Keen sense...
MBMG Client Update - a conversation with Professor Steve Keen
Steve Keen (left) seen with Richard Duncan (author of “The Dollar Crisis” and “The Money Revolution”) and Paul Gambles, at MBMG IA office in 2013
The following transcript (lightly edited for clarity) is of a discussion earlier this year between Paul and his long-time mentor and friend, Steve Keen. Steve has done a great deal to revolutionise and inspire novel approaches to understanding economics and in doing so to antagonise the economic establishment which he has variously described as “inconsistent, unscientific, and empirically unsupported.”
Steve was one of the few economists to foresee the Global Financial Crisis of 2007-8. For this foresight, he received the Revere Award. He has since taken a keen interest in the economics of climate change and his formative work on the role of money creation in the modern economy has been more widely embraced by heterodox economists, including many who have embraced Modern Monetary Theory (MMT).
“So take the lively air; And, lovely, learn by going where to go.” – Thomas Roethke, The waking
The Introduction
For those who prefer audio, this is available at https://mbmg.substack.com/p/3e02d67f-ab4e-47a2-8a95-251c143839d0 and runs to around 1 hour and 15 minutes
As always, don’t hesitate to fire back any questions or thoughts.
Paul Gambles - It’s the 14th of August 2025. I’m sitting here with my good friend and great mentor, Steve Keen. I’ve known Steve for many years, and I think most of the good stuff I’ve picked up about economics has largely come from that association and friendship. Any gaps in my knowledge are entirely down to myself.
Steve, welcome back to Bangkok. I wanted to talk today about something that you were instrumental in opening my eyes to, and that is money creation in modern economies. You were maybe not quite a lone voice, but not far from it.
When we first started talking, probably the best part of 20 years ago, many of the things you were saying in the lead-up to the GFC in 2007–2008 were striking because they were so different from the mainstream[1] but I’d like to go back a little bit further than that and talk to you about one of the first examples in my career of what happens when policymakers really get it wrong in terms of money creation.
Part Two – The Original J-‘pop’
Paul Gambles & Steve Keen discuss how the fallacy of ‘loanable funds’ (the idea that banks take money from depositors and lend that to borrowers, which is in fact now recognised as being incorrect in that bank loans actually create new money and new deposits but is still widely taught in conventional economics) had influenced Japanese policymakers in the late 1980s and triggered ‘lost decades’ for the Japanese economy.
Paul Gambles- A mutual friend of ours, Richard Werner, wrote a book about the Japanese crisis. He was based in Japan at the time, and he made some fairly astute comments about Japanese policy. I’ll quote here from the preface to his book Princes of the Yen, which I’ve recommended many times, where Richard talks about how the central bank constantly defied goals by the government, the finance minister, and the prime minister to create more money to stimulate the economy and to end the recession –
“At crucial junctures, such as 1992, 1993, early 1995, and much of 1999, the Bank of Japan even actively reduced the amount of money circulating in the economy. This shrank purchasing power, reduced domestic demand, rendered the government’s currency intervention ineffective, strengthened the yen, and aborted all the emerging recoveries. Lacking sufficiently supportive monetary policies, the government had to rely on fiscal policies. These weren’t effective and instead produced the largest national debt mountain of any industrialized country.”
Richard’s book is largely about why the Bank of Japan went down this route. It felt the need to reform Japan, and its process of reform was to reduce credit going into the economy. That clearly led to the lost decades. For me, the Bank of Japan was an extreme example of how policymakers globally were thinking at the time. This was pure neoclassical economics.
Steve Keen - I’m going to disagree immediately with part of Richard’s reasoning. Recently, we had a fight on Twitter over whether the government creates money or not. He believes that government borrows, which is the conventional belief. Ninety percent of economists believe that if the government spends more than it takes back in tax, it has to borrow that money from the private sector. Which is intriguing, because I’d like to know where the private sector hides its printing presses. He is completely correct on private money creation. He’s done some great original work on that front, and I quote him for it. He showed what actually happens inside a bank when it creates a loan, which therefore creates money. It doesn’t involve reserves; it doesn’t involve deposits. He’s done the best work on that front.
Paul Gambles – Yes, he called it the empirical proof of money creation by banks.[2]
Steve Keen - Yes, and he deserves respect for that. But here’s the problem: he thinks fiscal policy produced the largest national debt mountain of any industrialized country. That means he sees government money creation as borrowing from the private sector. That is neoclassical economic thinking. If you look at how neoclassicals think banks operate, they see banks as intermediaries that enable savers to lend to borrowers. They treat households as the savers and the corporate sector and government as the borrowers.
