Why Economists Ignore the One Chart That Predicts Every Crash | Prof. Steve Keen

Summary

Podcast Summary: Impact Theory with Tom Bilyeu

Episode: Why Economists Ignore the One Chart That Predicts Every Crash | Prof. Steve Keen

Release Date: August 6, 2026
Host: Tom Bilyeu
Guest: Prof. Steve Keen

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Episode Overview

In this thought-provoking episode, Tom Bilyeu interviews economist Prof. Steve Keen, known for his heterodox and data-driven approach to economics. The discussion delves into the fundamental dynamics of modern capitalism, the role of private and public debt, systemic flaws in mainstream economic thinking, the balance between capitalism and socialism (with a focus on China as a case study), and why ignoring private debt sets the stage for economic crises. The episode aims to challenge common understandings of economics and provide practical insight into the causes and potential solutions for recurring booms, busts, and growing inequality.

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Key Discussion Points and Insights

1. The Impact of Globalization, Manufacturing, and China ([00:31]–[07:11])

• Globalization's Downside: Keen and Bilyeu agree that outsourcing manufacturing to countries like China hollowed out Western economies, eroded workers' power, and concentrated growth in services—mainly the financial sector, not tangible services.
• China’s Strategy: China deliberately combined elements of capitalism and socialism, building a robust manufacturing sector while adopting pragmatic governance, resulting in rapid per capita growth (~8% per year since 1980).
  • Quote (Steve Keen, 03:35):
    “Manufacturing is where true value is added. By outsourcing manufacturing, China said, 'Come here, we'll let you establish in a special economic zone…' It was deliberate to get Western technology fast and create a capitalist class in China.”

2. Private Debt and the Erosion of Worker Power ([07:11]–[11:18])

• Private Debt’s Role: Rising private debt reduces workers’ share of GDP, even if workers aren’t the ones borrowing. Debt disproportionately shifts income to bankers, squeezing labor.
  • Quote (Steve Keen, 11:09):
    “The rising level of private debt caused a falling workers’ share of GDP. That was in my modeling. Then I checked the American data. That’s what’s happened.”

3. How Banks Actually Create Money and Stimulate Demand ([14:49]–[18:34])

• Misunderstood Banking: Mainstream economists ignore the fact that banks create money (not simply shift savings). When banks issue loans, they generate new money, increasing aggregate demand—ignored in neoclassical models.

• Credit Drives the Economy: Increases in credit stimulate economic activity, while repaying debt (credit contraction) depresses demand, directly correlating with unemployment.

  • Quote (Steve Keen, 17:36):
    “Credit is absolutely vital. It’s the main driving factor in a capitalist economy. And it’s completely ignored by mainstream economists, which is why they didn’t see the global financial crisis coming.”

4. Why Mainstream Economists Miss Crashes ([18:34]–[27:33])

• Confusion Over Debt and Credit: Economists conflate debt (stock) with credit (flow/change), leading to a blind spot about how expansions/contractions in private debt drive booms and busts.
  • Bernanke’s Nobel: Ben Bernanke continues to model banks as intermediaries, ignoring central bank findings that banks create money—a “willful ignorance” likened to religious dogma.
• Predicting the 2008 Crash: Keen saw unsustainable growth in private debt as the clear precursor to the crisis—charts showed a drop in credit leads to recession every time.
  • Quote (Steve Keen, 28:42):
    “Credit goes up, unemployment goes down. Credit goes down, unemployment goes up. They’re literally mirror images.”

5. The Ongoing AI and Private Credit Bubble ([29:52]–[36:28])

• Hidden Leverage in AI: New forms of private credit (via non-bank lenders) are fueling overinvestment, paralleling pre-2008 dynamics; risk is often shifted onto retail investors and pensions.
  • Schumpeter’s Theory: Technological innovation drives capitalist booms/busts; banking sector plays a key role funding innovation. The AI bubble may end with undercutting of legacy industries and mass layoffs.
  • Distributional Crisis: AI could cause massive unemployment among both white- and blue-collar workers—a “huge shift in income distribution,” potentially handled better in China (due to public sector structure) than the US.
  • Quote (Steve Keen, 35:17):
    “The real challenge about AI... is that it could eliminate so many clerical and blue-collar jobs… This means a huge shift in income distribution.”

6. Lessons from China’s Economic Model ([40:34]–[48:06])

• Pragmatic Governance: China shifted from rigid, top-down central planning under Mao to experimentation and promotion based on engineering merit; this created a highly effective hybrid system.

• Quality Assurance and Innovation: Chinese bureaucracy rewards innovation and performance, blending state infrastructure and fierce market competition among private/provincial actors.

  • Quote (Steve Keen, 45:55):
    “Deng got rid of all that [dogma] and said, we have to experiment... An experimental mindset took over the Communist Party.”

7. Understanding — and Misunderstanding — Marx ([48:06]–[79:45])

• Marx Beyond the Caricature: Most criticism of Marx is aimed at a distorted version parroted by Marxists, not his actual work. Marx’s original insight—critique of capitalism’s instability—was later abandoned for “inevitable socialism.”

• Value Theory and Machines: Marx’s deeper insight was that both labor and machinery add value; the real discontinuity comes from the capitalist shift from use value to exchange value.

• Economics as Complex, Not Predictable: Tom stresses that economies are inextricably bound to human psychology and constant innovation—central planning can never fully account for this complexity.

  • Quote (Tom Bilyeu, 56:53):
    “It is just obscenely complicated... when I hear somebody act as if you can map these things out ahead of time and know what one or two forces govern the price, I’m just like, that’s nonsensical.”

8. The Myth of Economic Equilibrium and the Flaws of Top-Down Control ([60:07]–[75:30])

• Textbook Economics vs. Reality: Keen argues that real-world markets are differentiated and dynamic—but academic economics relies on mythic “perfect competition.”
• Role for Government—and Its Limits: State provision is essential for infrastructure and public goods (like education, health, sewage), but innovation flourishes in decentralized private systems.
• Socialism’s Historical Failures: The Soviet failure was rooted in its inability to foster innovation and consumer goods, unlike capitalism’s demand-driven, competitive, and innovative structure.
  • China’s “Yin and Yang”: The state builds the foundation; the market competes on consumer goods. This blend, not pure socialism or pure capitalism, drives China’s modern success.
  • Quote (Steve Keen, 75:27):
    “It’s not a case of socialism or capitalism is better. There’s a yin and yang between those two approaches.”

9. What Marx Actually Offers—and What He Doesn’t ([77:37]–[85:51])

• Marx as Critic, Not Architect: Marx provided a powerful critique of capitalism’s instability, not a practical blueprint for socialism. His fantasy of a classless, needs-based system is widely misunderstood.

• Dialetical Approach: Keen suggests Marx’s “dialectical” method—focusing on dynamic, evolving systems—is the real contribution, not his political conclusions.

  • Quote (Steve Keen, 84:50):
    “We need a theory of economics that’s based on evolution and change. As it happens, Marx provides a foundation for that.”

10. Financialisation, Government Deficits, and the Real Causes of Crises ([85:51]–[137:09])

• Financial Sector Too Powerful: Keen and Tom agree the financial sector is “far too big,” with most activity speculative, not productive.

• Gambling vs. Investment: The current US system incentivizes speculation on assets rather than true investment (new goods/services). Most private bank loans fuel bubbles, not real growth.

• Government Deficits Are Not the Problem: Keen disputes the mainstream fixation on public debt-to-GDP ratios (like 130% triggers). Instead, he shows that private debt is the true culprit behind crashes; public deficits are usually band-aids applied after private sector implosions.

  • Quote (Steve Keen, 129:08):
    “Government debt tends to be the band-aid we put on what happens after a private sector bubble bursts.”
  • Quote (Steve Keen, 131:52):
    “Governments can and should deficit spend.”

• COVID Stimulus and Inflation: Keen argues the real reason for American malaise is long-standing shifts in income distribution and a sluggish economy post-1970s financialization—not merely pandemic-era stimulus.

11. Policy: Balancing Public and Private ([115:38]–[137:09])

• Public Funding for Common Goods: Education and health should be provided on a merit basis with full public funding, not via debt; market forces can distort these essential services.
• Systemic Flaws in US Governance: The US has “the best politicians money can buy”—privatized election funding and privatization ideology have led to suboptimal public outcomes.

12. Future Risks and Economic Prognosis ([101:37]–[106:45])

• AI Bubble: Keen expects a severe recession—not a depression—driven by massive overinvestment in AI (“cost 10, revenue 1”); most companies will fail, possibly ceding dominance to lower-cost Chinese counterparts.
  • Quote (Steve Keen, 101:45):
    “I think we’re [headed for] recession, not depression from the AI side... but it’s not the only issue.”

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Notable Quotes & Memorable Moments

| Timestamp | Speaker | Quote | |-----------|---------|-------| | 03:35 | Keen | “Manufacturing is where true value is added... China said, 'Come here... we'll let you establish... to get Western technology.'” | | 11:09 | Keen | “The rising level of private debt caused a falling workers’ share of GDP. ... That’s what’s happened.” | | 17:36 | Keen | “Credit is absolutely vital. It’s the main driving factor in a capitalist economy. ... That’s why they didn’t see the global financial crisis coming.” | | 28:42 | Keen | “Credit goes up, unemployment goes down. Credit goes down, unemployment goes up. They’re literally mirror images.” | | 35:17 | Keen | “The real challenge about AI... it could eliminate so many clerical and blue-collar jobs... a huge shift in income distribution.” | | 45:55 | Keen | “Deng got rid of all that stuff and said, we have to experiment... An experimental mindset took over the Communist Party.” | | 56:53 | Tom | “It is just obscenely complicated... when I hear somebody act as if you can map these things out... I’m just like, that’s nonsensical.” | | 75:27 | Keen | “It’s not a case of socialism or capitalism is better. There’s a yin and yang between those two approaches.” | | 84:50 | Keen | “We need a theory of economics that’s based on evolution and change. As it happens, Marx provides a foundation for that.” | | 129:08 | Keen | “Government debt tends to be the band-aid we put on what happens after a private sector bubble bursts.” | | 131:52 | Keen | “Governments can and should deficit spend.” | | 101:45 | Keen | “I think we’re recession, not depression from the AI side... but it’s not the only issue that’s a challenge for the American economy.” |

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Important Topics & Timestamps

• Globalization, Manufacturing, and China: [00:31]–[07:11]
• Private Debt and Worker Share: [07:11]–[11:18]
• How Banks Create Money: [14:49]–[18:34]
• Why Economists Miss Crashes: [18:34]–[27:33]
• AI Bubble and Modern Speculation: [29:52]–[36:28], [101:37]–[106:45]
• China’s Model & Governance: [40:34]–[48:06]
• Marx, Caricature vs. Reality: [48:06]–[79:45]
• Economic Equilibrium & Complexity: [60:07]–[75:30]
• Financialisation, Policy, Inflation: [85:51]–[137:09]

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Final Takeaways

• Private debt—not public debt or interest rates alone—is the leading indicator of booms and busts.
• Mainstream economics ignores key realities of banking and money creation, sidelining the role of credit.
• China's hybrid approach, blending competitive markets with strong public infrastructure and merit rewards, has outperformed Western models in recent decades.
• Massive financialization has shifted incentives from productive investment to speculation, leaving economies fragile and the working class disempowered.
• Marx’s lasting value is as a dynamic critic of capitalism—not as a utopian or architect of socialism.
• Effective economies balance market dynamism with publicly funded infrastructure, education, and health—avoiding both centralizing tyranny and unchecked privatization.

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Connect with Steve Keen

• YouTube: ProfSteve Keane
• Substack/Patreon/Twitter: ProfSteve Keane
• Courses: stevekeen.com

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For further exploration:

• Schumpeter's "Theory of Economic Development"
• Hyman Minsky and Irving Fisher on debt-driven crises
• Steve Keen’s Ravel modeling software

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This summary excludes advertisements, intros, and outros to focus on the substantive content and insights of the episode.

Transcript

[A]

Evening. Buyer's remorse. Buy a new car. I'll be moving in. Let's get started. Sorry, I think there's been a mistake.

[B]

I bought it from Carvana. You what? Yeah, great price. I even have seven days to love it or return it.

[A]

So there's no. No, no buyer's remorse.

[B]

More like buyers rejoice.

[A]

I guess I'll let myself out. Congratulations. I mean it. Buyers rejoice. Buy your car today on Carvana. Limitations and exclusions may apply. See our seven day return [e-mail] I

[B]

think America gone too far in privatizing everything. Election campaigns are something that should be funded 100% by government money and private donations should be banned. Not even possible. Set it up in such a way that you guarantee you can't buy your politicians, whereas you've got a system where you can buy your politicians. And I think you see the results

[A]

of that when we look at China. What lessons do we take?

[B]

I think China learnt that lesson. They've managed to combine the best of capitalism with the best of socialism. To me it's not a case of socialism in question. Capitalism is better. There's a Ying and Yang between those two approaches.

[A]

Steve Keen, welcome to the show.

[B]

Thank you for the invite. Tom.

[A]

As I was explaining to you off camera, I have been completely blown away by the way that you're approaching the economy. You're a very heterodox thinker. You see things very differently than I do. But as I push and challenge your ideas in my own sort of mind, I come to the realization that you're right about a lot of things that nobody else is talking about right now. My read on the economy is basically this. You had Covid caused a between shutting down the manufacturing the world over the supply chains, you artificially limited supply and then you printed money like crazy and gave it to people in a way that made them want to spend it. So now you have fewer goods being chased by more money and you get roughly over the last six years, about 30% inflation. Those prices have never come back down for a host of very complex reasons. It's easy to raise the price. It's very hard to bring that price back down.

[B]

Yeah.

[A]

So now we've got real wages, did not keep up. And so the worker in, in my read of the situation has been disempowered by many things, but the most important being globalization.

[B]

Yeah, I agree with that.

