of course. But this is my software package called Minsky after Hyman Minsky. And what it lets you do, it’s just a dynamics program, so if you’ve ever used packages like STELLA, or that sort of thing, it’s a relative to those programs. And what it lets you do is generate systems of differential equations using a flow chart. So I’ve zoomed in here, and what I’m showing you... I’ll just do a quick quiz. Can you recognize the model?

Jed: No. I can’t.

Steve: Okay. You know Lorenz’s Model of Chaotic Dynamics?

Jed: Yes, I have learned that.

Steve: That’s it. Okay, so this is Lorenz’s model of chaos in fluid dynamics and flow. So you have just three variables, X, Y and Z. Three constants, A, B and C. And this was in 1963 when Lorenz first built this model to explain why there was turbulence in weather and why we had to use non-linear models rather than linear. This is where we discovered what was called the butterfly effect.

So if you’ve heard people talk about the butterfly effect, when you plot one variable against another in this system, you get what looks like the wings of a butterfly. And that’s what inspired Lorenz to use that particular comment to characterize how a tiny difference in initial conditions could lead to a completely different weather system. Where the flapping of the... A butterfly wing flapping in China can cause a hurricane rather than clear skies in the USA.

So that’s Minsky as a way of modeling any dynamic system, and it’s actually quite good for mathematical modeling in general. But what I’ve used it to do is to model the monetary system. And as I mentioned in our talk a few days ago, most people who don’t study economics think economists must be experts on money, because isn’t the economics about money?

In fact, mainstream economics has rationalized leaving money and banks and debt completely out of macroeconomics.” – Dr. Steve Keen

In fact, mainstream economics has rationalized leaving money and banks and debt completely out of macroeconomics. And what they’ve done is they pretend that banks do not create debt. They pretend that banks instead are what they call intermediaries, who take in savings from one group of depositors and lend them out to another group of depositors.

And the model they use to do that is called the model of loanable funds. I know that model was nonsense in terms of describing what the banks actually do. So one ambition in building Minsky was to make it easier to model monetary dynamics and analyze arguments like that.

So this is part of my software package called Minsky, and what it uses is double entry book keeping. If we have any accountants watching the show they’ll regard this as fairly familiar. So what I’ve done, and I’ll just actually go to the other model over here, brace yourself, it looks pretty messy. I think it’s this one. Yeah. This is the model of loanable funds done in Minsky.

Jed: Wow.

Steve: Okay, so it looks deadly, and all these things do. But the fundamental dynamics are stored in this particular table, which is the one I’m showing you, which is showing the economy from the point of view of a bank, where the banks do what neoclassical economists pretend they do, which is intermediate between their savers and borrowers.

So what I have here is lending by a consumer sector to an investment sector. So the consumer sector lends money to the investment sector. Then repay, the investment sector then repays some of the loans, the investment sector pays interest to the consumer sector, and the bank only gets money like an introduction fee, so that’s the consumer sector paying a fee to the banking sector.

And then I have the consumer sector hiring workers, the investment sector hiring workers, the investment sector buying into consumer goods to help make its output, the consumer sector buying investment goods to make its output, workers consuming, bankers consuming, and bankers investing.

So that’s just a simple explaining the layout of the model, and I think that’s fairly easy to follow, rather than trying to work out what the hell’s going on here.

Jed: Yeah. [chuckle]

Steve: Okay? Now, nonetheless, when you’ve got that I can vary the rates of lending and repayment in this model by changing these two controls as I run the system.

So this is what’s called the time constant for lending, which is the number of years it takes effectively to double the level of debt, it’s currently seven years. And I’ve got nine years to halve the level of debt. And when I simulate the model, what you get, and you can see from this graph down here, is a constant GDP.

I’ve got a rising level of debt, which is the black line, but no change in the money supply. And if I make radical changes to how fast lending occurs and how fast repayment occurs I get not much effect on the GDP. The level of debt has risen, the debt to GDP ratio has risen quite dramatically down here, I’ll just make it a bit smaller so you can see that while the simulation runs.

