Creation of Money - Dr. Steve Keen, Economist

Steve Keen is an economist, critic, and author who believes our current economic theories fail to properly deal with private debt, the role of banks in money creation, and more generally fail to take into account real-world contradictions to theoretical predictions at the margins. We talk about the creation of money, deflationary crises, speculation vs innovation, how to distribute public vs private spheres, and his vision for the future of economics.

00:00:00 Go!
00:03:17 What is the goal of economics?
00:11:48 Punctuated Equilibrium & System Dynamics
00:18:20 Economics 2.0
00:23:27 The Creation of Money
00:35:21 Godley and Minsky
00:44:54 Why is double entry bookeeping bad?
00:50:09 Alternative paths to money creation CLIP IN
00:56:09 Deflationary Crises
01:10:35 Building an Audience
01:13:49 Public Vs Private
01:24:58 Speculation vs Innovation
01:27:11 What would you do to fix it?
01:30:22 Closing thoughts

#economics #bank #financial


PODCAST INFO: Anastasia completed her PhD studying bioelectricity at Columbia University. When not talking to brilliant people or making movies, she spends her time painting, reading, and guiding backcountry excursions. Michael Shilo also did his PhD at Columbia studying the elastic properties of molecular water. When he's not in the film studio, he's exploring sound in music. They are both freelance professors at various universities.

SOCIAL:

MUSIC:

[DemystifySci_Podcast]

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[ralphmason]

I absolutely *love* the way you guys dig in and question everything. Steve Keen, Michael Hudson et al. are such great speakers, but most interviewers just accept what they say and don't clarify to make sure what they're saying is really understood. It's frustrating not being able to ask questions, but you guys do a fantastic job of asking the hard questions, making mistakes, getting corrected, and therefore really teasing out the issues for the benefit of the audience. Great job!

[rodrigoribeiro]

Economists can be divided into two groups: the renegades, who are intellectually honest showing how the economy actually works, and those generously rewarded for convincing the broader public of how the economy has to work to serve the interests of the plutoligarchy.

[OrpheoTreshula]

Steve Keen is at the top of his game. Amazing interview.

[ChrisCleg]

The whole historical barter money myth was so strong and so evident with the interviewers. I’m so glad Steve keen was here to talk to them and us. It was a great interview, everyone did a great job.

[charlesloucks]

Anastasia asked around 48 minutes into the podcast why it matters when the Oil Industry in the 1980's defaulted on debt that was created out of thin air or fake money. I don't think Steve had the time to respond adequately to her point. So I will try to explain. When banks issue loans created out of thin air, that money is put into circulation into the broader economy. The way the banking system removes the money from circulating is when principle payments on the loan are paid by the borrower. This keeps the supply of currency from running to infinity. If a borrower defaults, the banking system cannot remove the outstanding principle on the loan from circulating in the economy. This is inflationary since you now have dollars chasing a reduced supply of goods. It is well understood that inflation is a tax on the public. What Steve was getting to is that the private banking system creates dysfunction this way since when the banks mess up, it is the public that pays but when banks fully collect on a loan, they get to keep the profits for themselves. This is called Socialism for the Rich, privatize profits but socialize the costs.

[haldanebdoyle]

Great find. Looking forward to seeing his take on system collapse in a future episode.

[evanmcarthur]

Finally people are talking about this more and more, I was in the middle of a Finance degree when 2007 happened
Freaked me out my finance class where tough but interesting
While the economics classes I hated cause they felt like bullshit with all those silly math formulas

[marvellous.mind.podcast]

brilliant stuff, thank you for ur beautiful and important work!

[solarsky]

Please also interview Dr. Richard Werner in this issue...

[chrismonksellye]

As the system collapses, we do indeed have an opportunity to develop, decentralize, open source and rebuild a new modern form of "self sovereign" economics. Hopefully, an energy / electricity based blockchain "E-coin" and real physical energy storage solution. Where, the "e-coin" literally is a rechargeable battery registered to a blockchain owner "generator".

[SolvingTornadoes]

Fascinating discussion. I'm somewhat out of my element on this subject, so if this is a dumb question please ignore it. But I wonder if the notion that banks manufacture money might be confusing. How about if we instead said that banks create or manufacture value? Or, they amplify the value of money?

