The Economist Who Called 2008 Says The Debt Crisis Warning Is A Myth — We Had To React

Summary

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Podcast Summary: Impact Theory — “The Economist Who Called 2008 Says The Debt Crisis Warning Is a Myth — We Had To React”

Host: Tom Bilyeu
Guest/Discussed: Steve Keen
Date: July 25, 2026

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Episode Overview

This episode of Impact Theory dives deep into the real mechanics behind public and private debt, the misunderstandings within mainstream economics, and why the most alarming warnings around government debt might be missing the point. Tom Bilyeu analyzes and reacts to the controversial theories of economist Steve Keen—famous for predicting the 2008 financial crisis. Together, they unpack why conventional models fail, how money and debt actually work, and what’s really driving cycles of growth and crisis in global economies.

Main Theme: Challenging the popular narrative that government debt is a looming crisis and exploring how money creation—especially through private banks—fundamentally shapes economic growth and risk.

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Key Discussion Points & Insights

1. Who is Steve Keen?

(01:00–03:41)

• Keen is a left-leaning, Marx-influenced economist known for his heterodox approach and for predicting the 2008 GFC.
• He critiques both Marx and mainstream economics, valuing evidence over allegiance to ideology.
• Noted for not trying to profit from his predictions—he doesn’t play the markets.
• Tom: “I respect Steve Keen for that dramatically... Here are the parts that I like about this thing. Here is where this goes off the rails.” (01:27)

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2. The “Debt Crisis” Narrative

(03:33–06:20)

• The United States' national debt (noted as $31.5T, now $39-40T) has become a headline issue, with predictions of imminent government debt catastrophe.
• Mainstream projections (e.g., US GAO) warn that debt exceeding GDP will lead to disaster.
• Steve Keen counters: The real misunderstanding is not in the numbers, but in how economists model money and debt.
• Steve Keen: “There’s going to be a government debt crisis in the near future. And I want to go through now and show why these warnings are completely wrong.” (03:33)

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3. How Money Is Actually Created

(06:20–11:20 & 18:33–25:17)

• Mainstream view: Banks are intermediaries—they loan out deposits, which limits creation of new money.
• Keen’s correction: Private banks create money out of thin air via the loan process—they’re not limited by deposits.
• Loans create both a new asset (the loan) and a new liability (the borrower’s obligation) simultaneously.
• Paying off debt destroys money; thus, debt repayment shrinks the money supply and can contract GDP.
• Tom: “If you map banks as being an intermediary that simply loan deposits out to people, you will never be right about the economy, ever.” (04:53)
• Steve Keen: “Banks do not act simply as intermediaries, lending out deposits that savers place with them... The Bank of England said both of those models are wrong.” (22:41)

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4. GDP, Money Supply, and the Velocity of Money

(08:46–10:57)

• GDP, in Keen’s model, is roughly the total money supply * velocity (how often money changes hands).
• To grow GDP: either inject more money (via new debt) or increase the rate money circulates.
• Tom: “If you have that mental model, then anybody saying that government debt is going to be a problem is nonsensical because you can’t bring on government debt without increasing GDP… So the government debt is a function of growing GDP in his mental model.” (09:43)

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5. What Mainstream Economists Get Wrong

(16:05–19:50)

• Standard models (loanable funds, money multiplier) ignore private debt and falsely view banks as neutral intermediaries.
• Keen argues these myths blind policymakers to the real risks: it’s private debt booms and busts, not government debt per se, that drive crises.
• Steve Keen: “If you get this wrong, you make up myths about the economy. So you have to understand double-entry bookkeeping to know how banks actually operate and how money is created in a capitalist economy.” (17:51)

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6. Practical Effects: Debt Expansion and Contraction

(27:02–31:44)

• When banks lend, money supply and GDP grow in tandem; when lending contracts, so does GDP.
• Empirical data: private credit growth mirrors employment (more debt = more jobs; less debt = higher unemployment).
• Steve Keen: “Banks lend, they create money, as well as creating debt, that money turns over and causes more macroeconomic activity. So you can’t ignore private debt and understand the macroeconomy.” (29:50)

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7. Ignoring History and Evidence

(29:50–31:44)

• Keen’s long-running frustration: academic economists refuse to change course even after models failed in 2008.
• They persist in obsessing over government debt and ignore the systemic importance of private credit cycles.
• Steve Keen: “By ignoring private debt and obsessing about government debt... they refuse to learn from history. Now, why do they refuse to learn from history? Because history refutes their theory.” (30:10)

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8. Prescriptions, Moral Hazards, and Systemic Problems

(35:30–45:19)

• Keen advocates for periodic “debt jubilees” (forgiving a chunk of debt), ideally targeted so that funds either pay down consumer or corporate debt—aiming to reset the system.
• Tom explores the trade-offs and perils: behavioral distortions (YOLO borrowing), inflation, and potential loss of discipline if debt write-offs are predictable.
• Tom: “If everybody knows, oh, every 10 years this is all going to get reset, then I’m just going to spend frivolously and I know that it’s going to get reset ... That’s where the behaviors just start to become unhinged.” (40:56)
• Discussion of real/nominal wage growth, inflation’s corrosive effect on living standards, and the balance of innovation vs. stimulus.