But a huge increase in the debt ratio, not much happening in GDP. Then if we go the opposite direction, so lending much more slowly and repayment much more quickly, you get a plunge in the debt ratio. Again, not much change in GDP.

So that’s the mental model. Neoclassical economists don’t have anything as sophisticated. But this is the mindset they have that says you don’t need to worry about banks and debt and money, you can have huge changes in debt, and nothing much happens to GDP.

Now, with Minsky I can dive in and say, well, it’s actually a myth when you claim that the banks are intermediaries. In fact, they create loans, they originate loans. So, it’s more sensible to say that the debt, which neoclassicals say is an asset of the consumer sector, is actually an asset of the banking sector.

So I’m going to just go inside and delete the debt being shown as an asset of the consumer sector, and delete all those financial operations here. Come across to the banking sector’s view and say, well, debt is actually an asset of the banking sector, the interest payments are made to the bank, and forget about the bank fee.

Now, I’ve made no other changes to the model, I should make some changes to make it slightly more realistic, but if I now start in the same situation that I showed beforehand with seven years to halve the debt and nine years to repay it, with only that change, suddenly you’ve got a totally different model. GDP is growing as debt is growing. Increasing level of debt causes an increasing level of the money supply. If I then speed up lending, so lending happens more quickly, and repayment more slowly, you get a boom. And if you go in the opposite direction, so repayment happens even more rapidly and lending more slowly, you get a slump. And I’ll go back to the original situation again. So...

Jed: Yeah, and last time you said that that slump is what we saw in 2008.

Steve: Yeah, exactly.

10:30COVID and debt

Jed: You kind of predicted it ahead of time, and you went on the record saying that we’re not really due for another slump, even though COVID has hit, even though there are some similar lending practices now that were in the private housing sector are now in the sort of business real estate sector.

But you said last time that because the business real estate sector is so small relative to the private housing sector, we won’t see the slump. Are you still pretty confident of that?

Steve: Well, yeah, I think in terms of looking at the level of private debt in America right now, the household sector de-levered by about 20% of GDP. The business sector’s actually got more debt now.

It’s more levered than it was back in 2008, and there’s been a dramatic increase in debt, I think largely because firms are being forced by COVID to basically access lines of credit and overdrafts. So that’s boosted the economy when that’s been happening, because if they hadn’t done that there’d be less money in the economy and less turnover and so on, and more people would have been laid off.

But if we ever get to the point where you can say COVID is over... I can say that in Thailand, you can’t say that in America, but if you can say that then I expect those positions to be unwound.

This is not debt they took on because they were trying to invest or they saw some opportunity of boom. So I don’t expect a credit crunch in America but I do expect a serious economic crisis coming out of the fact that you have so much less money coming into the economy with the reduction in employment and the reduction in many businesses, from the airlines, restaurants, live entertainment and so on, that because the financial commitments people had made were pre-COVID, when they go back to a post-COVID situation, having accumulated more debt during the crisis and having less income, we’re going to see financial failures coming out of that. So COVID will cause a downturn, a financial crisis in America, but not... The actual dynamics of credit weren’t going to cause another one.

Jed: Okay.

So there will be a downturn and we’ll start seeing it after COVID somewhat resolves in the US and Europe. Is that what you’re saying?

Steve: Yeah, but also if you take away some of the supports that exist at the moment... I mean, I think... I don’t know the details of the American supports as well as I do some other countries, but okay, for a while you were giving American household $600 per week per worker. Now, that actually caused a boost in take-home incomes because so many Americans are on insecure contracts, the zero hour contracts, and the gig economy as they call it, that was actually a boost and they weren’t spending on transport to get to work.

