Steve Keen -- We Need a Private Debt Jubilee >> Hi. I'm Ed Harrison for Real Vision, and I'm about to interview Steve Keen, the heterodox economist, Australian economist, who a lot of you may know. We recently have started talking to economists of a heterodox nature. We spoke to Richard Werner a few weeks ago, and I think it's great to have a body of thought in economics that will challenge our beliefs, that will help us understand how the market works, how the economy fits together in a different way. I anticipate this is going to be a really good talk. We're going to go through endogenous money. We're going to go through the neoclassical model and what's wrong with that. We're going to go through why private debt is central to the economy. A whole bunch of things, very much looking forward to it. Steve is a great guy, and I think you'll enjoy this interview. Professor Keen, good to talk to you, Steve. >> Good to be chatting once again, mate, not face-to-face this time but at least with video camera to video camera. >> So you are late night, I'm early morning. I think we have 11 hours between us right now? >> Yeah, 6:30, not too bad for me. >> We've got 7:30 in the morning here in the DC area. A lot of things to talk about, but I wanted to take it back to the beginning because you what people would consider a heterodox economist. That means that you look at economics in a different way than mainstream economists would. When I was thinking about this interview, the first thing that I thought about was debt, private debt in particular. I want you to talk through how you look at the centrality of private debt in an economy and in terms of economic growth. How is that different than you might see in a mainstream textbook? >> Well, the simplest thing is that if you imagine you go shopping, your shopping spending power is the sum of your income, your earning plus anyway, you're intrigued to extend your debt. If you use a credit card to buy a TV set or you use a mortgage to buy a house, you're spending both your income and the change in your personal debt. Now economic theory says, "Well, that's true at the individual level." The textbook will tell you this, but, in fact, you are borrowing off somebody else. So when you borrow, your spending power goes up, the other person's spending power goes down. So your individual spending power can include the change in debt. But that's the opposite of the person who lent you the money, their spending is going gone down. The two will cancel out and the only way that personal debt will matter if you were much more spendthrift person than the person you borrowed from. So that's the only way in which they say it actually matters to the macro level. They're completely wrong because they're imagining you're borrowing money from my deposit account of my bank. So if I lend you money, my deposit account would go down, my spending power would fall. Your deposit account would go up. Your spending power would rise. The two would cancel out to some extent, the aggregate will be less than the increase in your individual debt. But you don't borrow from my deposit account, you borrowed from a bank. What a bank does, it says, "Hey, that's a great idea that you could buy that house in fancy section of Washington. Here's a million dollars to borrow it, which we give you to put in your deposit account." We also record, by the way, it was a million dollars, we put an asset of your debt to us in our asset column with [inaudible] extended to the public. So the assets rise and the liabilities rise at once, and the increase in the liabilities actually increases spending power. Now you don't just sit there thinking, "Great, I've got this million dollars, isn't that fabulous?" You're going then service the million dollars to the bank. You borrowed that money to buy the house. So you transfer it to the person you're buying the house from. That change in your level of debt is an identical increase in aggregate demand, not just for goods and services, but also for financial assets, which is the best the borrowed money goes. So credit is part of aggregate demand, and though [inaudible] are aggregate income, and the way that I talk about it is saying that, to aggregate demand, the total aggregate demand in the economy is the turnout of existing money plus the change in debt. >> Right. >> I'll prove that mathematically. Now the textbook said that doesn't happen because they ignore banks. Why do they ignore banks? Because it's stuffs up their theory. Well, that's their theory that should be ignored and not the banks. >> It's interesting you would say that because I'm looking at a blog post that I re-posted from your blog at the time on credit write down, this is from eight years ago. There's a screenshot of a mainstream economist, actually a Nobel Prize winner, and he differs with you. What he says is, first of all, any individual bank does in fact have to lend out the money it receives in deposits. Bank loan officers can't just issue checks out of thin air like employees have any financial intermediary. They must buy assets with funds they have on hand. I hope this isn't controversial, although, given what usually happens when we discuss banks, I assume that even this proposition will spur outrage. >> Yes, and it did from the Bank of England. But one of the great delights of the last decade has been that the Bank of England, and even the Bundesbank, have come out and said, textbook writers, such as, for example, a Nobel Prize winner or choose one at random, Paul Krugman, what they write on textbook is wrong. >> Right. >> This is the Bank of England, the Bundesbank, the New Zealand Central Bank, even the Australian Central Bank, the Norwegian Central Bank, all saying what the textbooks issue is wrong. >> Right. That was Paul Krugman by the way. >> That's what to tell you but I did have an idea here. >> It's interesting you will bring up the Bank of England. This is why I was talking about private money because I was actually looking at the Bank of England's account of how money is created before we got on, and there's a page that says, "How does it work?" It's their page on their website which asks how do we create money? They said there are three types of money in the UK economy. They say three percent of money is notes and coins, 18 percent are reserves, and 79 percent are bank deposits. So basically, what I'm understanding is that when you're talking about creating deposits, that's how 79 percent of the money in the UK is created. So private money is what really is keeping the economy accelerating, is that right? >> Largely, the fact that they include reserves there in one sense is correct, in another sense is wrong, because reserve is the money that actually isn't in circulation. Reserve is the money that the banks themselves have either stored in cash in their own vault, so it's not out there on the main street buying jewelry. I hope not anyway. Or they have