This Is The Most Important Video About Economics You'll See This Year

Professor Steve Keen's Description of the Economy Is a Must-Watch whether you're a Capitalist, Centrist, Liberal, Marxist, MAGA, Socialist or Social Democrat.

I was really excited to see Professor Steve Keen’s recent video where he shows off his software, Ravel, which models the macroeconomy in more complex and accurate ways than the orthodox economic formulas that developed nations like Canada, the UK, the US and others have been relying on since the 1970s.

I’ve been a fan of Keen’s work for a number of years, because he is practical.

I have worked in public policy research for many years, I’ve written political platforms and legislation, I’ve lectured in Government-business relations, and studied economic crises and how they can be, and have been, practically resolved.

None of this was an abstraction for me: my father was born in 1933 and grew up in the Great Depression in the Canadian West, where the impact of the Depression was worse than anywhere else in the world. For most of the 1930s, my father was living in an 8’ x 10’ grain shed with a veranda built around it with his four older siblings and parents in an economy that had collapsed by 70%, to the point that it had reverted to barter: my grandfather - a lawyer - was accepting pay in geese. In some areas of Western Canada unemployment was over 75%, as the Federal Government pursued austerity.

From these origins, my father won a Rhodes Scholarship, became a lawyer, a financial executive and one of Canada’s top experts in monetary policy. I would ask him to explain the economy, and money, and we sat in the car on a ride home from the local airport, he told me, “To really understand a problem you need to look at it from the top down and the bottom up, and most economists do neither.”

This simple statement provided a useful approach to understanding a problem, which is to consider it from different points of view, and to do what you can to understand the different perspectives and interpretations of a scenario.

Dr. Samia Hurst, who is a Swiss professor of ethics, who made a profound point about ethical debates that bears repeating: for an ethical debate to be fruitful, both sides need to work very hard to have as complete an understanding of their opponents’ views as possible.

This is also true of philosophical, scientific, political and economic ideas - not just armchair discussions, but how those ideas play out if they are applied or misapplied in the real world.

Today, we are all drowning in false assumptions and accusations in an atmosphere that is so overheated that good faith disagreements aimed at better understanding are impossible, because they’re all just talk, and reward convincing liars, not accuracy.

Keen’s describes his latest book as “an engineering approach” which is why it is so important. No matter what the intentions of various individual and group actors in the economy, there are transactions and processes that are taking place that are recorded and can be independently observed.

That is why his insights - and those of other economists who are working empirically - are so useful, and why our current politics are so cursed.

He is a professional economist with a real desire to have an economics with sound foundation that describe the function of the economy as it is operating, no matter what political party is in charge.

This essentially means taking the assumed intentions out of it and focusing on better describing and modelling the actual relationships and interactions at the macro level, and demonstrating that it is different than the models and assumptions that form the basis of current political and economic policy-making.

In his excellent Debunking Economics, Keen breaks down in detail the hidden assumptions that are embedded in our current, neoclassical macroeconomic models based on scaling up microeconomics that created:

“a model of the macroeconomy as a single consumer who lives forever, consuming the output of the entire economy, which is a single good produced in a single firm which he owns and in which he is the only employee, which pays him both profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labor, to which he decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon which he rationally expects and therefore correctly predicts… Any reduction in hours is a voluntary act, so the representative agent is never unemployed, he’s just taking more leisure. And there are no banks, no debt and indeed no money in this model.”

The fact that there are no banks and no money in this model may seem hard to believe, but it is quite accurate. That’s because of some very important assumptions about money and banks. Money is treated as just another kind of good - as if it is a physical item that is used to add transaction convenience to what is essentially a barter economy.

In this view, when households save, they put extra money in the bank, which then lend that same money out. The bank is seen as a middle man who is just connecting people who have extra money with people who need to borrow it. For this reason, it’s treated as if the bank deposits and bank debt just cancel each other out.

In the neoclassical model, these household savings are then used by government and by firms. This is “supply-side” or “trickle down” or “fiscally conservative” economics, because of the idea that you have to save money by generating a surplus before you can invest.