So their expenses dropped, the cash coming in was similar if not greater than their wage, so you got a boost to incomes at that point. But if they get taken away, going the opposite direction, and fast, then quite a large segment of the American population has less than... Not enough money in their bank accounts to cover a month’s expenses. So if you have a cut down on the government funding, they will go under.

Jed: Okay, so then you’re seeing a big problem because once they go under then you do have the same 2008 problem where the private sector is under water, is that what you’re saying?

Steve: Yeah. Yeah, and that then the banks and the... The landlords, banks, the whole lot, could be financially in negative equity, courtesy of the aftermath of the COVID shock and the lack of cash flows.

Jed: So last time you were on this show you said that there wasn’t going to be a 2008-size depression or recession. Now it sounds like you’re saying it could be just as large, is that what you’re...

Steve: With COVID. Well, COVID itself is as big as the Great Depression. And probably the most important point I want to make here, which puts me outside the mainstream as well, is how do you pay for attacking COVID? Because a large part, or you see some... There are many movements in America, the deficit hawks, as they’re called by some people, saying, "We’ve got to get the deficit back to zero, etcetera, etcetera, because we’re burdening future generations."

…the mainstream think there's a limited amount of money out there, which if you use it for something like fighting COVID then it's not available for investment, and that's why they see a negative consequence from things like fighting COVID.” – Dr. Steve Keen

This again, is one of the reasons I designed Minsky, because are we burdening future generations? It depends upon what are the monetary dynamics. And the mainstream think there’s a limited amount of money out there, which if you use it for something like fighting COVID then it’s not available for investment, and that’s why they see a negative consequence from things like fighting COVID. But let’s talk about the negative consequences of World War II. Okay?

Now, what were they? Well, not for America, you lost less people in World War II than you lost to COVID so far, as it happens, but your economy boomed, absolutely boomed. You came out of the Second World War with the strongest economy on the planet and you went into a, almost straight away, into a boom. The ’50s and ’60s and ’70s, early ’70s, are called the Golden Age of Capitalism. But if you look at the level of the deficit that was run out during the Second World War, the deficit in 1942 was 30% of GDP.

Now, how did we pay for the war? Okay, this is not hypothetical. How did we pay for the war? The answer is, government spending paid for it. Because when the government spends it ultimately puts money in people’s bank accounts in the private sector. When it taxes, it takes money out of those bank accounts. So if it’s spending 30% of GDP more than it’s taking out, it’s boosted the amount of money in people’s accounts by equivalent of 30% of GDP, which is a huge boost.

Now, how do they finance that? How do they pay for it? Well, the way that the money is actually paid in is it goes into your personal deposit accounts and it turns up on the reserves of the banking sector as well. So if you have a 30% of GDP boost to money in people’s deposit accounts at the banks, you also have a 30% of GDP boost to the reserve accounts that those banks have at the Central Bank. Now, reserves normally earn no interest or negative interest, okay? So suddenly the banks have got 30% of GDP in 1942, additional money sitting in the bank accounts earning no return.

The government then issues war bonds. The war bonds that might be valued at 30% of GDP. And they have, say, a one or two percent rate of return. So the Government goes to the primary dealers as they’re known, they’re the part of the financial sector that actually buys the bonds, and says, "Would you like to buy these bonds and get a two percent rate of return?", let’s say. "Or would you like to stick with your 30% of money, earning nothing?" What do you think they say? "We’ll take the 30%, thanks, we’ll buy them." So the bonds are simply transferring money out of... For the banking sector, out of reserves into income earning bonds, okay? There is no...

Not only is there no shortage of money, the banks would need to be blithering idiots not to take on the offer of going from a zero return asset, to a two or three or four percent rate of return asset. So the bonds are purchased and that doesn’t take any money out of deposit accounts because deposit accounts are the liabilities of the banking sector. This is all happening on the asset side. So if I go back to sharing my screen, I’ll just actually load the right program before I... Before I do that, I don’t want to make the mistake of bringing up the wrong one.