[A]

China taking advantage of that and going, oh yeah, you guys want to be paper guys. Sure. To financialize your economy, that's fine. We understand what made America powerful after World War II was you guys had turned yourself into the manufacturing powerhouse somewhere around World War I. Ish. And so by the time World War II ends, you guys are unscathed from the war. Everybody owes you money, you've got a ton of gold and you are the manufacturing powerhouse of the world. Facts say less fam. We're now going to replicate basically exactly that and we're going to become that in the modern era. So if that's accurate one I would love to get a sense of how does the US like what are the actual steps the US needs to do to right the ship? And then when we look at China, what lessons do we take especially recontextualized around Marx? Socialism. Are they capitalists? Are they socialists? Are they communist? Right, what that whole thing looks like.

[B]

Yeah, I mean, I completely agree on what globalization has done because the argument in favor of globalization was services of the future. Manufacturing is old hat and passe. We'll let cheap labor do the manufacturing in a third world country, we'll do design in the west and we'll will focus on services, which is the growth industry. That's a complete farce. The economies that focus upon services, the only services that really expanded were banks lending money to people to speculate on prices. It wasn't a huge increase in massage services or car cleaning or stuff like that. If you want to say what services are. It was literally the growth in the financial sector and that boomed and busted. That came to an end in 2007 in many ways. But manufacturing is where true value is added. And by outsourcing the manufacturing, China basically said, yeah, come here, we'll let you establish your activities in a free trade zone or a special economic zone as they call them. And they were doing it deliberately to get Western technology as fast as possible. And they set it up in such a way that they also created a capitalist class in China as a result of that foreign investment. So China said we're going to industrialise. It was an engineer driven society and it still is. Their focus is on the manufacturing sector and making things rather than the service sector. And they've been incredibly successful. And like if you look at the rate of per capita growth In China since 1980, roughly it's been about 8% per annum. Now that means that every less than 10 years, income standards double in China. Okay. Whereas when you look in the west, the rate of economic growth in America, the rate of per capita growth is of the order of 2%, which means it takes 35 years to double living standards. Okay, now you kept that up for long enough. One country's doubling every eight years, you're doubling every 35. Guess one which wins and very rapidly. And that's what China has done. And it's also why China seems to have come out of nowhere. People think because when you have an exponential growth process like that, a divergence in growth rates doesn't look like much initially, and then it just explodes. And that's what we've seen for China in the last six years.

[A]

Okay, so one, manufacturing back in China, doing things that actually add real tangible value. I think it also gives them leverage geopolitically because now everything has a choke point in China. So that puts them in a much more powerful position. Also, they've been able to create, basically, they send so many things into foreign countries, there's like a glut of that thing. So the, that country's own industry gets hollowed out because China can do it cheaper. And so now people just stop manufacturing cars, for instance. One more thing I'll put on the table. China right now is beginning to clamp down. I think it was July 24, they clamped down on trading paper gold, and now people can only do physical gold, which I think is another brilliant move. So when I take those as lessons and I look at the U.S. so the U.S. right now, wild K shaped economy, wealthy people, because of the bubble, they're just getting wealthier and wealthier. Big difference between wealth and money. But anyway, yeah, they're getting wealthier and wealthier. The people on the bottom side of the K are, have never been able to catch back up with that 30% inflation. So they just feel poorer as the day is long.

[B]

Yep.

[A]

What would we need to do here in the US to rectify that?

[B]

Well, a major thing is reduce the level of private debt. Because one unexpected outcome of my modeling of financial instability was that increasing levels of private debt reduced the share of GDP going to workers. This was why.

[A]

I know why. Now, I've studied you enough, I know what the punchline is. But most people watching will not understand why that's true. First of all, yeah, anyway, you know the shtick. How did we end up here?

[B]

Okay, what we have is, if you look at capitalism, we tend to think of workers and capitalists. We don't include the banking sector in there. I include the banking sector as a separate class to capitalists. And so capitalism is a cyclical system. It goes in booms and busts, profit goes up, wages go down, et cetera, et cetera. That's been part of its nature for its whole history. So it's not in equilibrium, it's always in cycles. And when you look at what drives the system, it's actually the level of investment. So what causes economic booms and busters? Investment. High level of investment, you'll get a boom. Low level of investment, you'll get a slump.

[A]

And is that investment into their own company?

[B]

Into physical, physical making physical goods? Okay, I don't treat the finance sector as genuine investment, that's to me that's speculation. But you get this boom and bust cycle in capitalism and you get rising profit means falling workers share and vice versa. If you just look in terms of workers and capitalists, the people who make the decisions about investment are capitalists. And let's say there's some level of profit where capitalists invest exactly what they earn. And then if they want to invest more than that, they've got to borrow money. And if they make less than that, then they pay off some of their debt. That's my starting model. So that means let's say the, when the capital share of GDP is 20%, then the capitalists invest 20% in GDP. And if it's more than, if their share is higher than 20%, they invest say 30%, but if it's below 20%, they invest less. That sort of dynamic. I know this is getting complicated, but I'll go back to an analogy that I find helps people understand this. That is that capitalists borrow money during a boom and have to repay it during a slump. Okay? Now what that means is during the boom they estimate higher profits than they're going to get over the system. Because the boom changes the distribution of income. It means they've got to pay more for workers, they've got to pay for more materials. They don't quite get the profit they expect to get. So then the boom comes around. The dynamics of the behaviour of the economy have reduced the amount going to capitalists. The they fall below that level where they are willing to borrow money to invest, they stop borrowing money for that reason and the economy goes into a slump again. Now when that happens and you have firms have borrowed money, let's say, As I said, 20% of GDP is the share where they invest exactly what they earn. The other 80% can go to workers and workers or bankers and capitalists, in this free class way of looking at it, couldn't really care who gets the other 80%. They'd invest exactly what they earned at 20%. Now if you have a process which means firms are borrowing money during a boom and having to repay it during a slump. What you get is a ratcheting up effect on the level of private debt. And as that ratchet rises, more money goes to bankers and less goes to workers. Now when I built my model I expected to see that the increasing level of private debt would cause a fall in the profit share of gdp. Instead of I got a constant fluctuating but fluctuating around a constant level profit share of gdp. The rising level of private debt caused a falling workers share of gdp. That was in my modeling. Then I checked the American data. That's what's happened. You've had a rising level of private debt and that is through the emergent properties of a capitalist economy that has caused a fall on the share going to workers. So workers have been screwed by a high level of private debt even though they're not the ones borrowing.

[A]

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[B]

you're borrowing and it's private individuals are doing the borrowing. So it's a combination of the two you have to have.

[A]

Now the one thing that if you just said I missed, but I've heard you say many, many times when if people understand what banking actually is, it is not an intermediary who takes a deposit and loans out that deposit. It is an entity that is part of a central banking system that creates money at the moment that that loan comes into existence. So a private individual goes to the bank, requests money. Money is made out of thin air and, and loaned out to that person with an interest obligation. And you're saying as that number goes up then it is a relative decline for workers only. Right? It's not an actual nominal decline. So they're, let's say if they're making $100,000 a year, they keep making 100,000 unless they get fired. But because we're creating new money and that new money is going to the company, they are not spending that money on employees anymore. Is that what you're saying? As the private debt goes up?

[B]

Well, there's less economic activity. This is one again. There's so Many elements of mainstream economics, which is complete garbage that I've got to fight against their ideas all the time. So the conventional economics says banks are intermediaries. You've already mentioned that the model that people get taught in textbooks is that banks are like credit agencies, credit rating agencies. That's the way the textbooks treat them. They think they don't actually lend money. They enable savers to lend to borrowers. That's the vision they have. Now in that world. If that were the real world, then the level of private debt wouldn't matter. Because when the level of. If the savers lend to the borrowers, the borrowers can spend more, the savers can spend less. If the borrowers repay, the savers can spend more, the borrowers can spend less. So the whole system doesn't change all that much. But in the real world, banks create money, and when they create money, they create debt at the same time. And this means that that extra money you've borrowed is actually added to aggregate demand. So the banking sector causes more demand by credit than there'd be in the absence of the banking sector. And then when credit goes negative, that reduces demand in the economy. So that's what I model and that's what I find in the real data.

[A]

And that's to say why that's true. So the reason that the banks creating money creates aggregate, an increase in aggregate demand is because the people that are borrowing that money, let's say, use that money to hire employees. So now there's a new person that's making money that maybe wasn't before they weren't making as much. And so now they're able to go buy things. And so it becomes private credit becomes stimulatory to the economy.

[B]

That's right. And that's the most dominant part of stimulus in the economy. If you take a look at this is what I say makes me so irritated with mainstream economics, they don't even look at a credit. They leave it out because according to their model, the level of bank, of bank. Banks don't lend. They record the data. It's crazy. It really is truly crazy. But that's what I'm fighting against, a crazy discipline. So they assume that banks don't add to demand because in their model where banks are intermediaries, they just change who has the demand. They don't actually change the total level. Now when you look in the real world, banks create money. That money is used by the borrower to spend. If the credit wasn't there, there'd be less demand in the economy. And then if people start paying their debt down, that causes a fall in demand in the economy. So credit is absolutely vital. It's the main driving factor in a capitalist economy. And it's completely ignored by mainstream economists, which is why they didn't see the global financial crisis coming.

[A]

Now, they've obviously heard this argument. So what is the sentence of logic they give as to why it makes sense to ignore credit?

[B]

You're not going to believe me. They mistake credit for debt. They have no idea. They don't even look at the banking sector. So there's a paper which. I'll send you a copy. Clearly you'd enjoyed looking at this work. I think there's a paper in 2000 by a leading neoclassical economist, Leohanian, and it's called the Great Recession from a neoclassical perspective. So he's looking back at what you know, the global financial crisis, as we call it, the rest of the world, Americans call it the Great Recession. Why did it happen? And he said, some people argue that it's because there was a decline in what he called intermediation services. That's what they think banking does, intermediation. So there's a fall in the amount of, of credit approvals being done by the banking sector. And he showed a graph and said, look, you look at the level of credit, and it was 170% of GDP and 150% of GDP in 2005, and it's 150% of GDP in 2010. It's the same level. Therefore, it didn't have any impact upon the economy. And this was a paper published in a leading journal with about 30 economists, including two Nobel Prize winners, who approved this particular graph and that analysis of that graph to be published. Now, what he had there, he called it credit, but it was actually debt. And the difference is debt is the amount of money you owe. Credit is the change in the amount of money you owe per year. So they looked at a level which is the level of private debt compared to GDP is 150% of GDP. Now they said, oh, they didn't even look at the numbers. Because if you looked at the numbers and thought, hang on a sec, a lender's lending out 150% of GDP per year. No way. That can't be real. They literally misunderstood a graph of debt, which is the dollars people owe divided by gdp. It was a debt to GDP ratio. They mistake that for the change in debt every year and they simply ignore this analysis and my side of economics. So Ben Bernanke, when He got his. Got the Nobel Prize. It's not a Nobel Prize. That's what they call it. When he got that in 2022 for his work on banking, he completely ignored a paper by the bank of England saying banks create money. So his model was of banks as intermediation services. They simply ignore what they don't want to understand.

[A]

Okay, it is really hard for me to wrap my head around how Ben Bernanke could be confused instead of having a willful reason to want to ignore that. Is there a willful reason why he would want to ignore that? Is he really just like. Because going back to one of the first things that we said, my beef with Marx was that he wasn't accurately tracking the actual mechanism by which this stuff happens. Because it's all human psychology. The creation of money is very trackable from exactly who types what into a database, how the Fed injects reserves for the bank and how the bank can access more money, how the government issues bonds, but they can only be purchased by the banks from the reserves you can actually just track. These are the keystrokes that created that money. This is where the money went. These are the people that ended up buying that debt on the secondary market. And so now I can track how the money gets into the system. Like there isn't a mystery. And so.

[B]

Oh yes, there is, if you're an economist.

[A]

I don't understand. Like really, I don't understand. So how are this being.

[B]

It's religion. If you want to think about what economists do, think in terms of rival religions rather than terms of intellectual discipline. You have a religion that says that banks aren't important. And so if you don't even look at the data that tells you banks are important. And that's what mainstream economists do. They have a theory that says that banks are just intermediaries and that's what they model. And they collect the data on the level of private debt, but they basically pretend that it's not the bankers doing the lending, it's households lending to firms. As if you're lending out your deposit account to a firm and they don't even look at the data. And I've had decades of experience of this and decades of pointing out that you've got it wrong and they continue ignoring it because if they took notice of that, then the rest of their theory would unravel. It's a bit like, I mean, I use the analogy all the time of I'm an ex Catholic, so I can do this. Imagine if an archaeologist turns up at the gate of the Vatican and says, I've found the body of Jesus Christ. Would you like to take a look what's going to happen to him? He's going to be speared by the Vatican guard. They don't want to know that Jesus Christ is actually dead and buried in a tomb somewhere. It's similar for neoclassical economists. You tell them that banks create money. They don't want to know because if they take that into account, the rest of their religion falls apart. And so they just don't look at contrary data.

[A]

Okay, well I know it's weird, but I've, I've had 50 years of experience, very distressing. So you said something a couple minutes ago that said because they don't take private debt into consideration, they did not see the 2008 crash coming. So if I'm understanding everything that you said, you would have looked at a chart and you would have seen the enormous amount of debt that is coming into the system is what going to be unsustainable. And so you knew this is going to have to come back down. As it comes back down, there's going to be a tight constriction. People are not going to be able to pay the debt that they owe because the economy is contracting hard. And so obviously this is going to lead to massive financial distress. Was it that straightforward?

