Steve Keen On Europe's Delusion And Why The Entire World Is Turning Japanese

[interestrateripoff]

http://www.zerohedge.com/news/steve-keen-europes-delusion-and-why-entire-world-turning-japanese

Economic Debunker Steve Keen is interviewed by outspoken Irish journalist Vincent Browne and no holds are barred as he describes the Maastricht Treaty as a suicide pact of critically poor central-planning design of a supposed market-economy, based on financial crises never occurring, locking European governments into an austere path when stimulus is required. "Ultimately the Euro has to fail and the longer we continue the farce of believing we can make it function the larger the ultimate crash will be" is how Keen portrays the situation and describes the foreign-exchange, fiscal policy, and monetary policy shackles that have created and exaggerated the situation. This leads into a longer discussion of the state of the World and its inability to 'export into the ponzi' like Japan could from 1990 to 2010 since the entire developed world is trying to do the same thing and "there is no ponzi scheme on Mars that we can export to" leaving the globe without Japan's initial way out. The must-watch 10 minute interview goes on to discuss the endgame (a break in the political compact based on austerity pressures and military or political coups) as Keen sums up "it's amazing to see us repeating the same mistakes that were made during the 1930s but we are doing just that." ending with some potential solutions noting that there is no easy way out of this.

"You need to have accelerating debt forever to have rising asset prices forever and not even debt can accelerate forever"

I think we can rest safe in the knowledge that the powers that be will do everything in their power to ensure we have the most destructive correction possible as they don't have the political will to do anything unpopular.

However there isn't any easy way out of this, which means the politicians will do nothing to address the structural economic issues causing the problems. Edited April 25, 2012 by interestrateripoff

[Executive Sadman]

Japan would be a nice route out. The 90s had falling commodity prices and after that the yen was strong enough to insulate them from rising commodity prices. Even now their unemployment is relatively low.

The trouble with Keen, Mish and to a certain extent Denninger is they all believe that inflation can only come in the form of new credit, and assume that as credit destruction in the private sector is as great as govt borrowing, it wont happen.

Well, govt isnt productive. They dont produce anything much, much less export anything, and without new productivity, without more energy sources, with commodities from corn to copper either seeing yields level off or simply being exhausted, we're going to get inflation regardless of whether govt sits on its hands or prints like crazy.

And then there is confidence in the currency. try measuring that.

[Britney's Piers]

Japan did try stimulus and ZIRP, yet the author says we need stimulus?

[sleepwello'nights]

Japan did try stimulus and ZIRP, yet the author says we need stimulus?

And what's the point of millions sitting around in financial hardship because of fiscal austerity?

Perhaps you enjoy the spectacle of Greek parents giving their children into care because they can't afford to buy food for them!

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

[LuckyOne]

And what's the point of millions sitting around in financial hardship because of fiscal austerity?

Perhaps you enjoy the spectacle of Greek parents giving their children into care because they can't afford to buy food for them!

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

The problem with this approach is that stimulus has to be funded.

There are two sources of funding :

- Government borrowing from "true" owners of savings

- Money printing by central banks

As many governments have lost credibility with "true" savers, the only route available is money printing by central banks either explicitly or implicitly (QE / LTRO etc).

In the end, stimulus has to be paid for by the debasement of money when governments have lost credibility. Krugman and his acolytes advocate the financial repression of savers to pay for the mistakes of governments. The owners of savings are starting to realise that this is happening and are becoming rent seekers rather than savers which actually reduces net societal wealth.

There is no easy way to deal with the current build up of the size of the problem that we face as the result of past mistakes.

A whole lot of presumed but actually non existent wealth will have to be destroyed because of past mistakes. This will happen in nominal terms (Greece etc) or real terms (the UK, the US etc). Either way, there are going to be a large number of families that are going to suffer miserably over the next decade or two. Blaming austerity (nominal) or inflation (real) is a bit pointless. The inescapable consequences of the mistakes of the past are the true culprit. They way that they are being dealt with are merely symptoms.