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9. Memorable Quotes & Moments

• Tom Bilyeu: “I’m shocked that he [Keen] still has a positive valence [on Marx]. But to Steve’s credit, he does say, but he had an outcome that he wanted to achieve from a philosophical standpoint, and he betrayed his own logic to get there. So he’s honest about that.” (46:33)
• On policy complexity: “The economy is extraordinarily complicated to tie this all up in a bow. I think Steve Keen is onto something…” (45:20)

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10. Conclusion and Future Directions

(47:25–47:45)

• Tom expresses gratitude for Keen’s expanding influence on his own economic perspective and commits to further exploration of these views in future episodes.
• Sign-off with Tom’s catchphrase: “Until next time, my friends, be legendary.” (47:33)

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Timestamps for Key Segments

• [01:00] – Introduction to Steve Keen and his background
• [03:33] – Outline of the “debt crisis” warnings
• [06:20] – Tom’s breakdown of Keen’s core model (money, GDP, velocity)
• [11:20] – Historical misprojections and the ahistoric trend problem
• [18:33] – Double-entry bookkeeping & the nature of money/debt creation
• [22:41] – Bank of England’s confirmation of Keen’s model
• [27:02] – Effect of lending/credit expansion and contraction on GDP
• [31:44] – Chart: private credit vs. employment; evidence dismissed by mainstream
• [35:30] – Discussion on inflation, policy hazards, and the case for (and risks of) debt jubilees
• [45:20] – Behavioral economics: GameStop, NFT, and market exuberance moments
• [47:25] – Closing thoughts and “be legendary” sign-off

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Notable Quotes

• Steve Keen:

  • "Banks create money by creating debt... as soon as you realize that banks actually create money, that creates additional demand and you cannot ignore the banking sector when you’re looking at the macro economy." (20:43–25:17)
  • "This is being ignored by the mainstream... so their advice about the private banking is completely wrong." (29:50)

• Tom Bilyeu:

  • "If you map banks as being an intermediary... you will never be right about the economy, ever." (04:53)
  • “You do run into a moral hazard. If everybody knows, oh, every 10 years this is all going to get reset, then ... I’ll basically spend right up to the 100k… So it is important, that’s just one of the reasons it is important that economists know what Steve is talking about. But, boy, you couldn’t broadcast that...” (40:56)

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Overall Takeaways

• The supposed ‘government debt crisis’ is largely a myth when viewed through the lens of modern money creation; it’s private debt cycles that fuel economic booms and busts.
• Mainstream economics and textbook models are dangerously misinformed about how banks and money operate—which leads to poor policy and ignored warnings.
• While Keen’s model greatly clarifies why crises like 2008 happened, its policy implications (like debt jubilees) demand careful consideration to avoid moral hazard and inflationary spirals.
• Tom Bilyeu finds Keen’s approach profoundly influential, shifting his perspective on the cause-and-effect dynamics underpinning today's global economy.

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This summary captures the core arguments, insights, and notable exchanges from the episode, structured for easy reference and understanding—especially for listeners new to heterodox economic critique.

Transcript

[Drew]

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[Drew]

Steve Keane is an economist. He starts out actually was a tennis player who could have potentially gone pro and is also a very left leaning, like with Marx, he loves Marx. So Marxist views, thinks Marx is the best economic mind ever or certainly of his day. That one I don't have teased out well enough. And so you know me, I'm violently opposed to Marxism and I'm learning a lot from this guy. And so this is where all we seek disconfirming evidence because you've got to find the holes in your own game. So anyway, economist, very left leaning, very much somebody who believes that Marx had the right ideas but had a conclusion, he wanted more and so ended up breaking his own train of logic. I respect Steve Keen for that dramatically that he can go, okay, here are the parts that I like about this thing. Here is where this goes off the rails. I don't think he covers it in this video, so we're not going to talk about it. But he can actually point to you the moment where Marx ends up going off the rails. The thing that he gets very wrong. So really, really a fascinating thinker. Don't turn off to him even if he seems like maybe he's partisan. I think that's the wrong interpretation of him. I think this really is somebody who, who's trying to actually identify what makes the economy work. And so I doubt this will be the last video that we do with Steve Keen. We are trying to get him on the show. Okay, so economist who ends up being one of the people that predicts 2008 coming, he gets a lot of credit for that. But he didn't get wealthy because he doesn't play in the stock market at all. He knows that we move in these booms and bust cycles. He thinks he has a better explanation for it, but doesn't want to be in the markets. I think partly it's philosophical and unfortunately I think he's wrong about that. I think that's a huge mistake. Anyway. Okay, so that's Steve Keen. He's now going to try to explain why economists keep getting the economy so wrong, why they fail to see problems coming. He sees a massive problem coming right now, which he and I both see the same problem coming. But he's pointing to a thing to pay attention to that was just not on my radar in this way. I've already done a deep dive on private debt and so it was on my radar, but not in this way. And I think this is going to be a load bearing pillar in my view going forward. So strap in. Nations are drowning in debt. The world could soon owe more than it earns.

[Grainger Advertiser]

Our national debt is now larger than

[Drew]

our entire annual economic output.

[Steve Keen]

There's going to be a government debt crisis in the near future. And I want to go through now and show why these warnings are completely wrong.

[Drew]

Meet stuff Steve Keane. He's the world class professor and famously predicted the 2008 global financial crisis years before it happened. Now he's lifting the hood on the GAO's terrifying debt projections to show the glaring mathematical blind spot the mainstream media completely missed. The USA currently has $31.5 trillion in public debt.

[Steve Keen]

And that is.

