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.