it in the deposit accounts at the Central Bank themselves. So that's reserves on part of the spending power. It's actually three percent is notes and coins and 97 percent is money in circulation, which fundamentally, part of that money is created by, you know, you send somebody a welfare check, then that's money added to their account by the Central Bank. So that's actually government created money, but most of that money is just created by private bank loans. What has actually happened under the cover of textbooks telling people that you don't need to worry about private debt, and that's what those textbooks tell, including certain Nobel Prize winners like Paul Krugman. Under the cover of that, which the textbook writers themselves believe and half the bankers believe or more than half, we've had an explosion in level of private debt. So using the UK data again, when Maggie Thatcher came to power, the level of private debt in the UK was equivalent to 55 percent of GDP, and most of the bankers between 1880 and 1979 when she became leader was 73 percent of GDP. Under her and until Tony Blair rose from 55 percent to 210 percent of GDP. So maybe 195 percent. I think I should be thinking another different country, 195 percent, I'll just check my numbers as we speak. But that enormous increase in private debt happened at a time when economists were telling everybody, "You don't need to worry about it because it just the transfer of spending power from one individual to another, from 55 percent to 195 percent as it happens." So that's such incredible increase in leverage, it's part of what created the apparent prosperity of the period of Neoliberalism. Now that we've reached peak dead, we've had stagnation because that credit boast amount has disappeared. So it's incredibly important and it's ignored by the mainstream. One of many things I ignore that actually matter in economics. >> So to keep that going, obviously, in order to keep growth going, it sounds like you need to keep accumulating debt. Is that really the problem? The problem is that you've accumulated so much debt that to keep the economy growing at the pace that it has been growing, you have to accumulate it even more, and that's very difficult given the ability to service those debts. >> Yes, that's fundamentally the problem. It's all about private debt, not public, this is the other punchline. Check books worry about level of government debt with this belief that we have to pay the government debt back at some stage, somehow thinking we don't need to pay back the private debt. That's because they've got this idea, the cancellation effect. I've done mathematical models of the mainstreams belief that lending is from one known bank to another known bank, I radically changed the amount of debt and it does have no effect on the macro-economy. So if their model was correct, they couldn't do what they do, which is ignore private banks. But because the model was wrong, the level of credit debt, it matters immensely. Then if you have a large amount of increase in credit, you get a large increase in aggregate demand. If credit goes negative, you have a cross and a slump, and that's what happened back in 2008. Our problem is, we have just too much private debt now, so much private debt, the greatest in the history of capitalism, that people are unwilling to take on more debt, therefore credit boast demand is low, and the level of demand we were accustomed to in the previous 30 or 40 years has disappeared. >> So let's talk about that in terms of the debt because things are a little bit different now than they were in 2008 in terms of who has the debt and also, where the demand shock or the supply shock is coming from. When you think about 2008, you think about subprime mortgages, the United States household debt. Now when you think about the United States, you think about Triple B companies and you think about corporate debt. How does that play out in terms of this particular crisis that we're going through the pandemic? Where do you see the problems going forward? >> It's a complicated one because in one sense, corporate debt is actually better than private debt. Because at least corporations are earnings a cash flow out of the debt they have. Most of the private sector takes on, they only get a cash flow when they sell on asset. The asset, they're selling the house, and what you get is an artificial bubble that's self-driven by the level of leverage that can fall over, as we saw back in 2008. But a commercial entity borrower, at least he's got a cash flow that it can support that out off. So generally speaking, I'm more willing to tolerate a level of corporate debt than I'm in a level of household debt. But the trouble is, this particular shock to the cash flows of corporations is gigantic. We've never had anything like it. Just to give one simple illustration of that, there's one of the many data series that the St. Louis Federal Reserve maintains and what they call spread database, shows the level of commercial and industrial loans reaching about 2.4 trillion back on February 26. It crossed the $2 trillion mark back in 2016, it reached a peak of 1.6 trillion back during in the financial crisis, so not a large amount of growth. It's gone from 2.4 trillion to a peak of 3.1 trillion over the last two months. It's coming down a bit now. But that's the increase in gearing people have had because they simply had to quickly access their lines of credit, their overdrafts and so on, to be able to remain afloat. Now that's a huge increase in the level of gearing. In the case of those loans alone, it's about a 25 percent increase in debt in a couple of months. So the potential is that even if the level of demand returns, if there ever is an after the coronavirus period, cooperates should be carrying 25 percent as much debt and will be financially fragile and likely to fall either. So I see us having a financial process following on from the coronavirus crisis, unless we reduce the level of private debt deliberately. That's why I'm now pushing my modern-debt jubilee again, which is something I thought I'd never see happen. But at least one positive of the coronavirus, the impossible will not be considered. >> Interesting. I think at the end I want to get to that. Let's dissect this a little bit, because I was looking before this at corporate debt issuance. In the US, perhaps it's global, we have $1 trillion of corporate debt issued in the first six months of 2020 alone. That's much more, that's almost double what we saw in the previous year. My question to you in terms of the leverage that you were talking about is, is it that these corporations are borrowing the debt, they're getting the cash, and then they're sitting on that cash? What are they doing with that money? Are they rolling over loans? How's this working? >> I've got to feel like a lot of them will be share buybacks. Because if you have an environment where you