Government Crippling US Economy (Uncut) 03-20-2025

Government Crippling US Economy with Dr Steve Keen

which are what actually give you the wealth of an economy. So if you obsess about getting your financial assets and liabilities equal to each other, you don’t therefore create the non-financial assets—the roads, the schools, the hospitals, and so on—that you need for a well-functioning system, and you end up with a crippled economy. And unfortunately, this is what the obsession about getting rid of the budget deficit is doing.

It’s crippling the physical resources that are provided by the public sector, in this case, that a healthy economy has to have. And it also means the private sector gets caught up in trying to increase the monetary value of its assets rather than thinking about, are we making a better spaceship, et cetera, et cetera. They’re worrying about something which is an essential feature of a well-functioning capitalist economy.

They’re destroying it. So therefore, the economy will behave less well. We might well have a serious recession coming out of what Musk and Co are doing in America, for no good reason.

On this episode of the What the Finance podcast, I have the pleasure of welcoming on Professor Steve Key. So Steve is a critically acclaimed economist who is looking to debunk traditional economics. So Steve, thanks so much for coming on the podcast today.

Thank you for the invite. No problem. Looking forward to the conversation.

There’s a lot happening in the world, I guess, at the moment, and I think it gets both of us quite busy. But I’d be interested to hear, you know, maybe a very top level overview of what you’re currently seeing in the global economy. Look, the two main things I’m working on are, well, three, I suppose, developing an alternative to neoclassical economics.

That’s what I wish I was doing full time. Simultaneously with that, because conventional economists, starting with William Nordhaus, but these now spread to about two and a half thousand, I would say, neoclassical economists doing absolute nonsense on climate change, which is one reason why we’ve done so little to address it, because these idiots, with complete lack of understanding of the actual dynamics of the planet’s biosphere, have told us that three or four degrees of warming is no big deal. And that’s why I’m fighting that stupidity.

And of course, at the same time, we now have an engineer in the White House, not Trump, obviously, who is falling for the childish economics of budget deficits, as explained by economics textbooks, which have got no idea of how money actually operates. And that’s one of the main reasons we need a new economics that does. So as I can say, I’m basically like a member of the lower deck who managed to climb up into the into the cabin of the Titanic.

And I’m desperately trying to grab the wheel away from the captain to avoid hitting the iceberg. And there are two major icebergs, destroying the economy through climate change and destroying our capacity to do anything about it by misunderstanding what the budget deficit actually does, and thereby destroying our productive capacity before climate change will finish the job for us. So I used to joke that I couldn’t wait till I retired to get some serious work done.

And now I’m finding myself working harder than I ever did when I was an employee of a university. And it’s to try to stop catastrophes being caused by conventional economics. Yeah, a lot of time back there, because I guess it’s a very different perspective to a lot of people, as you’re saying.

A lot of people think, oh, this is good. They’re cutting the deficit. It’s unsustainable at the moment.

So, yeah. So why is that, I guess, thinking wrong? Oh, well, it’s because it’s somebody taking the numbers, like take the percentage government interest payments now. And so they’re growing at X percent per annum.

And that’s faster than the economy is growing. And you extrapolate that forward. And what you get is a catastrophe in the near future, which is which is I think that’s why Musk sincerely believes he’s doing good by slashing the deficit.

But if you actually look at the monetary system through the lens of double entry bookkeeping, and that’s how banks operate, it’s how government finances operate as well. When you do the mathematics of that, government deficit is a critical element of creating what we call fiat money, money backed by the government rather than backed by the banks. And by destroying that, we actually will end up not merely well, we could pretend well, sorry, pardon me.

The thing the thing I think they’re doing by doing that is avoiding a future economic catastrophe. What they’re actually doing is reducing the amount of money circulating in a capitalist economy and telling the economy to grow faster. That simply doesn’t work.