So if the government borrows money from the household sector, there’s less for the firm sector. That slows the economy down. The government has to repay what it borrowed, and that causes a crisis. That is completely wrong. When you look at how banks create money—and Richard is correct on this—banks, when they create a loan, make an entry for the amount of the loan in their asset column. Absolutely. They make an identical entry and it has to be identical, because on the deposit side of the bank’s balance sheet is the borrower’s account. If you borrow money directly from a bank, your bank account goes up, and the debt you owe goes up identically. If you use a credit card to go shopping, you swipe the card, and the bank records the debt as yours and the deposit in the shop’s account. In both cases, credit is created: an entry on the asset side of the bank’s ledger (the loan), and an identical entry on the liability side (the deposit). That is how banks create money. Now, Richard is not aware that he’s still thinking in loanable funds terms when it comes to the government. But for private banking, he is thinking correctly, in endogenous money terms. This makes the situation worse than Richard describes, because fiscal policy can be effective. It should have been what the government did. And it did some of it—that’s partly why Japan didn’t sink as deeply as it could have. Credit money went from 25% of GDP in 1989 to minus 20% in 1995. That was a huge private credit-driven downturn. Fiscal policy compensated for it, but not enough.
His view is that the central bank creates money. But when you look at the accounting, the central bank creates money when it buys bonds from the private non-bank sector. It does not create money when it deals with banks. His accounting is wrong. That’s what I find frustrating: his insights into private-sector money creation are correct, but his accounting of government money is wrong.
Paul Gambles - What I find interesting is that policymakers at the time were also trapped in that same model.
Steve Keen - Yes, and even worse. They don’t understand that the private sector creates money.
So what you get are policymakers stuck in textbook supply-and-demand diagrams. Say “supply and demand,” and everyone imagines an X on a graph.
When they look at the government, they say: the government spends more than it takes back in taxes, so it borrows from the private sector. That supposedly reduces supply. But when you do the accounting, it’s the exact opposite. Government money creation increases the supply of what they wrongly call “loanable funds.” There are enormous fallacies on both sides.
Paul Gambles - Exactly. That was the environment at the time, and I think it was a major factor behind Japan’s policy mistakes for decades. One interesting point Richard makes is that banks had become so unwilling to extend credit that he argued the Japanese government should have lent directly into the economy to replace private credit. Again, I think he was right.
Steve Keen - He was on the right track.
Part Three – Making money, with Ray Dalio…..
Steve explains how government money creation, for example through bond issuance, is primarily an asset swap as governments bonds ultimately end up as privately held investments, and therefore flow of funds analysis, such as that undertaken by Richard Vague, have indicated that this ‘cancellation’ of governmental money creation, effectively transferred dominance of money creation to the private sector, even after exceptional periods of government money creation such as during World War II or in the COVID lockdowns.
Steve Keen - I’ve been reading Ray Dalio[3] recently, and he makes similar mistakes. His success is in understanding that credit adds to demand. But he still thinks banks are intermediaries. He doesn’t see banks as creators of credit. He sees credit as simply “I’ll pay you back later.” In fact, private banks create most of the credit in the system. The change in private debt is the major contributor to credit. So Dalio and Werner are both correct about private money creation, but both are wrong about government.
Paul Gambles - They’re hung up on the idea that gets drilled into everyone—that this is where money comes from. They’re a step ahead of most people in realizing that bank-created money adds to the money supply.
Steve Keen - Exactly. They’re better than most, but they still make mistakes about government money creation.
Paul Gambles - Right. I think this misunderstanding still echoes today. Policymakers and the system as a whole keep repeating myths about sovereign deficits: that a country is “borrowing” money, instead of recognizing the contribution that new money makes.
Steve Keen - Yes. Government spending in excess of taxation creates money. It doesn’t borrow it. A simple way to see this: when the government taxes you, it takes money out of your bank account, reducing the money supply. When the government spends, buys something from you, or gives you a welfare check, it increases your bank balance. If government spending exceeds taxation, it increases the amount of money in your bank account. That is not borrowing—it is creating money.
Paul Gambles - Exactly. When I first started following you, private credit creation was the dominant factor. But since then we’ve had periods when government money creation has played a larger role, especially during crises.
Steve Keen - COVID was the most recent crisis. World War II was another.
Paul Gambles - Yes. Unless people understand how money is created, they risk missing the real drivers of the economy. I think unless people have the understanding you just outlined—how all money is created—they’ll miss the bigger picture. The danger for people like Ray Dalio is that they won’t look at aggregate money creation. Aggregate new money creation is what we need to look at as the driver.
In the past, government creation of money was fairly constant, the minor player relative to banks, and private credit was the real driver. But in the last few years we’ve lived through, we need to look at the aggregate of government and private money creation.
Steve Keen - Exactly. Richard Vague makes that point as well. He’s a banker who became a critic of private debt and has done some of the best historical research around.
Paul Gambles - Agreed – readers should note that his website can be found at www.tychosgroup.com
Steve Keen - Yes, named after Tycho Brahe, the astronomer whose observations enabled Copernicus and Galileo to create their theories.
Richard Vague went through the flow-of-funds data and shared it with me recently.
In 2020, there was roughly $5 trillion in deposit accounts in America.
By 2024, that had risen to $21 trillion—so a $16 trillion increase.
Most people think that’s government money creation. But Richard broke it down: two-thirds was private money creation through loans creating deposits.
The remaining 30% was bank operations that also create money—for example, when private banks buy bonds from non-banks (which could be hedge funds, rich individuals, or others). When banks do that, the value of bonds held by the private sector falls, but their deposit accounts rise.
Richard concluded that of the $16 trillion increase in U.S. money supply between 2020 and 2024, 91% was created by the private sector.