[Drew]

So first of all, that number is now 39 million and approaching 40 million. So it's grown a lot since that number came out. And so what's really interesting is to see one of the things, one of his philosophies, not philosophies, one of his core beliefs is that the economic textbooks are written by people that have one glaring fundamental misunderstanding of how economies actually work. And as we go through this, I'll help fill out some of the gaps in what he explains. Because the first time you went through this, I was so dizzied. My first reaction was, this is idiotic. I spent hours researching this from a position of this guy's obviously wrong. And let me just put together the best argument as to why he's wrong. And the more I went through it, I was like, wait, wait, hold on. Actually. So the core misunderstanding that he's going to be getting into is that the federal government and the Fed have to be understood that the way that they end up creating money and injecting it into the system is very different that than the way that loaning money that already exists works. And so if you map banks as being an intermediary that simply loan deposits out to people, you will never be right about the economy, ever. If you understand that the way that banks actually do this is that banks create money in the act of loaning it. And so now you need to watch that the private debt, as it grows and shrinks and forget about government debt, which is a totally different phenomenon, then you'll be able to actually understand where things are going. Okay, I'm going to leave that there for now. I don't expect people to understand it yet. This is going to get more clear as we go.

[Steve Keen]

Simply sounds boring. In fact, if you get this wrong, you make up myths about the economy. So you have to understand this is a serious warning. There's only one trouble. It's based on completely mythical, completely fallacious visions. So the Government Accountability Office has just published a report to Congress telling the Congress that unless there's urgent and sustained action to improve the fiscal outlook for the economy, there's going to be a government debt crisis.

[Drew]

Okay, so the important thing to anchor yourself with is the punchline is going to end up being, he agrees that there is a crisis coming. He even agrees that there's a debt crisis. He just does not agree it's a government debt crisis. Okay, going back to this idea of when the government creates money, that's again, they're creating money out of thin air. And so you end up, we're going to have to get into the math of this. And I believe he does that in a minute. So just know when the government creates money, it ends up being good for gdp. He's going to show the math. Okay, and I'll slow it down. I'll walk us through that. But for now, just put in your mind, government creates debt that improves gdp. So basically, people's lives are getting better again. We'll go into that more. If you think that banks are a part of that system, you're right. If you think banks are simply loaning out deposits, you're so wrong. You will forever be confused about the economy. That's what you need to understand right now. At this part in our journey, debt

[Steve Keen]

as a share of the economy is projected to grow at an unsustainable rate. I mention government debt there because they don't mention whether it's government or private. They simply talk about government debt as if that's the only form of debt, which is something that neoclassical economists in general do all the time. And I want to go through and now and show why these warnings are completely wrong. Because economists do not understand money. Ridiculous. Because everybody thinks economists are experts on money, but fundamentally they don't include money in their Mac reconnaic models. And their arguments about money are based on fallacious concepts of how money is created. Well, let's see what they're warning the the government of in America right now. And this is the same thing that is being told to the British government, to the Australian government, to the Spanish government. Governments all around the world are being told, government debt is dangerous, you must reduce it. So the Government Accountability Officers said that government Debt will reach 106% of GDP according to their projections by 2029. It'll grow twice as fast as the economy over the next 10 years and they claim in 30 years time it'll hit 200 of GDP. So it's unsustainable for government, it's unsustainable for debt. And here they are just by leaving out any word, all they're thinking of is government debt. Over the long term, it's unsustainable for government debt to grow faster than the economy grows. This is the projections they're making.

[Drew]

A really important thing to say here is that they are right. So if the debt grew faster than the economy, you really are going to be in trouble. What he's going to show is that that isn't what ends up happening once you take into consideration how money actually works. Remember, we have a math formula that's coming that's going to talk about how GDP is based on the amount of money in the system and how often it turns over. And if the only way to get money into the system is through government debt, which by the way is true, then you find yourself in a position where the only way to grow the economy is to either speed up the velocity of money, and I'm going to leave that alone for now just because it'll get overly complicated. But for now there's only two variables in his mental model. Okay, so his mental model says that GDP is the amount of money in the system times how many times it turns over. Okay, so if I've got a dollar, how many times does it move through the economy? So I buy something for a dollar person that I paid that dollar something for a dollar. Okay, so that'd be two. So that'd be two turnovers. The actual velocity, it's known as velocity of money. The actual velocity of money, how many times it turns over, right? Now, I believe in the US is 1.8. I can't remember if he talks about that here, but that just is a true number. And so it's usually somewhere between 1.8, maybe 2.2 somewhere in there. Okay, so now you've only got two variables. If you want to increase GDP, you can add more money to the system, government debt, or you can increase velocity, get people to buy more stuff, and move that dollar around faster. Okay, if you understand that much so far, you will understand. If you have that mental model, then anybody saying that government debt is going to be a problem is nonsensical because you can't bring on government debt without increasing gdp. So the government debt is a function of growing GDP in his mental model.

[Guest or Co-host]

Okay.

[Drew]

If he ends up being right about that, then of course, it makes no sense to say, as government debt grows, that we create a problem in the economy. Okay, if you've got that much so far, you're in good shape. We're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere. Thanks for sticking around. Let's get right back into the action. All right, keep on.

[Steve Keen]

They're projecting forward what they think is going to happen to government debt over the next 30 years. And you can see there's been rises and falls in government debt as a percentage of GDP from 1900 till today. But they simply project continued growth. And notice the ratio of government debt to GDP is rising exponentially.