[B]

Exactly, it really was. Because from my perspective, I've always followed the work of Hyman Minsky and Irving Fisher. These are the two very non mainstream economists. They focus upon the role of private debt in causing the Great Depression. And what I've done is I've taken their theories and put them into mathematical form. So that's always been my focus. And what I see credit as doing is adding to aggregate demand for the simple reason that when you borrow money, you don't borrow for the sheer pleasure of being in debt, you borrow to spend. So when you then borrow the money, you spend it. Now if you borrow off somebody else, if I borrow it off you, for example, then your spending capacity falls and mine rises. I might buy different stuff than you, but the same aggregate amount is going to be purchased. If I then paid you back, same story, you'd be able to spend more. I could spend less. Aggregate demand doesn't actually change. And that's the model that neoclassical economists have in their heads. It's what they teach students at university and it's what they believe themselves when they get into management positions like Ben Bernanke. But my perspectives, and this comes down to how do banks actually function? It was called endogenous money, which is something which only makes sense to people in the discipline itself. I call it bombed, which stands for bank originated money and debt. And then in that world, when you borrow money from a bank, it doesn't take money out of one account and give it to you. It says, we're going to. That's a great idea, Tom. Here's $100 million to start that business. By the way, you owe us $100 million. So they increase their assets, which is the loan they've gave to you. They increase their liabilities, which the money they're giving to you, and that's how they create money. Now, with that 100 million, you've got it. You then hire people and you don't hang onto it. It can speak to user spending. So that change in debt when it comes from a bank increases aggregate demand. Now, when you go in the opposite direction and you try to pay that debt down, you're also eliminating demand. It doesn't matter if many people, there's a whole spectrum of people. Some are borrowing, some are paying it off, et cetera, et cetera. It's when the aggregate level goes up or the aggregate level goes down. And when you take a look at what was happening in the prelude to the global financial crisis, there was such a high rate of increase in private debt in America, and it was already so high. And I was looking at Australia mainly at the time, because I am Australian, I was looking at my own country's data more, but I checked the American as well. I basically said, this rate of growth of debt can't be sustained. It has to slow down. When it slows down, it'll probably go negative as well, and that'll cause the biggest downturn since the World War II. And that's exactly what happened. I can show you again. I'll show you another chart, if you like, to make that point. And that's what I look at. And the mainstream still won't look at this information because it contradicts their religion. So this is. I know it's ridiculous, but this is the American data. As you can see, there's government debt. And that's the one that everybody obsesses.

[A]

Which color. Which color is government debt?

[B]

The black is government debt, the red is private. Okay? Now most people would think, oh, government debt must be the bigger one, because that's all you ever hear about. You can see which one is bigger. It's obvious. And then what I said, what the mainstream did to ignore this, is they looked at the level of debt. And they said, oh, look, debt was 160% of GDP here and 160% over there didn't change. This is what happened. The change in debt went from plus 15% of GDP in 2006 to minus 5% in 2009. That's what caused the collapse. And then when you take a look at what that means in terms of house prices, you get the house price bubble being driven by it. You get the unemployment rate. The correlation between. I haven't got that particular chart in front of me right now, but if I graph the unemployment rate against this chart, it's the opposite. Credit goes up, unemployment goes down. Credit goes down, unemployment goes up. They're literally mirror images of each other. According to the mainstream, there should be no correlation at all. When I look at this data, between 1990 and 2015, the correlation between credit and the unemployment rate is minus 0.93.

[A]

Jesus.

[B]

Yeah, I know. That was my reaction when I first saw it.

[A]

All right, so let me, let me state that in plain English, because money is created at the time that a private individual goes to the bank and takes on debt. But they don't borrow the money just to borrow the money. They borrow to spend it. One of the things that they spend on which if you look at your screen now, everybody will see this, one of the things that they spend money on is employees. So as private debt goes up, employment, unemployment goes down and vice versa. When people start paying off that debt, then they're hiring less people, they may be even laying them off. And so now they're going to go in the opposite direction. Credit is going down, unemployment is going up. Okay, that's so easy to follow and so terrifying that that's not part of the classical economic model. But for anybody paying attention, it gives you a window into what's going on. Now something's going on right now that worries me, which is the AI bubble. And I'm very curious to know if you see a similar rise in the private credit to fuel all the AI build out and speculation for that matter.

[B]

It's actually been hidden by the level of what they call, what do they call it these days, private credit. I've forgotten the name they're using for it, but it's large corporations pooling their money and then providing loans from non banks. But at the same time, whenever this happens, the people who do that go and borrow money from banks as well. They might raise $100 million from individual investors and they'll go, and really fast.

[A]

I don't want to Skirt past this. I happen to have a little bit of an insight here.

[B]

Good.

[A]

If I'm not mistaken, this is because after 2008, people took a look at the just absolute insanity of everybody borrowing stuff that they were obviously not going to be able to pay back the fragility that that created in the market. And so regulation was put in place and the reason people are now going to private credit or whatever they're calling it, was to sidestep those regulations and find, as you said, non bank entities that were willing to loan this money. But if you really do a deep dive on this, which I have, they are now actively the, the banks are now actively packaging up that credit debt, whatever we're going to call it, and selling it off in a very similar way that they did in 2008 so that they can get the risk off of their books and push that out into pension funds, retirement funds, 401ks, et cetera, so that they can spread the risk around to retail investors who don't necessarily understand that what they're actually buying is a bunch of this overzealous debt. So you're saying okay with all that, but you're saying we won't see what's happening in AI in that chart that we just looked at?

[B]

No, the data wouldn't be turning up there. It's hidden in various ways. So that's a real problem for me because I'd like to have the data. I want to work from data all the time. But what to me so like the actual telecommunications bubble to me is a classic innovation buggle in capitalism. It's happened all the time. One I'll give you a reading recommendation by Schump. Joseph Schumpeter read his Theory of Economic Development. That was his PhD thesis. Do not bother reading his is a book called Capitalism, Socialism and Democracy. It's a waste of time. It's actually his retirement defined. Okay, don't bother reading that one. I read that when I was an 18 year old and I thought why do people rave about Sean Pater? Then I read this one Theory of Economic Development and thought, this is the first time I've read somebody's verbal book, including Marx, by the way, where the guy makes verbal logic and does not make a single error and his entire logic through the whole thing. So what he explained was he said first of all, he did this. He made a starting error. He took neoclassical economics seriously. He believed volra, that's a mistake. But apart from that he was fine. So what he said was in the system that Economists use, which is this idea of equilibrium in the economy. He said, in equilibrium there's no profit because according to the theory, you're paying the marginal cost of marginal product of workers times the number of workers and marginal product of capital times the number of machines, so there's no actual profit for you. So the only way to make an entrepreneurial profit is to disturb what he called the circular flow. And he said you disturb the circular flow by finding some advantage out of a technological change of some sort, which means you can undercut your rivals. And he made it doubly hard for himself to model it, because he said an entrepreneur is somebody with a good idea but no money. So he rules out things like Microsoft and Google funding themselves in that situation. So the banking sector provides the money they need to be able to invest. So an entrepreneur goes to a bank, and this is almost treating banks like venture capitalists these days, goes to a bank, gets the money and then can establish his factory to make the new technology he's trying to create. So when he does that, there's actually an increase in demand in the economy because money is being created by the banking sector. It's being spent to buy existing resources. That'll drive up prices of goods and services, cause some inflation, but also cause an economic boom. Then when the technology is developed, you sell it into the market and it's now undercutting the previous systems. So your new technology comes in and makes other businesses less profitable or even unprofitable. There's a slump caused by that. And your technology will permeate society during the slump. Now, I think that was when I read it, I actually partly thought, I don't really accept this. I read it in the late 1990s, but then in the 2000s, of course, we had the telecommunications boom and bust. We had all this dark fibre, you remember that? Ok, he's right. That's how it happened. So in that sense, Schumpeter explained the boom and bust cycle in capitalism driven by technological change, and explained it brilliantly. And it included the banks playing a fundamental role in that and that whole system. So I think this is again a classic Shumpeterian berm and bust. And so we are seeing a huge investment right now. That's partly why America's got a booming, relatively speaking, a healthy economy at the moment. One of several reasons, but that's one of them. It's all the investment, building data centers, buying copper, buying GPUs, all that sort of stuff is causing a relative boom when the technology is implemented it will undercut many other industries and then there'll be a slump. And then in the slump, the technology will end up permeating all of society. The thing which is a real challenge about AI, as you're clearly aware, is that it could actually eliminate so many clerical and blue collar jobs. Because the clerical stuff you can replace with AI, the blue collar you may be able to replace with robots. It's still an open question there, but the ultimate idea was that robots can ultimately replace any process worker. So what this means to me means a huge shift in the distribution of income. And that's going to be a real challenge for America to cope with. Because when you have the attitude that you know you earn what you can, well, you live off what you earn. Therefore you have to be able to earn income to be able to spend anything. And if you can't get a job because you're being replaced by robots or replaced by an AI, you can't spend. So this is going to cause a real aggregate demand shock and income distribution shock for America. Whereas if you say, well, we're going to spread around the benefits of that technology, which is feasible in, say, in some Chinese companies, with half the production coming out of state owned enterprises, they could probably more likely to cope with that distributional shock in America is.

[A]

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[B]

Yeah.

[A]

And then when I look at the go forward strategy, I see an authoritarian country that does what you were saying before they split and they say some things are best served by a competitive landscape and some things are best served by us, the Politburo knowing best. We're going to aim industry, we're going to use collective bargaining with the rest of the world. And so we can say, no, you can't have any of our cars or you take all of our cars or whatever. I'm not saying that's a literal example, but that kind of thing, which is very powerful, they've built infrastructure the likes of which quite literally the world has never seen. It's unbelievable.

[B]

Have you, have you been to China? Just so I've only. My last time is 2017. I really want to go back again.

[A]

I really want to go, but I talk so much about China that I am quite literally worried about getting arrested.

[B]

No, don't worry, don't worry. I'm sorry, they'll just ignore you. There's lots of people talk about China and then they're happy to. They're happy. I mean, I'm not going to go to America until the orange, orange monster leaves the White House. Okay. Because I know I will get arrested at the American border. Because you will be fine.

[A]

So just like I'm not going to

[B]

find out the hard way, mate.

[A]

That's how I feel about Xi. So anyway, I get it, we're both paranoid. So I have not gone to China yet. Would love to truly bucket list. It just absolutely looks extraordinary. But the trade off for me is one I'm not willing to make which is, I fear, authoritarian top down rule. When they get it right, it's amazing. When they get it wrong, it's Mao's China and 45 million people are dead. So that's my big fear. Now if you were to magic wand and maybe we stay to Australia. But whether you're magic wanding Australia or the U.S. do you feel like kids? You've got to get over whatever this thing is. China has a better model. Do the fucking Chinese model. Stop with all this individualistic bullshit. What does that walk us through your a large part?

[B]

I mean I first went to China in 81, 82. Okay, so right back I was literally there during the trial of the gang of four. And for those that aren't old enough, that's not a boy band. That was the successors to Mao after he died with his wife being hardline authoritarian system. Then Deng Xiaoping came back into power again and Deng evicted the gang of four. They were tried for the crimes against humanity. So China actually tried their miscreants in a way that America has not done. So in terms of authoritarian countries and consequences for authoritarian behaviour, China has actually done better than America on that front thus far. But what Deng Xiaoping's attitude was, I don't care whether the cat's white or black, so long as it catches mice. So a real sense of pragmatism took over the Chinese Communist Party at that stage. And I saw the opposite extreme when I was there. So I took a tour of Australian journalists to have a conference with Chinese journalists. And then we did a tour of the country and we went to Sichuan Province at one stage, and we were being shown a range of villages. And the idea was to try to get sympathy from the west because there'd been a flood recently. But I was looking at the kids and I said to one of the journalists, I think they've got protein deficiency disease, a lot of the kids. And one of the journalists was a health journalist, says, yes, you're right, that's quak ajour. They're suffering from it. What actually happened? Well, you look back at the history of the Communist Party under Mao and what you had there were. It was a very agricultural society and you had two factions, the grain faction and the legume faction. And at the same time, the Communist Party was 30 million people in a country of a billion. So one in every 30 people was a member of the Communist Party. What that meant was the way the command system would go. The Politburo would decide something and send a slogan down to the local level. Now, the slogan might be promote legumes. What they would do at the local level is rip up wheat crops and plant legumes. Then a year later, there'd be a famine. The news of the famine would pass back up to the Politburo, the power system would switch the protein, the grain group would be in dominance. Promote grain. And then you get this cyclical booms and busts, and it turned up in people's health. And that was something the Communist Party had to get rid of. Now, my one example of that was when we went to Shanghai. We had some data that came out of Chinese statistics saying there had been a 17% increase in light industry output in 1980 and a 6.7% fall in heavy industry. And we thought, this doesn't compute. You need heavy industry to make light industry. Why did one go up and the other Go down. So we kept on asking a question about it. We got a very authoritarian type answer from everybody. We followed the directives of the Central Committee of the Communist Party of China. I'm not joking. That was literally the first line in every answer. We finally got an answer in Shanghai. We asked a guy who was introduced to us as the economic boss of Shanghai and we said, why did this happen? He said, well, we followed the directives of the Central Committee of the Communist Party of China. I said, okay, what does that mean? And he said, they gave us a directive to promote light industry. I said, so what did you do? And this is a quote, translated of course, but a quote. We stripped heavy industry factories and turned them into light industry.

[A]

Woof.

