To get a better understanding the coming financial crisis, the #Futurologyshow team spoke to one of the very few economists who predicted the 2008 Global Financial Crisis – Professor Steve Keen. This really is a must listen to episode, where we dig into why another financial crisis will happen, where it will happen, and the implications for South Africa.
Are you prepared for a repeat of the 2008 Global Financial Crisis?
But to give you a bit more insights into our chat, here are some of the ideas that Prof. Keen shared with us in the show. Of course, reading through Prof Keen’s Book will give you a better understanding of these ideas and concepts.
In the show, Prof. Keen outlines his thinking in an incredibly well written, easy to understand book “Can We Avoid Another Financial Crisis? (The Future of Capitalism)”. You can find it on Amazon and is well worth the read.
The crash is coming and every one of us needs to understand what is driving this! It does not matter where you live, what work you do, or if you are looking at building a new exponential business. The impact is real and it will happen in the next 1 to 3 years.
Boom, Busts and the Bullshit of Equilibrium.
The simple reason for the coming crisis is that Capitalism is a victim of its own success and its core strength: Innovation.
To understand this Hyman Minsky, who lay the groundwork for Professor Keen, focused on capitalism core strength:
Risk taking and optimism drive innovation that will transforms production.
Stability Leads to Instability
This led to Minsky’s famous statement that stability leads to instability. The Economy works through booms and busts – which is in principle, driven by private debt (corporate and personal).
What this means is that optimistic entrepreneur’s (and capitalists) borrow more money to grow their business thanks to strong market demand. This results in an increase in wages, interest costs and production costs.
At some point, this increase in costs will lead to greater uncertainty thanks to the less profits, which leads to a decrease in borrowing. This decrease leads to a decline in growth stimulation and the economy moves downward – or a towards a bust. As debt becomes cheaper and not so risky the cycle will turn. Entrepreneurial optimism once again leads to more borrowing. Yet the baseline borrowing is higher on the next upturn. This leads to too much debt in the overall economy and a greater bust is required to level the over leverage situation.
Yet the baseline borrowing is higher on the next upturn. This leads to too much debt in the overall economy and a greater bust is required to level the over leverage situation. Hence the coming crisis.
The 3 Key Metrics
To understand this cycle of boom and bust Prof. Keen highlights 3 key macro element metrics that need to be tracked – and which helped him determine the 2008 Global Financial Crisis:
- The level of Unemployment in the economy
- Ratio of Private Debt to GDP – the tipping point is at 150%
- The level Debt borrowing as a percentage of GDP % pa
How Risky is South Africa
South Africa is ok on the last two points but we have massive unemployment issues. Many of the major economies are tracking well excess of the 150% mark of the personal debt to GDP ratio.
So, as you can see, the economy does not bounce back to a state of equilibrium as most mainstream economists want you to think it will. It goes up – and what goes up must come down. The simple truth is that mainstream economic models cannot track and help manage this scenario.
And when will it all come down with a crash – in the next 1-3 years.
Fortunately, we have a maverick economist in Prof. Keen. You are warned!
Governments have a role to play – and it’s not what you think it is.
Government’s own their own bank. And while most economists and bankers don’t get this principle: Money is created out of nothing. When you go to a commercial bank to get a loan, they don’t lend you someone else money. It’s a simple debit and credit where they originate the debt out of nothing that is backed by a real asset.
Governments Must Stimulate Demand and Drive Innovation
Governments can use this facility to spend more money than what they collect through taxes, by simply creating it. And in case you ask, this is what many Central Banks did when they created the billions of dollars for Quantitative Easing. It was money that never existed before and was created out of nothing.
Of course, you cannot have a Gupta or a Zuma controlling the Central Bank. The money that is created needs to be spent on projects that will grow the country, stimulate employment and solve problems that the private sector cannot solve. So yes, the answer is we can pay for education and solve the #Feesmustfall crisis quite easily.
To Solve Inequality You Must Understand Money
In addition, we spoke about Inequality. The solution to inequality lies in this banking illusion and if we honestly want to solve inequality – this is where we need to start.
Where To Listen In
We also believe in and support Prof Keen’s work. You can support him on Patreon, where he is creating realistic economics for the post-crash world.
You can also follow Prof Keen on Twitter at @ProfSteveKeen
Enjoy the show!
By the way – my explanations above a real simplification of the arguments that Prof. Keen outlines his book; “Can We Avoid Another Financial Crisis? (The Future of Capitalism)”. To really understand the concepts and ideas you can find it on Amazon. As I said it’s an easy to read book and well worth the read.