[Drew]

Okay, so another important thing to note, what he's saying is they're modeling out something that's ahistoric. We just don't see that. It does not go up, up, up, up, up, up forever. We have, like, all these ups and downs. So already he's saying they're projections. And by the way, he's a big believer in that the climate is going to be a catastrophe. Let's talk about why you're sweating. Summer is when bad fabric becomes too hot to ignore. That tea that felt fine in April is suddenly stiff, clingy, and practically suffocating you by July. Most guys just suffer through the hot months, but you don't have to. Quince fixes that. I've got their Pima cotton tees, and I am very impressed. The fabric, the fit, the construction, you can feel it just by touching it. That's what happens when a brand actually cares about quality materials. Quince builds everyday essentials like soft Pima cotton tees, breathable European linen shirts and pants, and lightweight cotton sweaters at prices 50 to 80% less than comparable brands. They work directly with ethical factories, cut out the middlemen and pass the savings on straight to you. There's no markup, it's just quality. Get the basics right and everything else gets easier. Make your summer wardrobe easy. Go to quint.comimpact pod for free shipping on your order and 365 day returns now also available in Canada. Quince is spelled q-u I n c e.com impactpod for free shipping and 365 day returns. Quince.com impactpod let's talk about the first thing you eat or drink in the morning. It's actually not a small decision. Whatever you take first sets the tone for how your cells are going to perform all day. I've spent years obsessing over what actually moves the needle on long term health and the thing most people overlook is just consistency. That's why I'm a huge fan of Nandica from Peak. Nandica is the Rolls Royce of coffee alternatives for longevity, full spectrum Reishi including Spore powder for cellular resistance and immune support, fermented Pu erh tea from 250 year old trees for metabolic and gut health, and ceremonial grade cacao that actually helps your body absorb all of it. It gives you calm energy, no jitters, no crash, and it can elevate your mood and help you focus. Set your longevity goals in motion. Get 20% off right [e-mail] impact that's peak P I Q U E life.com impact Let me tell you about something that happened to me. I was traveling abroad. My phone got hacked. It was a nightmare. That was the moment I really understood exactly how exposed all are. The hack is just the entry point. Once your data's out, it gets sold to data brokers who then sell it again and again. Your name, your address, your phone number, your Social Security number sitting on hundreds of sites available to anyone willing to pay for it. You can try and remove it yourself, but tracking down every site, submitting every removal request, repeating the process every few months as your data reappears is designed to be impossible. So Incogni does it for you. You authorize them once they track your data across hundreds of broker sites and remove it automatically. And when it reappears, because it will, they remove it again. Plus, with custom removals, you send them any link where your information shows up and their dedicated team takes it down. Go right now to incogni.com impact and use code impact for 60% off an annual plan. Try it risk free for 30 days or that's I N C O G N I.com impact and be sure to use code impact. And I think he's ironically making the same mistake there, where he's taking these models that just go up forever and not looking at the. All the fluctuations that we see historically. Anyway, I digress. He's pointing out here that history looks nothing like the forward projection. So we should automatically have an alarm bell that goes off that says these are fake numbers.

[Steve Keen]

They go almost totally vertical unless we do something about the level of government spending. And equally, because you pay interest on government debt, they're making the same projections about what's going to happen to interest payments. So they're saying the historical high was right back in the early 1990s when the interest payments were 3.2% of GDP. Now they're at the same level and they project them to triple over the next 30 years. So this is a serious warning. There's only one trouble. It's based on completely mythical, completely fallacious visions. How money is created in a capitalist economy. And this is not something specific to the Government Accountability Office. This is something that all economists learn when they're at university. So this is an extract from Mankiw's textbook on macroeconomics. And just to read it through, when the government spends more than it receives in tax revenue, the resulting budget deficit lowers national savings, the supply of what they call loanable funds. And fundamentally, you can regard that as the money that's in your bank accounts because that's the money you have available to lend out to somebody else. The supply of loanable funds decreases when the government borrows to finance a budget deficit, it crowds out firms that would otherwise borrow to finance investment. And what they've. The simple supply and demand model that Manku uses to illustrate his argument argues that a budget deficit reduces the supply of loanable funds because it takes funds that households would have lent to firms and instead it goes to the government. So that is the mindset that all people who accept mainstream neoclassical economics have in their heads. And the people who staff the Government Accountability Office are all predominantly economists. They learn this stuff, they think it's correct. Now the trouble is it's not. They learn what they get taught at university, which uses supply and demand diagrams, as you saw in the extract from Mankir. But banks don't draw supply and demand curves to decide how much money to lend you. They use double entry bookkeeping. And that is something which instantly sounds boring. You know, double entry bookkeeping means accountants and all this dreadful, dull stuff in Fact, if you get this wrong, you make up myths about the economy. So you have to understand double entry bookkeeping to know how banks actually operate and how money is created in a capitalist economy. So what double entry bookkeeping does, first of all is classify all financial claims as either financial assets or financial liabilities.

[Drew]

One misspeak that he did there is that it isn't either or. It is both an asset and a liability, always and forever. So you end up with matter and antimatter. And this is a big part of his argument is that what he's saying is people do not seem to understand that when you create debt, you create this. You have both a liability and the asset. And so if you were to pay off that debt, then you lose both the liability and the asset. And so they just zero out. And people are not thinking about the fact that as you pay off debt, that money ceases to exist. And so if he's right, and GDP is a function of the amount of money in the system, times the velocity of money, how many times it turns over, pulling money out of the system is going to slow your gdp. So that's where understanding this matter antimatter thing is very important. Because if you understand that they cancel each other out, then you understand why he's saying that this growing isn't a problem because they cancel each other out. And pulling it out of this system becomes a problem because they cancel each other out, because they affect directly your gdp.