[B]

Okay, that is just totally destructive. So Deng got rid of all that stuff and basically said, we have to experiment, we have to try stuff and see what works and stick with it and try stuff that fails and don't do it anymore. So an experimental mindset took over the Communist Party at that stage. And people to get promoted inside the Communist Party, you had to have a degree, you needed a level of education, mainly engineering. So you got the top level of the party is a whole bunch of engineers who've proven their worth through managing local systems. That's where Z came from as well. And therefore you get a selection process whether it's not democratic, obviously, but neither is America. Okay? What you've got is not a democracy. You have a circus and you've elected a clown. So congratulations. But a genuine democracy is a people oriented selection system. What the Chinese have is a skill oriented selection system. So as long as they stay away from the ideology, the, the cult of the personality and so on, which we've seen some arguments that's happening with Z, but so long as that's kept in check, what it means is you have a pragmatic administration trying to get the best possible outcome for their overall system. And one thing I learned as well, a whole bunch of students attended the conference. I ran and they all asked me about the Ombudsman system. And I didn't actually answer the questions for them. I feel guilty about that. But they wanted to know what was the Ombudsman system. That was the thing we were most fascinated about by the West. Now what? The Ombudsman system came out of Sweden and that was a public official who is required to discipline public officials. Okay. If you don't meet the objectives, you get penalised for failing to meet the objectives you signed up for as an administrator. The Chinese have implemented a system like that. It goes across the entire country. So there are performance cases, criteria for people who get a position. If they don't meet it, they don't get promoted. So what you've got is in that sense a quality assurance system and innovation focus as well in the, in the bureaucracy in America and in China. And of course, what you get in America, you get the best politicians money can buy.

[A]

I look at Marxist thinking and I consider it one of, if not the most dangerous thing that is propagating in culture right now. But you view Marx as one of the most profoundly effective economic thinkers of all time. And so I want to understand what you see that I'm missing.

[B]

Well, let's ask a quick question. Have you read any of Marx?

[A]

I've read a lot of commentary of Marx and very little Marx directly.

[B]

Yeah, yeah. I mean Marx and Marxist Marx. There's actually a funny occasion when Marx was visited by a number of young Marxist back when he's obviously still alive in the 1800s. And he asked them, what is Marxism? And they explained what it was. And he said, well, in that definition, I'm not a Marxist.

[A]

Interesting.

[B]

So what you find is often your worst enemies are your best friends. They take a particular part of your orientation and they distort it and make that what you're known for in the long term. So that's partially what I see. The reason that people demonize Marx is they're demonizing his followers, who've got a caricatured version of Marx in the first instance. But Marx also contributed to that. And this is something where I again have a unique perspective on Marx because when I first started reading Marx, I was 20. I'm age 73 now. It's quite a while ago. And it was after a student rebellion at Sydney University back in the 70s when students were revolting in the genuine sense of the word. And we decided to spend a beautiful Sydney summer sitting in a cold room in the main quadrangle of Sydney University reading chapters out of Das Kapital together. And I remember walking across to that meeting and one thing I knew about Marx, from what I'd read, the name, sort of thing as you, you know, people commentary on Marx. Marx argued that machinery added no, no value, so all profit came from labor. And at that stage there was a huge building boom in Sydney. And as it happens, Sydney University's campus sort of overlooks the central business district. And I looked at it and said to one of my friends on the walk there, I want a very good explanation from Marx as to why all those machines, and you could see all these cranes, buildings, high rises. I want a very good explanation for Marx as to why those machines don't add value. So I approached it with a sceptical reason and what I found was that Marx actually gave an explanation for why they do add value. But he then retreated from that because that meant it eliminated his claim to fame as being the scientific socialist, the person who would prove that socialism had to come about because when you apply his logic properly, you find that it doesn't argue that socialism is inevitable. So I'm so irritated with Marxists in general because with the exception probably of the practices in China, most of them have no idea what Marx actually said in putting a caricatured version forward, which is where a lot of the ridicule of Marx comes from.

[A]

So let's start pinning it down then, so everybody, the people that have a caricature understanding, and I'll even lump myself into that, it's going to be something this collectivism state wants everything they want to take all your private property, et cetera, et cetera. I know enough about direct marks to know that he specifically admonished that and was saying, look, I'm not coming for your T shirt or your house. This isn't that. What is the real Marx line of logic understanding that you've already pinned down, that he sort of abandoned his own logic, the logic that you found when you read Das Kapital. What is it and why is it so profound?

[B]

Okay, well, I'll start with the caricature that most people believe is Marx about what his logic is. And the argument is that labor creates all values. So the Marx. There is a theme in Marx which is it started back in the 1840s when he first started looking at economics in 1844, and that is he said that labor is a unique commodity. I'll backtrack a bit. The Marxian foundation is the classical approach to economics, which comes out of Ricardo and Smith and Ricardo, for example, to give you an idea how different Ricardo is to what modern economists argue, Ricardo said at one stage, the cost of production is what ultimately regulates price and not, as has often been said, the relationship between supply and demand. Now you modern economics, it's all about supply and demand. Okay, so the classical school specifically rejected that and said that elements, commodities in a capitalist economy exchange at their cost of production. And now that led a dilemma that if everything gets sold for a cost of production, how do you make a profit? Now, Marx's explanation was, well, labour's are unique because labor, when you pay something for its cost of production, the cost of production of a worker is fundamentally the subsistence commodities a worker needs to buy to stay alive. They might take say six hours to make. Remember back when Marx was writing, the working week was six days long and the day was 12 hours. So the average worker is working six 12 hour days. And Marx said, let's say that the commodities that keep the worker alive take six hours to manufacture. The working contractor, he's got to work for 12 hours. And the gap between the six hours necessary to make the commodities to keep the worker alive and the 12 hours that he works, that's the source of profit. Now what that meant was Marx also argued that over time, competitive forces in capitalism would force capitalists to use more and more machinery to get a cost advantage over their rivals. But he argued that the machinery added no value, added no profit. So what you've got, you had a profit, was the gap between the output of the worker and the means of subsistence for the worker. He called that surplus. And you divided that by depreciation for machinery plus the commodities that the worker needed to consume. And because there was an increasing amount of fixed capital going in, over time the rate of profit would fall. That would lead capitalists to attacking workers trying to suppress their wages below subsistence, et cetera, et cetera. That would lead to revolution. Bang. We'd have socialism and we'd all live happily ever after. Now that was obviously completely wrong in how things worked out. Okay, no argument there. But I never swallowed that argument because it meant machinery added nothing to profit. And I simply. It didn't make sense to me. So I read Marx's first seven chapters very carefully and I found a brilliant explanation there as to why not just not labor, but all commodities used in production can be a source of surplus. And this gets a bit esoteric, so pardon me if it's getting a bit hairy for people, but neoclassical. The mainstream economists these days talk about marginal utility and marginal cost. You may have come across those terms in your. Okay, Marx talked about use value and exchange value. And he said that use value is obviously what I buy a commodity for. Exchange values what it costs. Fairly obvious, but he said they're incommensurable. If you go back to an early stage for society, when you have early tribes bumping into each other and they're exchanging stuff. If, say one tribe can make white leather and another tribe can make pottery, but neither tribe knows how the other tribe makes it and they want the tribe that makes the White leather wants the pottery, they've got to give away some of their white coats. So in that case, the utility that the buyer and seller gets affects the price. But he said, after a while, societies get used to the fact that they're making additional pottery and additional white coats so that they can do these for exchange and trade. And they no longer care about the utility for consumption. They're making the goods for profit, for exchange instead. He said, in that case, the use value and the exchange value become decoupled from each other and they're incommensurable. There's no relationship between the two. Now he applied that to labor again and said, well, how does labor make a profit? Well, how does labor contribute to a profit? Well, the exchange value of labor is the subsistence commodities. The use value is the capacity to produce goods for the capitalists sell gap between the two that'll create profit. That confirms his previous argument, but exactly the same argument applies to machinery. If you buy a machine for its cost of production, the reason you're buying it is because you want to use it to make goods and services for sale. If they're incommensurable, there'll be a gap between the two. So machinery can also add value. And therefore, if even there is a tendency, and there certainly is one, for the ratio of fixed machinery to labour to rise over time, that has no necessary effect on the rate of profit. It doesn't have to fall. Therefore, there won't be an inevitability of socialism. Now, you can imagine how popular it made me with Marxists.

[A]

Okay, I can. Now, before we go any farther, because I think you're right, I think for a lot of people this is going to be very heady. And so I'm going to restate all of this in a way that will also nod to my thesis on where this all where economics, honestly, largely as a field, begins to fall apart. So what I see in Marx is a desire to boil the economy down to a system that has predictable inputs and outputs and so therefore can be mapped into the future. This is why he felt that it gave predictive indications that ultimately capitalism would cause socialism. Whether he's right or wrong is indifferent to the point I'm trying to make, which is he saw it as a knowable system that could have predictive validity. And my thing is, the very thing that whenever I hear effectively any economist talk about the economy is I don't think they understand what it is fundamentally, which is a system that is almost entirely predicated on human psychology and the A system that is being formed by both the buyer and the seller. And so when you start getting into like price mechanisms and stuff. And now I'm speaking as an entrepreneur, so if anybody's encountering me for the first time, I spent 25 years building businesses. I've been very successful, successful at it. So I understand all of the things that somebody who creates something is trying to do from better machinery to lower the cost so that I have better machinery than the other people I'm competing against, that I can create a product where there's a psychological sense of how much I'm willing to pay for this thing that just exists in the subconscious of the world. And so I've got to do things to reduce that cost. It could be reduction in labor costs. It could just be doing something better with a machine that outputs things much faster. So I'm more efficient, I'm bartering and using my own growth as to be more important to the people that are supplying me the raw goods. And so now I'm leveraging that power to drive my cost down there over time. So I'm doing all this stuff, but I'm also trying to make my brand feel cool because I know that consumers will pay more for something that helps them signal to their friends. And so now you get into this extremely complicated, like, back and forth web of like all of these things that change. Things change in culture. My competitors change what they're doing. What once seemed really original for me is now being done by my competitors because they saw it was cool or they saw it was successful financially. So it stops feeling cool to the end customer. Now I've got to find other things to make my brand worth the money, yada yada. And so it is just obscenely complicated. So when I hear somebody act as if you can map these things out ahead of time and know what one or two forces govern the price, I'm just like, that's nonsensical. This is somebody who's never had to make payroll. And so it is a far more complicated thing than that. And if I were just going to round it to something, it would be human psychology.

[B]

Yeah, I mean, I'm not going to human psychology. I'm going to go to all the stuff you've spoken about so far. So, for example, you're talking about making differentiated products. You're making something that is. And it goes into a market segment, but you've got some unique feature to it, whether that's the cost structure of the machinery you use to make it, which gives you an advantage, some features of the product, something that appeals about it to consumers, and so on and so forth. And that's again my side of economics, which I put Marx in, and not the only element by a long shot, but is in that side versus the textbook economics. And textbook economics basically starts from, let's assume we have a can opener. They don't go and do that empirical work. So again, part of the tradition of economics that I'm a modern day representative of decided to go and ask firms how they actually set prices. And now what KMAC is pretty much what you're spoken about here. You know, you choose a market segment, you make something which is a differentiated product that distinguishes you from your competitors. You work out how much of a markup you can make given whether your product is better or worse than you think of the other producers in the same market segment. And you try to give it some identification, which means you can take sales away from your rivals. That's the real world. Now, the economics textbooks live in a mythical world in which everybody makes exactly the same product. So if you read an economics textbook like Mancube, for example, you'll see them saying, we're going to talk about perfect competition now. And a perfectly competitive firm industry has uncountable number of firms, all of whom produce exactly the same thing. Now, how many perfectly competitive markets are on the planet? Zero. It's a myth. Okay. And so what I'm trying to do is build an empirically realistic approach to economics. And when you do that, all the textbook stuff gets thrown in the garbage bin because that's where it belongs. It is contradicted by empirical reality. And so when you try to put your model together of how the whole system functions, you have to be based on what empirically exists. And then when you put all those factors together, you can get complex interactions between sections of the economy that lead to what's called complex systems behavior, booms and busts and things like that. And that's what I work on and that's what I model. Whereas the mainstream believes we all roads lead to equilibrium.

[A]

Okay, we're probably going to need to define equilibrium in a second, but I want to tie this all up with a bow and say, my beef with every economist and specifically Marx, and keep in mind, every time I say Marx inside my head I'm thinking of the DSA and I don't know how aware of American politics.

[B]

Yeah, okay, so Democratic Socialists of America, is that correct?

[A]

Correct. Yeah, yeah, yeah. So when, when I look at that movement as a Philosophical movement that is trying to wrap themselves in the cloak of the economy is broken. It's being weaponized against the working class. And when you love the workers, then you're going to give them socialism. And what I am trying to get people to understand is even if you strip out, which I think resentment is what drives that ideology, but even if you were to strip that out and say they're really trying to help workers, that they would need to understand what I just walked people through, which is this is so complicated. The only way to get an answer is to completely push this out in a decentralized fashion. Create an environment where anybody can start a company and honestly, sometimes with just an absolute tiny bit of capital and through the LLC functionality, so that if they fail, they can wipe that away. You decentralize it. You let everybody try. You do not try to do any planning from the top down. It's just too complicated for that. And then the people that win, managed by luck, whatever, doesn't matter, but they were able to create the thing that the world wanted and was willing to pay for. Added enough value that, you know, people return over and over and those guys can keep making payroll. So anybody that tries to do price controls from the top down or tries to allocate labor from the top down, I immediately go. That just fundamentally is at odds with reality.