The hardship that you describe is inevitable. The exact form that the hardship will take is unknown.

[sleepwello'nights]

The problem with this approach is that stimulus has to be funded.

My knee jerk reaction is that "funded" is the problem. The resources exist and are real. The debt or funds are an artificial concept.

We all agree that a reset is needed, its how to do it. Revolution and war are the most extreme form of reset. I fear that unless a solution is found then it may well turn out that revolution and war will be the outcome. Economics is pretty much the study of human behaviour, when one has nothing to lose extreme action can the result.

The status quo is failing, look at the Arab spring, the riots and unrest stirring in Europe. In the developed western world we have not experienced real hardship. There are no starving people in the UK, for that we should be thankful.

Look across at the USA, people living in tent cities, in underground tunnels. The occupy Wall Street movement hit a nerve that reverberated throughout Europe. It lacks a powerful leader, if hardship continues to grow one will emerge. We better hope that he is not too extreme.

Does the hardship have to be inevitable?

[mikthe20]

And what's the point of millions sitting around in financial hardship because of fiscal austerity?

Perhaps you enjoy the spectacle of Greek parents giving their children into care because they can't afford to buy food for them!

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

IMO we are here BECAUSE OF STIMULUS - loose lending and massive public sector spending actually did take place between 2000 and 2008 - that was stimulus to the economy that created a lot of jobs (perceptions of) wealth. THAT WAS PLAN A! It could not be maintained and the consequences of stimulus spending are what's killing us. More stimulus isn't going to fix things - Japan has been trying that for 20 years.

Plan B is really what Osborne is doing, although rather badly. Fundamentally, it should encourage capital formation that then leads to investment. Not debt to create investment. One of the ways to do that is highter interest rates to encourage capital to be formed, and let asset prices such as houses, offices, land and capital equipment to drop in value as they should, so that those in capital invest.

[Self Employed Youth]

I'm on the dole and I cannot get an allotment to grow food.

There are rich landowners in this country claiming CAP payments (some are claiming millions), for merely owning land, they don't even grow food upon!

Dig for victory folks.

Oh wait. It is 'Wait for eternity and screw social mobility" (wrt allotments)

TPTB don't think you need to be allowed to grow your own food and survive for yourself. The government says you can live on £56.25 a week if you shop at supermarket X, and you can do your workfare there too!

[sleepwello'nights]

IMO we are here BECAUSE OF STIMULUS - loose lending and massive public sector spending actually did take place between 2000 and 2008 - that was stimulus to the economy that created a lot of jobs (perceptions of) wealth. THAT WAS PLAN A! It could not be maintained and the consequences of stimulus spending are what's killing us. More stimulus isn't going to fix things - Japan has been trying that for 20 years.

Plan B is really what Osborne is doing, although rather badly. Fundamentally, it should encourage capital formation that then leads to investment. Not debt to create investment. One of the ways to do that is highter interest rates to encourage capital to be formed, and let asset prices such as houses, offices, land and capital equipment to drop in value as they should, so that those in capital invest.

On a longer term perspective what are your thoughts on the stimulus that caused the explosion of growth in the post WWII period.

Or was that a result of capital formation leading to investment?

[interestrateripoff]

On a longer term perspective what are your thoughts on the stimulus that caused the explosion of growth in the post WWII period.

Or was that a result of capital formation leading to investment?

That was needed to rebuild bombed out cities etc...

We've had stimulus to hide the fact there are serious structural issues in the economy. At some point those flaws where going to be revealed.

[LuckyOne]

My knee jerk reaction is that "funded" is the problem. The resources exist and are real. The debt or funds are an artificial concept.

We all agree that a reset is needed, its how to do it. Revolution and war are the most extreme form of reset. I fear that unless a solution is found then it may well turn out that revolution and war will be the outcome. Economics is pretty much the study of human behaviour, when one has nothing to lose extreme action can the result.

The status quo is failing, look at the Arab spring, the riots and unrest stirring in Europe. In the developed western world we have not experienced real hardship. There are no starving people in the UK, for that we should be thankful.