So what will end up instead of slashing the deficit rather than avoiding a future catastrophe will cause one now, because the amount of money in circulation won’t grow at the rate the physical economy actually needs. And we’ll potentially have a recession caused by this policy for no damn good reason. Now, of course, to explain the run packet, I’ve got to go through the accounting, but that’s what I’m watching.

It’s just complete lack of understanding of the monetary system. And unfortunately, that lack of understanding is taught by economic textbooks. So you can open a textbook and like Mankiw, for example, Mankiw’s macroeconomics and say that the government should run a surplus.

Now you do the double entry bookkeeping, the government running a surplus is destroying money. And a capitalist economy, a growing capitalist economy needs a growing amount of money. And this is a policy which is destroying money instead.

Yes, it needs collateral. And I guess it’s even more important when you’re sort of the world currency and the rest of the world needs your collateral and your money to survive. And then once you sort of pull that back, there’s issues.

Yeah, there’s all sorts of errors. I mean, Trump, this is more Trump than Musk in this particular case, but wanting to achieve an American trade surplus while also having an overvalued dollar. And it’s just, you know, the old expression of a bull in a China shop doesn’t do justice to what’s happening in the American economy right now by people who think they’re doing the right thing.

Yeah, but I am empathetic to the fact that, you know, if you continue with the current trajectory, debt’s obviously extremely high as percentage of GDP, interest rates are quite high, and the actual repayments of that interest is taking up a large portion of the government spending. And that’s what the conventional thought is. And that’s exactly the same thing as saying, look, you look up in the sky, you can see the sun obviously orbits the earth.

The earth must therefore be the center of the universe. It’s looking at surface appearances and not looking at the actual physics underlying it. And the physics of government money creation, when you lay it out with double entry bookkeeping, and that’s what my Ravel software is, unfortunately, the only program on the planet that actually enables you to do that.

You see that the government isn’t borrowing when it creates money. It’s not borrowing, and it’s not borrowing to pay interest. All these things are simple accounting fallacies.

Now, if I wanted to explain it to people, I’d be setting up a set of double entry bookkeeping tables to actually explain it. And unfortunately, you’ve got to have that sort of knowledge to be able to see why this is erroneous. But I’ll try to do a simple explanation now of why the government is not borrowing.

Yeah, let’s do it. And even if you want to go a bit more complex, I think our audience would quite enjoy that. Well, the straightforward reality is that the government spends more than it takes back in taxation.

That means it’s putting more into people’s private bank accounts than it’s taking out of those private bank accounts. So that’s actually what a deficit means. And that’s not borrowing money from you, it’s giving you money.

So in that sense, the actual act of running a deficit is increasing the amount of money in people’s deposit accounts. And I think even Elon Musk would have to have conceived that, even with the attitude he has to the deficit right now. So when the government spends more than it takes back in taxation, it puts more money into private bank accounts than it takes out of private bank accounts, and therefore it’s created money for the private sector by running a deficit.

So that’s on the liability side of the private banking system. Every entity in the financial system, which capitalism obviously is, has got assets and liabilities. So on the liability side of the banking sector, the liabilities increase because the government has put more money into deposit accounts than it’s taken out.

Deposit accounts are a liability of the banking sector, that increases the amount of money. And if you come down to the private sector itself, the private sector then does its own double entry bookkeeping. What it sees is one of its assets, which is bank accounts, has risen.

There’s no offsetting liability that’s risen as a result of that. So the private non-bank sector of the economy has an increase in its financial net worth. That’s again, it’s simply the mirror image of the liabilities of the banking sector rise, then the assets of the private non-bank sector also rise.

Now, is there any liability associated with that? Well, no, when the government gives you a welfare check, you don’t have a debt to the government. It’s money in your bank account, there’s no offsetting liability. So your net worth rises.

So a government deficit increases the net financial worth of the non-bank private sector. So that’s that level. Let’s go back the opposite direction of what’s happening on the banking sector’s asset side, and then up that to the government.