can't see much in the way of profit opportunities or investment opportunities, and bear in mind that over the long-term the data does show that the main function of long-term debt is to finance investment, which is what you want to have happen. But for the last 10 years, given the stagnation and aggregate demand overall, the cost credit is so low after the financial crisis. Given that low growth environment, there hasn't been a great deal of corporate investment, most of it is being financial engineering, where big firms buy their shares using whatever money they can get to do that. So the borrowed money could actually be used to buy the shares, reduce the number of shares in circulation, and effectively draw back the share price, which then rewards the corporate executives who run those companies and they devour nicely out of it. So to me it's a form of corporate fraud. >> My question then is, what happens in terms of when that debt accumulation slows? Do you want the debt accumulation to slow? Because it would seem that, okay, yes, they're accumulating lots of debt, but that's what keeping the economy growing. How long can they continue that? Also, why would you want it to stop? Why would you want the gravy train to end when it means a huge economic calamity? >> This is the reason why I don't want it to end in the way that the private sector would do it. Because Irving Fisher put this very well back in the Great Depression. He had the only sensible explanation for the Great Depression during it, which was that it was a debt deflation. He said capitalism is always out of equilibrium. He learned that the reason he got it so wrong in the 1920s was he believed in an equilibrium model. So he rejected that in the 1930s after the equilibrium model sent him bankrupt during the stock market crush. He said capitalism is always out of equilibrium. What matters most is when you have too much debt and too lower rate of price inflation. He said if you start in those circumstances and then you have a foul crisis, people will try to pay their debt down. One way they'll do it is reduce their process to try to attract customers in through their doors rather than their competitors doors. Then use the cash flow to pay off debt. But because everybody is doing that, the price level falls, everybody pays the debt down. That reduces the money supply. You actually have a fall in debt and a fall in the money supply at the same time, and the fall in the money supply means the rate of turnover, money slows down even more and you actually have the debt level ratio rising as the debt level falls. If you look at the data back in 1932 to '33, that's precisely what happened. Private debt was falling between 1930 and 1932, while the debt level rose by about a 110 percent to about a 150 percent of GDP. So I call that Fisher's paradox. You don't want to experience Fisher's paradox again. >> Yes. >> The private sector does it on its own, it will cause an acceleration of the downward process. So you have to have the government doing it and you're going in the opposite direction providing money which replaces the cancellation of private debt by it's money. That's what I'd like to see. Whether it happens, I prefer by debt jubilee, but if it's done by the government spending at the same time and giving a cash flow to corporations that are fed created money, then that's better than just relying upon the credit system alone. >> It sounds a lot like Richard Koo's balance sheet recession when you talk about the debt deflation. Is that how you're thinking about it as well? >> There's a few people who've have been non-orthodox thinkers about money for a longtime. Richard Koo, Richard Verna, Michael Hudson, myself, Anne Peterfall. You have this long history of people being aware of the role of credit and debt in a capitalist economy. We've all had different perspectives on the same elephant in the living room. Now the mainstream says there is no elephant in the living room. >> When you mentioned Michael Hudson, immediately I think about an article that you co-wrote with him about what I would call a bastardized MMT. What I mean by that is that, for a long time, Michael Hudson's talked about the fire sector, that's the financial services industry, and the insurance industry, and the real estate industry to combine and how that particular segment of the economy is very politically savvy. Ultimately, when you talk about the government taking over the spending when the private debt is deflating, really, what Michael Hudson seems to be saying in this article with you is that actually it's a way of siphoning money off to the fire sector. Can you explain how that's different from a solution that you would have or maybe someone who was a MMT proponent would have? >> Yeah. The point of that article was that MMT is correct about the creation of government money, but in our opinion, not paying sufficient attention to where that money is created. When you have things like quantitative easing, that creates money on Wall Street not on Main Street, and as Margot put it beautifully in a seminar we were at once in the last few years, he said, "The Greenspan's helicopter or Bernanke's helicopter is flying over Wall Street not over Main Street." So what do you have with things like quantitative easing is the Central Bank using its money creation power which is unlimited, to create money which ends up in the financial sector. So QE was a decision that for indefinite period in the open market operations, the Central Bank is always doing with the private financial sector to try to maintain its target interest rate. Buying and selling bonds to try to keep the bond price within a quarter, represented inside of its target rate. It was going to be on the buy side to the tune of 80 billion per month, which is one trillion per year, pretty much. So that's meaning that you're getting one trillion dollars of government created money, created by the Central Bank alone without any involvement of the Treasury, going for the most in Wall Street. What did they do with that one trillion? The bonds went down by one trillion, the cash goes up by one trillion. All they're legally allowed to buy is financial assets, they can't buy bonds because the market's being quoted by the Fed, they buy shares. That's driven up the share process dramatically, from, if you're thinking, the bottom of the S&P was what, 666. I never know what the top is, but the bottom of 666, which I really love. >> Then it went up to 3,400, I believe, in February. That was the top. >> Yeah. Now, that's the scale of increase and fundamentally, its been driven by QE and share buybacks, where QE is actually financed, although they share buybacks as well as some of the private borrowing we're talking about beforehand. Now, how much of that money actually turns up on Main Street? Well, if you just simply imagine that the one trillion dollars of money took the buy shares ended up as