The Science of Predicting the Next Financial Crisis

 

By

Can We Avoid Another Financial Crisis?

Steve Keen

Polity Press (2017)

Book Review

This book is a well-researched and documented critique of macroeconomics, the so-called “science” of capitalist economies. Maverick Australian economist Steven Keen’s main criticism of conventional economics is its inability to predict the extreme bubbles and recessions that plague capitalism. He blames this failure on macroeconomic models that pretend money and debt don’t exist. Instead conventional economics employs models that are based on primitive barter and treat money as a replacement for barter.

In contrast, Keenn’s economic modeling is based on the inconvenient reality that most mainstream economists choose to ignore – that private banks create 97-98% (see  An IMF Proposal to Strip Banks of Their Power to Create Money) of our money out of thin air when they issue loans. Keen also criticizes conventional economists for failing to track private debt (corporate, small business and household debt – which includes mortgage, credit card and student loan debt).

Based on careful research, Keen reveals how all recent recessions were triggered by a rise in private debt above 150% GDP* – preceded by five years of private debt exceeding 10% of GDP. The recession occurs when various economic stresses cause banks to reduce the amount of credit they issue (ie the amount of money they create).

He disputes that public (government) debt plays any role in triggering recessions. He points out that government debt had been declining world wide as a percent of GDP prior to 2008 – when governments increased public debt to try to compensate for the collapse of private debt.**

Keen predicts the next debt zombies headed for recession (based on extremely high levels of private debt) are Ireland, Hong Kong and China.**


**The US private debt to GDP ration reached 210% at the end of 2017 (US private debt to GDP ratio) and continues to increase.

**Because nearly all money is created by banks as loans (debt), when private debt declines, government must increase public debt to keep money circulating in the economy.

 

 

9 thoughts on “The Science of Predicting the Next Financial Crisis

  1. Pingback: The Science of Predicting the Next Financial Crisis | The Most Revolutionary Act | AGR Daily 60 Second News Bites

  2. Well, if you believe some of the news that’s out today, we are already in the midst of a financial crisis. There is talk of a ‘bear’ market and of a recession. It seems they never want to call it a ‘Depression’ ever again, which is exactly where we are headed. Food prices are ridiculous. Government shutdowns are the new bywords and an insane, childish president is not making things any better what with his demands for funding for a useless border wall and we are indeed, going to find ourselves in deep shit. But never you doubt us resilient Americans, we will take it up the wazoo and keep on keeping on. Just ask the federal employees who are working without pay. The Powers That Be can always count on the cowed sheeple to never give up their apathetic and complacent stance and actually DO something about the shit hitting the fan. We good, even when we’re not!

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  3. Pingback: The Science of Predicting the Next Financial Crisis – O Society

  4. I agree totally, Shelby. For most Americans the financial crisis started in 2008 and hasn’t let up since. Have you ever heard of Cards Against Humanity? Last year they promoted a crowd funding project whereby 150,000 people paid $15 to purchase property (on the border) and to pay an eminent domain attorney to keep the federal government from seizing it: https://cardsagainsthumanitystopsthewall.com/

    My son-in-law told me about the project (he paid $15 for a tiny plot of land). I must say I’m really impressed.

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  5. The basic cause of the 2008 financial crisis was the ability for banks and through them landlords to speculate in rising land values. The banks made it easy with low cost mortgages and the greed of certain landlords introduced the belief that land always becomes more costly as cities grow. As development land is withheld from use, the competition to build on it makes it more costly.

    Eventually the building trade and its many associated supporters of materials and techniques finds it too costly to buy more land and they reduce or cease their operations. The land begins to loose its value, which embarrasses the land owners who have recently mortgaged their newly acquired real-estate. The wiser banks, having seen these loans becoming “toxic”, have already sold at reduced prices what is owing to them to other less reputable banks, which then face bankruptcy as the mortgages holders begin to default on their payments. This being due to the resulting loss of jobs in the building industry. This effect spreads and the government is forced to bail out some of the bigger banks whilst the rest go to the wall, instead of Wall Street.

    This explanation s according to the school of economic thought known from the writings of Henry George (1879 “Progress and Poverty”). The cycle of land prices is about every 18 years, so we can look forward to the next crash in 2026. However what they can’t predict is how hard it will be, and it is possible with better control of the banks lending policies that it will not be as hard as before.

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