These ideas make great intuitive sense, but none of them are accurate descriptions of the economy, for the reasons Keen explains in his book as well as this video.

As Keen (and many others) have noted, neoclassical economics is based on ideas about about how money is created and injected into the economy in the first place that are demonstrably incorrect.

The entire idea of “supply-side economics” where people have to save before they invest has been demonstrated not to be true by the actions of governments and central banks, both recently and historically with the creation and introduction of new currencies.

In this video, Steve Keen singles out billionaire Ray Dalio for some conditional praise, because Dalio recognizes the difference between cash and credit.

Keen says

“I want to focus on the ways in which Ray Dalio is very different and much more correct than the mainstream. And that's how he treats the role of credit in economic activity. And he does a lovely explanation of that in

His extremely popular video how the economic machine works. Let's have a listen to the beginning of that.

Ray Dalio:

“The economy works like a simple machine but many people don't understand it.

Let's start with the simplest part of the economy, transactions. An economy is simply the sum of the transactions that make it up. Each transaction consists of a buyer exchanging money or credit with a seller for goods, services or financial assets.

Credit spends just like money. So adding together the money spent and the amount of credit spent, you could know the total spending.”

[Keen]: I can now give you the high priest of mainstream economics on credit which is Ben Bernanke who got the Nobel Prize in economics for his work on banking. Here he is talking about the role of credit in the economy and the way that banks function in the economy.

Bernanke: “Now it's important to recognize also that we talk about borrowers, mortgage borrowers, small business borrowers, but banks themselves are also borrowers. They have to get the funds they need to lend to ultimate borrowers.”

According to this argument, which is mainstream economics - the idea of loanable funds - banks don't actually lend in this model. They are not the ultimate lenders as Bernanke said himself there.

The ultimate lenders are people in the public who save money, and then banks operate as intermediaries to enable the savers to find borrowers.

And that is the reason that they ignore credit because if that's the case then credit is simply a transfer of spending power from one person to another.

• The lender's money supply goes down.

• The borrower's money supply goes up.

If the borrower spends more rapidly than the saver does, then that's going to increase economy a bit. But there's no extra demand created and it would be a mistake to add credit onto the turnover of existing money.

Let's take a look at what the Bank of England thinks about that. Because eight years before they gave this guy the Nobel Prize for his work on economics, the Bank of England said that model is false.

And they weren't the only one. We had the BundesBank coming in and saying the same thing, the Norwegian Central Bank, even the New Zealand central bank.

And what they were saying is the same thing that my side of economics has been saying for over a century: that banks create money when they lend. And that makes an enormous difference.”

That enormous difference is clear when you simply state the obvious:

• Savers don’t lend to borrowers, banks lend to borrowers.

There are two opposing models of banking used by economists: Loanable Funds, in which banks function as intermediaries between savers and borrowers. This is taught by almost all economics textbooks—see for example (Mankiw 2016, pp. 71-77), (Samuelson and Nordhaus 2010a, pp. 454-465); and

"Endogenous Money" (McLeay, Radia, and Thomas 2014, p. 15), in which banks create money by creating debt. This model has been endorsed by the Bank of England (McLeay, Radia, and Thomas 2014), and the Bundesbank (Deutsche Bundesbank 2017).

It can be traced back to Irving Fisher (Fisher 1932, p. 15), Joseph Schumpeter (Schumpeter 1954, pp. 1110-1117), and Hyman Minsky (Minsky, Nell, and Semmler 1991).

The crisis Musk envisages is inevitable under Loanable Funds.

In his book - and his videos, Keen uses his software, Ravel, to simulate different models of the macroeconomy - one where all the money comes from the private sector, and another with credit money as well as government fiat money.

When the simulations are set up to run, the result for a system where all money creation is private is that it crashes.

“These models show that a pure private sector model, with no government sector, is susceptible to collapsing into a debt-deflation. In contrast, a system in which government spending can exceed taxation is immune to such crises.”