one trillion of cash in share owners who sold that to the financial sector, and then that one trillion they've now spent 100 billion buying a new Lamborghini or a new chef for their holiday house, you might have got 100 billion out of the trillion into the real economy. So rather than the multiplier effect people talk about for government spending, this is a subtractor effect. Most of the money ended up on the financial sector, a small amount trickled on the Main Street. That's a very ineffective way of using the government's money creation capability. What we're saying is you should go not to Wall Street but to Main Street. You should use the same capacity to create money, to put that money into Main Street, where not only will it get to people who actually are poor or middle-class, they'll also spend it because guess what? They're poor or middle class and they've got to spend more than the rich do of the money they have. So it's much more effective for that creation of money to end up on Main Street than Wall Street. >> What's the net effect of redistributing this money in that way? That is, is that to the degree that the government creates money and it goes to people with higher marginal propensity to spend, as you're saying, does that decrease the debt overall in the private sector or does it increase the GDP, and therefore that ratio goes down? >> It's more the ratio in the first instance, I would like to reduce the private debt as well, that's my debt triple A, I did want to talk about shortly when you want to get onto that. But fundamentally, one important thing I've learned since those articles with Paul Krugman, out of buy back in 2012, is thinking about money the way an accountant does in terms of assets, liabilities, and equity. I've built a software package, Minsky, which you're probably aware of, that actually lets you build financial models of the economy using double-entry bookkeeping. As part of that, if you imagine a pure-credit economy, and those economy, there's no government sector, then the banks have to have positive equity. You cannot be a bank, if your liabilities exceed your assets, that's bankrupt. So the banking sector has assets greater than liabilities and non-bank has to have liabilities greater than assets. So if we lived in a pure-credit system, the non-banking sector in the aggregate, will always be a negative equity. Now, if you're negative equity, even though it's a necessity out of the accounting balance, nobody enjoys being a negative equity. So what do you do? Well, I go out and borrow money from a bank, and I'll go gamble on asset process. So I'll buy some shares on margin and the share price goes up and our value, the shares that I've purchased at the process very large share sold for, times the entire stock of outstanding shares. I imagine, in my own personal case, that I could sell all the shares I've got at the current price. Everybody else is making the same calculation, we do that, wow, magical, you've got positive equity, so long as you don't try to actually realize it. Now, that's the mindset we get trapped in by a pure-credit economy. If you have a government sector, the government can actually handle negative equity indefinitely, because the government creates the money. There are now Central Bank papers coming out that have said precisely that the Central Bank can operate with negative equity because it's the country fundamentally, nobody goes and checks its books, and even if they did, what could they do? They can actually create artificial equity anyway. So central banks don't have to live by that rule. So it means that if government can actually spend more than it gets back and taxation. Now if it does that, the government is running itself in negative equity. The non-government by definition, now this is where we haven't figured if this is all correct, is in precisely the same level of positive equity. So if the government runs a deficit, the private sector actually has more cash and therefore there's less incentive for the private sector to go and borrow money from banks and gamble, because the private sector could look at its aggregate books and say, "We're in positive equity, that's okay, what's for lunch?" But instead, because we have this obsession for the Main Street economists about giving the government into positive equity by paying its debt down, that tempts the private sector on to negative equity, we rush off to the banks and gamble and speculate. So again, the Main Street way of thinking about is completely, if I can use a technical expression here, it comes from Australia, completely *** about tip, upside bloody down. >> I like that expression, that's good. Very technical, I do appreciate that. >> Yeah, I thought you'd like it. >> So here's the question though. Let me play devil's advocate, this is how I would spin it. Isn't it true that when you allow government to think suddenly that they can spend whatever they want, have as many deficits as they want, then they will, and therefore that will lead to bad outcomes? Isn't it problematic to think that we have an unlimited checkbook and therefore we can do whatever we want? >> That other than the check book had been useful on a couple of important occasions such as the Second World War, where, for example, in the British case, the British deficit in 1940 was 40 percent of GDP. Now, what that did was enable us the weapons to fight the Germans, and if anybody had said, "Oh, that's too much, it'll cause inflation," the English would now be speaking an interesting dialect of German. So yes, it's a potential danger. But when you look at the real world, the only times you find it has happened, has been when there's been some dramatic destruction of physical resources, whether that's in the Weimar Republic, where the reparations took away a huge part of Germany's productive capacity. Still live with the debt servicing need and they basically printed, they invited pay the reparations back. The collapse in Zimbabwe was a similar thing with the wiping out the white farmers and supposed they've put across as being democratic, it was actually like most of the pay back system, destroying the productive capacity, and then printing money to cater for the thing. Those are the instances you can find of it. If you look globally, you can find about four instances. If you look on the other side of the ledger and say how often it's been a crisis caused by private debt and too much private debt over the last one-and-a-half centuries, there's about 150 cases. One of the persons I highly recommend you interview, as well as Richard Vague, you know Richard Vague at all? >> No, I don't. >> Richard, he loves he's last name, he's the least vague person I've ever met. The short story is a successful banker started two of America's major credit card companies and is now, both a philanthropist and a campaigner about the dangers of private debt. He commissioned a research group to