Jed: Well, I do want to talk about the one that you pulled up the last time, so... But go ahead. After you explain all this, because this is fascinating.

Steve: Okay, so this is now using Minsky again, you can model anything you like with Minsky. I’ve even modelled epidemics using this logic, by the way, the Sears model. But here what I’ve got is the government taxing and spending, banks lending and they’re getting repayments, and then if the government spends more than it takes back on taxation... I’ll just actually make it possible to see that happening.

So here I’ve got taxes starting at 42 billion and spending at 45.5, so there’s 3.5 billion additional money put into the firm sector’s accounts in this simple model. And therefore there’s 3.5 billion additional reserves, then the Government sells those bonds, which means the 3.5 billion gets converted to bonds which earn interest for the banking sector. And that interest actually increases the amount of money in the economy as well.

The interest is paid for by the Treasury borrowing from the Central Bank, so there’s absolutely no difficulty in paying for something like COVID. It simply means... It’s just like we paid for the Second World War by creating money, we’ll pay for COVID by creating money and at the same time, we actually have a problem of deficient demand right now.

During the Second World War, you wanted to soak up some of the demand, so more of the money actually went to armaments than to consumers. And if I’d showed bonds being sold to ordinary people, workers and bankers, ’cause I’ve got workers and capitalists here rather than bankers, that would show money being taken out of circulation. So, you have to have a model like this to be able to understand what monetary dynamics are and conventional economists don’t have anything like this. They just work with a childish set of notions about loanable funds. A man like Greg Mankiw , do you know the name Mankiw at all?

Jed: We actually spoke with him the other day, yes.

So there's a very big gap between how non-orthodox thinkers like myself think about money and how the mainstream does, and as it happens, the mainstream is wrong and the unconventional bunch like myself, and like Herman as well, are right.” – Dr. Steve Keen

Steve: Right. Well, Gregory Mankiw’s textbook has got a blatantly wrong model of government funding using loanable funds. Now, that would be okay if he’d written it in 2014, ’15, at a pinch 2016. In 2014, the Bank of England came out and said the textbooks are wrong and the heretics are right about money creation. A 2014 paper by the Bank of England called Money Creation in the Modern Economy, it said the textbooks are wrong. Now, what Mankiw has done is to repeat that wrongness after he was told it was wrong by the Bank of England, the Bundesbank, and a range of other central banks. So there’s a very big gap between how non-orthodox thinkers like myself think about money and how the mainstream does, and as it happens, the mainstream is wrong and the unconventional bunch like myself, and like Herman as well, are right.

21:15End of World War II verses COVID

Jed: Fascinating. Now, all of this means to me, listening, that we could have a big economic boom after COVID like we did after the Second World War if things were done a certain way, but then earlier, you said that we’re going to have actually a downturn, so explain the difference between the end of World War II versus the end of COVID.

Steve: The main difference was that, first of all, the Great Depression was caused by exactly the same decadence that caused the 2008 crisis. You had a boom in private borrowing in the 1920s, which we call it the Roaring Twenties for good reason, and The Great Gatsby, and so on. It was a period of huge speculative excess, debt-financed, at the same time as the government was running a 1% of GDP surplus and congratulating itself on good economic management. Now, while the government reduced its debt level by about 30% of GDP, the private sector increased its by about 60%, and in particular... This is the most egregious thing about the great Roaring Twenties and the Great Depression... Margined it. And back in those days, you could put down a 10% margin. You put down $100,000 for the stockbroker and buy a million dollars worth of shares. These days, I think you’ve got to put down $300,000 to buy a million dollars worth. Margin debt went from 1% of GDP in 1920 to 12% in 1929, and then right back down to 1% again in 1930.

That’s why the Crash wiped out so many people, but in the process, private debt hit about 150% of GDP in the middle of the 1930s, and then from that point on, it went down most of the time, and during the Second World War it halved again, so we came out of the Second World War with the private sector having a debt level of about 40% of GDP.