[Steve Keen]

All right, Transactions twice on each line, once as a credit entry and once as a debit entry. That's what makes accounting very hard to learn. But you also record all transactions from two perspectives, from the creditors and the debtors. So each transaction quite records, requires at least two of what I call godly tables in Ravel to show the overall dynamics. Now, my side of economics, which goes right back to Joseph Schumpeter back in the early 1900s and even earlier back into disputes between different schools of economic thought back in the 1800s. My side has been saying that that's wrong. Banks are not intermediaries. Banks create money by creating debt. And that argument has only been made by critics of the economics for decades. But in 2014, the bank of England actually came out and said, the critics like me are right and the textbooks are wrong.

[Drew]

He is 100% correct. So I didn't even know that neoclassical economists think of banks as intermediaries. There are actually people. It might even be Ben Bernanke, don't quote me on that. But there was like a really big economist who was like, the right way to think about a bank is that they take a little bit of money for delineating between who's worthy of lending money to and who's not. And while that is a role that they play, the reality is that they're part of the central banking system. And so when they create a loan, they are creating money out of thin air. That money didn't exist and now it exists. And now banks are held accountable in terms of they have to have assets on the book that match the solvency rate, if you will. Like, they need to have more assets than they have liabilities, otherwise they're insolvent. So they have rules on them like that, which is exactly how a bank can end up failing, is they find themselves having to write off enough of their assets that their liabilities become more than their assets. But it is very important to understand that part of it if we're going to begin mapping how neoclassical economists get themselves in trouble. Because they're thinking of the bank as simply an intermediary of deposit money, which would not create new money, which would therefore not affect gdp. Whereas if it is what it really is, and I'm shocked to hear that anybody argues this, but because we have a federal central banking system, when a bank creates that new loan, they're not pulling from deposits, okay? That's a very important thing to understand. They are not pulling from deposits. They have a license from the Fed to just create that money. And so, poof, it now exists.

[Steve Keen]

Reserves are determined by the amount of

[Drew]

notes that people want to hold or

[Steve Keen]

need for their transactions, and the amount of notes and reserves that banks want to hold. Given the level of interest rates in the economy, it is not chosen or fixed by the central bank, as is sometimes described in some economics textbooks. So this report was published called Money Creation in the Modern Economy. And it opened with the statement that money creation in practice differs from some popular misconceptions. Banks do not act simply as intermediaries, lending out deposits that save his place with them, and nor do they multiply up central bank money. So it's criticising two models that economists use to supportedly describe the monetary system. One is called loanable funds. The other is called the money multiplier. The bank of England said both of those models are wrong. And when you put this model together, you find that there's no particular impact of private debt on the economy. Well, if this video has alerted you to the fact that what, you thought you were back at E Commerce, as always, I'll let these People, you'll thoroughly enjoy the free book bundle that has been requested by over 5,000 people already. It's worth $50, but it's free right now. Click on the link in the description or go to stevekeen.com and click on the black button and fill in your information. About 60 seconds, you'll get the free book bundle. And after that, if you want to study with me personally and use my proprietary software Revelle, there'll be an invite to join that course as well. So this is showing the conventional model that banks are just intermediaries in Ravel. And what I have is that there are two types of depositors in this model. There are savers who lend out money, there are borrowers who borrow that money and then use it for other purposes. The debt that's created through the banking system is not an asset of the savers, it's an asset of the banks. And it's quite easy to go through and modify this in Ravel. If the textbook model was right, then you would be correct to ignore private debt. But it's not correct. And I can easily modify that and say it's not true that debt is an asset of the savers and it's not true that the savers lend the money and that the interest is paid to them. It's the banks that own the debt and it's the banks that earn the interest income. So I can rapidly amend that. And now I'm just going to say I'm not using the textbook model. So to simplify my presentation here, I'm just pretending that banks instantly spend their interest income in the real world. They take time. That would make a more complicated model. And I just want to focus on the essence of the reality that if you say that banks are not money creators, then you can ignore private debt in your models of the economy. But as soon as you realize that banks actually create money, that creates additional demand and you cannot ignore the banking sector when you're looking at the macro economy. So I've just changed that one detail.

[Drew]

So the one thing I think he gets a little fast and loose on. So it'll be interesting as I research him more to see if he brings me around to his side or not, is this idea that the interest of the money doesn't cause the demand. And I do think that the interest rates do have an effect, which is partly why the Fed comes in. Now. I think that Jeff Snyder is correct that the Fed is far less leading than they are reacting. But if you make money, money more expensive People will borrow less money, like simple as. Because they're going into it assuming that they're going to have to pay this debt back. Now, Keane has a whole thing around debt jubilee, but when people borrow right now, they know they're going to have to pay it back. And so at a minimum, they're going to have to make those interest payments. So as interest payments go up, I mean, you can see this in the housing market right now, Today, as interest rates go up, people borrow less money. So I haven't quite been able to figure out why he's dismissive of that. I don't know if it's. He's just gotten so used to trying to simplify, simplify that he's sort of forgotten that there's a very real psychological impact to all of this. Look at Japan. I've talked about that many times before. You break their psychology with the bubble bursting in 1989, plus some uniquely cultural elements for them, and they just stop spending. No matter how much you try to stimulate the economy with cheap interest rates, they're just like, I don't want to owe anything and so they won't borrow. So that's a psychological play. So, yeah, I will say that a more sensible way to read that is that if a bank sees, oh, the economy is beginning to drag, if we lower interest rates, that will stimulate demand, unless there's some other psychological principle at play and we can begin to push people forward. So take that into consideration and I'm

