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posted on 28 July 2017

Can We Avoid Another Crisis?

Written by , Econoblog101

Review of latest book by Steve Keen

I just read the new book by Steve Keen, which is … a little red book with an intriguing title: Can We Avoid Another Financial Crisis?. It is very readable and brings the reader up to the latest economic theory applied to the reality of 2017.


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The focus is on private debt, and that is very important. The “smoking gun of credit" has been widely overlooked in the economics discipline over the last several decades, which instead focused on constraining public debt.

For those who are interested in state-of-the-art economics of 2017, this is a very good book since it gives the reader some perspective at how we got where we are. What is disturbing is the fact that we did not rethink our economic theory and policy even though we clearly hit a wall in 2008/09.

Most economies still rely on increasing private debt as the major mechanisms to ignite and sustain growth. The problem, of course, is that private debt cannot increase forever, and when it does not, a financial crisis plus a recession result. This, perhaps, would not be so bad, but the problem is that we are unlikely to repeat this cycle.

Japan, so argues Keen, shows the way forward. The public will be afraid of debt, rightly so, and stop borrowing. This will change the way the economy functions since private sector spending will be reduced permanently. The public sector hence needs to increase spending to reduce resulting unemployment. It remains to be seen whether economists can make the intellectual jump into a new world of (private) “Debt Zombies".


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