look through, and I wrote to the very detailed level, actually reading ancient newspapers like newspaper from the 1920s and the 1840s and 1850s around the world, to get a picture of all the financial process that occurred 150, roughly one per year across the world. Six major ones for things like the Great Depression, the 1890s crush particularly that in Australia, the 1837 as it happens back in America, 2008 obviously, every last one of them, private debt. >> Right. >> So the devil's [inaudible] question is saying, "Let's worry about the trivial stuff that happens almost never." I understand the devil's advocate. We've been conditioned to think that's paying a devil's advocate. It's actually coming condition not to think about the important stuff. >> Yes. If we could sum up where we are at this point in the conversation. Basically what you're saying is that private credit creation increases GDP. At some point we seem to have reached a level which is what you could ostensibly call peak debt. When you are at that level where it's very difficult for all entities to be able to service their debt, the question then becomes, does the debt decline outright and force a debt deflation? Or do you have the government step in in some capacity and smooth out that transition to prevent the fall. That's one possibility, and then obviously the other possibility is that you have a debt jubilee. But before we get to the debt jubilee, which is where you decrease the numerator as opposed to dealing with the denominator, the actual output. >> Yeah. >> Where do you differ with MMT in terms of they say, "It's really the denominator. We really need to work on the denominator. We need to increase GDP, and the best way to do that is through deficit spending." It's not really, from my understanding in MMT about the numerator, it's not about decreasing the private debt levels. >> Yeah, that's very well put [inaudible]. I think it's because MMT is still an evolving area and they haven't quite worked this out yet. So I'm going to be critical of MMT, but only a sense of saying you can improve yourself if you consider the role of private credit as well. You may have seen Doug Henwood coming out with a strong particular MMT, and Randy Wray coming back and being quiet, rather dismissive of what Doug was saying the part of what Doug said. He said, "Randy used to be part of the endogenous money camp." >> Right. >> A lot of important work, and suddenly you're no longer talking about it. In replying that, Randy said, "Yes in retrospect, I do regard the endogenous money to buy this trivial." What he said was, all it did was it citizen rather than the government central bank controlling the management or the vertical curve and the IS-LM, they cut my vertical manage on the standard textbook model, but saying it's horizontal, so rather controlling the money, you control the process. That's all they said endogenous money comes down to, but that's correct in the sense that is what endogenous money [inaudible] says. The government doesn't control the money for part of the private sector largely controls that the government can control the process is true. But there's also the role of credit and creating additional aggregate demand. On that front, I [inaudible] fit with notches with Randy, on that front bitmap Lavoi. >> Yes. >> A very famous and prominent post Keynesian economists because I was saying, credit is part of aggregate demand, and they were saying, "Look, you must be making an accounting error there." So I had to work out the logic myself, and that's what one of the papers, which is a paper in the review of Keynesian economics. I finally worked out the logic to say that credit is part of aggregate demand and aggregate income. Because when you borrow money from a non-bank, there is just transfer of spending debt, there is no increase and aggregate demand credit does cancel out. That's the mainstream vision. But when you borrow from a bank, the bank creates the money, it creates a debt. It creates money and you spend the money. Therefore, that change in debt becomes part of your expenditure and the person you spend it on becomes part of their income. So credit, one of the insights of endogenous money is not just the government sets to process money rather than the quantity. It's also that creditors part of aggregate demand. When you do that MMT should be supporting the idea of yes, we should reduce the level of private debt as well. We can do that using government money creation. So I don't see a conflict, but I see incomplete logic in the MMT cost at the moment. >> Yes, and what's the role of regulation there? Because when I've spoken to [inaudible] who's another post Keynesian economist as well, she talks about government regulation of private debt creation as very important in terms of capping that level of private debt? >> Yeah, I think it's extremely important. Again, this is something again because the image is focus its attention on what the government should do. Of course, that's very important, that the belief that government should run surfaces as being a crucified capitalist economies. Secondly, integration book, the Stephanie Kelton's book, the deficit myth is very important contribution the opposite direction, but you've got to consider the private banking sector as well. It's not just one picture. So Hans work there I completely agree with as well. You do have to regulate the private banks because, and this is where Richard Vague [inaudible] was so good as well, having been a banker, who knows what they're like. He was one and he says, "Bankers if there's commission then it, they'll create it." >> Right. >> What are they commissioned for? They create debt. So they when there's a bubble going and they're all competing to be the first one to lend the major in this particular industry sector. His particular example and the reason he became a successful banker in his own right, rather than being just an employee of a bank, was he was in the oil bubble back in 1979 when the oil price increased from $10 to $40 with the second opaque porosity rows. He said, "Texas was full of bankers lending money for oil rigs in Texas." Then the process crashed from $40 to $10 again, they were all basically bankrupt, and they've had to try to write off their commercial wing and sell their private wing to cover their commercial wing. He bought the private household debt wing at that surgeon and got into the business very successfully. But he set the mentalities to lend as much as you **** well can when the bubbles going on and then go the opposite direction. So you don't want that mentality. This is where Austrian attitudes about it'll let the private sector rip a great for that's what you want for the industrial sector, that's what you want for people innovating thus you don't want it for the banking sector that'll cause bubbles and crashes. But they're the main beneficiary of that Austrian vision. So I would