This new video from Steve Keen is good and worth looking at:
Sometimes his focus on modelling makes his videos hard to follow: I think the balance is OK here, and the suggestions he makes are worth watching.
We share an understanding of modern monetary theory.
We also share an understanding that the discipline of double-entry bookkeeping is key to understanding economics.
With double entry, we focus on reality. The rest play games.
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As a non economist, non accountant I really liked the simplicity of Steve Keen’s graphs showing what actually happens with increased public spending and I also like the idea of focusing on double entry accounting as a way of countering the prevailing mantra that extra spending means we get a bigger and bigger ‘black hole’ as though the money spent simply disappears. I listened the other day to a Government spokesperson regarding the cost of the wage and employment demands of the Resident Doctors, saying that this would be ‘fantastically expensive’, when in reality, as I understand it anyway, much of the extra spending would be recouped in tax, spent back into the economy and have the multiplier effect of stimulating GDP.
Your understanding is right
Steve Keen is great man. I discovered him before happening upon Prof Murphy. Stick with him and he’ll get you there – I find his narrative always delivers and worth persevering folks – honestly.
But do try to see the value of the math.
Of course, the details are more subtle and complicated (eg. banks do not hold all gilts, banks are not the only credit providers etc.) but the key points he makes are correct and well illustrated.
For me,, thinking about the relationship between velocity of money and debt was a completely new and unexpected take-away from this video. It implies that “redistribution” away from wealthy people who save/hoard to poor people who spend/recycle money not only increases growth but also reduces debt. Interesting.
Thanks for posting the link.
I agree with both observations.
Thanks for the referral, his video was clear, well-thought-out and as a data analyst I greatly appreciated the modelling. When I started to learn about economics just shy of a year ago I had a feeling the velocity of money had an impact, but I didn’t know what. Now I do and could see it according to his model.
I guess this could be why people like Gary Stevenson see the wealthy who pool money and don’t spend it as bad for the economy but don’t correctly show why. They say it’s because they can afford more but also say they rarely spend it. In Dr Keen’s model such people are an anchor on the economy as they potentially slow down the velocity of money like pools at the side of a river that are filling up on the water from the river. Would this be roughly correct?
You would enjoy Ravel – I think it is free
Maybe next year I will learn how to use it.
And, yes, your description is a broadly correct way of thinking about it, and Steve’s metaphor is a useful one.
When very wealthy people accumulate money and do not spend it, that money does not simply “sit there harmlessly”. It changes how the whole system works. In macroeconomic terms, it reduces the velocity of money – the rate at which money circulates through wages, spending and investment. If money pools at the top and is not recycled back into the economy, aggregate demand weakens.
Gary Stevenson is right to identify the problem, even if he sometimes describes it in everyday rather than technical language. The issue is not that the wealthy could spend more but choose not to. It is that the way wealth is accumulated encourages money to be parked in assets – property, equities, financial instruments – rather than used to support productive activity or everyday consumption.
In Keen’s stock–flow models, these pools behave like reservoirs alongside the river of economic activity. Money flows into them through profits, rents and capital gains, but leaks out only slowly. The faster the inflow and the slower the outflow, the more drag they create on the system.
That drag shows up as weaker growth, underemployment, and pressure for households and governments to take on more debt just to keep demand going. Inequality is therefore not just a moral issue; it is a macroeconomic stability problem.
Taxation of wealth, higher wages, and public spending all act as ways of increasing circulation – opening channels that allow money to flow back into the real economy. Without that, the system increasingly relies on credit expansion, which is precisely the dynamic Keen has spent years warning about.
When you have the time (!) and the inclination…
I’d be interested in your views on:
(a) the development of much more complex SFC models than Steve Keen’s simplified ones (great for ‘teaching principles’ as he does; but leave out a lot of details); and in particular some sort of replacement for the clearly-useless BoE and Treasury DSGE or whatever models (I assume new model(s) would be needed to do ‘what if?’ scenario modelling for decision-making around government fiscal and monetary policy; since I also assume that just trying to decide future tax rates etc using lagging historical data alone would be too much like ‘driving down the road just looking in the rear mirror’?);
(b) the combination of the double-entry-accounting robustness of SFC modelling and the multi-agent complexity economics approach. (I recently read J Doyne Farmer’s ‘Making sense of chaos’ – which indeed, imho, seemed to include a lot of ‘sense’).
Of course, “All models are wrong, but some are useful”.
In a nutshell, we need such a model. I agree with you.
Thank you for the response and explanation.
I’ll keep an eye on Ravel, at the moment it doesn’t fit my use cases but I can see how it will be useful in the future.
I was interested to hear Steve Keen say governments “have to” and “are required to” issue bonds to cover the gap between spending and taxation.
You were kind enough to reply to a post of mine on 12th December which asked the question “Why does the government pay interest on its bonds?”
Steve’s video prompts another question: ‘Why do bonds ‘have to’ match the value of the gap between spending and taxation?”