Paul Gambles - That’s counterintuitive.
Steve Keen - Yes. But remember when the private sector creates money, it does so through loans. An increase in loans creates an identical increase in deposits, and there aren’t many mechanisms to reverse that.
By contrast, when the government runs a deficit, that creates money. But then it has to sell bonds to match the deficit plus interest on existing bonds. That’s an asset swap for the banks: their reserves go down; bond holdings go up.
If that were the end of the story, government money creation would be large—6% of GDP in recent deficits. But banks then sell those bonds on the secondary market. When they do, buyers pay by reducing their deposit accounts. So the sale of bonds reverses the government’s money creation.
There’s no equivalent mechanism that cancels private bank-created money. That’s why Richard is right about private-sector dominance.
Part Four – Flow rider….
Having discussed how the fallacy of ‘loanable funds’ had influenced Japanese policymakers in the late 1980s and triggered ‘lost decades’ for the Japanese economy, Steve went onto explain how global government money creation, for example through bond issuance, gets mopped up by the private sector, negating government money creation and how this resulted in most of Japanese policymaker efforts to supply liquidity to the economy failing to flow beyond the financial sector, and therefore propping up excessive private debt balances, rather than tackling the root problem.
Paul Gambles - Another point that Richard Werner makes is his focus on how funds are used. He distinguishes between productive and nonproductive uses of credit.
I think this came from his Japanese experience. He wrote that sometimes the BOJ claimed it was injecting money into the economy, but it mostly went into the narrow money market, which only banks had access to. So after the crisis, when Japan did get money creation, much of it was negated because it didn’t go to businesses—especially SMEs that needed credit. Instead, it went into money market operations and the financialized economy, not the real economy.
Steve Keen - Exactly. When the central bank buys bonds, if it buys from banks, it only changes the assets backing the money supply—it doesn’t change the money supply itself. If it buys from non-banks, then it does increase the money supply.
But in practice, central banks mainly transact with the financial sector, since they are the main bondholders. Fiscal policy, by contrast, creates money across the whole economy. That’s why fiscal policy is the tool that works.
Paul Gambles - Which was Richard’s point—that the BOJ should have been lending directly to consumers and SMEs instead of relying on banking channels.
Steve Keen - Yes. Fiscal policy could have achieved that. My main issue with Japan’s “lost decades” is this: during the bubble economy of the 1980s, there was an enormous increase in private debt. Most of it went into stock market and real estate speculation. That loaded up banks and corporations with debt.
Japanese corporations, unlike American ones, rely more on debt than equity to finance investment. So when the bubble burst, they were overleveraged, demand collapsed, and they couldn’t reduce debt. They stopped investing and innovating.
Paul Gambles - Exactly. They stopped borrowing except to service existing debt.
Steve Keen - Yes. What needed reducing was private debt, not government debt. That’s where even Richard gets it wrong.
Paul Gambles - Agreed. He recognizes the policy mistake was in not increasing sovereign balances enough to fund the real economy. Whatever increase in Japanese government debt there was ended up just propping up bank balance sheets and doing asset swaps—without reducing private debt.
Steve Keen - What you need to reduce is private debt, not government debt. This is where even Richard makes mistakes.
Paul Gambles - Agreed. He recognizes the main policy mistake was not increasing sovereign balances enough to fund the real economy—the private sector and non-bank sector. Whatever increase in Japanese government debt occurred was largely ineffective because it just propped up bank balance sheets and didn’t reduce private debt.
Part Five – Debt wish
Having discussed how government money creation, for example through bond issuance, gets mopped up by the private sector, negating government money creation and how this had resulted in most of Japanese policymaker efforts to supply liquidity to the economy failing to flow beyond the financial sector, propping up excessive private debt, Steve advocates the millennia old policy solution of a private debt jubilee[4]. This leads Paul and Steve to touch on the issue of so-called central bank independence, something that both Paul and Steve find alarming on the grounds that central bankers are the last people who should be allowed independence, being so dependent on their discredited and outdated economic models.
Steve Keen - To clear debt, you don’t prop it up.
This is why I argue for a modern debt jubilee—using government’s money-creation capacity to cancel private debt. That would mean a short-term increase in government debt levels, but it would also remove the burden on households and firms.
If people have high private debt, they try not to spend, because they’re saving to pay down debt. When individuals do that, they reduce GDP. The only way out is to reduce the overhang of private debt from past crises like Japan’s bubble economy, the Asian financial crisis, and so on. Reducing private debt would revive the economy. But because policymakers ignore it, they’ve done nothing. In fact, they thought they should increase it—improve credit channels—without realizing the real issue is the huge overhang of private debt. That’s the main thing stifling the economy.
Paul Gambles - Exactly. That’s something you’ve done a lot of work on, including your book Can We Avoid Another Financial Crisis? One of its main themes is the buildup of private debt and how policymakers are failing to manage it.
Steve Keen - Yes. Look at the Great Depression: private debt peaked around 150% of GDP in 1932. Then, after the New Deal and World War II—with the massive money injections during the war—individuals and firms paid down their debts.
By the 1950s, private debt was about 50% of GDP, not 150%. At that level, with interest rates of 2–3%, servicing debt was easy, and taking on new debt wasn’t a big problem. Credit boosted the economy through the 1950s and 1960s.