be restricting what banks can lend to as well. I would one of my concepts, part of that jubilee idea with what I call the PILL. That used to make people smile. Now they just looked at me and say what's the PILL stand for? >> You would try. Let's talk about that jubilee in the PILL, yes. >> The PILL, I call Property Income Limited Leverage. At the moment what banks do is if you want to go buy a house, anyone are competing over the same place in Washington, then the one of us that gets the biggest bank loan will win. So banks are willing to lend as much money as they can. You and I tried to get more debt because that means we'll win that desirable property we're both fighting over. That gives you a positive feedback loop between the huge credit for housing and your house process. I've done the mathematics on it, it's absolutely strongly the case of what causes rising house process is rising level of new mortgage debt. Categorically, that's the case. >> Right. >> So I want to break that and change that from an amplifying feedback into a dampening one. That would be what the PILL robot say, "The maximum amount of money anybody can borrow to buy a property is some multiple of the income earning capacity of that property." So let's say the pleasure that you and I are competing over in Washington range for $30,000 a year. The rule would be on the process for the thing, the maximum you can actually borrow was $300,000. Now therefore, you and I are competing over it. The person who would win is not the person who could get more bank debt because the ceiling will be set at 300,000. Neither one of us in seize more money. So you'd get a negative dampening feedback between leverage and house process. So that is one way of cutting out property bubbles. It also have what I call EELs, which stands for Entrepreneurial Equity Lines. I know there were issues about having a banker on your board. But I would like to have the possibility for banks to lend and not take a deposition against the firm but take an equity position. That way you mightily fill in just six entrepreneurs further going to file, and if you lend to one, you get interest payments at the moment you don't get any increase in your equity level. But if you could offer an equity loan, then you get six, five of them might file the one who succeeds normally can pay the interests, but also you get arousing value of the asset you've generated by lending them money as an equity position, not a deposition. So various rules to make force banks to actually lend to the productive sector of the economy and not to finance asset bubbles. So you can't do it without regulating banks in that sense, because the banking license is a public good and you shouldn't let it be abused by private access, which is what we've done for the last 50 years. >> There are a lot of different ways I can riff off what you said. But immediately I thought about the bank licensing practice because I think back to the 1800s in the United States when banks were actually issuing their own money. When you deposited your money and you wanted to take the money out, it would actually have on the money, it was from this bank. >> Yeah. >> It was their money. But through the process of having a central bank, we now realize that the Central Bank is saying, "Okay. What was private money is actually, we're going to make it government money. So when you take money out of the bank, you're actually getting government money, not private money. For that, because we're giving you the bank this advantage, we're going to regulate you." So that's the trade-off that we're making in the system. To me, that seems like a very good trade off but a lot of people have, they liked the concept of transforming private money into government money, but they're not regulating what happens with the banks. >> That's extremely eloquent and extremely sensible. Because if you do think about it, go back to the 1800s as you know that's the period they called a wildcat banking period, where you didn't have private banks and they would issue their own bank notes. The reason I call them wildcatters, you'd be aware is that when you wanted to get your money back, the bank branch, we are told you can get your money back was where the quote, unquote what the wildcat saw. When the bank regulators went around to see just how much they were backed by other forms of assets, they'd find things like there'd be the chest showing this is all the gold coins we have. Then they'd scrape off the top of the gold coin that you find a whole lot of old rusty nails. All fraud were part of it. Fraud was a huge part of banking, because there's no easy way to make money than to be a bank. That makes sense. When you say a bank can actually issue a deposit which is one-for-one recognized with government money, that is an enormous gift by the government to the private sector. That gift should come with responsibilities. In fact, what we've had is because it's been so long since we had this era of private notes, we don't realize that banks use to issue their own money, not government money. Now when you say it's government money, then they've got the backing of the government sector. In that sense, they are a public enterprise, and they should be controlled. Not so much controlled, but they shouldn't be allowed to commit fraud and call it business. Fundamentally, what we've done is they have committed fraud and called it business. So yes, you're quite right that that very fact that the notes they issue, the deposits they have a one-for-one convertible government money, gives them a level of the public backing and solidity, which comes not out of the them but out of the public sector itself. They have been given a gift by the public sector, they're our responsibility. We go with that gift and we should enforce them, and we haven't been doing it because we believe then that they're God's gift to creation. That they're God's gift to, once I got gifts to women, but a lot of them believe it. But they believe that they were the masters of the universe. ********. You're the Sorcerer's Apprentice. You're not a master at all. If you want to go back to being master of the universe, start issuing your own private money and see what happens. >> Yes, exactly. There's a second thing I want to riff off of that answer that you gave before about property, because I've been thinking about it from the Henry George perspective. He is a political economist from the late 19th century, early 20th century, who talked about rentiers. Basically, he felt that land value was a huge problem in terms of people basically just accumulating wealth and that this is really a big problem. Rentiers within the system accumulating wealth and holding onto that wealth, can you talk about that? Because I know that you've spoken about this whole the rentiers of society being a problem in terms of how the distribution is done. >> Yeah. Just particularly the Henry George