Look across at the USA, people living in tent cities, in underground tunnels. The occupy Wall Street movement hit a nerve that reverberated throughout Europe. It lacks a powerful leader, if hardship continues to grow one will emerge. We better hope that he is not too extreme.

Does the hardship have to be inevitable?

The problem is that the resources that exist are primarily owned by individuals rather than the state.

The owners of the resources should realise that it is in their enlightened self interest to give away enough of the production of those resources that those who don't own the resources don't try to take take them by force.

Those who use the share of the production of resources that they don't own should realise that it is not in their self interest to ask for too large a share of the production as the resources are mobile to varying degrees.

In my opinion, neither side of the argument understands the nature of the relationship between the owners of resources and the consumers of the output of resources that they don't own. In the end, both sides are probably going to be worse off than they would be if they understood their mutual dependency and acted co-operatively rather than in conflict.

[Dorkins]

My knee jerk reaction is that "funded" is the problem. The resources exist and are real. The debt or funds are an artificial concept.

Are you sure about that? A lot of Britain's manufacturing industry is gone, especially the low-medium skill stuff which is now being done by cheaper Asians. The primary sector (farming/fishing/mining) employs far fewer people than before thanks to replacement of human labour with fossil fuels and imports. The human and physical capital in these two sectors has been seriously reduced. In the public sector, governments have spent the last 15-20 years replacing cheap-to-maintain civic buildings like town halls, schools, hospitals, and airports with prestige projects which are extremely expensive to maintain.

I think it's very possible that the UK has far less real, productive capital than it did 30 years ago, it's just that the consequences have been hidden by printing money to consume capital as income or to buy the shortfall in production from overseas.

[mikthe20]

On a longer term perspective what are your thoughts on the stimulus that caused the explosion of growth in the post WWII period.

Or was that a result of capital formation leading to investment?

There was a lot of capital formation by both businesses and households during WWII - many businesses boomed which then did well commercially (aviation, vehicles) and households saved because there was little to spend money on due to rationing. Yes, there was a huge government stimulus (much financed by the Americans, which we only paid off in 2006!!)), but don't underestimate the power of private investments. There was plenty of government stimulus through privatisation in the 60s and 70s and that royally screwed up British industry, including aviation and vehicles. However, there was little government economic stimulus during the war of course, as survival rather than economic growth was the key. My main point is that we've had 10 years of government stimulus and actually it made things worse, not better, so more of the same is not going to work, and Japan is the prime example. Do you not agree with that premise? If not, why is more spending going to have a different result this time?

[Britney's Piers]

And what's the point of millions sitting around in financial hardship because of fiscal austerity?

Perhaps you enjoy the spectacle of Greek parents giving their children into care because they can't afford to buy food for them!

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

"Stimulus" is just a tax by another name, on the holders of currency. You are taking money out of their hands to be spent on, what, concrete paving the sides of little country streams (this happens in Stimulus Japan). There is no growth. The lesson of Japan tells us, stimulus doesn't work. In fact it has dragged the crisis on so long that the "lost generation" have failed to reproduce and Japan now have no next generation. It is toxic poison to a nation, but they will try it anyway.

Edited April 26, 2012 by Britney's Piers

[dissident junk]

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

This reading of the cause of the end of the depression has been challenged by numerous economists. It is not the sole theory out there.

The one that hold more water to my mind is that WW2 caused households to save, because there was nothing to purchase and rationing was in place. When the war ended, all that money was released into the economy and spent, causing a boom in the US and a step-change in the standard of living.

The interesting point about this, however, is that household debt levels were very low in the first half of the 20th century, which is not the same situation today.

Indeed, Japan had high levels of household/internal savings to finance their stimulus schemes; we do not.

Unfortunately, the only three paths out of this I can see are 1) a global economic cataclysm, 2) inflating away the debt until ordinary people are almost penniless, 3) war.

Any way it goes, there is an enormous danger that we will return to a kind of neo-serfdom economic and social set-up.

