posted on 07 February 2016
Written by John Lounsbury
Steve Keen is one of the world's foremost students of the relationships between money, credit and economic growth, an area that has been ignored in much economic theory and analysis for many decades. The fact that he was prompted to criticize so fundamentally the very system he has studied is noteworthy.
Prof. Keen summarizes our current monetary problems, which he maintains are primarily the result of excessive private sector debt. He says this in the current Forbes article:
The Private Sector Problem
The failure of the banks to produce the money needed by the economy now is because "they created too much of it in the past". Japan was the first major economy to experience this phenomenon. You might think that the rest of the world would learn from that but Steve provides the graphic proof that they simply followed suit:
Perhaps the rest of the world did not quite reached the extreme of the Japanese excess but Canada and China may yet get there. And what has been the experience of Japan? Prof. Keen:
He suggests that shifting the Japanese credit growth experience forward in time to overlap with the Great Financial Crisis may provide insight to the future the rest of the world is facing today:
The Public Sector Problem
Prof. Keen says the problems here relate to "bad metaphors" and defective "ideology". The fantasy of an ideal world with "no-government, free market idyll" inspired by "conservative politicians from Reagan and Thatcher on" has curtailed government spending so that source of needed money has also been deficient. He cites the non sequiturs that "the government is 'like a household'" and should "live within its means".
He says that this thinking is okay for a barter-based economy. But that is not what runs the world today. (See the recent series on this subject by Derryl Hermanutz: Barter Thinking in a Money Economy - Part 1, Part 2, Part 3, Part 4 , Part 5, Part 6.)
Prof. Keen decries the ignorance of the public policy initiatives (which I would suggest are encouraged by the banks for deflection of attention from themselves). These initiatives have focused on the symptom of the monetary breakdown (rising public debt) instead of addressing the disease (excessive private debt). He writes:
Prof. Keen asks "How much longer can governments (and banks) continue with failed policies?"
He responds that if current policies of increasing bank reserves and implementing negative interest rates persist, the answer is "indefinitely". And, if we are all following the Japanese monetary footpath, quoting from Steve's closing paragraph, we will repeat what he sees happening to Japan:
Reforming the Monetary System
Prof. Keen does not mention details about the structure of the monetary system except to say early in the article that the cost of running a deficit (presumably he refers to interest) is trivial compared to the size of the deficit. I would like to point out that there is any interest at all is an arbitrary condition resulting from the decision of governments to relegate the actual creation of the money to private banks. There are solutions proposed for this system by many contributors to GEI and others, often discussing the U.S. but sometimes the EU and the UK. It has been a political decision in the U.S. to abrogate the specified responsibility in the U.S. Constitution (Article 1, Section 8): "To coin money, regulate the value thereof, and of foreign coin,".
Among the areas of discussion for monetary reform are the following:
Public Banking. The U.S. federal government could create part of its debt through a public bank. Money spent for infrastructure, public goods (education, health care, basic research, defense and safety, for examples) and other government expenditures as specified could be lent into existence by public bank credit and there would be no interest cost to the government. The benefit of using a public bank would be the added flexibility of debt security transactions with the private sector which could be varied as conditions in the economy changed. Prominent among those writing on this has been Ellen Brown, President Emeritus of the Public Banking Institute. Her recent articles are listed here.
Debt-free Money: This represents a radical departure from the existing system wherein the government simply issues money as needed for government expenditures and taxes only to remove excess money from the economy to suppress inflation. Some of those who have written on variations of this concept (in alphabetical order) are (click each name for lists of recent articles) :
See also: Adair Turner: A New Debt-Free Money Advocate (GEI News)
Our Dysfunctional Monetary System (Steve Keen, Forbes 06 February 2016)
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