focus upon land taxes effectively lock with vitamin C of economics. Just add land tax, everything's going to be perfect. That has denigrated the focus which George had, as you correctly emphasized on controlling rentiers. In other word, meaning you're quite happy to make people earn a living by an honest day's work as a waged laborer. Quite happy to have them earning profit as an entrepreneur or as an effective manufacturer. The danger in capitalism comes from people who own assets, getting increase in their wealth simply because they own assets, society as a whole is rising and they benefit from that because the asset rises in value and they benefit. That's the target, not just of Henry George but also have Ricardo. If you read Ricardo properly, and most people don't read Ricardo let alone read him properly, he says his whole focus is on getting money out of the hand of rentiers into the hand of capitalists. He argued that workers would fundamentally be paid off subsistence wage. If you could reduce the cost of subsistence, which was bread back then fundamentally, then you would reduce the wage not affecting the real standard of living, a worker's work, it would still get the same amount of bread, but they would pay less to the landlords who own the land where the bread was farmed and more would go to the industrialists as profit and you get a more sustained period of growth. In that sense, Henry George is repeating the argument of David Ricardo, but focusing just on that particular issue of reducing rentier income. Meaning, if you're going to get income, you got it either because of a worker or as a capitalist, and minimize the amount that goes to rentiers. That's been an important message in capitalism, which we've lost by actually ending up eulogizing the rentiers. The banking sector is the main support for rentiers because it's their debt that lets those rentiers borrow the property >> Great. When I think about it in the modern context, increasingly I'm thinking about it from an intellectual property perspective. Because it's almost identical in terms of, you own this property, this intellectual property now, not tangible property, but you can therefore extract rent from that property and you're not doing anything productive with that per se. If you think about Amazon might come out and they have a patent for how you swipe left and swipe right to have a one-click on your mobile device, they're earning a huge amount of rental value out of that particular patent. Is that the new Henry George rentier type of system? >> To some extent. But at the same time, it's something which you have innovated something new. I mean, Henry George focuses on simply buying residential land, having a proper population increase because you have residential land or you have let's say farming land which has become residential, you benefit from the resigning. You haven't done anything creative out of it. When somebody comes up with new technology, then that is since creative and you do actually want to emphasize that in capitalism. The trouble is, when you get things like the example you've just given, which actually conflicts with developments. For example, you and I hop in a car. It doesn't matter manual or automatic, where's the accelerator? Which foot is the accelerator? >> On the right. >> Okay. That's true in every country in the world. Now, if you had this patent you're talking about a moment ago, their patent swipe left. Well, if you hop in a car with patent that the accelerator being for the right foot, you'd hop in the car and put your foot down and find you're hitting the brake. I've actually once had an accident, hit by a dog. Forty kilos of matter moving at 40 kilometers an hour, hitting me on a beach and smashing my leg so badly that I couldn't use the accelerator or the break. I had to use my left foot for both the accelerator and the break. It was an exciting journey, let me tell you. There's some things you want a convention to rule, not something stupid like a patented swiping right or swiping left. That's something I don't want to see patented, you'll just say what it actually is creative. In a sense, that is laying out territory and saying I'm marking that territory as my own and excluding other people and not enlivening the social benefit. But if you come up with a new technology, things like for example a rocket come back and land on earth, you would like that to be something which you got benefit out of for some period of time. You can get the benefit by being the very first to do it and nobody catches up with you and that's the case, of course, with SpaceX and Musk on that front. But there are some areas where you'd like to preserve, if you invent a new concept, you want to get to a cash flow benefit for a period of time that's benefiting you as the innovator. Now, the classic instance where patents don't do that, you know the expression of what they called the Mickey Mouse course? >> No. >> Okay. Mickey Mouse, of course, was invented by Walt Disney, and only just recently has the patent on Mickey Mouse expired. But whenever it's about to be expired, Walt Disney Corporation lawyers, long after Walt Disney died, would come along and lobby congress to extend the copyright. So it's supposed to be a 25-year copyright for the benefit of Walt Disney and maybe his heirs for a few years became a 75 year monopoly. That is the abuse of patent power. I would use old allowed patents to benefit the innovator for a defined period of time before the idea can be ripped off by somebody else. There's a balance between the two. Sometimes you'd want patents to be short, other times longer. Certainly the whole idea that Walt Disney's great great grandchildren were getting money from Mickey Mouse, that's a very Mickey Mouse idea. >> Well, I've veered the conversation off because I still want to go back to that whole private debt jubilee thought. Because where we were is talking about the numerator and the denominator. That is, is that the numerator's the debt and the denominator is the output, GDP, whatever you want to call it. When you look to increase the output, that number shrinks, but when you look to decrease the amount of debt, that number also shrinks. How do you go about doing that decrease in the debts in a debt jubilee, in a way that is fair and is not chaotic? >> Very good point, again. The basic story is that there are two ways we can create money in capitalist economy. The government can spend more than it gets back in taxation and have that financed by the central bank, which creates fiat money, or private banks can lend out more than they get back in repayments, which creates additional credit money. Now, because we've had this obsessive idea that there should be no fiat money creation, this again comes out of neoclassical textbooks and Austrian thinking as well, we've allowed too much private debt to be created. So if you look at the level of money in America, the