15 September 2009

Protecting yourself from World War III: Debtors vs Creditors

Steve Keen is an Australian Post-Keynesian economist credited as having "seen it coming" in this survey of research by economists or financial market commentators. Keen was one of only eleven researchers who qualified, which included Schiff, Roubini, and Shiller.

Steve Keen is a follower of Hyman Minsky’s “Financial Instability Hypothesis”, which he summarises as:

1) Capitalist economies periodically experience financial crises;
2) These are caused by debt-financed speculation on asset prices leading to bubbles in asset prices;
3) These bubbles must eventually burst because they add nothing to productive capacity while increasing the debt-servicing burden;
4) When they burst, asset prices collapse but the debt remains;
5) The attempts by both borrowers and lenders to reduce leverage reduces demand and causes a recession;
6) If the economy survives such a crisis it goes through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
7) This leads to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt;
8) Then a Depression ensues.

A plausible but dismal explanation. Consider this comment on Steve's latest blog post:

"This is one of the great questions for all of history, how to get out of this. For one thing, one persons debt is another persons asset or in many cases their money. ... It is clear that everyone that has something is going to take a haircut on it. Either by a systematic bankruptcy or by a natural one."

As Steve Keen says:

Some form of price chaos has to be expected though, whatever is done. One side-effect of the bubble has been an enormous dislocation in prices, not just with overvalued financial assets, but also with drastically overinflated incomes for the financial class, and concomitant price distortions all the way through commodities.

How do you protect yourself from this economic World War III? Simply swallow the red pill and step outside the Financial Matrix: bail out of your "has something"s into precious metals and sit by and watch the annihilation as everyone else takes "a haircut".

5 comments:

Anonymous said...

I wonder if Keen ever got around to buying gold. He was considering this about 2 years ago. He would now be sitting pretty if he had.

The last three out of four Augusts were excellent entry points. I expect August this year to be the same again.

Bron said...

I don't think he is that pessimistic. I would love to have him apply his modelling skills to seeing what would have happened if we were on a gold standard, or at least not on fractional reserve banking.

Kiwi Envoy said...

Excellent commentary thanks Bron.

Keen certainly seems to have a handle on matters.

bernardpalmer said...

I spoke with Steve Keen last year. The impression he gave me is that he's a Socialist who admires Marx for foretelling this inevitable collapse of Capitalism. He's wrong because what we have is not Capitalism because Capitalism only works with gold as money. What we are seeing is the world wide collapse of Socialism dressed in Capitalism's clothing and all its accompanying fiat currencies.

bill said...

Good gracious -- can Keen really be a socialist who admires Marx? In such an event he might read Paul Johnson's demolition of that scribbler in his book "Intellectuals".Bernard is right on the money about Socialism collapsing.It's a pity that it will take the fall of the West to extirpate the Marxist virus.