Saturday, March 14, 2009

The Great Steve Keen

Steve Keen wrote an article in February called The Roving Cavaliers of Credit which struck me as pretty brilliant and very deep.

The idea's expressed by Keen in this article perhaps are not novel but, as is frequently the case, sometimes brilliant writing is about summarizing what is already known, pointing out the importance of a particular point of view and demonstrating what the consequences must be.

Keen is an economist, that is, he has a Ph.D. in economics, but might be described as a rouge economist. He thinks most of what passes for economics is bunk; a view I happen to share. He wrote a book called "Debunking Economics: The Naked Emperor of the Social Sciences".

The main idea in his "Cavaliers" essay is that we don't actually have a fiat currency controlled by the whim and printing presses of central banks like many believe. Rather we have a debt based currency. Debt is money. Steve's blog is appropriately called Debt Watch. Therefore, the quantity of money and also economic growth has more to do with the willingness of people and institutions to borrow more so than the actions of the central bank. Eventually of course a debt frenzy has to reach a point where no one wants to borrow anymore even if interest rates are zero. No more debt is taken on and so no more money is created. At that point, deflation must occur and there is nothing a central bank can do about it.