[B]

Yeah, there's one part of reality that's odds with that expression, and that is that there are some businesses that simply aren't profitable to be undertaken by individual entrepreneurs and where the market itself won't provide enough of what you need if the good is something which benefits more than just the person who buys it. So if you look at things like sewerage, for example, if sewerage was a privately allocated system, there'd be far less sewage, there'd be far more shit on the streets, there'd be far more communicable diseases, we'd all be suffering because there'd be an inadequate level of sewerage. And this says that to be a profitable capitalist, to be successful as a capitalist, of course, you've got to either borrow money to do something or you've got to pay dividends to your shareholders. And that means your costs accumulate very rapidly as financial component to it as well as the actual cost of building something. So there are long lived features of capitalism. Power systems, roads, hospitals, things that take a hell of a long time to build and don't give a return straight away are unlikely to be done as well as necessary by the profit oriented side of your economy. But they're the sort of thing a government can provide because it doesn't have to make a profit. And in fact, one of the best examples of this, by the way, if you go back and search in the New York times in the 1920s, search for Henry Ford and Thomas Edison and a project called Muscle Shoals, which is a, I think it's on the Mississippi river, it was a hydroelectric scheme and both Ford and Edison argued that it should be government funded. And the reason they said that was it takes too long to, if you try to get it as a private industry, you've got to borrow the money, you borrow the money off the bankers, you've got to pay interest to the bankers. That compounds over time. So ultimately the cost of the Mussel Shoals hydroelectric scheme would have been far higher if it had been paid for the private sector than if the government did it. And Henry Ford was in favor of government money creation to create long term, long lived capital assets which then benefit everybody is in the market system. So this is a way in which you can see there's a time issue to whether you want the market to provide something or the government. And if it's something immediate and it's something where consumer choice is vitally important, private sector for sure. But if you want something which is a background thing that all capitalists benefit from and all workers as well, that's better provided by the state and that's the division between the length of time it takes to make something and the compounding effect of having to borrow money for the private sector, which doesn't apply to the government.

[A]

So I totally agree, I'm of the mind that we want government, we want small government, but we want government for that reason and quite frankly many others. So I certainly don't find myself on the libertarian side of this. The reason that I think this point is so important when we talk about the modern interpretation of the caricature of Marx, which unfortunately is the Marx that we encounter, even if that is a unfortunate for him a sad betrayal of the legacy that we could have had. But the reason this becomes so problematic is as a student of history, I look back at Lenin, Stalin, Mao, Pol Pot, and I see people who used all of his words, used his name to centralize power, to centralize decision making. It's the exact same thing that I see happening again with the DSA here in America. And I know the deranging effect of that. Because the economy is so complicated, it must be on most things, let's just say it must be pushed down to the decentralized level where we get to take advantage of what I will call human selfishness. So when I look at you have, is and ought. So is is just, this is how the world is, Ought is how we wish it were, or from a values perspective, how we think it should be. I'm just like, we have to live in is, ought's nice. It gives us something to aim at, but we have to contend with is for whatever reason, evolution saw it fit to leverage selfishness to motivate humans to take action. And so one of the things that humans will pursue is I want to make my life better. I want to make the life better of my family. Once we made the LLC so that you didn't have to be a wealthy person in order to start a company because you didn't have to fear the looming lifelong tragedy of debt that now all of a sudden anybody could start a company and if you failed, you could just declare bankruptcy for the company and move on. Now you have this ability to go, oh, if this person wants to get rich, they want to be selfish, they want to build something. The way that they have to do it is to innovate, to make something that people want badly enough that they say, oh, I would rather have that thing you just made than my money. And so it becomes this equal exchange. And so when I look at the character of Marx that we all have to deal with, it is a betrayal of that reality. Now I know we're still in the caricature of Marx, but when we look at that, are you and I on the same page about that or do you go ahead.

[B]

Similar, similar. I mean I, as well as studying Marx, I've done a fair bit of study of socialist economies as well, of course. And the obvious failure in socialism was Russia, okay? The Soviet Union. Now when you look at why it failed, this was actually most intelligently explored by a brilliant Hungarian economist called Janos Corni. And Korney was looking. The Hungarians tried some various experiments. Hungary and Yugoslavia both tried market oriented socialism at various times. They were aware that the Soviet system alone didn't work. But Kohan's explanation for why Soviet system failed and the capitalist system succeeded, relatively speaking, which is the opposite of what Marx expected and the opposite of what Lenin and Stalin and co thought would happen as well. You might remember the old. Do you remember the old? Oh, you don't remember, you're too young for that. But do you know of Khrushchev smashing his shoe on the table at the United nations saying, we will bury you do you remember? You know that?

[A]

I haven't heard that.

[B]

Okay. Stalin, Khrushchev, when he deposed Stalin, speaking at the United nations one day and literally took his shoe off to pound the table and make a point. And he's saying, we will bury you. Now what he meant was, we will bury you in consumer goods. Because the attitude the Soviets had was if they focus on building what they call the means of production and building the machinery that makes consumer goods the first priority, and that consumer goods happen as a sort of afterthought, the increase in the number of machines will cause a dramatic increase in production. And that'll mean that workers in the east get so much better than workers in the west get. And people will be clamoring to come into the socialist countries. Well, that cause a complete failure, obviously. Now what actually happened was, as Corny said, the socialist economies. Russia was still a peasant society. It was still a feudal system. When the Soviets took over in 1917, you still had people who were Serbs bonded to the land. What that meant was that to develop the country, and that's what the Bolsheviks tried to do, every sector deserved investment goods. Therefore every sector got less investment goods than it needed. And so every. You have this like a single factory making motorbikes and a single factory making cars and so on. They all got less resources than they needed to actually meet their five year plan. So the best way to meet the five year plan was to make last year's model. Don't innovate. Okay? And I'll give you my little funny example of that. I had my first girlfriend's brother wanted to buy a 650cc motorbike. This is back when I was 20, wanted to buy a 22. He wanted to buy a 650cc and he couldn't afford a Honda, let alone a hog. So he found he could buy a Russian motorbike called a Cossack for 650 Australian dollars, literally a dollar per cc. It arrived in a wooden box. We took the wooden crate apart. We then found a whole bunch of oil soaked rags, took those off the machine, and there on the wooden pallet below, in all its Splendor, was a 1942 BMW. Okay? No innovation for 30 years. So this is what led to the failure of the Soviet system. They didn't encourage technological innovation for consumer goods, whereas the west did, of course, encourage. So what Cournot said is the socialist system is supply constrained. All these sectors need more inputs than they're getting. They've all got less. Therefore, the best way to Cope is not to innovate. And therefore you grow no faster than population because there's no technological change going on. Whereas capitalist firms are demand constrained. You have numerous companies all competing into the same market with differentiated products. They're all trying to take sales away from their rivals. Therefore they all have excess capacity. They need the excess capacity to be able to expand into a growing market. So that's one reason why you have excess capacity. Another is without excess capacity, you can't take advantage of mistakes that your competitors make. So in this situation, you're trying to innovate and take demand away from your rivals. And the best way to do that is to innovate. So capitalism leads to a higher rate of innovation and that's why capitalism grew more rapidly than socialism for that time period in the collapse of the Soviets. We're going to talk to China in a bit more detail later, but I think China learned that lesson. So what they've got at the state sector provides the long lived facilities that benefit all different parts of a capitalist economy, economy in general, and therefore that reduces the cost of starting a business. You've got educated workers, you've got health systems for them, you've got cheap transport to get them from their home to your factory and so on. The state does that stuff and in the goods producing, let competition rip. And it isn't just between firms, it's also between provinces in China. So I think there's about 20 or 30 provinces and each of the provinces is competing to be a dominant in some particular segment. The local government's providing funding. There's 130, 120, 130 car companies in China right now. So they've managed to combine the best of capitalism with the best of socialism. The state provides the long lived stuff and makes sure that the costs of things like power are much lower than they are in the West. And the power is available if you're a private company providing it, you'd only provide as much power as you made a profit out of. The Chinese just build power stations, period, huge capacity that way, but at the same time they're competing like crazy in consumer goods. So to me it's not a case of socialism or capitalism is better. There's a yin and yang between those two approaches. A long lived not trying to make a profit, but providing resources that everybody needs in a sophisticated society with at the same time the rampant competition for consumer goods.

[A]

Right now I want to transition from caricature of Marx to the marks that you see that has not made it into the public consciousness. And I want to start with you said, this is really the best of when speaking about China. This is the best of capitalism and the best of socialism. Now, as I've researched socialism, I realize Marx never talks about socialism. He talks about communism. And it was Lenin that said, I've got to explain to people what this intermediary step is that we have to go through in order to get to communism. And I'm going to call it socialism. And so then people grab onto that and it becomes this whole thing. But, like, right now in public discourse, there's a debate of, like, I don't think people really take the time to stop and almost follow the etymology of these words to get a grounding. But when you do that, you realize what I just said. And then what ends up being the debate here in America and for people that don't know, you're Australian and I think you live in the Netherlands. So a different frame of reference maybe than some things you're going to hear me say. But I hear people trying to use what I will say as socialism as a disguise, because communism, at least here in the west is understood as that didn't work. And so I think this is really a question of centralized versus decentralized. And so that is my thrust as you and I talk is I'm saying when you agreed, some things will be centralized under the government. That's why I'm not libertarian. But the vast majority of things will not. And the great evil, the thing that we need to be very afraid of is, and this is my thesis, is this centralization. And so when I look at Marx, what I want to understand is, in the real Marx, is he looking for a centralizing force, or is he looking for a decentralizing force? And do you believe that our current modern Western economy would be in better shape if we followed whatever Marx's prognostication is?

[B]

Marx was more of a critic of capitalism than he was an architect of socialism, as you've already said. So there's very little discussion of what a socialist economy would be like. And his idea of communism was basically a. Almost a poetic fantasy, like a future world in which his definition of communism was from each according to their ability, to each according to their needs. Okay, so there's no hierarchy in the whole system. But he really didn't. It wasn't Marx who came up with the ideas of socialism. In fact, if you look at what Marx was arguing for, we pretty much call it social democracy today. He wanted universal education. He wanted Universal healthcare. You'll find comments like that inside there. Most sophisticated, sophisticated societies, and I do not think America's a sophisticated society on that front, have those elements. You've got public health, you've got public education, and that means that you provide a sort of base standard of living for everybody. And then if you want to rise above that, you've got to become a capitalist, that sort of thing. So it's like having read everything Marx wrote in economics, which I did for my original master's thesis, I find the actual discussions of him might as well have been written by Walt Disney when he had. When he accidentally swallowed some marijuana. It's got maybe mescaline. It's got no relevance whatsoever to what Marx actually said.

[A]

Okay, so what is. When I hear the. From each according to their abilities, to each according to their needs, I hear a naive person that's accidentally swallowed marijuana or maybe mescaline, like that feels so detached from what is ever going to be true given the nature of the human mind, that I'm just like, yeah, you can throw that out. So this is where. And I've already confessed, but I'll state again, I've not read very much Marx directly. And part of it is because for me, just hearing that, I'm like, this guy's a utopian. He's not connected to reality. So whatever he says is going to be trash. So what's the thing that like, did he caveat and say, oh, this is just my fantasy, but it's not actually what we build towards? Or was he actually trying to build

[B]

towards that there was elements of Marx which are fantasy because he started out as a poet and a philosopher, not as an economist. His first original writings were poems to Jenny von Westhalen. So we have to put the guy as a human being. And that's something that we read all these economists, from Aristotle forward, frankly, I tend to say, what's their emotional and personal situations to explain some of the arguments they come up with. So he was really. His main interest was, how do I understand capitalism? It wasn't about what's the old. He thought he could better go back a bit. The 19th century, we talk about it and what's your image of the 19th century? For most people, it tends to be cowboys, Westerns, that sort of thing. But if you look at the state of life in England in the 19th century, then my picture of the 19th century England is Calcutta 30 years ago, because you had open tanneries everywhere. You had people sleeping next to the machines they were working in. And to give you an idea of how severe conditions were in London at the time, Marx and his family left Chelsea because of a cholera epidemic. So the level of the standard of living of most workers was extremely savage in that period. And it was actually a decline in the standard of living from what they had under feudalism. Because one of the elements of UK feudalism, it's not the same around the whole world. But one element that applies in the UK was after the Black Death, of course, the population fell by 50%. The peasants had a bit more bargaining power in that situation and the king passed a law. There was a law passed, I think at about 1500, that a serf could have no less than 4 acres of land to work themselves. Now if you have four acres of land in England that's, you know, sufficient to live moderately comfortably, you have to work on the lord's land as well. But you had that security of the feudal system. Along comes capitalism. What's called the enclosure movement occurs. All the would be capitalist farmers, who often were originally feudal landlords, started enclosing the land and driving the serfs off, creating a class of landless laborers. Now they became the input to the factory system. And it was a savage world. It was a highly polluted world at the time. The pollution we put up with today is trivial compared to what occurred in industrial sites in 19th century UK you had people, you had child labor on a grand scale. You had women working in massive factories, having to work and sleep next to their machines. This is the world that Marx wrote in. And so what we tend to do is we look at our current situation and say, Marx isn't describing that. Of course he's not. He's describing something 150 years earlier coming out of a feudal system where in the transition the work has got done very badly. And therefore there's a huge number of socialist movements. At the time Marx was writing and his intention was to make the socialism more scientific rather than utopian. So have you ever eaten Cadbury's chocolate? Yep. Okay. Cadbury's was a socialist firm. Okay. The Cadbury family wanted to create a sort of worker utopia where the workers shared in the profits that were being made. You've got various elements of worker cooperative firms still around the world. So that was what Marx called utopian socialism. And he was trying to create what he called scientific socialism to say, well, socialism has to happen because of these forces I've identified in the economy. And that's what he stuck himself to. But he was really 99% intellectual, less than 1% activist in that sense. So we tend to think Marx is out there trying to create socialism. He was involved in socialist debates. So there's things like the first and second and third and fourth Internationals and the fights he had with anarchists and all this sort of stuff. But fundamentally, he was an academic reading other academics trying to explain capitalism.

[A]

Okay, so now we've got modern capitalism. I'm looking at it, and I will say that here in the US My estimate is that capitalism is. Our economy is desperately broken and we are in a very fragile time. And I'm wondering one, do you agree with that statement? And if you do, is there anything that Marx has taught you that should be directly applied to the modern economy, or is he only interesting as a sort of philosopher or historian?

[B]

Well, I think when you take the approach to Marx that I found in him, which he then suppressed because it undermined the labor theory of value and the argument that socialism was inevitable, I think that insight he had was actually the best possible foundation for understanding capital. So I start from that, what I call dialectical philosophy that you can find in Marx, and use that as a foundation for understanding capitalism.