And what you see is that when the government spends more than it takes back in taxation, what it’s actually doing to do that is making a whole lot of transactions at the central bank level, where it tells the treasury, the treasury has a very complicated account at the central bank. And that includes information, if you are a taxpayer in America, then the government would have details of the bank account we have and which bank we have it at and so on. So if you were getting a, let’s say a stimulus check under COVID, that’s probably the best example to take, then that stimulus check would actually be executed by the treasury reducing the amount of money in its deposit account at the central bank, which is called the, it’s got a whole lot of different terms, but it’s consolidated government revenue, terms like that are used for, so that’s called a consolidated government revenue, that’s all those accounts put together.

It makes a transfer via the reserve accounts of the private banks at the central bank. So if you banked at Barclays, for example, and we’re talking the UK here, if you banked at Barclays, and you were getting a stimulus check under COVID, then the treasury earmarks your account to receive, you know, let’s say 1,000 quid, we’re working Britain here, so 1,000 pounds. And it therefore transfers 1,000 pounds from the consolidated revenue fund of the government to the particular reserve account of the bank that you bank at.

So what that means is that’s just transfer on the liability level to the central bank. The reserve accounts of the private banks are a liability of the central bank, so is the government’s consolidated revenue fund. So one of them goes down, the consolidated revenue fund goes down, the reserves go up.

And you look at that on the private banks, what it means is the asset that banks, that backs the government, increasing the liabilities of the private banks by that 1,000 quid welfare check at the reserves that that bank has at the central bank. So the increase in deposits, you aggregate this for the whole economy, the increase in deposits of private banks is matched by an increase in the value of the reserves that the private banks have at the central bank. So that’s the mechanism there.

Then you have the transfer at the level of the central bank, treasury account goes down, the reserve accounts go up. Then you look at what’s actually happening at the government level, how does the government actually manage to make that increase? You look at the government, of course, the treasury account of the central bank, which is a liability of the central bank, is an asset of the treasury. So that asset of the treasury goes down in value because you’ve transferred some money out of that to reserve.

So the amount of the net worth of the treasury account goes down, looking at from the point of view of the, pardon me, the treasury’s accounting system. Now, what’s the balancing item? There is none. What it turns out is the government finances that transfer of money from its account at the central bank by going into negative equity itself.

So what you’ve got is the private sector has had its net worth increased because it’s got this increase in its deposit accounts with no offsetting liability. Up at the government level, the value of its assets has fallen down with no offsetting fall in the liability. So the net worth of the government’s gone down.

This is a more technical argument of the sort of thing you’ll see from modern monetary theory activists that, you know, government’s reading is our blank What it means is the government creates money by going into negative financial equity and that creates identical positive financial equity for the private sector. So rather than borrowing from us, it’s creating money for us, but it’s backed by the negative equity of the bank, of the treasury. Now, people are going to say, oh, that’s terrible.

You know, the government shouldn’t be in negative financial equity, but it’s a bit like saying, oh, that’s terrible. The person on the top of the seesaw should, the person, because there’s somebody on the top of the seesaw, there shouldn’t be somebody on the bottom of the seesaw. In other words, net financial worth is like a seesaw.

The average is zero. So if the government tries, is in, let’s say this is the government side here, the government goes into negative equity that causes the private sector to go into positive. If you want the government in positive equity, that means the private sector has to be in negative equity.

So the question is, A, is it a good thing to be in negative equity at all? And B, who can sustain it? And I know this is getting a bit hairy for people, but let me finish and we’ll elaborate more in a moment. Because financial assets sum to zero, financial assets and liabilities sum to zero, any sector in positive equity necessarily means that the rest of the economy with respect to it is an identical negative equity. Therefore, unless we all have completely balanced budgets, someone is going to have negative equity.

Somebody else is going to have positive equity. Now, when you look at the banking sector, what, how do banks operate? Banks have to get licensed by the government before they can start operation. And an essential part of that is that they have to have positive financial equity.