But later, when private debt hit 100%, 150%, and eventually peaked at 170% of GDP, people didn’t want to take on more credit. So instead of “secular stagnation,” as some call it, what we really had was credit stagnation.
Paul Gambles - That’s a really good segue into the next point. Before I do, let me read one final quote from Richard’s preface, which I think some may find provocative.
He describes how the Bank of Japan became politically independent and replaced much of the power previously held by the Ministry of Finance. His preface begins with a story about a Japanese diplomat crying on New Year’s Eve 2000 because the Ministry of Finance was being reformed, renamed, and made subservient to the BOJ.
“Most experts felt that central bank independence was a good thing. But the arguments in favour of central bank independence—whether in Europe or Asia—have serious flaws. This includes the argument that the German Bundesbank’s success was based on its independence. The truth, as we should see, was actually the opposite.”
So Richard is clearly not a fan of central bank independence.
Steve Keen - Nor am I. What you have are neoclassical economists with insane models in their heads—dynamic stochastic general equilibrium models. In those models, inflation is caused by expectations of inflation.
They think raising interest rates reduces inflation expectations, and problem solved. Juvenile, stupid nonsense. In reality, it’s not interest rates that drive investment, it’s expectations of profit. Neoclassical models assume away those expectations by assuming we’re all “rational.” And by “rational,” they mean having the capacity for accurate prophecy.
Paul Gambles - So basically all-seeing, all-knowing.
Steve Keen - Exactly—as if we’re gods. Which raises the question: if we’re gods, why do we need money in the first place?
Part Six – Out with the old…back in with the old again….
Paul Gambles & Steve Keen focused on this issue of policymakers perpetuating economic fallacies and mistakes enshrined in discredited but still widely taught conventional economic teaching, such as Reinhart and Rogoff’s widely read book.[5]
Paul Gambles - Richard’s final comment in his preface is that in Japan, it’s not the government but the BOJ that decides whether the country has a boom or a recession. It’s a criticism of giving so much power to central bankers.
You were just saying that excess leverage constrains the economy. Once private-sector leverage is too high, you can’t keep increasing it. There’s a servicing constraint, a lending constraint, and ultimately a ceiling on how much the private sector can grow.
Fast forward to 2009–2010: the financial crisis happened pretty much as you had predicted, caused by excessive private debt and credit turning negative. That made the system unsustainable, triggered a spiral of slowdown, falling asset prices, deleveraging—a full feedback loop. Am I oversimplifying?
Steve Keen - No, that’s pretty accurate.
Paul Gambles - So, to be fair to policymakers at that time, they did realize—at least to some extent—the need to inject fiscal support into the economy. We both have an issue with the fact that most of it went into supporting the banking system rather than the real economy.
Everybody remembers the summer of 2008, when it seemed like every major bank was at risk of collapse. Some managed to raise external funding, others were bailed out.
You’d think that experience, and the willingness of policymakers to engage in unconventional policy, would have taught even the most die-hard neoclassical economists something. But by 2009–2010, the best-selling economics book was Reinhart and Rogoff’s This Time Is Different. A paper was published to accompany the book.[6] Let me quickly read the abstract:
We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data from 44 countries spanning about 200 years. The dataset includes 3,700 observations across many political systems, institutions, exchange rate regimes, and historical circumstances.
Our main findings are: first, the relationship between government debt and real GDP growth is weak below a threshold of 90% of GDP. Above 90%, median growth rates fall by 1%, and average growth falls considerably more. Second, emerging markets face lower thresholds for external public and private debt, usually denominated in foreign currency. When external debt reaches 60% of GDP, annual growth declines by about 2%. At higher levels, growth rates are cut roughly in half. Third, there is no apparent link between inflation and public debt levels in advanced economies, though in emerging markets inflation rises sharply as debt increases.
There’s a lot there I’m sure you’ll want to respond to.
Steve Keen - The first point is that their results were wrong. A master’s student at the New School of Social Research, Thomas Herndon, tried to reproduce them and found spreadsheet errors in Reinhart and Rogoff’s database.
The worst example was their weighting system: one bad year in New Zealand accounted for much of the negative results. When you corrected the weights, the results disappeared. It was one of the worst pieces of research in economics history—and that’s saying something.
Paul Gambles - And yet, much of what Reinhart and Rogoff claimed in that paper and book is still widely accepted, even today.
Steve Keen - Yes, because of the supply-and-demand thinking economists rely on. That’s why I built my software, RAVEL. It has two main functions: first, to model the monetary system using double-entry bookkeeping; second, to analyse data.
When I think in RAVEL terms, I think in double-entry bookkeeping. Neoclassicals think in supply-and-demand curves. That mental model is so deeply ingrained that it dominates their thinking—even when real-world events prove it wrong.
Paul Gambles - Can you explain that a bit more?
Steve Keen - Sure. Supply-and-demand curves are like the old Ptolemaic astronomy model with spheres and epicycles. It was completely wrong, but you could make it fit the data if you tortured it enough.