[A]

So this is where we're going to have to get into equilibrium, partially.

[B]

I mean, the mainstream economists are obsessed with the idea that capitalism reaches equilibrium, which is a state in which nobody wishes to change their current behavior. That's the way they define equilibrium. That's the last thing. If somebody hopped off Ummamau and landed on the planet Earth and said, what do they see? They wouldn't see equilibrium. They see evolution and change. And we need a theory of economics that's based on evolution and change. And as it happens, Marx provides a foundation for that. It wasn't something that he developed properly because he was still trying to prove socialism was inevitable. And his followers are far worse. But I. I think he's part of the way in which we can understand a complex society. Like the way you were describing earlier.

[A]

You didn't say whether you agree with my assessment that the west, largely from an economy, seems fragile place?

[B]

I. I think it's beyond fragile.

[A]

Okay, perfect. So we both agree that we're in trouble right now.

[B]

Yep.

[A]

Does Marx offer an insight that tells us, like, what the Fed should do, or is it just that that's not at all the layer of analysis?

[B]

Well, you can get to the stage where you say what the Fed should do and the Fed should stop fiddling with interest rates is one of my conclusions. It comes out of my own approach to economics, which I can drag back to Marx. But what Marx really complained about was having an excessively financialized economy. One of the most potent posts I ever wrote back before I. Before the global financial. After the global financial crisis, I called the roving cavaliers of credit. And that's a phrase from Marx where he said economic booms and busts can give an opportunity for the banking sector and the parasites that hang off them to take over real production. And he says this gang knows nothing about production and should have nothing to do with it. So he was against a highly financialised economy. He wanted to have one dominated by the industrial sector and have the financial sector as servant to the industrial sector. Now what we've been able to happen in the last 50 years, the financial sector runs everything. And I think what Marx saw and said that that is going to be a catastrophic mistake because what you'll have is far too much private debt. Booms and busts caused by people speculating on assets like houses and shares. This is an unproductive economy. You need to tame the financial sector and put it back in its box and make it a servant of the industrial sector, not the master. So that's one thing that Marx would say, and I'm 100% in support. The financial sector is far too big. There's far too much private debt. And banks don't provide money for entrepreneurs. They provide it for speculation on house prices and speculation on shares, which is an unproductive, destructive use of the capacity to create money.

[A]

Why is that? Why is that unproductive?

[B]

Because you're gambling on secondhand assets. Okay? You can't get rich selling secondhand houses to each other. You can't all get rich selling secondhand shares to each other. What you want is people building new houses, you want people making new products. And the share market is in terms of creating financial capital to enable investment to take place. It does some of that. But the vast majority of activity on the stock market is what Keynes called a casino. And again, a remark from Keynes which is very compatible with Marx. He said when the industrial development of an economy is dependent upon the activities of a casino, the job is likely to be ill done. And I think that's in the situation we are. Everything's about can you make, can you, can you sell your assets for a profit, can you buy a rising asset and sell as it goes up? This just leads to financial booms and busts and we've had far more of those since the 1970s than we had in the pre war, in the post war period up to that stage. Because the level of private debt and the strength of the financial sector is so much greater now than it was after World War II.

[A]

Okay, I want to make sure that we understand your read of the mechanism of how these booms and busts come about. Is it that, okay, we've turned by letting people bet up or down, like hey, this thing is going to go down and I'm going to make money when it goes down? That kind of casino like behavior, does that become a problem because the businesses become a servant to their share price or is there some other mechanism by which that actually breaks things?

[B]

Well, the main thing is the people. You're not building your machinery, not making new factories with that borrowed money. You borrow money from a. If you borrow money from a bank and use it as working capital for your company, then that's going to produce goods and services. And the sale of the goods and services will service the debt you have to pay interest on. But if you're borrowing the money to go and buy shares and you're hoping the shares will rise in price, then what you're doing is taking a levered bet on the share market. And the scale of the levered bet is what actually causes the ups and downs of the stock market. So end up borrowing money. Gambling at the share price is going to rise, but the only way the price will rise if somebody borrows more money than you did to buy those shares off here.

[A]

Why does that matter in the real economy? So if you've got a bunch of buffoons that want to gamble their money and they want to put themselves in debt, whatever, let them do that. Why does that end up causing a boom and bust?

[B]

For a start, because it's not making any productive facilities. You're buying secondhand shares of somebody who else has borrowed money. You haven't created the capacity to make goods and services to finance that, those share prices. So we get ridiculous bubbles like we've got in the stock market right now, a 40 to 1 ratio between the Vino Shillers Cape index, the cyclically adjusted price to earnings ratio. Huge bubbles coming out of that, all driven by margin debt.

[A]

So I'll walk through what I think is the mechanism. You tell me if you think this is correct. The reason that when you over financialize a market it actually builds booms and busts is you've got people bringing on all this money. They are chasing a finite supply. It's not, it's not like stuck. You can always issue more shares, but it's a relatively finite supply of companies that people have belief are going to go up. And so like with AI right now, you get all this money that's pouring in, you have a historical Cape ratio that's like 16 to 1. We're now at like 40 to 1 or something.

[B]

Yeah.

[A]

And so for people that don't know the Cape ratio, it's like. Like, how profitable have they been for the last 10 years? And so you get a rough idea, oh, okay. Like if 16 to 1 is a reasonable price for something, and I'm at 40 to 1, odds are that this has just become completely detached. And this is really about gambling dollars coming in, driving the price up. And the fundamentals of the business no longer justify that price. Okay. But the economy hasn't broken yet. So now create this big bubble in that it's overinflated. There's way more money chasing these shares than should be. That bursts. Now, the reason I think mechanistically this ends up hurting the economy is because now that company whose share price just plummeted based on psychological factors of people getting wiped out. So there everybody's now afraid they were doing it on margin. So they got margin called. So now not only do they not have the asset anymore because that was seized, they may also be in like massive negative debt. So now that company that might need capital to grow and has been using the capital brought to them by these gamblers to keep their stock, something that they could sell to generate money, that now goes away. Now, as all those people lost money, they're not paying. If they have employees, they're not paying their employees because they're not broke. They're not spending money in the economy because they're now broke. And so everybody. And there's fear. And so everything just now contracts, people get laid off. There are people outside of the workforce. And that's how a boom creates a bust. Do you agree that's the mechanism?

[B]

Yeah, pretty much. If you'd like, I can actually share the screen and show you information on the margin debt versus the S&P 500, which might be of interest. So this is my Ravel software. So the cyclically adjusted price to earnings ratio, as you said, its average is about 14 to 16. This is its low point back in the 1970s. And you've got this huge valuation in 2000, another huge valuation now. So that's the cyclically adjusted price to earnings ratio. This is margin debt as a percentage of gdp. Now, I was literally. I fell off my chair when I first plotted this because I knew margin debt was big during the 1920s, I had no idea. It reached 9% of GDP. And that was back in the days when margin debt was a 10 to 1 ratio. So you could buy the margin loan, you put down $100,000 and bought $1 million worth of shares. And then if the shares got by 10%, you doubled your money. But if they fell by 10%, you were wiped out. And that's what of course happened on October 1929. You see the huge plunge here then we had a whole period from the 50s through to the 80s, pretty much where margin debt was relatively trivial. Only about half a percent of GDP most of the time. And then after the Alan Greenspan put hit, we go up to yet more bubbles. We've restricted the level of leverage, it's now only 2 to 1. But now we have margin debt. I think the most recent data goes up to about, I think about 4% of GDP. So that's the amount of money people are borrowing to speculate on share prices. Now my argument is that change in margin debt causes change in the cyclically adjusted price to earnings ratio. And again, when I plotted this the first time, I fell off my chair because I did expect to get a strong correlation. I didn't expect the correlation between margin debt, change in margin debt and change in the cape to be 0.8 over 1200 data points, over 100 years of data.

[A]

What is it that makes those mechanistically connected?

[B]

Because people are borrowing money to buy the shares. The price they're paying for the shares is levered up by the amount of money they're using. If they just use their own money, like back in the day, in the current times, you'd be able to put $10,000 into shares. Instead you put 20,000 or 20 million you're leaving out.

[A]

So let me say it another way and see if I'm understanding this correct. So what you're showing is that the amount of money available based on how much debt people can take on is inflationary. So it's just pushing the cost.

[B]

It causes asset process to rise. And the fundamental thing the profit sector private banking system is doing these days is causing asset price bubbles. We had the subprime bubble, of course, with houses back in 2000-2007, all you got was more expensive houses. Now more expensive houses don't create smarter kids. Okay? It is totally useless in that sense. It looks great. You think you're worth a lot, your house is worth a fortune. But it's only worth a fortune if you can sell it to somebody else who borrows more money than you do to buy it. So we get caught up in this artificial bubble and then it has to crash because you're adding to the debt of the economy. You're not adding to the productive capability of the economy at the same time,

[A]

which is a little untrue. So here's how I would look at that. Tell me where I'm going wrong. So if I'm a public company and there is all this money sloshing around in the system due to debt, I'm able to sell my shares basically at a moment's notice. If I'm in a hot industry like AI and it becomes trivial for me to raise hundreds of millions of dollars, if I'm a known entity, I can probably just raise it by selling my shares. If I'm not, I'm going to raise it from capitalists that see that I can go public and they're going to be able to get their money back. So that mechanism allows for companies to have easy access to capital so that they can do all the things that they want to do. So from that perspective, I look at the stock market and I say, okay, it's prone to booms and busts. There's no doubt about that. However, it's a modern miracle. Now, where it starts to get dicey for me is when you allow people to bet against something. So now people can get rewarded for things going poorly. That starts to derange things from tying back to what you said, which is, hey, when that capital is letting the business do something productive, we're good. But now if on margin, you're betting against something, that's deranging. But the mere fact that you have money, a lot of money flowing into the system in a financialized way on debt doesn't have to be problematic. It's just we've let the casino get so crazy betting up, down, left, right, that becomes the problem.

[B]

Yeah.

[A]

Does that.

[B]

Gambling is. Capitalism has become a gambling system. It should be a creative system.

[A]

It's always going to be gambling because. No, please.

[B]

Well, gambling. There's a difference between speculation and investment. And we've tended to confuse the two. People buy shares and they think they're investors. They're not investors, they're speculators. They're gambling. The price is going to go up or down. An investor makes companies, an investor makes goods and services. We need an economy based around that being what we really focus upon and reduce the status of speculation. But instead we've exalted speculation and we've let banks finance speculation rather than financing actual investment. So if you go back to the 50s and 60s, a major form of bank lending was for what they call lines of credit. And lines of credit are like credit cards for companies. So a company like mg, like General Motors would have a billion dollar or more line of credit, meaning that if it wanted to expand output or wanted to buy a higher price for oil or for the workers and so on, it simply accessed its corporate credit card to enable that to be done. And that's a productive use of bank money. You give people money that they can access to, money that they can use to expand their business. And I'd rather see banks doing that. What we can get is that now they finance people that gamble on house prices and gamble on share prices and that's got bugger all to do with investment and building a real economy. So I think we'll let the finance sector get far too strong and far too powerful. And we spend our time speculating over or arguing over speculation rather than getting investment done.

[A]

So the private credit thing with Bull owl Really struggling, BlackRock has stopped people from taking money out. There's some crisis looming there. But is that functionally, is that one person who already has the money loaning to another and so it's non accretive, there's no money being created. Is it, is that true first of all? And then is that going to offer some protections or is there banking involved where money is actually being created?

[B]

I think there's both. I mean again I don't know because you can't get the data on this but, but it would have started off as original pooling money, extremely cash rich companies like Microsoft and Google and so on and then using that as an alternative investment source. But when AI came along and the scale of spending and the banks can see profit in this and this is one of the dangers. There's a famous Australian ex politician who once said never stand between a banker and a bucket of money. And they all tend to get involved in fads. They all look at each other and say what you haven't lent to an AI company? Oh, there's something wrong with you, we won't invite you to the next drink session. So there's a tendency for herding in the banks as well and how they finance things like this. But I think the AI bubble is extreme. Even if it wasn't being financed by money creation, it's still got this extreme scale that the level of overinvestment that's occurred because in a capitalist economy when the new technology comes along Everybody thinks they're going to be the winner. So what you get is massive over investment. And the scale of over investment in AI appears to be of the scale of 10 times what it actually will probably settle down to because the revenue of these firms is about one tenth their costs. Now you can't maintain that is just an enormous gap. So on that basis I expect most of these companies to fail. It's quite possible Chinese companies will come out winning against Americans with lower cost versions of the same. So I think the AI bubble and bust. The bust is going to be extreme and even on its own it would have caused a recession for America, let alone on top of what's happening with Iran and the other elements of madness in the American economy.

[A]

So how deep are we recession, Are we depression, are we two years, are we 10 years? What's your sense?

[B]

I think we're recession, not depression from the AI side of things alone. But it's not the only issue that's a challenge for the American economy and I'd give it in the next one or two years. I simply can't see these firms, even with the cash buffers they've got, sustaining 90% losses, revenue of 1 and cost of 10. You simply can't sustain that indefinitely. So at some point there's going to have to be an increase in the cost of the tokens or a low cost rival is going to come through and take over the market that everybody else thought they could do with high cost data centers and so on. So I saw somebody, I'm not an expert on the whole AI area, I acknowledge that to begin with, but I saw one person saying a lot of these data centers are going to turn into pickleball courts. Oof.

[A]

Oh God, that would be rough. That would be very bad. I would not like that at all. Okay, so that's wild. Now my audience right now is going to be thinking, Tom, Tom, you've got to ask this guy, how does he invest his money? Now I know the punchline, but I don't.

[B]

Yeah, that's right.

[A]

People are not going to believe you. But walk us through. Why not?