Their short-term assets, so in other words, stuff they can liquidate immediately, have to be greater than their short-term liabilities, stuff they can be asked to pay immediately. Any bank that is not in that situation is bankrupt. So banks by definition are required to be in positive financial equity.

Now, that means without the government, then if there’s only a private credit system, and that’s the sort of thing that a lot of these libertarian types want to bring about, if there was only a private monetary system, then the private non-financial sector would necessarily be in negative financial equity. In other words, you take a look at your bank accounts and for most of us, the result would be that your liabilities, your debts exceed your assets. So without a government, with a pure credit economy, the banking sector must be in positive financial equity.

Therefore, we would be in negative financial equity. Now, when you add a third party to that, which bringing the government in here, if the government is in negative financial equity, then the rest of the system, which is the private sector banks and private sector non-banks, they’re in positive equity. So it’s quite possible if the government goes into negative financial equity, then both the private non-banks and the banks themselves can both be in positive net financial equity.

So if the government carries the negative financial equity, it’s not a problem for the rest of us. But when the government gets obsessed about getting back to the stage where it’s in positive financial equity, then it means that would that therefore would mean the private sector, banks and the private sector together, would have to be in negative financial equity. And that would mean that now banks can’t be.

So the negative effect of the government trying to get itself into positive financial equity would be borne by the non-bank private sector, which would find its debts were much greater again than its assets. So it’s hard for people to get their heads around that because they think all negative equals bad, but it’s a system. And unless you have the government running negative, spending more than it gets back in taxation, unless it’s doing that, then the ultimate result of that is the private sector ends up having debts that are greater than its assets.

And then what that means is, how am I going to service my debts becomes a worry for the private sector rather than a worry for the government. So be careful what you wish for. And then the question is, who can sustain that situation indefinitely? And the only answer to that is a government.

And that’s largely because the government runs the bloody country or is the vehicle of the country. And it’s got lots of non-financial assets, armies for starts, and non-financial assets are things which are assets to the owners and a liability to nobody. These are the physical things.

And that’s what government should be creating. Armies, unfortunately, but also roads, long-lived capital items, education, etc., etc. The government should be providing that.

And that gives us non-financial assets, which are what actually give you the wealth of an economy. So if you obsess about getting your financial assets and liabilities equal to each other, you don’t therefore create the non-financial assets, the roads, the schools, the hospitals, and so on, that you need for a well-functioning system. And you end up with a crippled economy.

And unfortunately, this is what the obsession about getting rid of the budget deficit is doing. It’s crippling the physical resources that are provided by the public sector in this case, that a healthy economy has to have. And it also means the private sector gets caught up in trying to increase the monetary value of its assets rather than thinking about, are we making a better spaceship, etc., etc.

So I know I’ve gone on for a long time. And I’m seeing all double entry book tables in my head as I do this, because that’s how I think about financial dynamics. But they’re worrying about something which is an essential feature of a well-functioning capitalist economy.

They’re destroying it. So therefore, the economy will behave less well. We might well have a serious recession coming out of what Musk and Co are doing in America, for no good reason.

Yeah, okay. Really, really interesting. Thanks for explaining that.

I think a lot of value. Yeah, and probably a good example of a country that hasn’t done it very well is the UK. Oh, yeah.

The UK has been slashing its spending for 40 years. And it’s one of the worst performing economies on the planet. And you and I experienced potholes everywhere in the roads, health system starting to fall down.

They’re destroying all the stuff they should be building because they’re getting into a budget surplus. And that’s the opposite of what a government should do. A government surplus destroys fiat-based money.

They should be creating it instead. Yeah, okay. So what this means, as you’re saying, is there has to be a constant deficit.