Neoclassicals think the same way. For example, they believe when the government runs a deficit, it reduces the supply of “loanable funds.” So they draw a supply curve moving in, and conclude it crowds out investment.
But if you do the actual accounting, a government deficit adds money to bank accounts—it expands supply, not reduces it. They’ve got it completely backwards.
Paul Gambles - So they present it as a causal relationship, when in fact the reality is the opposite.
Steve Keen - Exactly.
Part Seven – Teaching old economists new tricks but not new habits
Having discussed policymakers perpetuating discredited but still widely taught deeply flawed conventional economic teaching, Paul asks Steve why lessons haven’t been learned or worse still have been so quickly forgotten.
Paul Gambles - All of this gets to the heart of what I wanted to ask you today.
If Japan was an extreme example of bad policy—neoclassical austerity thinking imposed on a failing economy—and if the GFC showed that aggressive monetary and fiscal policy, even unconventional policy, could succeed, why is it that just a year later, after the biggest financial crisis of our lifetime, the neoclassical worldview reappeared and dominated again?
Supported by mathematical errors, conceptual errors, and practical errors, yet still widely accepted.
How do we ever move away from these false constraints that policymakers tie themselves up in?
Steve Keen - We’ve got to break them out of that model. This is why I say supply-and-demand thinking is the most dangerous meme in human history.
If you pick up Mankiw’s textbook,[7] it will tell you a government deficit borrows money from the private sector, reduces investment, increases interest rates, and burdens future generations.
Politicians repeat this because their professors told them the same thing. The supply-and-demand meme is simple: you just shift a curve. But they shift it in the wrong direction. They think they’re right, and it’s embedded so deeply that even crises don’t shake it.
It’s like Galileo turning up with a telescope and saying the sun is the centre of the solar system. At the time, everyone “knew” the Earth was fixed at the centre and everything rotated around it. They couldn’t accept otherwise.
Paul Gambles - And yet we almost had that moment, didn’t we? Based on your work, Michael Hudson’s work, and others’.
Steve Keen - The heretics are here. That’s why I like that Richard Vague calls his website Tycho’s. But we’re being ignored more than Galileo ever was.
Paul Gambles - Even Modern Monetary Theory (MMT),[8] which picked up on some of the empirical evidence of money creation, had traction. And then in 2014, the Bank of England published that famous paper, Money Creation in the Modern Economy.
At the time, you and I thought it could be a pivotal moment.
Steve Keen - But it wasn’t. The Bank of England explained[9] exactly what non-orthodox economists had been saying since Basil Moore in the 1970s: loans create deposits. Banks are creators of money, not intermediaries.
I thought surely neoclassicals can’t ignore the Bank of England. But they did. They ignored both the Bank of England and the Bundesbank,[10] which said the same thing.
Then the Nobel Prize was given to Ben Bernanke for work based on the “loanable funds” model. If you read the prize announcement and the supporting scientific paper, there’s no reference to the Bank of England or Bundesbank at all. They hadn’t even read it.
Paul Gambles - Worse, the Bank of England paper wasn’t even absorbed into policy. It sat there as research, but the Monetary Policy Committee didn’t act on it.
Steve Keen - Exactly. Neoclassical economics is a religion. They think they’re doing mathematics, but really it’s “mythmatics.” My friend Asad Zaman calls it “matheology.”
It’s like telling the Vatican you’ve found the body of Jesus—evidence that contradicts the faith. They’d reject it outright because it can’t be reconciled with their belief system. That’s why economists ignored the Bank of England.
Paul Gambles - So the world just reverted to denial again.
Part Eight – Crash coming, full steam ahead!
With the ‘Eureka moment’ of the Global Financial Crisis quickly forgotten by policymakers, Paul and Steve explored how this currently impacts financial markets, with valuations stretched far too high by the use of excessive leverage.
Paul Gambles - So the world just reverted back to its default denial position. Then we got to 2020, to lockdowns, and at that point we probably saw the most dramatic policy shift in my lifetime.
You’ve said before that the only comparable example was at the end of World War II, when there was also a dramatic adoption of aggressive, unconventional policy by governments.
So, there’s a sense that when things get bad enough, policymakers will abandon their beliefs and do what actually works. But again, after 2020, we reverted back into denial.
Steve Keen - Exactly. There’s been no progress in economic theory. Paul Romer, who won the Nobel Prize in 2016, wrote a paper called The Trouble with Macroeconomics, where he said the field had actually gone backwards for 30 years.
Why? Because neoclassical economics paints a seductive picture: a market economy in equilibrium, inflation as a purely monetary phenomenon, everyone paid their marginal product, perfect competition everywhere.
It’s a vision of a perfect anarchist society. But it’s not science—it’s a cult. A cult doesn’t revise its beliefs. If you reject even one part, the whole edifice collapses. So they double down, even when confronted with contradictory evidence.
A good example: neoclassical theory assumes rising marginal cost as output expands. But when researchers looked for it, they found constant or falling marginal cost. Alan Blinder, who was Deputy Governor of the Federal Reserve at the time, did a survey and reported that 89% of firms had constant or falling marginal cost.
He called it “overwhelmingly bad news for economic theory.” Yet 15 years later, in his textbook, he went straight back to the old story of rising marginal cost. He ignored his own research.