[Bloo Loo]

My knee jerk reaction is that "funded" is the problem. The resources exist and are real. The debt or funds are an artificial concept.

snip

indeed, the resources exist.

what doesnt exist is the 40 times more resources bankers have promised each other.

Yet they are fighting tooth and nail to be the one in 39 who Does get his 100%.

[scottbeard]

The problem with this approach is that stimulus has to be funded.

There are two sources of funding :

- Government borrowing from "true" owners of savings

- Money printing by central banks

Indeed. We are either going to have a deflationary collapse, or significant money printing (and i mean actual money printing, not QE).

I still don't know which though.

[Sledgehead]

I've said it before and I'll say it again: if you want dynamism, deregulate (and I don't mean financial services).

The reason why foreigners seem far less work-shy is simple : their own countries have not beaten them into submission with bureaucracy and red tape.

Foreign nationals come here and start businesses because, back home, starting a business requires two things : a business idea and the willingness to work. Here the first thing we encounter when attempting to start a new busines are rules and regulations. Essentially one has to become an expert on the system and making it work for you. Is it any wonder therefore that generations are growing up with the sole interest of working the system?

People above are talking about the need to purge the system. But it is not a financial enema we need, merely a regulatory one.

Edited April 26, 2012 by Sledgehead

[trevor_1977]

Europe and the world need to invest in more infrastructure now , as no one nation can get out of recession on their own, so we need coordinated stimulus .But governments only look to the next election , and there's the flaw . .

[the shaping machine]

Growth never started after the global depression of the 1930's until goverment stimulus around the world built war machines. The lesson of history is that stimulus is needed.

Was it stimulus or just a massive increase in productivity due to the war economy? (e.g. women working)

[LuckyOne]

Europe and the world need to invest in more infrastructure now , as no one nation can get out of recession on their own, so we need coordinated stimulus .But governments only look to the next election , and there's the flaw . .

It hasn't escaped notice that most of the "investment" carried out by the previous government was essentially overpriced leases called PFI. A lot of spending on so called "investments" were really just state short term spending which added no value to our national stock.

[mirage]

This reading of the cause of the end of the depression has been challenged by numerous economists. It is not the sole theory out there.

The one that hold more water to my mind is that WW2 caused households to save, because there was nothing to purchase and rationing was in place. When the war ended, all that money was released into the economy and spent, causing a boom in the US and a step-change in the standard of living.

And also to the point, the US was exporting using an undamaged industrial infrastructure into a world it had just bombed flat, causeing the double whammy of enormous foreign demand and destroyed ability to compete!

How did the depression that started in 1870 end? Or 1920?

[mirage]

Europe and the world need to invest in more infrastructure now , as no one nation can get out of recession on their own, so we need coordinated stimulus .But governments only look to the next election , and there's the flaw . .

There is no evidence or coherent argument that we need general fiscal stimulus, let alone coordinated stimulus.

On the other hand there is coherent argument to suggest we need liquidation of unserviceable debt and repricing of assets until the markets clear.

[mirage]

I've said it before and I'll say it again: if you want dynamism, deregulate (and I don't mean financial services).

The reason why foreigners seem far less work-shy is simple : their own countries have not beaten them into submission with bureaucracy and red tape.

Foreign nationals come here and start businesses because, back home, starting a business requires two things : a business idea and the willingness to work. Here the first thing we encounter when attempting to start a new busines are rules and regulations. Essentially one has to become an expert on the system and making it work for you. Is it any wonder therefore that generations are growing up with the sole interest of working the system?

People above are talking about the need to purge the system. But it is not a financial enema we need, merely a regulatory one.

Bit of a mess that post.

Imigrants work hard because they haven't been "beaten into submission"?

So self-selection and relative economic opportunity with exportable wages play no part then?

They come here and start businesses because it is so easy to do over there, do they?

No "over there" country is as bureaucratic, eh?

Been out much?

[mirage]

indeed, the resources exist.

what doesnt exist is the 40 times more resources bankers have promised each other.

Yet they are fighting tooth and nail to be the one in 39 who Does get his 100%.

Well put!