The Science of Predicting the Next Financial Crisis

The end really is near: a play-by-play of the coming economic collapse

Steve Keen is a Professor of Economics at Kingston University with a focus on analyzing capitalism as a monetary system

What will happen: I expect a boom before a slump, and a pretty messy economic performance overall. And I expect a small downturn rather than a 2008 crash.

Why: The countries I think can’t avoid a crisis — Canada and Australia — aren’t a huge part of the global economy. China is the biggest economy facing a credit crunch, but its huge level of government spending is already softening the blow. Other countries in line for a credit crunch — South Korea, perhaps Singapore, Belgium, Norway, Sweden and a few others — have large trade surpluses, which can counter the effect of a credit slowdown.

But it will mean a fall in export demand for the countries like the U.S. and U.K. that had a crisis in 2008, so overall I think it will lead to a reduced global economic growth rate. But nothing to compare to the impact of 2007/08.

How this will transpire: Trump’s tax cuts, even though they’re going to the wrong people to stimulate the economy strongly (the rich don’t spend anywhere near as much of any change in their incomes as the poor), will still stimulate it a bit. So there’s a boost from government spending.

Credit, which is the most volatile source of demand, is running at about 6 percent of GDP now. That’s way below the peak before the 2008 crisis (15 percent of GDP), but it’s solidly positive. It was substantially negative during the 2008 recession, which is why the recession was so deep and prolonged.

Employment still hasn’t returned to pre-crisis levels, but it is steadily rising, and at some point workers are going to be scarce. Only after we reach that point will wages rise, since workers have no bargaining power these days. But when we do [reach that point], employers will bid up wages and that could give a short, sharp spike to inflation.

Trump’s tariffs won’t add anything like as much inflation as mainstream economists warn, because only about 10 percent of any increase is actually passed on. But there will be an impact on inflation from them.

The Federal Reserve likely will respond to rising inflation by putting up interest rates, without being aware of the danger this might cut demand from credit substantially (they don’t think credit has any impact on aggregate demand). But they will, since debt servicing costs will hit very high levels, since private debt is still over 150 percent of GDP and rising. This fall in credit demand in response to rising interest rates is what I think will trigger the next recession.

When: This will all take time to play out, but I think we could quite possibly have a recession in 2020, which Trump could quite legitimately blame on the Federal Reserve.

baby-bling

Can We Avoid Another Financial Crisis? by Steve Keen

The Most Revolutionary Act

This book is a well-researched and documented critique of macroeconomics, the so-called “science” of capitalist economies. Maverick Australian economist Steven Keen’s main criticism of conventional economics is its inability to predict the extreme bubbles and recessions that plague capitalism. He blames this failure on macroeconomic models that pretend money and debt don’t exist. Instead, conventional economics employs models based on primitive barter, then treat money as a replacement for barter.

In contrast, Keen’s economic modeling is based on the inconvenient reality most mainstream economists choose to ignore: private banks create 97-98% (see  An IMF Proposal to Strip Banks of Their Power to Create Money) of our money out of thin air when they issue loans. Keen also criticizes conventional economists for failing to track private debt (corporate, small business, and household debt – which includes mortgage, credit card, and student loan debt).

Based on careful research, Keen reveals how all recent recessions were triggered by a rise in private debt above 150% GDP* – preceded by five years of private debt exceeding 10% of GDP. The recession occurs when various economic stresses cause banks to reduce the amount of credit they issue (i.e., the amount of money they create).

He disputes that public (government) debt plays any role in triggering recessions. He points out that government debt had been declining world wide as a percent of GDP prior to 2008 – when governments increased public debt to try to compensate for the collapse of private debt.**

Keen predicts the next debt zombies headed for recession (based on extremely high levels of private debt) are Ireland, Hong Kong and China.**

 


**The US private debt to GDP ration reached 210% at the end of 2017 (US private debt to GDP ratio) and continues to increase.

**Because nearly all money is created by banks as loans (debt), when private debt declines, government must increase public debt to keep money circulating in the economy.

If an Economic Apocalypse is Coming: Here’s a Play-by-Play

How Mainstream Economics Became a Cult

Pigs Want To Feed at the Trough, Again…

Pay No Attention to the Man Behind the Curtain: Modern Monetary Theory

 

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