Paul Gambles - How many people have actually crossed over—left neoclassical economics after confronting contradictions like that?
Steve Keen - A trivial number. There are always a few spontaneous combustions—individuals who can’t ignore the evidence. They get tenure, so they can’t be fired, but they’re pitied and excluded from the mainstream.
Paul Gambles - And you’ve experienced this with publishing too.
Steve Keen - Yes. My work has been rejected by leading journals. That’s one reason I know it’s good. Thomas Kuhn described this in The Structure of Scientific Revolutions. Every field has paradigms that dominate research. In astronomy, the paradigm was that the Earth was the centre of the universe. Data that contradicted it was ignored or tortured to fit.
You couldn’t just add “the sun is the centre” into the old model—you had to abandon the model. But most people can’t reject their intellectual religion. They defend the paradigm at all costs. Neoclassical economists are the worst example in history of this behaviour.
Paul Gambles - One last point on this before we move into something else. Since 2020, U.S. policy quality seems to have improved slightly—at least at the margins.
Even though the rate of money creation hasn’t matched 2020 levels, the Fed has responded more aggressively than in the past. That has helped support the economy somewhat, though mostly it has supported financial markets.
David Rosenberg showed that margin debt has now gone above $1 trillion. It has grown by 25% in the last year and doubled in the last four or five years. So a huge amount of money creation has gone into financial assets.
Now we have a big new fiscal bill that claims to cut deficits but really shifts taxes in a way that benefits those least likely to spend. Doesn’t that create big risks for capital markets and the U.S. economy in the near future?
Steve Keen - Yes. Assets are massively overvalued, and margin debt is a big part of that.
In my new book Money and Macroeconomics for Elon Musk and Other Engineers: First Principles, I show the relationship between margin debt and stock valuations.
In the 1920s, margin debt went from 1% of GDP to 9%, fuelling the stock market bubble. Then it crashed to 0.5% of GDP. For decades it stayed low, except around 1987 and the 2000 dot-com bubble. Now it’s back at 3–4% of GDP, the highest ever.
When you look at the correlation between changes in margin debt and changes in cyclically adjusted price-to-earnings ratios over 100 years, the correlation coefficient is 0.74[11]. It’s extraordinary. Margin debt drives stock valuations.
So, yes, we’ve allowed far too much leveraged money into stock markets. That causes bubbles—and crashes. Personally, I’d ban margin debt entirely. If you want to buy shares, use your own money.
Paul Gambles - That makes sense. So you are as concerned as we are about the ability of financialized debt to keep supporting asset prices.
Steve Keen - Yes. Debt has pushed valuations too high, and it won’t be sustainable.
Part Nine
Financial market valuations being stretched far too high by the use of excessive leverage also has serious implications about the use of funds that have been created and consequently the terrifying underinvestment in tackling climate change, with potentially disastrous effects for the global economy and the global population. Paul asked Steve whether any countries are taking a much more responsible approach to climate issues.
Paul Gambles - Okay. Let’s go back to the original question, but with a twist.
If there are fewer constraints on government creating money than the neoclassical model suggests, and if the real constraint is psychological—mindset and misunderstanding—how does that play out globally?
Because what we really need is massive investment to prevent a climate crisis. Will there be a road-to-Damascus conversion at some point?
Steve Keen - I think it will only happen after disaster strikes. My guess is Dallas will be the first “Damascus.” I’ve said for years that economists are responsible for our failure to act on climate change. William Nordhaus did the most negligent work in academic history.[12] He argued that three degrees of warming by 2100 would only reduce GDP by 3.12% compared to no warming. He claimed the damage would be trivial. That conclusion has misled policymakers for decades.
Paul Gambles - This is the man who basically argued that most of life is indoors, so climate change won’t matter much?
Steve Keen - Exactly. Completely ignorant of climate science.
Paul Gambles - Even though the planet may reach the point where ice caps are melting and cities like Bangkok are underwater, Nordhaus claimed it would only have a trivial impact on GDP.
Steve Keen - Exactly. He assumed that roofs protect us from climate change, that average global temperature rises of two or three degrees are insignificant compared to natural daily ranges, and that there’s nothing to worry about.
But this is profoundly ignorant of climate science. Because of work like his, we’ve done almost nothing. The Limits to Growth study in the 1970s warned we should stabilize energy consumption at 1970s levels. Instead, we’ve quadrupled it. Their “business as usual” scenario is now playing out: collapse in food production, collapse in population, collapse in resources.
It’s not just economists or politicians. We all want to believe there’s nothing to worry about because we enjoy the lifestyles fossil energy gives us—airplanes, fast cars, refrigerators, air conditioners, mobile data centres. We’re addicted to energy.
But if the science is right, ignoring this will destroy civilization.
Paul Gambles - One specific risk is food supply. You’ve spoken to climate scientists—how worried are they about global food security?
Steve Keen - Very worried. I’m not a climate scientist, but I work closely with them. Some, like Michael Mann, are optimistic that we can still turn things around by 2050. But others believe we’re doomed.
Tim Lenton, the expert on tipping points, was once asked at a conference what civilization would look like in 2100 if we stayed on this track. His answer: “Not a chance.” In other words, no civilization—just survivors as hunter-gatherers.
