Thursday, September 30, 2010


I don't read anywhere near enough Keen.

Focusing on the good bit, one reason we got into this predicament in the first place was because private sector, debt-based money swamped public sector, fiat money. Ultimately we need to return to the public-private money balance we had in the 1950s and early 1960s.

YES: Monetary imbalance is the problem.

So why aren’t we “Back To The Future” already? Why isn’t the economy booming once more, and why is inflation giving way to deflation?

Because, though the money supply is back to where it was in 1960, the debt to money ratio is utterly different. Even after Ben’s Helicopter Drop, the debt to base money ratio is almost twice what it was in 1960, and over 3 times what it was back in the Golden Days of the 1950s.

YES: Debt per Dollar is the problem. (It is the same problem as monetary imbalance.)

I should add that things are not as good as Keen suggests. He says, "the debt to base money ratio is almost twice what it was in 1960..." But that is debt relative to base money. The ratio is still far from 2 to 1 if you look at M1 money. People don't spend base money.

I’ll focus on the obvious message from the above chart: if the government simply pumps its money into the system without restraining the financial system from financing speculation on asset markets, the best we can hope for is a repeat of this crisis, on an even larger scale, some years down the track.

YES: We must not only increase the quantity of money, but also decrease the reliance on credit.

1 comment:

The Arthurian said...

And again, decreasing the reliance on credit must become our new method of fighting inflation.