And I guess the challenge is that once you increase that deficit, say the US, where it’s sort of 6%, 7%, 8% of GDP, then if you bring that back, you get recession. So it’s a challenge of sort of you can’t, is it best to keep it consistent or to keep slowly increasing it or what’s best for an economy? I’ve got to leave out the ecology here to begin with, unfortunately. But if you take the standard situation of capitalism that’s been growing over time, whereas if you look at the feudal period before us, there was no great change in the averaged standard of living between 1200 and 1800.

If you look at data from the Bank of England, the effective wage of a working class person, a peasant originally, and then working class person in terms of the commodities they could buy didn’t change between 1200 and 1800. But then you have the industrial revolution that we take off from that point on. And therefore you’ve got a growing per capita real standard of living.

That occurs partially because both the government are creating money, which partly to some extent matches the way the growth of the real economy. So if you didn’t have the government deficit, you wouldn’t have fiat money being created. You need credit money creation as well.

You want to keep them in balance. You don’t want to make one go down to zero. And this is the crazy thing that I find about this emphasis upon eliminating the deficit.

That would mean that you want to have a growing, physically growing economy. You’re allowing private money creation to continue and you want to stop government money creation. The real target should be to make them all work in harmony with each other.

And one of the hangups of mainstream economics is because they think in static terms. The supply and demand diagram has no time to it, no time dimension. And everything is thought in terms of constant this and constant that.

And you’re supposed to implicitly then think about it growing. But people never make that second logical leap to say you want this thing growing in balance over time. So the equilibrium orientation of mainstream economics is a major reason why people simply fail to think in the terms of growing systems.

And with growing systems, if you want to have balance over time, you want to have them all growing at much the same rate. And that means for the government, because the government creates money by running a deficit, you want it to be running a deficit roughly equivalent to the rate of growth of the physical economy, given the rate of turnover of money as well. Yeah, that makes a lot of sense.

I guess the interest repayments, are they something that’s just only an issue when there’s sort of high interest rates? No, no, they’re fucking not an issue. I understand people thinking this because, you know, if you’ve got to pay, like I’ve been in debt on occasion in my life and you’ve got to pay the interest and if you can’t, you lose your financial assets, your non-financial assets, your house gets sold. That’s a real terror for most people and justifiably so.

But what the government’s doing, just like when it runs a deficit, it does it by going into negative equity itself. It does the same thing when it pays interest on the bonds it issues. And this is the hard thing for people to get their heads around, one of many hard things.

But the government, the selling of bonds by the government is irrelevant to the creation of money. Because when you look at the actual act that creates the money is the deficit itself initially, and that means you’re increasing the liabilities of the banking sector and you’re increasing the assets. So that operation and all double entry bookkeeping entries by definition have two entries.

If there are two on the liability side, they shuffle who has money. If there are two on the asset side, they shuffle what money is backed by, but they don’t change the amount of money in existence. So the deficit creates money and so does interest payments on the deficit because the reserves, if you think of the banks owning all the bonds, just to make it simpler, the government then credits the reserve accounts of the banks with the interest flow and that turns up as interest income for the banks.

That’s the equity that the banks get increased rather than their liabilities. So they gain from the payment of interest, but it’s money which was created by the government going to the negative equity exactly the same way as the deficit is created. Now, if you look at what bonds do in that situation, when the government sells bonds and this is the initial sale of bonds, they can only be bought by primary dealers, as they call them in the States, which are the banks that have accounts at the central bank plus a number of the financial institutions that are registered.

And when they pay for the bonds, they literally transfer part of their reserve balance to the consolidated revenue fund the government has at the central bank. So those bond sales are an inflow into the treasury’s account at the central bank. Now, if that inflow didn’t exist, the only inflow would be taxes because taxes reduce the money in deposit accounts.

They make reserves go down at the central bank and the reserves go down as the red money is credited to the treasury consolidated revenue fund. The reserves go down, the consolidated revenue fund goes up. So the tax flow is an inflow.