Jed: Wow!

Steve: And we currently have 150% of GDP. That’s the difference. If we could use... The reason people paid their debt off during the Great Depression and the Second World War is the huge scale of government spending, particularly of course during the Second World War. Now, if you couldn’t go shopping, you couldn’t even buy coffee... You had to buy... Oh, I’ve forgotten, I almost had the dully word in my head... A substitute for coffee. You couldn’t buy more than one cigarette a day, or crazy stuff. Everything was rationed. So with rationing, you couldn’t spend and therefore what would you do? You got extra money, you pay your debt off. And the corporations were...

Jed: But isn’t that happening to... Isn’t that happening to some extent in the United States?

I’ve read reports that credit card debt is down and things like that, so tell us more what’s going on.

Steve: The household debt’s declined a substantial degree, about 20% of GDP, from sort of about 100% to about 80% of GDP, roughly speaking. I’m not looking at the figures myself right now. I do have them, but I haven’t got them in front of me, whereas corporate has gone...

Jed: Okay, so it did go down.

Steve: Corporate debt has gone up. The corporate debt has gone up. We now have the highest level of corporate debt in the history of American capitalism.

Jed: Okay, and that’s bad, right? We want both private debt and corporate debt to be low if we want a healthy economy and we want government spending to be high. Is that sort of the formula?

Steve: Relatively speaking, yeah, because if the government spends, it creates money which is debt-free for the recipient. So if the government gives you money, it doesn’t say you owe us, "Here’s $100. By the way, you owe us $100." Now, if a bank gives you money, "Here’s $100. By the way, you owe us $100." So, government money comes without debt for the recipient, and that means that it effectively, if you have that sort of money coming in, your equity rises, your personal equity has gone up by 100, so you don’t feel the pressure to, "I gotta go and borrow money to buy something. Ah, I’ve got this money.

Therefore, I’ll use that." So if the government is creating the money, we actually have more personal equity and are less likely to go into debt and certainly less likely to speculate. So it’s actually more productive to have the government creating money than the private sector. However, I am in favor of private banks. A lot of people want to abolish private banks. They’re on the heterodox side. I would like to channel them so that they can only make money by lending for productive investment. Working capital.

Jed: As opposed to lending from banks for people who are speculating on the stock market...

Steve: And real estate, and so on.

Jed: Real estate. Okay, real estate. You wouldn’t let banks lend for real estate. Who would you...

Steve: I would limit how much they could lend. A proposal I put forward about 10 years ago was what I called Property Income Limited Leverage, which used to be... If you’re old enough to be my age, you know that that’s the acronym is the PILL, which has a certain relevance for those who remember those days. Don’t they talk about the Pill anymore?

But that would limit the amount of money that anybody could borrow to buy property to 10 times the annual rental income of the property, known or imputed rental income. In that case, if you and I were... At the moment, if you and I are on the same income, and we’re fighting over the same property, the one of us who will win is the one who gets the high level of leverage from a bank.

Now, if you make the PILL proposal, you and I... If the place was say earning $30,000 per year in rent, you and I would both know the maximum we can borrow is $300,000, and if we borrow more than that, we’ve committed a crime, and so has the lender. So that would just rule out anything more than $300,000. So then in that case, the one of us who would win would be the one who has saved more money out of their income.

So rather than getting an amplifying feedback between house prices and leverage, you’d get a dampening feedback, and that’s what we need.

Jed: Okay.

Steve: So proposals like that... But then... I’d like to have the banks lending the funds for working capital to consumers for actual consumer purchases, houses to live in, cars to drive, and stuff like that. And then funding entrepreneurs, but of course that would involve another change in banks because at the moment banks can only issue debt.