[B]

A lot of reasons. Too many marriages doesn't do good for your investment capability. And I've never been a speculator, I've always been skeptical of speculation. I've tried to start a couple of businesses and I'm doing another one now. So I'm willing to invest in that sense. But gambling on share prices and stuff like that, because I know it's gambling, I have a very negative attitude to Gambling in general. And that means that because I see this as not investment, but gambling and speculation, I've stayed away from it. And that is potentially a mistake. For example, two people I used to know quite well were Max Kaiser and Stacy Herbert. They were trying to persuade me to buy bitcoin. What was about two quid of Bitcoin. I could have bought 500, not even noticed it. But because they explained the energy stuff, I didn't do it. That was a mistake. I've got to confess. Okay, I wish I'd ridden that bubble, but I've stayed away from bubbles deliberately. And some of my friends have said, why don't I use my ideas to try and make money out of the bubble? But I said, if I do that, I wouldn't have the ideas. I'd be so focused on what's happening to the shares I've purchased that I wouldn't be trying to reason through the whole dynamic of the economy.

[A]

Yeah, yeah, it's really interesting people that. That are drawn to the just core understanding of something. I'm. I'm in a slightly different position in that. So I generated all my money through actually building businesses and then realized, oh, wait a second, as I grew to understand inflation, I was like, hold on, I have to invest. And so I feel like this real push to, like, if I don't figure out how to invest my money, it's going to be taken via inflation. And so my approach has been, all right, you have an obligation to the family to solve for this problem. So my earliest understanding, the very first time in my 20s, when somebody tried to explain the stock market to me, I was like, oh, this is gambling. And they're like, no, don't be so ridiculous. And I was like, but unless I own stocks that pay me a dividend, this is just me betting that the price is going to go up. I don't see how this isn't baseball cards, Pokemon cards, gambling. Like, it just is. But I was able to get my head around that. But, okay, you don't invest. That's wild. One thing I do, Steve, I'm very intrigued by how much you and I see the world the same. I wasn't sure coming into this if you and I were going to kung fu fight for 90 minutes or what it was going to look like when I look at America and totally understand, you didn't grow up in America. And so maybe this stuff is less familiar. But the thing that I admire about the American system is that it is constructed with a deep understanding of man's tendency towards tyranny and that you have to create checks and balances to make sure that you can never have Amal and so dangerous what's gone wrong. Well, so that's where you and I will differ in that I am certainly not a fan of Trump, but when, if I'm asked to choose between Trump and somebody who I think is headed in a socialist direction, I'm going to take Trump every day. And the way that I explain it to people is he's terrible, he's corrupt. But for him to win in the system, he has to create a system that people can also win inside of. So we can't create a system in isolation that only serves him. So he's creating a. If at least if you understand assets, you're going to be able to get ahead. I also think he has the right read on. The need for us to return to a Hamiltonian stance of being protectionist enough that we stop letting our manufacturing base be hollowed out by China.

[B]

Yeah. There's some, some things I would definitely agree. Trump's gut reactions are more sensible. Okay. And obviously I'm a critic of free trade and I'm an intellectual critic as well as well as an empirical critic of free trade. So Trump picks up on good stuff like that and he's quite okay. But I mean, you want to. I want to see the guy removed. Okay. We're going to differ on that front. I think he's absolutely corrupt and he's damaging American society in massive ways as well as America's military situation and social cohesion as well. So I had a look at section 25. Have you had a look at section 25 of the Constitution?

[A]

I know of it. I haven't read 25, but read it, read it.

[B]

You'll be horrified. OK. Two reasons. One is the people who are given the power to remove Trump are the people Trump has appointed. Okay. The 15 members of THEI think it's 15 major ministries, all have to vote to tell the Congress that they want the president removed. But the next stage of it, and this reflects the historical period when the Constitution was drafted. The president, the vice president becomes the acting president. The next paragraph says the president can write to Congress and say, I'm ok, I can take over again. So the next act after the acting vice president becomes the acting president, is the president can overrule what the acting president has done and get back to being president again. And then you've got to have a three week period where Congress comes together and has to vote whether they Let the President continue or not. That's never going to happen. You've got a system to remove a tyrant that can't remove a tyrant.

[A]

So what I will say to that is you have a system where you can't remove a tyrant for four years, but then you can elect them and boot them out. And the thing that scares me right now, the thing that I'm animated by is the dsa. Their actual platform is to abolish the Senate. And so they're trying. Go ahead.

[B]

Sorry, I'm just smiling over the day. How many votes does the DSA get?

[A]

Well, they keep winning primaries. So the thing that I always mean

[B]

the Democrats dsa, I thought you meant the Democratic Socialists of America, like a

[A]

little Democratic Socialists of America.

[B]

So that's not the Democrats though.

[A]

Well, they run under the Democrat banner. So they compete against Democrats. Because we have a two party system in terms of the way that our election cycles work. It's going to be a Democrat versus a Republican. So now the DSA goes under that banner. So that's really the energy of the party. That's going to be the thing that we have to battle here in America is are we going to skew more in that direction or are we going to skew more in the direction of, of what I'll say is traditional American values? So that's going to be the thing that plays out here. Now when I originally started researching you, it was just like at a headline level, I'm like, oh, I'm going to disagree with this guy. And then I would actually listen to what you said and be like, that's actually, I think, something I have to add to my mental model. So you do a very good job of reconnecting back to the ground. So I'm not super fussed that at a philosophical level we may see things differently. I think both of us are trying to get back to the grounded cause and effect is what I always say. I'm just trying to find the cause and effect here. Now, once you get into the philosophy of it all, what I call frame of reference, everybody's locked in a frame of reference. My thing is, I don't want to be emperor. I don't want to be the person everybody has to listen to. I don't trust myself enough to be right all the time. So I'm very grateful that we have a system that has checks and balances against that. And so anyway, my thing is I have that fear of the top down. You, I think, are less inclined to have that fear given what you were just saying about China because I agree China's outperformed us for the last, I don't know, call it 20 years and don't deny that at all. Still would not make that trade. And the. I'll be interested to get your feedback on this statement. So when I look at America, what I see is the biggest problems that we have are the betrayals of our own actual principles. And so if you go back to the founding fathers who are like, okay, we're going to have a central bank, but we've got a ticking clock on it. It was only like whatever, 19, 20 years, it's going to expire. After that, we're going to be focused more on sound money. We're creating a checks and balances system so that we don't end up in a place where we have somebody that gets tyrant status. We understand that we need to protect individual freedoms largely because we don't know what's going to work and what's not going to work. That's why we have a federal system. You can have now 50 different experiments running and people can vote with their feet. It's like everything designed around the better parts of capitalism. I agree with you on the problems of the hyper financialization that we let our manufacturing base get gutted. So there are things that we've done that I would say violate those principles. Take health care, so we spend a fortune on it. So we definitely don't have a. We're not willing to spend money. We're willing to spend money. But the setup that we have, same with student loans, is the government guarantees things which creates a disturbance in the actual like price mechanism. So banks alone to people to go to school for things that are never going to make that money back. And so now you get yourself into very weird situations where that would be that on education, but on healthcare you get, hey, we're spending a ton of money, but we're getting terrible outcomes because people are basically, they know the government is going to pay for that service, so there's no incentive.

[B]

I don't know. That's not what I see as America's problem at all. You've got to pay an absolute fortune for health care. In America, you don't get health care unless you've got a, a company that's giving you health care. You don't get public health, whereas in the rest of the world, I mean, I saw a wonderful little joke on Twitter saying public health is so difficult and public education is so difficult that only 32 of the world's 33 advanced economies have managed to develop those systems. The exception of course, is America. You have incredibly expensive private health and incredibly expensive, largely private education. And people move between one's, you know, I've had friends move from one location in Atlanta to another to get close to a better school and pay the high rates that are involved and so on and the local rates pay for the education. So you get again the best education money can buy. Now the attitude of Germany for example, and Germany is by no means a country I hold up as a effective example, alternative example to America. But the German education system is free. It's hard to get into university, you've got to get good marks, you can be failed, et cetera, et cetera, but you can't buy your way in in the west. And this happens in Australia, it happened in America and UK as well. When you start charging student fees, students think they've earned, they've bought their education, they expect to be given a degree and you get a dumbing down coming out of that. And the education is costing your students a fortune. They graduated with huge amounts of student debt. We're locking them in very, very badly. So I think there are. America's done a very bad job of saying what should be paid publicly and what should be paid privately. And if you compare it to other capitalist nations, you find the balance between the state providing generic stuff everybody gets access to where you can't buy your way in and therefore you've got to compete your way in with your brains rather than your dollars. That gives you a better quality of education and a better quality of health. So I think America really has to get a better balance between the public and private sectors. And it's not going in that direction. Everything ends up being in America about how we need to privatise and individualize. You've got such a heavy handed ideology on that front that you can't see there's also a need to provide stuff at a public level because for many reasons, often the public sector is better at providing those things because it's not trying to make a profit out of them, it's simply trying to make sure you have an educated workforce. And where in America, yeah, you get an educated workforce if you got the money to pay for the education.

[A]

And when you look at the success of America, do you attribute that to just lucky time and good geography or do you grant anything to the national experiment that we're running about? Basically the individual is self governing in the sense that we don't have a king, we don't have a supreme leader. We don't have a Xi Jinping. Like this is. We're going to have to elect, we're going to have to pay attention. We're going to have to make sure that we get good people in office. Do you think that America's success has anything to do with our setup?

[B]

Yes, it does. Okay. I'm not going to argue that it doesn't. But I think your setup is much more flawed than most people, most Americans realize. That's why I made the comment about you've got the best politicians money can buy. Okay? Your election campaigns are so expensive that people get bought by their financial supporters and they end up doing what their financial supporters want in office. And basically they're harvesting votes to get there. So you get this, you know, I can 100% guarantee we both agree the next president of America will be the Republican or a Democrat. Now, you can't say that in most of the rest of the world because they don't have the same massive private funding of electoral campaigns and they don't have that dominance of having to buy, get the money to be able to become politically obvious in the first instance. So I think America's gone too far in privatising everything. Election campaigns are something that should be funded 100% by government money and private donations should be banned. Not even possible. Set it up in such a way that you guarantee you can't buy your politicians, whereas you've got a system where you can buy your politicians. And I think you see the results of that.

[A]

Yeah, on that one, you're not going to hear any argument from me whatsoever. When I think about, like, if you take education, my beef with the way that we do education is we're not letting market forces dictate that if you guarantee the loans as the government, then people are going to take those loans and they're going to the schools.

[B]

The government should just pay it 100%. There should be no need to borrow money to go to a university or a school.

[A]

And so you would just use what, merit based testing?

[B]

Or you would say, everybody, merit based testing. I mean, like I'm, I'm an academic. I've been an academic for 30 years, okay? My life. And I was in University for 50. And when I went to university as a student, Jesus Christ, you could get failed, okay, you do put a bad essay in, don't do enough work for the final exam, bang, you fail. You've got to repeat next year. These days, I mean, my university, this is an English thing They said a requirement, you have to give 92% first class honours results. What? I was just stunned by that. This is ridiculous. And it's great inflation. And this comes out of the fact students think they've paid a fee, they think they've bought their education, they get annoyed when they get failed. There's a tendency for the bureaucracy in universities to reduce standards to guarantee more passes because that increases the revenue for the university. So if you let money rule what's going on, you end up with a defunct, with a perverted education system. It's better to make education based on what education is, which is intelligence and skill. And if you can't cut the mustard, you fail, you don't lose any.

[A]

I would love that. That certainly isn't where we are culturally right now. But setting that aside, because there's one big thing that I want to make sure I get your take on, which is right now you've got Japan, we've got the, what I'll call the unwinding of the yen carry trade happening right now. When you look at that with your unique model of certainly the US economy, the global economy, do you see danger signs coming from that?

[B]

Not particularly. Not particularly. I think again conventional economic thinking focuses upon public debt and ignores private debt debt and doesn't understand how private debt money or public money is created. So the paranoia that we have about the level of public debt tends to reflect what happens for a private individual that gets into too much debt. If you get into too much debt and you don't make enough money, you're going to go bankrupt and lose all your assets. That's a private sector outcome. When you look at the public sector, public sector doesn't borrow money, it creates it or it can create it. And therefore so long as you're issuing bonds in your own currency, there's no problem for a government in servicing those bonds. The problem is when you run a trade deficit and then with a trade deficit you end up ultimately selling bonds in somebody else's currency and then you're in deep doo doo because you have to earn the export revenue to service that foreign debt. So that's what I see as the main danger. It's not the public deficit. In fact, I think my argument is the government should run deficits. If governments don't run deficits, they don't create fiat money. So you have to run deficits and you have to do that on a regular basis. Every country on the planet can spend more than it brings back a taxation. But at the global level, every country in the world can't run a trade surplus. So to me it's the trade deficit that's the limiting factor. Japan, I think it's still running a trade surplus overall, but with the rise of China, it's likely to lose that surplus. So I wouldn't worry about Japan and its level of government debt until Japan has a large trade deficit. Then I think it might be in trouble, but not now.

[A]

Okay. So one of the pillars of my economic philosophy is that debt to GDP in a country follows a known trajectory. And if you get over 130% debt to GDP, if you stay there for call it 18 months, roughly, you're historically, with the only exception of Japan, you end up in open warfare, revolt inside your country, revolution, full stage civil war, something like that. I have a feeling that that does not ring true to you or absolutely doesn't.

[B]

I'm sorry, that's one we are going to disagree on. Perfect.

[A]

Please. I'm only interested in knowing what's true.

[B]

Yeah, it's the private debt that causes those booms and busts and the government debt goes up in response to it at a later point. And actually I might just again see if I can bring up a little comparison there.

[A]

So can.

[B]

Yeah.

[A]

Given that countries have to pay interest on the debt, how is it possible that you can just rack deficits up forever?