Then you’ve got the outflow of the spending. Now, already, if you’re running a deficit, spending is greater than taxation. So the trend for the consolidated revenue fund of the treasury at the central bank is negative.

And if you add in interest payments, that’s another reason. So spending by the government, the deficit is an outflow, interest on existing bonds is the second outflow, taxation is one inflow, and those two outflows are greater than the inflow. Therefore, that consolidated revenue fund will go into overdraft.

Now, normally an overdraft is a dangerous thing for you to have at a bank. There’s only one exception here. The treasury owns the central bank.

It’s going in deficit, going in negative equity to its own, having a negative balance in its deposit account at a bank it owns. Now, that looks bad. There’s a positive account you’d normally expect to be positive or at least non-zero.

So what the bond sales do is make sure that happens. If the bond sales are equal to the deficit plus interest on existing bonds, then that inflow of sales of bonds means that the consolidated revenue fund of the government remains constant, doesn’t go up, doesn’t go down. So that’s what the bond sales do.

They mean that the treasury remains an identical net worth position. When you do the accounting again for them, they’re still in negative equity, some of the deficit plus the interest they’re paying on the bonds. But what it means with their account is that rather than having a negative deposit account, an overdraft at the central bank, the bond sales to the private banks mean that that account remains non-zero.

So bond sales aren’t there to actually borrow money. They’re there to avoid the treasury fund going into overdraft. But otherwise, they’re not essential for the creating of money.

People get terrified of the level of government debt. There’s a simple solution. You could fix it tomorrow night.

Just make me governor of the central bank or make me governor of the Fed. I’ll buy all the bonds. There’s what, about $40 trillion worth of government bonds that are outstanding in America right now.

And those bonds are either owned directly by banks or they’ve been purchased by non-banks from the banking sector and all the sales that the banks make through trading and selling bonds with the non-bank private sector. All that the central bank has to say, I will buy those off you. So here’s an injection of $40 trillion in your reserve accounts.

And because of that increase in our liabilities, you’re going to give us all the bonds, which are worth $40 trillion. So the value of the assets of the central bank could rise by $40 trillion. The liabilities rise by $40 trillion.

Now that means all the bonds are owned by the Fed. And the Fed, because the Fed is owned by the treasury, the Fed pays no interest. So bang, interest payments disappear.

Now, guess who’d complain about that? Private banks and the private non-bank financial sector and wealthy individuals, because they like having the income flow from bonds. So it’s a crazy argument because a bit like Elon’s, you know, the best part is no part, or the best debt is no debt or no interest. You buy outstanding bonds, problem solved.

Now, of course, that’s a crazy way to solve a problem, but that’s a potential solution. Why the F aren’t they talking about that, rather than slashing the deficit? Yeah, as you said, it’s not something that people talk about. But then I guess if I think about, you know, what has this system been aligned with? It’s been aligned with the last 50 years of financialization of the world.

And it has created this sort of wealth divide as well, where, you know, capital has been prioritized, labor has not. So there’s this massive shift. So I guess the challenge is that if we continue this, I imagine that is going to become worse.

So how do you, is it possible for that not to become worse, or does the system change? I think we’ve had, we’ve financialized the economy to its close to death. The financial sector should be not, a large financial sector is not a good thing. I remember one of my students way back when I was back in Australia, pardon me, talking about the financial sector and saying, is the financial sector a profit center or a cost center? Is a big financial sector a way of making a profit or is an additional cost for the physical economy? And fundamentally, if you’ve got a larger financial sector, you’re paying more for the cost of money.

There’s more effort in, more cost to creating money than if you have a smaller financial sector. So Marx had a wonderful phrase, I was highly critical of bankers, and he told them the roving cavaliers of credit and said that occasionally economic circumstances let this bunch of parasites, as he called them, take over the real economy, the physical economy. And this gang knows nothing about physical production and should have nothing to do with it.

So we’ve ended up financialized everything. And this is the really important debt. This is what, again, really pisses me off by the focus on government debt.

