Tag Archives: banking

The Nature of the Beast: eBook now available

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The Nature of the Beast: how economists mistook wild horses for a rocking chair.

Mainstream free-market economics fundamentally mis-identifies the nature of market economies.  Its record is of retarded growth followed by disaster.  It counts costs as positives instead of negatives.  It is blind to how the present banking system destabilises the economy.  It is relentlessly materialistic and adversarial.  It ignores most of what we know about real people and the real world.

The result is pseudo-scientific gobbledygook, and the unstable, inequitable, undemocratic, destructive and unsustainable mess known as the global economy.

The Nature of the Beast draws out the real nature of market economies using modern knowledge of systems, human behaviour, ecology, biology and physics.  It points the way to stable, prosperous, democratic market economies that can support people, societies and the living world into the indefinite future.

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How Free-Market Fundamentalists are Hopelessly Wrong, III: money, debt and blindness

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Part I presented the evidence that economies in the free-market era delivered only mediocre performance before crashing in the disastrous Global Financial Crisis.  Part II showed how the standard theory of free markets bears no useful resemblance to real economies, and its application amounts to pseudo-science.

Returning to the GFC now, there is a particular reason free-market economists claim the GFC was unforeseeable:  debt and money play no role in their standard equilibrium economic models.  They claim one person’s debt is another person’s asset, and so aggregate “demand” is not affected by debt.  This would be true in a barter economy, or if the banking system was based entirely on savings, for only in those cases would the extra purchasing power of the borrower be balanced by the reduced purchasing power of the depositor.

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The Nature of the Beast manuscript available on request

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A complete manuscript of The Nature of the Beast is available for comment.  It is under a password, so as not to upset potential publishers, and so I can keep track of who is looking at it.  I would love to have feedback of any kind.

Use the Books and Downloads menu above, or go here.

A sample, the first 16 pages, can be downloaded without password.

Asleep at the Wheel, Accelerating Towards the Precipice

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[This was published at On Line Opinion 29 Nov 2011.]

It is characteristic of some past societies that their highest accomplishments occurred just before a precipitous decline in their fortunes, according to Jared Diamond in his book Collapse.  It is less common that a society’s trajectory comprises a slow rise, a plateau and a slow decline.  Diamond does cite some societies that were able to shift their strategy and successfully negotiate a crisis, so a crash is not inevitable.

The former pattern, accelerating into a crash, is a signature of a society oblivious to imminent peril.  At least, the leadership of the society is oblivious to warning signs of a crisis, and they just keep on doing what they have always done.  Or perhaps they become more and more dissolute, like the later rulers of ancient Rome.

There is an eerie sense of unreality in Australian public life.  The things our leaders argue about, and the evidence they pay attention to, are largely irrelevant to our real situation, which is one of rising multiple crises.  The longer the crises continue unattended, the worse will be the consequences.

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How to crash an economy – some monetary parables

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[Another sample from The Nature of the Beast, from Chapter 11:  Economic Fire.  Another downloadable instalment will be available after Easter.]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks.  What does “highly leveraged” mean?  It means that you are betting a small amount on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

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The Problem is Private Debt, not Government Debt

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The obsession on both sides of politics with cutting the Federal Government deficit is not only short sighted in the context of the recovery from recent floods.  It is also economically insupportable when private debt in Australia is more than twenty five times public debt.

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What a realistic government agenda would look like

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[This article was published by the Canberra Times 14 January, p. 19, under the title “Carbon price, wealth creation are critical issues this year”.]

Prime Minister Julia Gillard has declared that 2011 will be a year of accomplishment for her Government.  However many people are deeply frustrated that mainstream politics seems oblivious to new and dangerous issues, as global warming tightens its grip and the verities of old ideologies are found wanting.  There is a huge chasm between politics as usual and the issues we really should be addressing.

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How Banks Create Money Out of Nothing (Dated version)

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Update Dec 2015. This version does not reflect the way modern banks work. A new version is posted here.

[Update 18 March 2010: this is the text-book explanation, but Steve Keen argues persuasively that this is only a minor part of the modern money creation process, most of which is beyond the control of central banks. See Kevin Cox’s comment below, including his proposed remedy.]

A little-known or poorly understood fact about our banking system is that banks create money. Out of nothing.

That in itself need not be a bad thing. We need a medium of exchange, which is the basic function of money, and the money has to come from somewhere. However the creation of new money is buried within our fractional-reserve system of banking. This makes it invisible to most people. Also, banks create the money in the course of making loans, which means they can charge interest on money they create at essentially no cost to themselves. That is a guarantee of unearned profits, even apart from the myriad fees banks charge for other services.

Because the fact and the process are obscure, I post here an explanation of how it comes about.

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