[Steve Keen]

going to start with zero lending. And of course, with zero lending, nothing happens. Well, let's say there's lending now, you know, $1 per year type lending. You get a rising level of money in the borrower's accounts, the loans create deposits, the private debt ratio rises, but nowhere near as much as it in the previous simulation. And GDP is rising for anybody that's

[Drew]

not looking at their camera or their screen, basically what you're seeing is in this scenario because they are creators of money. What you see is all these things moving in tandem. So remember, the foundational thing that people are reacting to is if your debt grows faster than your gdp, you have a problem. And what he's showing is when you start modeling this accurately, that it's money creation. The debt itself is driving the gdp. So you can't get these out of

[Steve Keen]

lockstep national economic activity and GDP rises. Now, that's completely missed by the mainstream. They ignore the level of private debt. Now if you have. At the same time, the lending goes negative, which I'm showing Now then GDP falls.

[Drew]

God bless him. He's explained this so many times in so many different videos that you really do have to sort of aggregate everything he says. I think he does end up explaining the math of this later, but it would be very helpful right now. So. So I'll remind everybody of the formula that we were talking about before in his mental model, and I need to research this more to find out if this is a universal model. But in his mental model, GDP is simply the calculation of the amount of money in the system times the rate that it turns over. And so given that, obviously if you start putting less money into the system, then GDP is going to start coming down. Now, one thing that would need to be tracked is if you just slow the rate of lending. Is that fine? Because here I believe for those numbers to be true, you'd have to assume that loans are actually being paid back, and that's the destructive force. So as the loans are paid back, you change that math equation on the GDP because it's money in the system times velocity. And so now, as people pay the debt back, because you're thinking of, well, I borrowed money from Drew. I paid Drew that money back. That money still exists. It's just not in my pocket. It's now Drew's pocket. What he's saying is, no, motherfuckers, that's not how this works. This is central bank money. And so when they loan you money and you pay it back, it ceases to exist. It stops being an asset for the bank. It just goes away. And so that money is destroyed as it gets paid back. Okay, so given that that's how we. If you really want to understand these numbers, why they start ticking down, you

[Steve Keen]

have to understand that classical economists do, unfortunately, do, then you ignore the extent to which the economy's operation depends upon the level of credit creation by the private sector. So you can see in this very simple model, private debt goes up, so does gdp. Private debt falls, so does gdp. This is being ignored by the mainstream. So their advice about the private banking is completely wrong. Because banks lend, they create money, as well as creating debt, that money turns over and causes more macroeconomic activity. So you can't ignore private debt and understand the macroeconomy. But that is what all mainstream economists do. And they continue doing it even after they got caught by surprise by the global financial crisis, which was caused by private money lending. They didn't see it coming. They ignored the whole thing. They didn't see the damage that was going to do, and now they're continuing to advise us as if they're experts on the monetary system. So by ignoring private debt and obsessing about government debt, you'll see that they. This is the line they worry about. They're ignoring this one. They ignored it back at the time of the global financial crisis, which is here. They're still ignoring it today. They refuse to learn from history. Now, why do they refuse to learn from history? Because history refutes their theory. And unfortunately, the way that academics in general behave, particularly those in the social sciences, is they ignore evidence which contradicts their belief system. They ignore anything that challenges their paradigm. Now, I've been publishing this chart for 20 years, and I've only had one or two economists ever even try to understand what's going on. And in the mental model that economists have, which they call loanable funds, that's true, because banks don't lend money. In the real world, they do. You take a look in the real world, and this is the pattern you see between credit and unemployment.

[Drew]

Oh, man. Pause, pause, pause. Yeah, you've got to look at your screens. This is one of the charts I was waiting for to come up. So private credit as mapped against employment. And they are, like he said, effectively just mirror images of each other. So as private debt goes up, people have more money, which means they're paying companies for more stuff, which means that companies can employ people. As private debt goes down, people have less money, and therefore they're buying less from different stores. And so those stores can, or companies can afford to hire fewer people. And so if you want to get people spending again, then you've got to put money back into the system via this private debt mechanism. And then people will start spending more again and jobs will come back. We're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere. Let's talk about leverage. Effort doesn't grow a business, at least not alone. You need leverage. The same hours that get you 10 sales somewhere else can get you 100 if you're in the right place. Whatnot is where that math works. Whatnot is the largest live shopping marketplace in the country. Sellers on whatnot move 10 times more product than on other major marketplaces. Same inventory, same hours spent, but 10 times the output because the format is built for selling. You go live, you show what you've got, you take questions in real time, and buyers convert on the spot. If you've never seen it, Whatnot is incredible. Check it out. Buyers spend more than an hour a day. In the app. They're engaged, they're loyal, and they almost never pay full price, which is exactly why they keep coming back. The number of sellers on whatnot making over a million dollars a year has doubled. And live selling has crossed the line into full time work for many people. Beauty, collectibles, electronics, luxury, fashion, even cookies. If you have something to sell, the audience is likely already there. Search whatnot wh a t n o t in the app Store download and you can start selling right away. Let's talk about why you're running your business on hard mode. Right now, your company is sitting on the answers to your biggest problems. The data exists, the patterns exist. You just can't get to them fast enough. That's what NetSuite Next solves. NetSuite is the AI powered business management suite trusted by over 43,000 customers. And NetSuite Next is their next massive leap. AI built into everything, it automatically surfaces customer insights throughout your day. Before you even think to ask, AI agents work alongside you to handle routine work and solve problems. And it's customized for a wide range range of industries. Whether your company earns millions or hundreds of millions, this is where Your business meets AI for the first time ever. You can try NetSuite next for free. If your revenues are at least in the seven figures, just go to NetSuite AI theory built for every industry, ready for every boardroom. Netsuite AI Theory when you're a maintenance