I would like to have banks being able to issue money to a corporation, a entrepreneurial corporation, and take an equity position, but it would be a non-voting... I had plenty of people tell me what they think about banks being involved in day-to-day business decisions, and I utterly agree. But make them into effectively a non-voting equity partner...

Jed: Got it.

Mainstream economics it has been a distraction from the important economic issues of our time rather than a way of understanding them.” – Dr. Steve Keen

Steve: And in that case if like 9 out of 10 fail, the one that does succeed could make it a worthwhile venture for the banks. So those sorts of change to how banks operate because banks are critical to our economy, and... But in the mainstream, leaving them out of... It’s completely... Mainstream economics it has been a distraction from the important economic issues of our time rather than a way of understanding them.

Jed: Interesting. Well, this is just absolutely fascinating. Of course, the average Joe on the street wants to know, "Well, is it going to get really bad after COVID?" It sounds like you’re saying that because our private debt at 80% is not that much different in my mind than the 40% debt at the end of World War II for private sector, but the corporate debt is what’s going to really sink us, and the fact that the government, although it is fighting COVID and it’s spending money to fight COVID, it’s not spending as much as it did in World War II.

Are those the two main things that are driving the difference between the end of World War II and the end of COVID?

Steve: Yeah, during... Nobody during World War II complained about extra... The deficit saying, "We can’t afford that," because if you said, "Well, we can’t afford that extra set of armaments then, well, we can’t afford to have Europe taken over by the Nazis either, which one do you want?" So when...

Jed: Right, so it’s easy to suppress what you call the deficit hawks, people who say...

Steve: Yeah, that’s right.

Jed: We’re ruining our children’s future by getting into debt, which by the way, just as an aside, it’s not a stupid way of thinking, because if I spent all of my inheritance for my children, that would be ruining my children’s future, if I went out and bought luxury items and ran up credit card debt, I would be burdening my children. It’s just that nations don’t work the same way, is that what you’re saying?

Steve: Exactly, yeah, because Stephanie Kelton puts it very well in her book The Deficit Myth, which of course is much less technical than my mathematical modelling, but exactly the same conclusions coming out of it. And she said that households and firms are currency users, okay?

Jed: Okay.

Steve: They have... If they are going to spend, they’ve got to get money in first of all. Banks and governments are currency creators. Their activities... If banks lend more than they take back in repayments they create money, if the government lends more... Spends more than it taxes, that also creates money. So you don’t have the same dynamics or the same problems at the government level that you do at the individual level, but because we are extrapolating from our own personal experience, we see the government as constrained as we are.

30:22Ballooning debt

Jed: Yeah, so you are in favor of these ballooning national debts and just huge debts, as long as... Maybe with one caveat, that the debt is to the people in the country, as opposed to having a debt to a foreign country.

Steve: That’s an important caveat, yeah, it’s only if it gets issued in your own currency that you’re safe, if you issue... If America, for example, issuing currency... Issuing debt in terms of euros, then it would need to earn euros to pay them, and that’s not your situation but it is Argentina’s situation.

Jed: Yes. Okay.

Steve: So it is a case of domestic money creation, is what matters, and the ballooning debt is dollar for dollar equivalent to the government money creation. So when you complain about ballooning government debt, you’re complaining about ballooning money creation.

Now, ballooning money creation is not causing inflation but stopping you falling into a debt deflationary trap, that’s actually a good thing. And there’s two ways you can get money, leaving out the export sector.

You can get it from banks or you can get it from the government. If you get it from a bank, you owe the bank money, and they’re going to be after you, if you can’t pay it back you go bankrupt. You get it from the government, effectively it’s the government’s problem, but if the government, as long as the government is a sovereign government, like the American issuing its own currency, and its economy is capable of doing that, and doesn’t have a balance of trade payment problems, you should have, which you don’t have because you’re the reserve currency of the planet, then it’s safe.