When Keen writes “a system in which government spending can exceed taxation is immune to such crises” it is because of a very simple, and self-evidently true relationship between government and the private sector, namely:

A government deficit means that the general public - households and businesses included - are all getting back more than they are paying in taxes. When a government spends more than it takes in, the deficit on the government’s books means the private sector is in surplus.

The reverse is also true: if governments are running a surplus, or paying down debt, then the private economy is in deficit. This is basic accounting.

If government is running a surplus and paying down debt, it means they are taking more money out of the economy through taxes than they are putting back into the economy. If government is running a balanced budget, it won’t be adding to the growth of the private economy at all.

For that reason, the incredibly rigid policy choices associated with fiscal conservatism actually create all the crises they claim to be solving: they create the conditions for financial crashes, and when they occur they make them worse.

If you think of the government as a kind of bank - which it is - think about what happens if someone wants to open a savings account with you. If you are a bank, someone comes to you, deposits money, and you pay them interest for it. That is what governments are doing when they sell bonds. People or institutions are putting their money in the The Government Bank, because it’s the safest bank going, because it has the power to create money. It’s the mother bank for the entire economy.

When governments balance their budgets or run surpluses and pay down debt, it means they’re not taking deposits anymore. For investors, that means that the single safest investment on offer - a government bond - is not available. Every single other possible investment in the world comes with greater actual risk than government bonds, because when you put your money with a federal government with monetary sovereignty, it can make sure that you get your money back with interest. Contra to anyone who believes this is destabilizing, or unjust, or anything else, it is this assurance that provides extraordinary strength and stability to an economy that makes extraordinary development possible. It provides certainty, which is exactly what is required to resolve crises.

When governments aren’t offering low-risk, high reliability bonds, investors have to look to riskier alternatives in the private sector instead. When I say “have to” it’s because they have money they want to keep safe somewhere where at least it will keep ahead of inflation. And by riskier, it’s recognizing that the investments may offer a higher potential reward, the trade-off is that there is a higher possibility of failure with higher losses.

So, instead of putting money safely in a government bank, they goes into inflating asset prices in a speculative bubble, creating the conditions for a financial crisis.

This is exactly how the 2008 Global Financial Crisis began, as This American Life reported in their episode, “The Giant Pool of Money.” The U.S. Government was focused on paying down the debt - and the economy was booming! However, the reason for the boom was because the investors who couldn’t buy government bonds were pouring money into the U.S. housing mortgage market instead. The mortgages on people’s homes in the U.S. were being sold off, then bundled into bonds with many mortgages in them, being sold like mutual funds. They were rated AAA - the highest grade, equivalent to U.S. Bonds, which is simply not possible when the U.S. government has monetary sovereignty.

And not just the Global Financial Crisis, but the crisis of 1929 as well.

Keen writes:

“Mainstream finance theory, in the form of the “Modigliani-Miller Hypothesis” asserts that leverage has no impact on share market valuations: We conclude therefore that levered companies cannot command a premium over unlevered companies because investors have the opportunity of putting the equivalent leverage into their portfolio directly by borrowing on personal account. (Modigliani and Miller 1958a, p. 273) This is strongly contradicted by the data, which shows a staggering correlation between change in margin debt and the Cyclically Adjusted Price to Earnings (CAPE) ratio over the last century—see Figure 37.[26]”

“The coincidence of booms and busts in asset prices with macroeconomic booms and busts is thus no coincidence: the huge asset overvaluations of 1929, 2000, 2007 and the mid-2020s are driven by the same factors which caused the booms and busts of the macroeconomy itself. Asset price bubbles are driven by credit bubbles, which burst if for no other reason than their persistence depends on ever-accelerating levels of private debt. These asset price bubbles are damaging aspects of private money creation. While the debt-deflationary forces modelled in the previous chapters on their own explain economic collapses caused by excessive private debt, the fact that margin debt reached 8.9% of GDP in 1929, when margin loans allowed up to a factor of ten leverage, shows why the Great Crash of 1929 was so devastating.”