Regarding interest on gilts, you responded:
Interest on gilts serves three functions. It provides a risk-free asset for pension funds and insurers whose business models depend on predictable returns. It assists the Bank of England in managing interest rates across the wider financial system. And it has distributional consequences: interest payments are a policy-driven income transfer.
While I’m sure your answer is true, I am still wondering:
1) Why does the government need to match its risk-free savings facility to the gap between government spending and taxation?
2) Why does the government need to use gilts to manage interest rates? The BOE has just changed interest rates directly; isn’t that simpler?
3) Isn’t tax the best instrument for transferring income?
I feel I might be being dim if I don’t understand there’s a chance that Zack Polanski doesn’t either, and that feels important. Fingers crossed these newbie questions might help you frame a more detailed “Bond movie” 🙂
I repeat it dopes no0t have to, although there are rules it says it should.
Steve is reocgnising the latter.
I emphasise the former.
We could swap roles and both still be right – they are differing angles on reality – what could be, and what is.
I don’t think there is any material difference between “full funding” where governments have to issue bonds to cover the deficit or “Ways and Means” where the government runs an overdraft at the BoE…. because intervention in the bond market by the BoE is possible.
Bond issue + BoE bond purchase = Government overdraft.
“Fully fund” or not is a red herring.
We’ll have to disagree.
They are totally and utterly different in terms of political power, and that is what matters. One grants power to the City, the other to the government. It’s literally fundamental. I am bemused as to why you can’t see that.
I am equally bemused that you don’t see it.
The BoE is an arm of government…..just as the BoE can order the Bank to pay (and run an overdraft) to meet its spending commitments/choices it can be ordered to buy the gilts that are issued under a “full funding” regime to “plug the deficit”.
It comes to the same thing…. except my strategy offers some greater flexibility in terms of yield curve management.
We’ll have to disagree on this ones.
I don’t even agree on yield curve mangememt.
I know I agree with Steve’s analysis because that’s my a priori understanding of our monetary system despite how it is usually taught in colleges and universities.
I think Steve’s delivery and diagrams would need two or three 1 hour sessions for me personally to follow. In fact, I would prefer a book to work through before I could teach this to a class myself at a more easy pace. Good stuff, though.
I really appreciate Steve’s work but people should be aware that he is charging $599 for his “Rebel Economist” course, which is only made clear when the application is successful.
Most of the course material is already covered in his “Money From First Principles For Elon Musk” book, which is free.
I signed up and am doing the course and I think it is worth every £ I’ve spent as I have access to all the video recordings of the lectures and am able to revisit these many times in order to get a better and more confident understanding. Also I see my financial contribution as a means of supporting Steve until he can commercialise Ravel and get the software into the mainstream.
Good article! It’s useful to hear Steve Keen’s view on money and how modern monetary ideas actually work in real life, not just in books.
I agree; this is a good introductory video, worth circulating widely. I am one of Steve Keen’s rebels and encourage others to join his course.
Can I talk about the role of the ‘free gifts of Nature’, renewable energy and the growth of private capital? In his video, Steve glosses over what happens when bank-created debt squeezes private households and businesses. He says they are tempted to venture into speculative investments to increase their incomes and cover their loan interest costs. My concern is that this financial pressure encourages everyone to exploit the biosphere more intensely; deforestation, overfishing, soil depletion, pollution etc in an accelerating ‘beggar your neighbour’ vicious cycle. We are all trying to monetise Nature’s bounty of materials and energy to feed the capitalist machine. I would like to see the Ravel modelling expanded to explicitly describe those linkages.
As I just said to Jeff Lucas, Taxing those with surplus wealth/income can reduce CPI pressure in ways the simplistic “they don’t spend much anyway” story does not highlight.
Two points matter.
First, it is true that the very wealthy usually have a low marginal propensity to consume: if you take £1,000 off someone on £40,000, they cut spending; if you take £1,000 off someone on £4 million, they mostly don’t. So if your only aim is to reduce day-to-day demand in supermarkets, taxing the rich is not the fastest lever.
But that is not the whole picture.
Second, the wealthy still consume a lot in absolute terms, and much of it is concentrated in scarce, price-setting sectors: premium housing, land, private rents, school fees, private healthcare, luxury travel, cars, energy use, imported goods, and high-end services. Those are areas where demand from the top can push up prices for everyone directly (housing and rents) or indirectly (energy, transport, supply chains). And because this consumption is resource-intensive, it can worsen the very bottlenecks that translate into inflation.
So higher taxation on surplus wealth and income can restrain inflation by:
• reducing bidding wars in housing and land markets (which feed into rents and CPI components),
• dampening demand in carbon- and import-heavy sectors where capacity is tight,
• shifting resources (labour, materials, energy) away from luxury consumption and back towards essentials,
• and limiting speculative asset inflation that spills into the real economy.
That is why taxing the rich is not just about fairness. It is part of inflation management and environmental management too. The aim is not to punish consumption; it is to stop a small group using disproportionate claims on scarce resources and then leaving everyone else to deal with the price consequences.