is steve keen correct..

Been thinking about this for a while.

Very long winded but seeing as its a Saturday night and there is nothing much on Telly i thought i would post my views and ramblings.

If you have read much of Steve Keens theories it is very apparent that his line of thought is very much opposed to the standard Neo-Classical economists of today.

Whilst studying at Uni in the early to mid 90's one of the units i studied was econometric modeling.

We would use a program called SAS.
Probably very archaic compared to the systems now used.

You would input the various factors into the model to make a future prediction. After that we would then apply various tests to ensure its validity. If certain parts of the model did not pass the tests, we would omit them and apply other factors that could be relevant. This process would continue until an objective was achieved and fell into a certain confidence level.

SK's argument is basically that economists and government policy makers have left out one of the most important ingredients to economics. That is DEBT to GDP. If anything, today's reporting is based on Growth rather than the Debt to acquire a particular Growth standard.

Now you may ask, where i am i going with all this?

In simplistic terms, years ago velocity of money was an important factor in how money was distributed.

Lets compare 1980's to today.

$1,000 you could buy a really good portable television.
Today, you could buy a very good portable for the same price or even lower.

The big difference is in how the funds were obtained and distributed.

In the 80's you would pay via Laybuy - Hire purchase - Cash - Credit Card. However, Credit Cards were know where near as popular as they are today.

Lets assume that the 1980's sale was cash.
How was that $1,000 cash distributed.
More than likely it would have been part wages and partly from your savings as banks had a certain withdrawal limit at any one time. That $1,000 would consist of $400 from your wages that you had already earned. Of that $400, it would consist of your companies profitability of goods and services they provide less administration costs. In other words there were tangible assets or goods and services to purchase the television. Eventually that $1,000 would be made of many associated functions that would flow through to the broader economy and the cycle would continue. Economic growth was more predictable.

Now lets look at today's method of purchase for the same product.
Most purchases will be through Credit Card or some form of Finance. Instead of a wide distribution flow on effect, it is made up mostly of debt/finance with a small amount eventually making its way back to the manufacturer.

Therefore, unlike the 80's scenario todays consumption is much more debt related and also the major reason for financial institutions rapid growth over the last decade especially with the introduction of leverage debt products the last few years.

We are a debt induced economy just like many other countries that have awoken out of it's coma and now its payback time. The Ponzi schemes of the Wall Street Instos was the tipping point.

Now, to Steve Keen's predictions.
Is his thinking correct compared to economists who would argue that we will always come back to equilibrium in a free market economy without intervention.

Well, just imagine what would have happened if many of the institutions had not been bailed out over the last 12 months. What has instigated this? Very simply "The Level of Debt".

In this type of situation, no one trusts anyone else to lend. That creates uncertainty which creates volatility.

Confidence or lack of it flows through the economy in every area. It will take an enormous effort from all countries to turn this around. Is Australian property immune.

Well, "The higher you go the harder you fall."

Cheers markco2