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[Drew]

Thanks for sticking around. Let's get right back into the action. Now this, this is ultimately going to be a like blocky, overly simplistic breakdown of how the economy works. Obviously there for anybody paying attention. You know that Covid caused a 30% spike in six years of inflation. So inflation is very real. He doesn't address any of that here. He's. I feel like he's got sort of ptsd. He's been screaming into the void for so long trying to get people to listen to him and nobody will listen, that there's maybe some frustration, some anger and he's not walking through some of the more nuanced Stuff about like, okay, obviously inflation matters. We're creating a problem for ourselves right now. The amount of interest that you spend on government debt is extremely destructive, which is why people keep paying attention to it. And so he's not talking about it here, he's talked about it elsewhere the way, and this will be an oversimplification that I don't think he would like, but I think it's pretty close to accurate. So, so his philosophy would go something like this. You want to build up government debt quite literally forever. You never want to pay it off, quite literally. As a matter of principle. Do not, don't worry about paying off your government debt. It's adding money to the system. And just like private money adds money to the system, you want to do that. So government debt is actually running your deficits and everything are creating new money. That new money goes to your GDP calculation and it's causing the money to go up. Now I will say if you don't then follow on to his thing, which is he wants debt jubilees and I would assume he wants them on like a consistent schedule. And so every, I don't know if it's once debt reaches a certain level, every so many years, but like at some point you do. And one specific prescription that he's given people is give everybody $100,000 check. But that $100,000 check has extremely tight restrictions on it. So you, if you have debt, you must put it towards debt. If you are, if you're a non debt holder, you must invest it in companies and those companies must pay down their debt. But that way you get equity in companies and all that stuff. Pretty, pretty interesting. And he was saying one of the reasons that the actual borrowing of money is so important, the non money creation side of it, is that it goes in a truly capitalistic way into the companies that will then innovate and all that. So it it without the debt jubilee. What he's saying is crazy because your interest levels would just rise to the point where it's a patent absurdity and you run into trouble. And so I want to be very clear, the way the economy is set up right now, you can't just do this. But what he's trying to do is get people to understand how all of this works so that we could start migrating to a system that recognizes this like basically economy good when money going in via debt, economy bad, when money coming out via paying off the debt. And so this is why, even if you look at Japan, this is why when they get into oh Shit, I need to pay off my debt. The economy stalls because he's saying, you're not putting new money into the system, you've got to put new money into the system. And so I don't know the Japanese situation well enough, but marrying this to that, I have a feeling it's going to play out something like this. Part of the reason that Japan struggled for as long as they did was all their money sought returns elsewhere. So the money wasn't actually inflationary inside of Japan, it was being invested outside. And so now part of the reason that Japan may find that all of this inflationary thing actually pulls them out of that rut, even though the inflation is terrifying, is that it's causing Japan to pull their money back locally, first of all, because they can actually get a return on it. So it'll be interesting to see how those dynamics play out. I haven't researched that one yet enough, so these are just early thoughts. But it's very, very interesting when you start seeing this relationship between private debt and the health of the economy. Again though, I want to just state emphatically, this system is sinister. We should not be in this system, this system right now. The way that we're doing it is kind of like what we do with health care, where it's like we do a good thing on one side and then a bad thing on the other. So on healthcare, we socialize the shit out of it and then we let the free market control part of it. And so when you have a guaranteed payer in the government, everything just gets more expensive and it completely deranges. So you either need a free market system or you need a single health pair. You can look at other countries to see if single health pair works out better. I would say it solves some problems better. Like no one's going to be at the bottom floor, but if you want like something done quickly or done by the best of the best, you're going to come to America. So trade offs, same idea here. It's like, yes, we let people rack up debt and that lets the economy run hot and everybody's loving life when it's working well. But the, the second that they get scared and they start paying things off, then they create their own problem. You get a 2008 and it just blows up in everybody's face. Now you've got to stimmy check everybody to death to get the economy working again. But because we don't do debt jubilees in any meaningful way, you get this inflationary effect flywheel. It Gets crazy and completely runs amok. And the last thing I'll say, and we don't need to play more of this, but is you do run into a moral hazard. And so if everybody knows, oh, every 10 years this is all going to get reset, then I'm just going to spend frivolously and I know that it's going to get reset and I'll basically spend right up to the 100k, maybe a little bit more. It's going to be paid for. And so that's where the behaviors just start to become unhinged. So it is important. That's just one of the reasons it is important that economists know what Steve is talking about. But boy, you couldn't broadcast that debt, because people are going to get super weird with what they do with debt.

[Guest or Co-host]

But to your point, it where it would then stimulate the economy in a very different way. For example, if I know that in eight years $100,000 is going to be cleared out, I'm going to go bigger on a house, I'm going to go bigger on the car, I'm going to buy Lynn, and guess what that will

[Drew]

do to the price of everything.