Economists say GDP might be 3% lower. Climate scientists say civilization won’t exist.
Paul Gambles - But if we get an early warning sign, like a food crisis, don’t humans have the ability to change behaviour? In finance, we’ve seen that the biggest constraint on money creation is psychological. But in a crisis, like 2020, the shackles can be thrown off. Couldn’t the same happen with climate?
Steve Keen - It would have to be a very big warning sign. I’ve often said nothing serious will happen until lots of white people die.
For example, when 150 white Christian girls died in Texas during a heatwave, that was the first “holy shit” moment. But one event isn’t enough. We’ll need multiple devastating events in politically dominant regions before there’s real action. At that point, maybe economists will be ignored and scientists will finally be asked, “What can we do?”
There are ideas: a group called MIRRORS (Mirrors for Earth’s Energy Rebalancing) proposes covering 1.3% of the planet’s landmass with cheap reflective mirrors. That could reduce global temperature by 1°C.
But survival would also require rationing—food rationing, energy rationing. It would be a complete mindset shift away from laissez-faire toward emergency survival.
Paul Gambles - And is that universal? Or are some countries already doing more than others?
Steve Keen - China has actually done quite a lot. Do you remember the APEC event in 2008? At that time, factories within a 50-mile radius of Beijing were shut down so the skies would be clear. People joked that the sky was “APEC blue.”
When I last visited in 2017, Beijing’s skies were much clearer than in the 1990s. China has been reducing coal consumption and investing heavily in solar, wind, and nuclear. They may even pull off nuclear fusion, but I’m more confident about their molten salt reactors, which are already becoming commercially viable.
They’re also building high-speed rail, which reduces the need for trucks and cars. Their objective is clear: to become energy self-sufficient and independent of coal and oil.
Paul Gambles - That was a loaded question—I assumed China is doing more than the West. Even Russia, to some extent.
Steve Keen - I’m not so sure about Russia, but certainly China. They’re moving toward food self-sufficiency and closing the gaps in their industrial production system.
For example, they control much of the rare earths supply chain. One rare earth mineral, essential for magnets used in countless technologies, has been restricted for export. That forces other countries to scramble.
Meanwhile, the U.S. tariff war is encouraging China to become even more independent. Eventually, they’ll be able to say, “We don’t need you anymore.”
Paul Gambles - I saw yesterday that Trump offered China a scaled-down version of NVIDIA’s Blackwell chip. The Chinese government’s response was to warn Chinese companies not to buy or use it.
They can take that stance because the U.S. export ban on advanced chips has forced China to accelerate its domestic development.
Steve Keen - Exactly. Decoupling is accelerating. And if any country is positioned to survive global warming, it’s China. Maybe Papua New Guinea or New Zealand will also manage, though New Zealand is filling up with billionaires building bunkers. But for large, organized societies, China is best prepared.
The West is walking blindfolded into disaster. By the time they realize they need to reverse course, they may not have the resources left to do so.
Paul Gambles - That’s a terrifying thought.
Epilogue
Paul Gambles – That is a terrifying thought. Before we finish, Steve, maybe tell us what you’re working on now. I know you’re doing online education courses; you’ve got Patreon and Substack, but what else are you focused on to help people see economic reality more clearly?
Steve Keen - The main project is my RAVEL software, which I’ve been working on for a decade. It’s now commercially released, though we’re only selling it through Patreon at the moment.
It’s available at patreon.com/ravelation. The basic modelling package is $2 a month, and the modelling plus data analysis package is $10 a month.
The software provides a graphical interface for handling multidimensional data. It also uses flowchart-based equations for modelling, which makes the work self-documenting in a way spreadsheets never can.
But the most important feature is what I call “Godley Tables,” named after Wynne Godley. They use double-entry bookkeeping to show financial flows. Once you see this, you can’t believe in the money multiplier anymore, or in loanable funds. You realize government spending creates money, and you see the dangers of excessive private sector lending.
That’s why I call RAVEL the “monetary telescope.” It lets you see the true structure of the financial system.
Paul Gambles - So who would benefit most from using RAVEL?
Steve Keen - Anyone selling anything who wants to understand why people buy. It was originally designed for marketing, back in the days when I reviewed computer software. It grew out of online analytical processing databases.
I pitched the idea to a company called PC Express, but they were bought out by Oracle before we could finalize a deal. In 2012, Russell Standish and I decided to build RAVEL on top of the Minsky modelling platform in our spare time.
Now it’s a commercial tool. If it succeeds, it can fund my research indefinitely.
Paul Gambles - And what about the Keen Institute? How close are we to seeing that launched?
Steve Keen - That’s still in development. Crowdfunding has fallen for this —it peaked at $10,000 a month in 2020 and I’m now down to $4,500. That makes it harder to fund original research.
The idea of the Institute is to get institutional backing so I don’t have to rely only on crowdfunding. My ambition is to hire around 40 researchers and 20 support staff, producing realistic research and driving neoclassical nonsense out of dominance.
Paul Gambles - And a lot of the focus would be on exactly the issues we’ve discussed today—debt, money creation, and climate change.