Government debt until Reagan was falling as a percentage of GDP, went from about 100% of GDP to about 60% across the same time period from the beginning, the end of the second world war until the peak of the global financial crisis. America’s private debt went from about 50% of GDP to 170% of GDP. And a large part of that money was borrowed to gamble on share prices and house prices.

It wasn’t a productive use of money at all. So by obsessing about government debt and ignoring private debt, we’re shutting down an essential part of a well functioning capitalist economy, which is the creation of fiat money and allowing the finance sector to get away with murder, fooling us into borrowing money to buy houses because house prices are rising when it’s the borrowing money that’s causing house prices to rise in the first place. So we need to de-financialize our economy.

And I’ve been arguing for that for 20 years, that we have to reduce the level of private debt. That’s the real worry, not government debt. Okay.

And what would be the process of that? Well, it’ll never happen. I guarantee you, it’s a proposal I made 20, something like 20 years ago, but I know it’ll never come into practice. That’s what I call a modern debt jubilee.

Because if you look at history, going right back to the archaeological period, you know, great friends of mine like Michael Hudson and originally then David Graeber, unfortunately now deceased, but a range of other anthropologists and historians have looked at ancient history. And what you find, even in Sumerian cuneiform tablets, you find an awareness amongst the Sumerians that debt tended to go just exponentially, debt compounded with the rate of interest, but agricultural productivity would rise to a maximum and then reach a maximum. You know, if you put more cow dung on your field, you get more output, but there’s a limit to how much more productivity you can get out of the land.

So they had a sort of sigmoidal S-curve approach to the physical economy. And then this exponential approach to household debt, not corporate debt, I’ll get to that in a moment. So they said, you’ve got to occasionally just abolish the household debt.

So that’s what happened in ancient Sumerian societies, right up to Roman times, that there would be an accumulation of debt. When you got into debt in those societies, you end up a slave. If you can’t pay your debt, you end up being a slave to the person you own the debt for, you lose your land.

Now in the Sumerian case, only freemen could be recruited for the army. So if you had a rising level of private sector indebtedness in those societies, that meant a falling number of people who could be recruited by the army to maintain the empire and defend it against external attacks. So it was in the emperor’s interest to abolish household debt.

And that was done periodically, every seven times seven years, 49 years, or every change of ruler, or again, some major political or religious events, all household debt was cancelled and debt slaves could go back to work on their own land. They’d regain it. That was an essential part of maintaining the existence, let alone the harmony of ancient civilizations, right up until Rome.

Now we can’t do that today because when you abolish the debt back in Sumerian times, what you were doing is basically screwing the lender. But the lender was normally mead houses, was actually alcohol debts that was a major part where people ended up becoming slaves. They’d be drinking at the mead hall, waiting for the half, as the half is terrible rather than great.

And when it’s terrible, bang, you end up being a slave to be able to repay the debt you’ve got. So household debts were regularly eliminated in all societies, not commercial debts, because they were seen as the two sides were equal parties in that sense. So commercial debts weren’t abolished, but household debts were.

Now you can’t do that today because if you did, you’d screw the whole financial sector. If you wrote off the debt, then the debt on the asset side of the banking sector would suddenly disappear. The liabilities would go down a bit, but it would be borne by the net worth of the banks, the banks would go bankrupt.

So you can’t do an old fashioned jubilee. And you also don’t want to benefit people who borrow money to gamble and speculate over those who don’t borrow money to gamble and speculate. So I proposed what I call a modern debt jubilee.

And that had used the government’s money creation capability to give people a cash injection and say that if you owe any debt, you must pay that debt off. So that would mean that when somebody’s debt was reduced, it would be reduced by converting credit-backed money into fiat-backed money, and then giving the debts of the assets of the banks would go down in terms of their debt would fall, but they’re going to rise in their reserves as well. So their asset situation would not be changed.