[Floxflow]

Steve Keen is brilliant. Your show is brilliant. Brilliant equilibrium (joke)

[Rob-fxdw]

It may only seem that Keen is right when he states that after the two times there was a surplus the US had a financial crisis but it only seems that way because he has omitted to include the real facts.
He quotes two times there was budget surplus but omits the fact that there were many years of surplus which was included 1947, 1948,1949, 1956, 1957, which were years of growth.
This compares to the great depression of the 1930's where deficits were accompanied low or negative growth and massive unemployment of up to 20% and government confiscation of gold which was default in real value of the currency since it was confiscated at an exchange price of $20 and people were charged $33 to get it back.
He even ignores the fact that Australia in the GFC had one of the lowest by far debt to GDP ratio of the developed nations and the GFC had such a smaller impact on their growth than almost all of the nations where debt to GDP was higher. So debt to GDP is factor in ascertaining what effect any other crisis may have.

[GETJUSTICEU]

26:00. the only way it could work is if all loans were in Errrr, surely cash is an IOU printed/minted by the bank?

[hoon_sol]

The answer to what she's asking about around 27:00 is that the way banking first worked, which is what banking actually is (as opposed to moneylending), was that the bank simply acted as an agent which stored your valuables, e.g. assets like precious metals and such, and charged a fee for it. They also rapidly developed a system for allowing people storing their assets (the so-called depositors, because they deposited their assets there) to be able to withdraw them in other places (if the items were fungible enough of course, or alternatively they could even have them transported from place to place by more secure convoys). A note acting as a claim on assets being deposited in a bank was called a "promissory note", i.e. a promise by the bank to yield the asset in question. This is also what the first paper money in the US was, namely promissory notes for claims on precious metals in banks, with one US dollar meaning a claim on a specific amount of gold.

So that is what banking was, which should hopefully answer the question as to who was the first "savers", although they at that point were not connected to moneylenders at all, and didn't lend out their money at all. Moneylending actually dates back way longer than banking, but even modern accounts of it have been popularized in stories like _The Merchant of Venice_ (where Shylock is indeed exactly that, a moneylender, and shows how moneylenders have historically had to resort to brutality in order to try to get paid back when their loans don't work out).

The first bankers were the Knights Templar, which is certainly an interesting fact, especially if you want to go down the rabbit hole of how the Knights Templar mysteriously disappeared from France after Philip IV purportedly destroyed their order, and how equally mysteriously cantons in the mountains of Switzerland right nearby started donning Templar flags and became Europe's foremost banking nation, still the home of the Bank of International Settlements, the bank of all banks, to this very day.

In any case, after banking first arose, it was a gradual process where they started to connect depositors with borrowers and thus became the so-called intermediaries they still claim to be to this very day, which at that point that were to some extent. But over time as they sought to simplify the process and to get as much out of it themselves, they first started devaluing the promissory notes to be worth less of the assets in question, then decoupling the notes entirely from assets (at which point you get what is called fiat money), and lastly banks at some point started to simply create money out of thin air by making up deposits when they give out "loans", which isn't what they're doing at all, since what they're really doing is purchasing a security from you (a promissory note of a different kind than the aforementioned ones, namely an IOU, a promise that you'll pay the bank), and to then seek out reserves later if any such requirements are still in place and if their practices are starting to fail due to giving out bad loans that more and more people default on (which is exactly what we have seen during all the last financial crises).

So while Ford didn't really utter the quote commonly attributed to him word for word, he is known to have expressed the general sentiment that has been paraphrased as follows:

*_«It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.»_*

[erikeparsels]

When you discuss economics, your description of the state of the discipline paints a picture that depicts a religion rather than a science.

[martinhartecfc]

Are there two types of people or are there two types of job? As a teacher, I hope I can work until the day I die; if I had to go back to washing dishes (which I had to do for 8 years), then I would want to retire as soon as I hit the minimum age.

[AtypicalPaul]

Objective gov? Lol, that's a good one;)

[FlamingFalconMan]

I’m curious about the falsity of the “diminishing returns to scale”. And that’s relevance to economic theory.

Since that is just an old model, highly simplified and based on old fashioned manufacturing jobs. And likely even considers the reduced profit from increasing output by decreasing demand/supply ratio and ergo price. As explained by Keene.

There are other models that include separate types of labour, manual labour (which is what can be argued to experience dimishing returns) and skilled (idea producing labour) which can produce increasing returns to scale due to new systematic processes, technology etc.

Maybe I’m missing something crucial here. But it almost feels like he’s trying so hard to be contrarian and point out the flaws in the subject and its constituents he’s been getting lost in the weeds.

I don’t think economics has gone far from the “study of economy”. Since it is literally just the study of how to distribute items in society. It’s just a lot of focus is on capitalism since that is our system and messing around with a used system causes less strain than overhauling a whole new system. (One which would likely still have many flaws).

Certainly an interesting talk and I’m probably gonna look into the more concrete academic papers of his to see exactly what he’s on about.