[Guest or Co-host]

So you're saying because I'm spending more, it would make things more expensive? Of course I was going the other way, where then it would then boost gdp. Earnings. Record earnings, Record profits, people. I would be more thinking.

[Drew]

But yeah, let's go back 1,000. This is brilliant. So you're getting on to the complexities of why you can't just go, oh, cool, Steve, let's just pump more money into the system. So the cost of things is always a ratio between how many of that thing people want and how much money is available to buy it. And so you're 100% right. If real wages are growing, meaning I'm actually getting richer, I can buy more stuff. I'm in a great place. If nominal wages are growing and I can buy less, I'm getting more dollars, but I can buy less stuff, then people, even though their money's going up, and this is what we have today, nominal wages are up, but real wages are down. And so it doesn't matter that people are quote, unquote, making more money. They feel poor because they are poor. And so if you could do it in the perfect ratio, and this is where the economy gets so complicated that people just sort of check out. But you always want innovators out there creating a new thing, making things cheaper. And then we can flood the system with money to eat all of that innovation Now I think that's evil. I think things should be getting cheaper over time and people should just manage their money. But if we decide, hey, we want to be fast and loose and let's just lubricate all these wheels and let's just get crazy, rack up debts, run forever, wars, fuck it, be completely unconstrained. It's a choice, it's the one we've made. So that's where we are today, whether we want to be or not. But that's why you have to be careful. Because what ends up inevitably happening is that such a delicate balance between the actual rate that people can innovate and so to really drive home how wrong that can go, 2008, we fucking go crazy and we bail everybody out. Wasn't really a big deal. We didn't get insane inflation. So everybody goes, look at that. There was all this slack demand in the economy. And the second we had money flowing into the economy, baby, they just meet demand. This is fantastic. We were just missing money, like actual money. And the second people had the money, then factories rev things up, they make more stuff, people buy it. They already wanted these things, the economy could already produce them. We just didn't have the money. Money, now that we have it, boom, Good. And that's why, God, 2008, I mean, shitty if you lost your house. But everybody that got bailed out wasn't a big deal. Then Covid comes and people go, hey, remember, we have all this pent up demand, no worries, flood all the money. You had economists screaming, this is way more money than we need. And they were like, no, no, it's good, man. There's all this slack demand. Like you're just going to build it up, it's going to be cool. And then prices jumped by 30% because there wasn't slack demand, demand. So now you had more money chasing the same, actually had more money chasing less goods. That was the real catastrophe of COVID is you put more money in and broke the ability to make this stuff because ships weren't going anywhere, people weren't going to work. And so you have this like insane catastrophe of the 30 inflation, the phase shift, as Jeff Snyder calls it, that's still causing people to have a much shittier life today than in 2019. And so all of those things have to be reckoned with, including like what happens to people's psychology. So because that will either cause them to spend more or less, take on more debt or less based on just where they think things are going, and that diffuses. So Widely. It's not like if you're listening to this, you're not one of the people we have to worry about. You'll be sensible, you'll figure it out. But like, the vast majority of humanity just goes, oh, shit, I've got a bunch of money. Pokemon cards have been going up.

[Guest or Co-host]

Fuck it. YOLO.

[Drew]

Like, if people don't remember the GameStop thing during COVID that shit was wild. NFTs wild. Like, it was just. It was like a totally different universe. And now understanding macroeconomics and looking back on that, I'm like, oh, my God, I couldn't see any of it when it was happening. So the economy is extraordinarily complicated to tie this all up in a bow. I think Steve Keen is onto something with the fact that neoclassical economists are not paying attention. They're not modeling money creation as if banks are part of the central banking system that creates money from nothing and destroys it when it gets paid back. And instead are thinking of it as, I give the bank money and the bank loans that money out. So when the money comes back to me, I've now got my principal back, plus interest. And now the economy's grown and it's all good and nobody stops to think, well, wait a second, where did the money come from on the interest? It comes from deficit spending. It's so crazy. I remember talking about this probably a year ago. I did a whole deep dive about money only comes into existence via debt. But the. The two things just didn't connect for me. And so it's so interesting. And we'll. We'll do more Steve Keen videos in the future and you'll be able to hear from himself how he feels about Marx fucking loves him. It is so fascinating to me that somebody who reveres a thinker who I think has done more damage to society maybe than any human ever to live, and is very on his side from, he's a brilliant thinker, all that, but. But to Steve's credit, he does say, but he had an outcome that he wanted to achieve from a philosophical standpoint, and he betrayed his own logic to get there. So he's honest about that. But I just. I'm shocked that he still has a positive valence. Anyway, that's for a future date. Man, do I hope that this added a ton of value because this, he is really expanding my connective tissue with the cause and effect of the economy. I think this is going to be very important to my entire economic worldview. I hope that it is similarly enlightening to you guys, we'll spend more time with him. Just super, super important ideas.

[Guest or Co-host]

You for some people want you to say your sign off be legendary.

[Drew]

Oh, really? That. That's like. We want to make sure that's.

[Guest or Co-host]

That was hilarious. Somebody said, remind him, Drew.

[Drew]

All right, everybody. Until next time, my friends, be legendary. Take care.

[Guest or Co-host]

Let's go. Let's go.

[Steve Keen]

Everyone in the chat saying, say the

[Drew]

thing, say the line.

[Guest or Co-host]

Bart.

[Drew]

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