It is devastating because countless future anticipated income streams are all immediately terminated - for banks as well as individuals and firms.

While neoclassical economists will talk about consumer confidence, they are not talking about the much more important reality, which is capacity.

After the Second World War, no lesser personage that Milton Friedman recommended that government should always spend slightly more than it took in taxes, financed with created money, in order to promote economic growth and stability.

It has to be said that the “loanable funds” vs “endogenous money” debate is particularly odd when there is so much history that clearly shows that national governments originate and create money in the first place.

There’s a reason why Government should never, ever be compared to a household, or even a regular business, because all governments are foundationally financial and legal institutions.

It is a statement of fact that money is created by government first, and that in addition to the fiat money supply, banks extend credit.

This is history that is recorded in detail, in the founding documents of countries from centuries ago to more recent changes in currency. Canada was founded in 1867. It is in the Constitution that “the exclusive Legislative Authority of the Parliament of Canada extends to all Matters coming within the Classes of Subjects,” with “currency and coinage” being listed.

The Euro, which was launched on January 1, 1999, and its banknotes coins were distributed starting in December 2001. When the EU was created, all the people who lived in all the countries that gave up their own currency had to get Euros from somewhere to be able to buy things and pay their taxes. The Euros were created first: they were not collected in taxes.

This means that federal governments that have their own currency whose debt is mostly in their currency can only default if they choose to. The US Government cannot go bankrupt in US dollars. The Government of Canada cannot go bankrupt in Canadian dollars. The UK cannot go bankrupt in Pounds Sterling.

Dalio does not recognize or appreciate the significance that, as a matter of legal and constitutional reality, that one of the roles of government is as a creator of public, fiat currency. He is not alone - this is the current, dominant view, despite the fact that it is recognized as not being accurate.

This is not a new idea. This is monetary sovereignty. It is absolutely fundamental to sovereignty and any capacity to govern in any society.

Even noted mainstread federal reserve officials will concede it.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Alan Greenspan: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

St. Louis Federal Reserve: “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.

A Monetarily Sovereign government has the exclusive and unlimited power to create its sovereign currency.

The United States is Monetarily Sovereign. It has the exclusive, unlimited power to create the U.S. dollar.

China, Canada, Australia, the UK, and Japan are Monetarily Sovereign. They have the exclusive, unlimited power to create their sovereign currencies.

By contrast, America’s states, counties, cities, businesses and people all are monetarily non-sovereign. They are users, not creators of the dollar and not sovereign over its creation.

Trillions of dollars and Euros and hundreds of billions of Canadian dollars have been printed over the last 20 years, but they did not go to support government fiscal stimulus for the economy (infrastructure, education, R & D), it went to propping the value of assets that were collapsing. This happened around the world, during the Global Financial Crisis, during the Euro Crisis, and during the Pandemic. This is yet more evidence that fiat money created by government is necessary for the financial system to function, not the other way around.

Hyperinflation - as in the famous instance in Weimar Germany a century ago - was not caused by government creating new money at all.

It is not when governments have debt in their own currency that hyperinflation crises occur: it’s when, like everyone else, they have debts in a currency they don’t control. Foreign-denominated debt is the most common driver of hyperinflation: a small country experiences a commodity or resource boom (oil, food, minerals for export) and while times are good, borrows in other currencies. If the commodity drops in price because of increased production elsewhere, it has multiple knock-on effects. Foreign customers buy less of the product - and less of the domestic currency they needed to pay for it. So revenues drop and so does the exchange rate, so it immediately takes much more domestic currency to service foreign debt, at the precise time the economy is faltering.

Over the decades, countries have developed policies that act as “automatic stabilizers” to deal with economic shocks - unemployment insurance for people who have lost their jobs, transfer payments within currency unions to compensate for regional downturns.

By contrast, hyperinflation occurs as a string of “automatic destabilizers” that are beyond a government’s control, often starting with a commodity whose price is set globally.

What is missed in all of this is the fact that all of these decisions are a form of risk-taking, and the nature of risk taking is that some ventures will succeed and some will not, and it cannot be known ahead of time which is which. There is always an element of uncertainty, and the same risk taken by different people will have different outcomes.