increase in the amount of money in circulation has fundamentally been increasing credit-based money. Now, if you get to the stage where you go to reversal of that by people paying their debt down, you get Fishers paradox. People reduce their debt level and the debt ratio rises because the reduction in money, given the fact that money turns over, the impact that has upon demand is actually greater than the reduction in debt. So your numerator falls by say, 10 percent and your denominator falls by 30, and you have an increase in the ratio and across, it's like the Great Depression. To put numbers on that, Ed, because you've done a great point by rising that point. If you go back to the Great Depression and take a look at the level of debt in 1930 when the Great Depression began, it was 100 percent of GDP pretty much and that surge, credit has just started to turn negative. It reached a peak of 144 percent of GDP, while debt was falling. >> Right. >> Credit was actually negative from halfway through 1930 all the way out to 1935, negative credit with a rising debt ratio. So you don't want that effect to happen. So if you just let the private sector do it, you'll have a fall in the money supply and that will give you a fall in money. So a turn-to-turn overrated money, decline in GDP, and as your numerator falls, your denominator will fall even more and you get a rising ratio. So you have to do something different, and that something different is used government money creation capability to replace credit-based money. You reduce the numerator without reducing the money supply. That's the idea of a modern-day triple A. It's just quantitative easing that's done. I'm sure that the government can create money by accounting operation. You use that accounting operation and put money in people's profit bank accounts even per capita basis across the whole of society. Everybody who has a bank account gets exactly the same amount of money. If they have debt, then that money is used to reduce their debt level. If they don't get debt, they get a cash injection. What you do is you don't change the amount of money in circulation. You keep them on a constant, which will reduce the debt level. You could also, if you're worried about inflation out of the additional spending power for those who are non-debtors getting a cash injection, then you could also have a rule where you require that money to be used to buy corporate shares, whereas corporate shares must be used to cancel corporate debt. So there's ways to do this to reverse the mistake we've made of letting too much credit money being created and get back to the stage we have the balance between credit and fiat money that we had back in the '50s and '60s. >> When you look at now during this pandemic at who's vulnerable, countries that are vulnerable to peak private debt and that you think would benefit the most from a debt jubilee. What countries come to mind and what are their vulnerabilities? >> There's a whole lot of countries that do because there's so many that have a huge level of private debt. For example, one of them was one of the countries doing best about the coronavirus, which is Norway. Norway's private debt level has fallen from its peak, but it's still gigantic. It's private debt level is 240 percent of GDP. So you have an enormous private debt level being carried. It's worse when it's more household than corporate debt. Norway has a high level of corporate debt, but also, I think, household debt is about 100 percent of GDP. If you can take that debt burden off those people by rebalancing credit money and fiat money, then you'd get an enormous stimulus to the economy because people wouldn't be trying not to spend because they're worried about their debt service. When you try not to spend, you don't actually increase the amount of money in the aggregate, you slow down how mass money turns over. So by taking the debt burden off people and they're not worried about servicing their debt, they'd actually spend more easily. You get a stimulus out of that. If any time, you need the stimulus now, about the people will be more willing to spend, it's after the coronavirus. So Norway, Denmark, the Netherlands, the UK, America as well, because you're still carrying a debt level of 1.5 times GDP versus a minimum level before this whole crisis began of way back in the 1940s, pardon me, of about 40 percent of GDP. We're all carrying about three or four times as much private debt as we should. So it's a very global phenomena. We could all benefit from a reduction in the level of private debt. >> To finish off with a few predictions, where do you think policy is actually going to go? I don't believe that it's going to go towards the debt jubilee until we reach extreme situation. Where do you see policy during this crisis, this pandemic going over, say the next 3-6 months? >> I think the same thing that happened pretty much with the financial crisis back in 2008. The initial panic reaction is throw the textbook out of the window and do what's necessary so that capitalism doesn't collapse on your watch. That's fundamentally what happened in the 2008 crisis. It's what pretty much happened with the cash handouts and debt forgiveness, and all that stuff that's happened during the pandemic. Once people think the crisis is over, they go right back and they go back and grab that textbook again, not literally, but in their minds, that's the way their minds think. When the panic is not there, they'll go back and say, "We got to reduce government spending." They'll do that and they'll take away the support that has stop the financial system collapsing. So I've got a feeling we're going to see those same mistakes. Pull back support levels, try to reduce government debt when it's not the problem as private debt is, and then trigger that private debt collapse by people, trigger people who can't pay their mortgages anymore to be evicted, then cause the collapse in the banks themselves. So I couldn't keep quite right. Unfortunately, they'll do the right thing while they're panicking and the wrong thing, and then they think they're being intelligent after the crisis. >> We'll, maybe we'll have to have an update once these measures come off. Because in the United States, at a minimum, we're talking about the loan programs coming off at the end of this summer. We're talking about the enhanced unemployment insurance coming off at the end of this summer. We're talking about credit card forbearance also coming off, and as you mentioned rightly, mortgage forbearance coming off. At that point, I think that there will be a reckoning. The question is, what happens then? So to be continued at that point, Steve. It's been a pleasure talking to you. >> It was both ways, mate. Very enjoyable to have somebody ask questions that actually really knows what he's talking about to begin with. >> Thank you. You're good to say that. I appreciate it very much. >> Very true.