Jed: So wait, you just said that trade deficit is bad. So deficit that we have in our own currency is good, it means that you’re creating money, which means if you’re doing it right, you’re creating money at the same pace that your economy is growing, and in fact, your creating of money is what’s driving the economy to get bigger and bigger each year, but trade deficit is bad. Is that true? Am I getting those two things right?

Steve: You’re getting that right. That puts me outside modern monetary theory, by the way.

Jed: Okay.

Steve: Because the modern monetary theory crew have a different argument, which I think is completely fallacious. But their... They argue that exports are a cost and imports are a benefit. And they wave their hands about the impact of the foreign trade sector, I’ve... I’m very critical of that, I kept my mouth shut because, initially, because modern monetary theory has done something no other non-orthodox theory has done, and that’s get the public attention. Right at the stage at which there’s a motion in Congress to it to criticize modern monetary theory from the Republican side, so it’s... Yeah. So that...

Jed: I was going under the assumption that neither Democrats nor Republicans in the United States would ever give any credence to what you and your colleagues are saying.

Steve: Now, they’re listening. They’re listening now.

Jed: Interesting.

Steve: Just search for modern monetary theory in the New York Times, and you’ll find lots and lots of references to it in the press these days, which has not happened for any non-orthodox theory ever since Keynes.

Jed: Ever since John Keynes or what...

Steve: Yeah. 80 years, since any non-orthodox theory, and Keynes was non-orthodox when he started, has got the public attention. So that’s a monumentally great achievement by modern monetary theory.

Jed: So are you personally hoping that the Republicans will take back the House, stay in the White House, things like that, or what are you personally hoping for?

Steve: No. Look, I want to see Donald Trump on 7th Avenue or maybe 42nd Street. Personally, I think Trump is the most disastrous human being to lead a major economy since Caligula. Sitting outside the whole thing...

Jed: But you’re saying that the Republicans are the ones that are listening to your theories, that you think are true?

Steve: We’re trying to knock it down. There’s a Republican, I think his name is Herd, H-E-R-D or H-E-R-N, Hern, I think. And he’s come up with a motion condemning modern monetary theory. So he’s actually anti... The Democrats are more positive. But to me, it’s simply saying, if you’re realistic about how money is created, then there is no problem about selling government bonds, and no problem about financing them, and that’s the opposite of what the so-called deficit hawks argue.

Jed: Okay. So I must have misunderstood. You were saying earlier, it sounded like that the Republicans are the ones listening to your theories...

Steve: Oh, they’re listening in the sense of "Shut those people up."

Jed: Ah, okay. But yet to me, it seems like what you’re talking about is almost like the Reaganomics, the Voodoo economics, where if you pump more money into the economy, it’s going to stimulate the economy. Isn’t that what Reagan said in the ’80s?

Steve: Reagan effectively was a modern monetary theorist without knowing it. He was fooled by Laffer, and I can think of few more aptly named people than Laffer. Have you ever heard about the Laffer curve?

Jed: No, I’m not an economist, so I’ve never heard that.

Steve: Lucky you. Lucky you. Believe me, it’s good for your mental health not to be an economist. But Laffer was a conservative economist who argued... He drew on a napkin like an inverted parabola, and he basically argues if it’s past a certain point and he presumed we’re already past that point, taxation reduces GDP. So he said, "If you reduce taxation, you’ll increase GDP." So Reagan came in and said, "I’m going to cut taxes and that’ll actually increase government revenues." Okay?

It wasn't deliberate but it wasn't completely by accident.” – Dr. Steve Keen

So he argued cutting taxes would increase revenue, ’cause there’d be such a rise in the GDP, that that would balance out the budget. In fact, the budget blew out, but that’s what... And Reagan effectively was doing modern monetary theory, and that’s why the economy turned around under Reagan. It wasn’t deliberate but it wasn’t completely by accident.

Jed: Okay. So it was completely by accident. He was trying to do something that Laffer was telling him to do, which you say is wrong...

