What will trigger the next economic crisis? Steve Keen Kingston University London Asymmetric Return Capital IDEAeconomics Minsky Open Source System Dynamics

“Nobody could have seen it coming…” “The Queen asked me: ‘If these things were so large, how come everyone missed them? Why did nobody notice it?’.”The Queen asked me –When Garicano explained that at “every stage, someone was relying on somebody else and everyone thought they were doing the right thing”, she commented: “Awful.” No! As obvious as the nose on a swan’s face when you include credit A “Black Swan”?

Simple reason why credit slowdown causes crises Two sources of expenditure (in pure private sector economy) –Turnover of already existing money Roughly measured by GDP (in £/Year) –Expenditure of new money created by bank lending Measured as change in private debt (in £/Year) –Total expenditure is the sum of the two streams –Identical to total income plus realized capital gains Crisis occurs when rate of growth of debt slows down from high base Easily shown using a spreadsheet…

Simple reason why credit slowdown causes crises Slowdown in credit growth causes crisis if Debt/GDP already high…

Simple reason why credit slowdown causes crises Precursors to crisis are thus (1) high ratio of private debt to GDP –(2) Years of high credit growth (compared to GDP growth)

Simple reason why credit slowdown causes crises The UK:

Simple reason why credit slowdown causes crises Spain:

Simple reason why credit slowdown causes crises Ireland:

Countries where GFC was sidestepped… Australia:

Countries where GFC was sidestepped… Canada:

Countries where GFC was sidestepped… China…

Where the next crisis will come from Countries with high private debt/GDP & high debt growth rates –Predominantly, the Third World…

Where the next crisis will come from Candidates (1) : private debt > 175% of GDP (in rank order)

Where the next crisis will come from Candidates (2) : Debt growth > 8% GDP per year since 2010 (rank order)

Diminishing cycles then a crisis We now have two Crisis data points: , 1980-Now Both had declining volatility before the crisis

Diminishing cycles then a crisis Both also had rising private debt & then deleveraging

Why economic mainstream ignores private debt Credit ignored by mainstream economists via “Loanable Funds” fantasy –Fantasy: “Banks intermediate”. Real world: “Banks originate loans” –“Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” (Bank of England, “Money creation in the modern economy”Money creation in the modern economy Fantasy wouldn’t matter if economists were merely entertainers But their fantasies mean –We don’t see crises coming –Once they occur we can’t escape them…

Why economic mainstream ignores private debt From their fantasy to the real world in 20 seconds…

Simple rules, complex behaviour Model with stable equilibrium…

Simple rules, complex behaviour Model with unstable equilibrium: diminishing and then increasing cycles –“Great Moderation” followed by “Great Volatility” Falling then rising cycles Cyclically Rising Private Debt Ratio

Simple complex systems model… Full model is Inflation-adjusted nominal interest rate 1 st order time lag determines inflation Inflation affects wages share Inflation affects debt growth Lagged interest rate reaction to inflation

As a Minsky model… Moderation/Recession (with nonlinear behavioural functions)

As a Minsky model… Employment, inflation & profit give no warning of crisis: Private debt ratio is the key indicator of impending crisis

Conclusion Neoclassical meta-axioms render it unable to understand capitalism –Not individualism but emergent phenomena in complex system Fundamental phenomena of capitalism result from interactions between entities, not innate properties of entities themselves –Not instrumentalism but structuralism “Unrealistic assumptions” mean structurally wrong models Dynamics of capitalism emerge from its structure –Not equilibrium but far from equilibrium dynamics Key features of capitalism—like Great Moderation/Recession— are far from equilibrium phenomena –Not barter but a fundamentally monetary model of the economy Capitalism without money is like birds without wings Modern complex systems tools—like Minsky—make 19 th century static compromises unnecessaryMinsky It’s time economics grew up