The relentless drumbeat of fear over government debt in the domestic economy is misplaced. The fact that federal governments that are monetarily sovereign and can’t go bankrupt means that for investors, they are the safest place to put your money, which is what investors are doing when they buy government debt. They are putting their money into the only institutions that is guaranteed to return their money with interest - not just because it has the power to get someone else’s money to pay for it through taxation, but because the government can create the money.

No one has ever made money betting against a country’s monetary sovereignty.

It also has to be said, the use to which that money is applied is all-important.

In recent years, it is routine for governments to run a kind of reverse-Keynesian policy, where instead of deficits being used to support a fiscal stimulus where money goes into new productive investment or job creation, the increased government debt is used to compensate for revenue losses from unfunded tax cuts.

If you imagine for a moment that government is supposed to run “like a business,” if you were a business, would you borrow money to pay for lower prices and lower revenue? Would you borrow money to prop up the price of assets that people paid too much for?

If real investment had been taking place, our roads, bridges, water treatment, and other public infrastructure wouldn’t be falling apart. The massive deficits and debt that have been racked up over the last decades are not the result of profligate overspending or waste. Government revenues have dropped, and government debt has risen because governments are taking on billions, and sometimes trillions of dollars of debt, in order to make up for the lost revenue from tax cuts that are totally regressive: the more you own and earn, the more you benefit.

Not only do such tax cuts accelerate the concentration of wealth in the immediate short term - equal to the billions and trillions of new government debt - it shifts the burden for paying that debt onto everyone else.

There’s No Excuse for Playing Dumb Anymore

In neoclassical economics, money is not modelled - and one of the arguments generally about the market vs. government is that the market is supposed to have better access to information. It could once have been argued that the data from countless millions of money transfers would be impossible to collect and calculate, because everything was being done manually - the accounting, the calculations, the data collection, searching for patterns. Throughout almost all of human history, the entire economy depended on human beings alone recording and performing all of the transactions, with the assistance of analog technology, like an abacus, then mechanical calculators, innovations like double-entry accounting, wire transfers, digital calculators, electronic spreadsheets, computerized banking, and so on.

There was a point in history - for thousands of years of human history - that storage, processing, calculation, command and fulfilment were all performed by hand. Now because of advances in speed and capacity of information technology, the entire economy now runs on electronic information technology for storage and processing of transactions, with human oversight, audits, and so on.

Information about the workings of the economy that were previously hidden or impossible to access are now openly available in vast quantities - the behaviour of individual humans, firms, transactions, transfers, money, borrowing and debt. We don’t have to rely on assumptions or speculative theories about what might be: we can observe the thing itself.

The data clearly shows that the neoclassical model is not correct, because it relies on assumptions that crumble in the face of abundant and unequivocal real-world evidence.

All ideologies and theories of systems express a worldview, where some things matter some things don’t. Instead of our understanding of the economy being adapted to suit the undeniable evidence, the evidence is ignored to suit the theory - or, worse, a gut instinct.

In his devastating 2016 critique of neoclassical macroeconomics, Paul Romer illustrated the bizarre conclusions this has led to, citing a 2010 paper by an economist expressing doubt over the importance of money:

“Macro models now use incredible identifying assumptions to reach bewildering conclusions. To appreciate how strange these conclusions can be, consider this observation, from a paper published in 2010, by a leading macroeconomist:

“... although in the interest of disclosure, I must admit that I am myself less than totally convinced of the importance of money outside the case of large inflations.”

While this is only one economists’ view, it still illustrates the existing gap between neoclassical theory and reality. It is a chasm.

The political and economic reality of money is that it defines and sets limits on every single aspect of any individual’s entire life. It is the major tool of mutual persuasion and control in any community that shares that currency.

No matter where people live in the world today, there are international and domestic crises. And yes, it absolutely is because current orthodox economics doesn’t accurately describe the macroeconomy on issues as fundamental as money, banking and debt - private and public.