Steve: You don’t want to get rid of the deficit. You want the government to be creating money, and by accident, that’s what Reagan did by cutting taxes, and not increasing spending all that much. You had an increase in the deficit, and that stimulated the economy.

36:28Infinite energy

Jed: Interesting. Well, this is all very fascinating. Now, just as we close out our interview this morning, would you be willing to talk a little bit about whether infinite energy could solve some of the zero-sum game problems that Herman Daly was talking about, and you said it’s actually not a zero sum, it’s a negative sum.

So what was the article that you were pointing me to earlier?

Steve: Okay. I can actually bring it up on screen. I highly recommend reading it. I think it’s a great piece of writing, as well as everything else. I’ll just actually go back and share a screen again. It’s by a physicist, and it is called Exponential Economist Meets Finite Physicist. This guy, I’ve forgotten his name now, but he was... His first name’s Tom. And he started saying that economic growth can’t go indefinitely and the economist came back and said, "Oh, no, I believe it can go on indefinitely." So I recommend taking a look at that blog post. The basic point that he’s making is that even if we could stop generating carbon in our energy, so we have zero carbon economy, even if we did that, when you look at the rate of growth of GDP, it’s in terms of over the long term, it runs at about 2.3%, which means it doubles every 30 years. Let’s say if you keep that up, keep up that factor of 10 every century, if you keep that up, then in less than... I think it’s about 400 years, I think the temperature of the Earth would exceed the boiling point of water. It’s either 400, might be two-and-a-half thousand...

Jed: Even if there’s not for global warming?

Steve: This is just the second law of thermodynamics, entropy.

Jed: Okay. I have to differ, I’m a physicist. So you can turn on all the lights of your house, you can bring a huge party over, which is essentially like doubling your economy, making their growth inside your house, and of course it’s going to get hot and stuffy inside your house. But then if you have unlimited energy, you can turn on an air conditioning unit.

And I know that you think of the world as not being something you can air condition, but why not? Why couldn’t you expend energy to expel the extra heat into outer space?

Steve: I wouldn’t go that way. We’re talking Astro-boy stuff here so I’ll do my Astro-boy thing, and that is, I think we have to take production off-planet.

Jed: Okay, well, that’s fine. That would be the same thing. Maybe that would be a more efficient way of doing what I’m talking about.

…we have done enormous damage to this planet, far more than we're actually conscious of. And I think the first planet we have to terraform is Earth.” – Dr. Steve Keen

Steve: If you look at what’s... Even at the moment, as you know, NASA is one of about three organizations trying to trap an asteroid and bring it back in low-earth orbit. If you and I were having a conversation about intercontinental flights one century ago, we would have been regarded as loonies.

How on earth are they going to hoppin’ fly from America to Europe? That’s insane. Well, in a century’s time, we’d equally be talking about asteroid mining and production off-planet and dropping stuff back onto the planet, whatever method we find, whether it’s belly flops with one of the descendants of Elon Musk ’s starship or whatever else. But yes, it’s quite feasible, in a century’s time to imagine doing it. And I think we have to, because we have done enormous damage to this planet, far more than we’re actually conscious of. And I think the first planet we have to terraform is Earth.


Jed: Interesting. So you would say it’s not impossible to continue growing at the rate we’ve been growing, but we have to think of radically different ways of doing it, is that what you’re saying?

Steve: Do it off the biosphere and treat ourselves as the custodians of the biosphere rather than its main predator.

Jed: So in that sense, you are right on the same page as Herman Daly.

Steve: Absolutely.

40:23Sign off

Jed: Okay. Wonderful. Well, this has just been a fascinating interview today. Thank you for another visit to our little program here. We really appreciate you taking the time. Thank you so much.

Steve: Like the invitation, Joe. Thanks very much again.

Check out more intriguing conversations with experts, scholars, and living legends.

Or jump to our student resource library for tips on everything from studying to starting on your career path.

Do you have a question about this topic? Ask it here