And I’ve done the modeling of that, and it actually ends up boosting the economy because suddenly money people are using to service interest on debt that accumulated doesn’t go to service debt anymore. It goes to buy goods and services, and you get a physical boost to the economy. So you could do it with a modern debt jubilee.

But again, I know there’s zero chance of that ever happening. If it does happen, then we’re going to be in a hell of a lot of trouble because only if it was absolutely catastrophic not to do it would that be done. And I wouldn’t like to be in that catastrophe.

No, yeah. And I guess the challenge would be some people would front run that as well. So just taking out as much debt as possible.

Yeah, but you can catch that. You can cover all that sort of stuff. If you did that to commercial debts, yeah, you could stuff up the commerce really, really badly.

But everybody, I think the first time it was done, they executed the money lenders. The Sumerian society wasn’t exactly a libertarian world, but ultimately became institutionalized that that occurred. And then the major collapses we’ve seen in past civilizations, to some extent, were driven by the creditors blocking those sorts of jubilees.

So that’s part of why Caesar was attacked by the Senate, because he was trying to, again, maintain the jubilee tradition. That disappearing was one of the factors that led ultimately to the collapse of the Roman Empire. So you don’t want to have runaway private debts.

And the ancients realized that. And we ignored private debts because neoclassical economists, who know bugger all about the financial sector, basically think that the banks, they have models of money of the private sector that basically assume banks don’t lend. Now that’s garbage.

They do lend. They’re not intermediaries. They’re what I call originators of money and debt.

They create money and debt at the same time. So again, conventional economics is leading us to ignore part of the current structure. And then therefore we’re less intelligent today than ancient civilizations were about how the financial system works.

Yeah, which is amazing to think. So Steve, thanks so much for your time. It’s been really interesting to hear the process of economics and I guess our system and ways that it could be improved, which unfortunately it probably won’t be.

But my last question is, what is one message you want people to take away from our conversation? Well, I mean, the main message is don’t trust economic textbooks. They’re the reason this nonsense is occurring, because people are learning a half-baked view of how banking operates and then applying that as policy. So that’s one reason I’ve done my own alternative approach to economics, which comes out of a whole school of thought known as post-Keynesian economics.

And that’s anti the neoclassical school. And I teach that on a set of online courses and I have books on the topic as well, my Patreon and Substack pages. But there’s plenty of other people, Stephanie Kelton, Louis-Philippe Rochon.

There’s a large number of people who are developing this alternative analysis. For Christ’s sake, start reading them rather than economic textbooks. Great message.

So thanks again. If anyone wanted to find out more about your work and what you do. So you said there’s the online courses.

Yeah. Yeah. Well, there’s Substack and Patreon.

So there’s profstevekeene.substack.com and there’s patreon.com slash profstevekeene. Those are my two. They’re basically open access.

I don’t put any of the posts behind paywalls. But of course, I appreciate financial support there. And then there’s, I have a set of online courses I’m teaching.

They’re marketed by a marketing company. And sometimes the techniques make me cringe a bit. OK.

But there’s a very good course and a large, about 500 people have signed up so far for that online course. So if you want to really learn the way I approach economics, consider signing up for that course. You’ll see stevekeenefree.com. It’s marketed through that website.

So hold your nose for some of the marketing. It’s a bit, you know, buy one, get one free, which irritates me. But it’s a genuine course at the other end.

So Patreon, Substack and the online course. Great. I’ll put all the description below, but thanks again for your time.

Thank you. You’re welcome. Ah, so far.

Hey everyone. Thank you for listening. I really appreciate the support.

If you got value out of this, I’d really appreciate if you could like, subscribe or comment, you know, good or bad feedback. I’m always open to that, but it really helps to the channel. As I said before, only about 14% of people actually subscribe to this channel.

So if you were to that, it would really help. It could mean we could continue to grow. If not, thanks for watching and see you on the next show.

And you also might like this video right here. All right. Thanks again.