Steve Keen - Exactly. The world is going to wake up one day to famine and fire and ask, “How did this happen?” Unfortunately, I’ll be one of the few people who can explain why. That’s why I want the Institute: to put real economics at the centre of policy before disaster hits.
Paul Gambles - And your new book—tell us about that.
Steve Keen - It’s called Money and Macroeconomics from First Principles—for Elon Musk and Other Engineers. It’s short, about 170 pages, available on Kindle and soon in paperback. It went to number one in macro and monetary policy on Amazon upon release, despite being self-published with no media backing. The paperback should be out next week.
Paul Gambles - Do we know if Elon Musk has read it?
Steve Keen - I spoke with Grok, who said Grok would bring it to Elon’s attention. Whether it did or not, I don’t know.
Paul Gambles - We’ve been talking to clients a lot about AI recently, and I think AI—along with Bitcoin—is one of the biggest wastes of energy in an energy-constrained world.
Steve Keen - Exactly. If we take climate seriously, three industries should be shut down immediately: Bitcoin, AI, and international travel. Cutting those would reduce global energy demand by about 10% and buy us some breathing space.
Paul Gambles - That would buy us time.
Steve Keen - Not much—maybe a year. But yes, it would help.
The deeper truth is that GDP and energy consumption are tightly linked. The correlation between changes in world GDP and changes in energy use is 0.83. GDP is essentially energy turned into useful work.
So if we’re going to survive, GDP will have to fall. That’s the reality nobody wants to face.
Paul Gambles - I remember your line: a machine without energy is a statue, and a human without energy is a corpse.[13]
Steve Keen - Exactly. And we’re heading toward a world where both will be true unless we change direction.
Paul Gambles – That’s great coverage of wide-ranging topics. Steve, thank you. We’ll put links in the text version so people can find your Patreon, your online courses, and your new book.
Steve Keen - Thank you.
The Links
Steve Keen Patreon - https://www.patreon.com/ProfSteveKeen
Steve Keen online teaching -
https://www.stevekeen.com
Ravel software - https://www.patreon.com/ravelation
For those who prefer it, the audio distribution of this is available at https://mbmg.substack.com/p/3e02d67f-ab4e-47a2-8a95-251c143839d0 and runs to around 1 hour and 15 minutes
For more information and to speak with our advisors, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
About the Author:
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[1] In economics, the mainstream is generally referred to as ‘neoclassical’ economics – it has been defined as “a broad approach that attempts to explain the production, pricing, consumption of goods and services, and income distribution through supply and demand. It integrates the cost-of-production theory from classical economics with the concept of utility maximization and marginalism.” - https://corporatefinanceinstitute.com/resources/economics/neoclassical-economics Major criticisms, especially by Steve & Paul are that it assumes that all ‘participants’ in an economy are rational and have perfect foresight and the ability to always act in their own best interest, that it assumes that all economies tend to revert to perfect equilibrium and that money, in and of itself, has no special economic function and is simply a form of intermediation. It takes this last point to the extreme in using models that assume that banks simply lend out the funds deposited by savers and that therefore the amount of money in every economy is a constant despite clear evidence that this isn’t so.
[2] Can banks individually create money out of nothing? — The theories and the empirical evidence – Prof. Richard Werner https://www.sciencedirect.com/science/article/pii/S1057521914001070
[3] Ray Dalio recently retired as CEO of leading hedge fund, Bridgewater Associates, which he founded in 1975. He has been increasingly sharing his thoughts on politics and economics as well as capital markets – e.g.
[4] One of the leading exponents of modernising the historic debt jubilee has been Prof. Michael Hudson e.g. https://www.washingtonpost.com/opinions/2020/03/21/debt-jubilee-is-only-way-avoid-depression/
[5] https://press.princeton.edu/books/paperback/9780691152646/this-time-is-different
[6]https://www.researchgate.net/publication/227486731_This_Time_Is_Different_Eight_Centuries_of_Financial_Folly
[7] Steve is referring to Greg Mankiw’s Principles of Economics, one of the most widely used academic primers in economic courses - https://www.amazon.com/Principles-Economics-N-Gregory-Mankiw/dp/1305585127 Needless to say, this contains many of the old ideas about economics that have been proven wrong by events and yet remain widely, almost universally taught.
[8] MBMG remains sympathetic to MMT, describer by Wikipedia as “is a heterodox macroeconomic theory that describes the nature of money within a fiat, floating exchange rate system - https://en.wikipedia.org/wiki/Modern_monetary_theory
[9] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction
[10] https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392
[11] Correlation is a statistical observation. It makes no qualitative inference about causation. However, a correlation of 1.0 indicates perfectly synchronous directional movement between two variables. In other words, there is a very strong historic relationship between changes in margin debt and changes in the most commonly used measurement of how expensive stocks are.
[12] Rather than quote Nordhaus, this is one of Steve Keen’s rebuttals - https://www.ucl.ac.uk/news/2020/sep/nobel-prize-winning-economics-climate-change-misleading-and-dangerous-heres-why
[13] https://www.rebuildingmacroeconomics.ac.uk/post/labour-without-energy-is-a-corpse-capital-without-energy-is-a-sculpture