[B]

They create the money, the government does not. If you and I want to pay interest, we've got to earn the income. Okay, that's absolutely bottom line for a private individual. If your wage doesn't leave you enough to buy the goods and services to keep your family alive plus pay interest on your mortgage, then you're going to not pay the interest, you accumulate more debt and at some times the bank will foreclose on you. So that's the situation for an individual who spends more than they get back in tax in income on a regular basis. But the government creates money by going into negative equity. The government, when it spends more than it gets back in taxation, actually creates money and it does the same thing when it pays interest, it creates the money. Now it can give too much to the financial sector and I think it's giving far too much to the financial sector at the moment. But there's no difficulty of the government creating that money in the first instance. Again, you've got to look at the accounting to understand this well, so I

[A]

definitely understand the double entry bookkeeping. However, you do run into a situation where you've got inflation to worry about. So you can. There's only so much money you can print before you start getting yourself into trouble. Because double entry bookkeeping insists that at some point it gets paid back so that they wipe each other out. But if you're just going in one direction, and this is where you're going to have to define for people how you calculate gdp, because I know you, your model shows that it sort of levels off and it just stays there. But when you look at the nominal dollars that you have to pay to keep up with the interest, it gets insane fast. Like we're already. It's the second biggest line item in the US budget and it's just going and going and going. So help me understand why, even though I can print money, why the inflation doesn't become a problem unless I annihilate some of the debt.

[B]

The inflation. We have this attitude to money which comes out of Milton Friedman, fundamentally that money causes inflation. Friedman made that comment in an Indian conference. Inflation is always a monetary phenomenon. When you look at the data, and this again is very much data driven, you see that the money system doesn't create inflation, it accommodates inflation. And the main cause of increase in the money supply in America in the last 40 years has been private sector. The government money creation is feasible, but the setup of the way the bonds are sold actually cancels most government money creation. So people automatically say government deficit causes inflation. Okay, that's the thinking people have. But if you look at the data, the government money creation has been close to zero for the last 40 years because the bond sales that banks make to the secondary bond market are now. The fact that non banks can actually participate in your primary auctions, which is a crazy rule that America's allowed, you end up canceling most of the government money creation. So there's excellent work by. I have a colleague, you may not have heard his name. And his name is weird. Weirder than mine. His name is Richard Vague. Ever heard of him?

[A]

No.

[B]

You'd enjoy talking to Richard. Very different person to me. But he was a very successful banker in Texas. And then he got worried about the level of private debt. We got a colleague, we became colleagues because of that. He's done far better empirical work than I've managed to do on the money creation in America. And he concluded that between 2000 and 2024, 92% of the money created was created by the private sector, only 8% by the government. And when you look between 1980 and 2000, 140% of the money created was by the private sector. So government money activities actually didn't create money, they destroyed it across that time period.

[A]

So walk me through this again then. So right now we, at a minimum we take on $2 trillion roughly in debt every year because we are running that deficit. Where is that money getting destroyed Again

[B]

when the, when the government spends more than it takes back in taxation, it puts more money into private bank accounts than it takes out of them, sort of. But yes, it's the opposite of what textbooks will teach you. But you've worked out the logic that it's quite realistic. If you get taxed out of your bank account, that'll fall, the government spends on you, that'll increase your bank account. Government spending increases your bank account, taxation reduces it. If the government spends more than it takes back in taxation, it creates money fiat money in private sector bank accounts. But then if the government is then required by laws drafted by people who don't understand the monetary system to sell bonds equivalent to the deficit plus interest on existing bonds, now those bonds are sold to the banking sector and the banking sector then on sells them to non banks. Now when the banks buy those bonds, that doesn't affect the money supply because what they do, they have reserves are created by the deficit. The banks use that funding to buy the bonds. It's an asset swap for the banks. There's no change in the amount of money. But if you let private individuals buy the bonds, which is now happening in the American system, then private people buy those bonds by running down their deposit accounts so that the money supply falls. They get the bonds in compensation for their money supply going down. But sales of the bonds on the secondary market actually destroy money. And when you look at the scale of bond sales that now occur, it pretty much reverses government money creation. So most of the money being created in the last 45 years in the American economy has been created by the private sector private lending. And what happens there is again they come back to the credit card example I gave earlier when if you go to, let's say you want to go and buy a new set of microphones and you get there and find the prices doubled, you swipe your credit card, the increase in the price has caused your increase in the money supply. It's the opposite causal direction that most people think. When you realize that it's not just the government that can create money, it's also the private sector. So most of the inflation we've experienced has been caused by private money, not by the government.

[A]

If you were saying that, listen, the government deficit spending does increase the money supply. It's just that it's so minor compared to the private debt. I would understand, but I think you're saying something different, which is that because governments can print money and the mechanisms by which that money gets into the system, that money is actually destroyed. And so despite the fact that the government is going to owe interest on that money, there's no problem. And you can just rack up government debts until the end of time because it's actually creating fiat money which is stimulatory for the economy. And given that it is a, an element of gdp, you will actually hit a level where it doesn't keep increasing. But I don't understand how we haven't hit that level yet because we're at 100 and whatever, 23% and climbing. So it's like at what point does it stabilize? And then are you saying that Ray Dalio, who put this on my radar, who has said you can audit every empire for the last 500 years and you will see over and over and over that when they hit 130% debt to GDP they will have internal strife that will end up creating so much bloodshed that they end up resetting their economy and that's that it always happens once you hit 130%. The only exception is Japan. So is he just wrong about that? Is there a mixture?

[B]

Yes, he's wrong about it.

[A]

Okay, so it's correlated but they're in no way shape or form causative.

[B]

Yeah, it's, it's what government debt tends to be the band aid we put on what happens after a private sector bubble bursts.

[A]

Okay, so private sector got out of hand. That's your real problem. Then the government comes in, prints the money through deficit spending in order to re stimulate a flagging economy.

[B]

Yeah, and I'll show another shot to put that in context if I can just do this now to share my screen again because this is long term data on American private and public debt. So people don't look past 1940, they don't go back to 1945 and don't look any earlier. Government debt's the red line and private debt is the black line. So almost all the all time private debt has almost always been higher than government debt.

[A]

And then when we look at the M2 money supply going up, up, up, up, up, up. That's really private debt.

[B]

Yes. Okay. And this is the long term pattern. Okay. This is data from the White House and from the American Bureau of Statistics about this medium Census Bureau. Going back to that you can see I've Got the private debt data starting in 1817, I think. And what you find is the government is always trying to pay its debt down. Nobody likes being in debt. This is a common. Because whether you're an individual or a company or a. A government is not pleasant to have for debt. So the government tries to reduce its debt level and it does that. So you see the debt level for the government falling down here. Notice what's happening to the private debt. You get a boom and bust coming out of it. The worst example being what happened during the 1920s. So you had Calvin Coolidge in charge. Coolidge deliberately ran a 1% of GDP surplus every year. And he was very proud of himself for having reduced government debt from 30% of GDP when he took office to about 20% when he left office. His final State of the Union address was of course, in the end of 1928. And he said, this is what's caused the prosperity of the 1920s. We must maintain it. He completely ignored, because everybody else ignored, rising level of private debt. And it was the crash in private debt that caused the Great Depression. Government spending rose at that time, and if the government spending hadn't gone up, you wouldn't have got out of the Great Depression. So we need a properly integrated view of the financial system.

[A]

So we need a properly integrated. Okay. So that means we need to be looking at private debt creation and destruction. Okay. So governments can and should deficit spend, according to Steve King.

[B]

Yep.

[A]

And you. Okay, so we've got moral hazard, we've got inflation. You're saying it's not inflationary? Not compared to what's going on in private credit. Now, at the very end of your. The graph that we just had up, both private credit and government debt are spiked. Is there a problem when they're both that close together?

[B]

No, this, I mean, this is more the response to what Covid did to increasing government spending. There was a dramatic increase in government spending when Covid hit because, you know, basically people couldn't work. So quite a few Americans got a better paycheck from the government at that stage than they got from their own jobs. So the government spending. But if that didn't happen, we would have had so many bankruptcies because of the lockdowns and the impact of a pandemic at the time. So that caused so much.

[A]

Don't you agree that doing that is the very thing that caused people to be underwater? Now, in terms of just making ends meet,

[B]

what the COVID stimulus or the

[A]

COVID stimulus happening in a way that was designed to be spent at a time where goods had gone down in terms of availability. So now you have increased funds chasing fewer goods. And that causes a ripple across the entire supply chain where prices go up and now you get into a stalemate because any one person that I'm just the nuts and bolts to that thing you buy, I'm not going to lower my price. And so there's 10 different people that you'd have to convince to lower their prices in order to bring that cost back down. But they're not going to because everybody's caught in this quagmire of well, I can only lower my prices if this guy that's supplying me the metal or whatever lowers his prices, but everybody's already raised. It's just too impossible.

[B]

What you want to avoid is a debt deflation. This is the. My focus of work is to show that the real danger capitalism faces is a private debt crisis where everybody starts liquidating in the aftermath because of the private. That's what Irving Fisher explained as his explanation where the Great Depression came from. So I'll send you a copy of Fisher's work. I think you'd be fascinated by it.

[A]

Before we move on to that, and I bet you're right. But let me just get a direct answer. Is that not the reason that people are struggling right now because the government printed so much money during COVID that Now there's a 30% inflation that started running six years ago is now sort of complete. And so now we're growing at a normal rate again, 4ish percent. But that's why people feel impoverished.

[B]

No, I think it's actually the change in the distribution of income in America over time that's making people feel impoverished. And the economy has been growing lower, slower since neoclassical economists took over in 75 than it was beforehand. So you've had an underperforming economy for 40 or 50 years and it's catching up with people. And the only way out of it is we'd say, you know, borrow money from the financial sector and speculate on house prices and you'll be wealthy because your house price rises. I think it's financialisation of the economy that has led to people being in this desperate state, not government spending up the time. Now I'm not going to be defending all governments spending, obviously I think is spending far too much money on wars. Okay? I think you'd be better off spending it on railways, et cetera, et cetera. But again, we need an integrated view of all this and see how one part of a Complex system affects the rest. And there's such a strong tendency in America in general, I find, to try to have like a black and white single line dimension. More private is better, more government is worse. Rather than seeing it as a complex system where you need to get a balance between different components of a system. And that's the sort of economics I'm trying to develop. But generally it does end up saying that the government spending, the main function the government spending has is to avoid collapsing into a Great Depression. And if you don't have a.

[A]

When you have a collapse of private debt.

[B]

When you have a collapse of private debt. And that's what the Great Depression was all about. The reason, I mean, people know of course, the New Deal and things like that. And they would debate whether the New Deal, you know, rescued the economy or caused the downturn. I see it as rescuing the economy. But the New Deal peaked the government spending being 5% of GDP, the deficit being 5% of GDP. The deficit during COVID was 20%. Jesus. Okay, now it's this. And government spending in the 19th century used to be 2% of GDP. You didn't need income tax at the time because government spending was so low. Now it's 20%. Now the fact that it was 2% in the 19th century is one reason why there was a financial crisis every 10 years or so. Booms and busts occurred all the time

[A]

because the government wasn't there to smooth it out.

[B]

Yeah, the government spending can give profits to firms which would lose money when there's a downturn, go negative. So the government spending smooths the thing out. And as a result we haven't had. But we've had far less financial crises since big government than we had beforehand. So again, you've got to get the balance right. But when I look at it, the unilateral approach on getting small government, which America is obsessed by, is partly why you've got a more unstable system now than you had in the 40s and 50s.

[A]

Steve, you are a fascinating economic mind. I can tell this is going to be the beginning of our relationship. I'm very eager to continue talking to you about this stuff. Tell people about your software. It's very interesting.

[B]

Yeah, it's called Ravel and I've tried it a couple of times for data analysis. But the main thing it's there for is dynamic non equilibrium modeling of systems in general. But it's specifically the economy. And the thing which is unique about Ravel is that I've created a system that lets you model the financial system using double entry bookkeeping and that gives you that integrated view. I think we need to understand how the economy functions. I'm just about to. We're trying to do a final commercial push right now, a capital raise to raise about a million dollars, which is all we really need to polish the product and go commercial. But we're still in the pre commercial stage right now. But hopefully next week there'll be a website people can buy the software from.

[A]

I love it, man. Well, may it be very successful. I'm excited for you. Thank you again for taking the time. Where can people follow you online?

[B]

The best thing is my YouTube channel. That's ProfSteve Keane. ProfSteve Keane on YouTube. I also have a Patreon site and a substack site and I'm now giving an online course through school. And you go through that through a website called steve keen.com. i've got to change the nature of that site. I've just actually had to take over the management of it. So it'll feel like a scam to some extent. I apologize for that. But it does lead to courses with me that about 1200 people have signed up for and it's a very enjoyable community. So YouTube, RothSteve Keane, Twitter, Profsteve Keane, and the same for Substack and Patreon. I love it, brother.

[A]

Again, thank you so much for taking the time, man. And I look forward to the next.

[B]

I'm looking forward to our next one too, Tom. It's a nice intellectual conversation with. I thoroughly enjoyed that.

[A]

Awesome, man. I'm so glad. All right, everybody. If you have not already, be sure to subscribe. And until next time, my friends, be legendary. Take care. Peace. Let's talk about a pattern that is guaranteed to be killing your progress. You know what you need to do? You need consistent nutrition. We all do. You need vitamins, probiotics, greens. We all know that we should be doing more of it. When your morning gets chaotic, you skip it. When you travel, you skip it. When your routine breaks, everything tends to break. And that inconsistency compounds against you every single day. AG1 is designed to solve the execution problem. One scoop, eight ounces of water and you're done. You're getting 75 plus ingredients, vitamins and minerals, pre and probiotics, nutrient dense superfoods. Everything that used to require six, seven different supplements and perfect planning now happens in one drink that takes about 30 seconds to make. Right now, AG1 is giving you $87 worth of free gifts with your first subscription. You get a welcome kit, travel packs, vitamin D3 plus K2 and flavor samples. Click the link in the show notes or visit drinkag1.comimpact to claim this offer.

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