This is monumentally important because we are relying on an economic model that gets fundamental relationships between government and the private sector wrong. In Canada, in the US, the UK, the developed world, the developing world. Because we have this model, we look at the wrong indicators, and people make the wrong policy decisions.

This worldview and these policies mean that institutions like government and central banks, are essentially restricted to creating and managing crises, but not resolving them, and the problem exists no matter who is elected, because the beliefs about the way the economy does run, and must run, are ideological, not factual, but have been accepted as science.

These failures are not not limited to the right: it is also the case for liberal and even hard left economists, because they are all still operating with an outdated model of the economy left over from the 19th century and spruced up for the 1970s.

Keen is not alone in his skepticism - he’s been at it longer than most. In addition to other non-orthodox economists like Stephanie Kelton, Randall Wray and Mariana Mazzucatto, there has been a growing chorus of major economists who recognize fundamental problems with orthodox economists - Joseph Stiglitz, Paul Romer, Angus Deaton have all written books and papers that say that the current model needs to be examined. William White has called for an overhaul of the monetary policy in developed countries. These should all be seen as fire-alarm fires.

Because Keen’s model is new, and more accurate, it must be considered and taken seriously by people across the political spectrum, because understanding how the system actually works reveals that there are effective solutions within our grasp, and within the existing powers of governments and central banks.

Governments and countries around the world are in crisis, but they are stymied because there is an irrational ideological taboo that prevents them taking effective action. Instead, they keep trying more of the same, hoping for a different result.

It’s not a panacea, and it is not utopian: at least it can be said to be non-dystopian.

But these are the realities of the modern economy.

Governments that have monetary sovereignty cannot go bankrupt in their own currency. Governments create currency, not the private sector. When government spends more than it takes in, that is a surplus for the economy. When the government takes in more than it spends, that is a deficit for the economy. Governments are also financial institutions, and they are the safest place for people for people to store their money and not lose it. Banks extend private credit, which creates interest and debt cycles in the economy - booms and busts. Money is not a good, or a commodity, or an object: it’s a statement. Money can be both created and destroyed. Anyone can create money as an IOU, and rip it up again when it is fulfilled. Money is destroyed in financial crises. This has happened for centuries.

Finally, the entire economy - money, property, contracts, rights, all operate within a legal and political structure that exists to provide guardrails, resolve conflicts.

This is not a panacea. It is true that you can’t solve problems by “throwing money at them” but money properly deployed can solve many problems that are currently considered chronic and unsolvable, because there is an economic taboo against solving them that is not based in evidence.

The reason all of this is so important is that the ultimate success of any policy or venture, public or private - depends on taking these economic realities into account. This is why we are in crisis, this is why we can’t escape it, and this is why policy measures that double down on neoclassical ideas are destined to fail.

For anyone - anyone - across the political specturm who wants to see their national economy reinvigorated, these are the realities they need to deal with. They are not political, or ideological: this is the actual machinery of the economy, and no matter where you are on the political spectrum, if you want policies that work, they have to conform to this current reality, not an imagined reality from 50, 100 or 150 years ago.

This is why ideas matter, and it is why policies fail. The saying “everything is a conspiracy theory when you don’t know how anything works” is the subtext beneath all of our division and politics. For all the complaints about disinformation and misinformation, politics has degraded into name-calling and blame, chaos and confusion and terms like “late capitalism” “capitalist” “liberal” “socialist,” “communist,” or “democratic socialist,” or, for that matter “conservative” “right” “moderate” “centrist” or “leftist. These are, at this point, all meaningless labels that only define different teams or tribes in the same league. Not one of them is engaged with the reality of how the economy, government or money really work. They all have a fantasy view of the workings of government and the economy - essentially, everyone has been converted to a view of the economy that is essentially faith-based.

For government and private sector ventures to work, they need to be grounded in reality. That’s why Keen’s work, and that of other economists who have been trying to bring scientific integrity and realism is so important.

You can follow him on Substack here, where you can find links to his books and videos.

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