Sunday 10 June 2012

Buddy Can You Spare A Euro?

Nicholas Shaxson, author of the best selling business book “Treasure Islands” had an item in his blog on Wednesday 6th June entitled “Steve Keen’s Savage Predictions For Britain” which gives an Australian’s take on the British Economy today.  It is not cheerful and its recommendations probably unwelcome in many quarters.


The controversial (and widely admired) Australian economist Steve Keen gave a fiery talk at the London School of Economics recently, which was broadcast by the BBC. You can listen to it here.  Below are some key extracts noted by hand.

His most central theme was that the financial bubbles that have built up constitute nothing less than a giant Ponzi scheme, and that the citizens of the UK in particular will cry buckets of tears before this mess is over.

We are only about 30 percent of the way through the crisis, he reckons, and forecasts another UK-based Lehman-style event before too long. Here are some direct quotes:

I would say we are about 30 percent through the crisis, because levels of debt are only slowly being reduced: US private debt from 300 percent of GDP.

“The level of debt the UK has taken on is breathtaking. I thought the USA was bad when it had a total private debt ratio of 300% of GDP. Even the treasury has your debt at 450 percent of GDP.

Whereas the US financial sector debt peaked at 120 percent of GDP, yours is 250 percent. And at various times in the last 3-4 years, something like 60 percent of (inaudible) demand in the economy has come from rising debt.

Turning that around is going to be painful. I can’t see you avoiding a credit crunch at some stage, that probably will be of the scale of Lehman brothers. The only reason you have avoided going down as fast as the Americans is that you have bounced up and down in debt levels . . . . but it is one and half times as high, and twice or three times as volatile.

When it starts to go negative, all the hot money that gave you what looked like prosperity for the last 20 or 30 years will be out the exits to Kuwait or wherever else the Mafia lives.”

As I said, fiery stuff. He was then asked whether stagnation, 0.1 percent Japan-like growth, would really be so bad. His response:

Japan continued developing industry till the 1990s, and it still has it. There has been far more industrial development in Japan than in Britain. You guys in Britain are specialised in the biggest Ponzi scheme on the planet.

You have a much more difficult transition till you get to the productive malaise that Japan is still in. It won’t be as bad as the Great Depression, but it will be a continuous state of depression, where you fall into it and out of it and back into it, but without the social cohesion of Japan, and without the industrial base, and I think by the looks of it, a far higher level of private debt and financial speculation. So it’s a difficult road for Britain to get to be Japan.

Capitalism was far more dynamic when engineers dominated in the 1950s. we need to get back to the time when the financiers were the servants of the engineers, not the other way around.

Steve Keen clearly loves bankers. He has a recipe for the sector, which sounds outlandish to those who haven’t come across it before, but is in fact being quite widely discussed here.

“We need a modern debt jubilee. You have to reduce the level of debt and the wealth of the financial sector without penalising people who purchased the goods that the financial sector spun off to them, that they call assets, or the loans they securitised. I would argue for “quantitative easing for the public.”

Instead of Bernanke giving money to the banks and saying ‘please lend’, you give the money to the public, saying to those who are in debt that they must pay the debt down; and if you are not in debt, here is cash.

The banks would then find a lot of their loans paid off. Their cash reserves would rise, their income earning components would fall, so they might be illiquid rather than insolvent; so there would be challenges there.

People would have less debt, people with no debt would have a stack of cash to spend. The income earning capacity of the bonds would fall drastically, they would have less income to spend, but much more cash, and that would reduce the damage of the transition, and it would minimise the power of the finance sector overnight.

That would cause a lot of financial people to be unemployed. Tough.


Elsewhere around the web there are others talking of “Debt Jubilees” some referring to the practice of the Ancient Babylonian Kings from time to time cancelling all debts to prevent too much land and power falling into too few hands.

Is is possible that almost anything could be better than the courses of action being pursued in Europe, Westminster or Washington DC.  Who knows?  But sooner or later we are all going to find out.  The picture above is Hogarth relating to “The Beggars Opera”.

Why does the date 6th June give me a twitch on matters referring to Europe?


  1. Here in the States, the idea of a debt jubilee would be spurned, even by those who would benefit.

    The puritanical nature of the populace here is such that punishment is natural to us. Correcting mistakes by letting someone not be miserable and scared is anathema.

    So, while I would support a deby jubilee in any form, I really don't see much in the way of traction here in the States.

    On a different note: You may now find me over at Wordpress.

  2. The solution of personal rather than bank bailouts was always the best option back in 2007. Coupled with major bank break up and mutual organisations the beneficiaries of personal solvency was the extra ingredient from my own blog back in 07-08. I'll dig it out, Demetrius.