Steve Keen, Professor of Economics at Kingston University, pours drinks with The Capital Network’s Lelde Smits to explain the global monetary system and expose the impact of Brexit and Donald Trump over the next five years.
LLelde Smits: Hello I’m Lelde Smits for The Capital Network. Joining me here at Sydney’s award-winning cocktail voodoo bar Papa Gede’s is Steve Keen, author and Professor of Economics at Kingston University. Steve, welcome back to Sydney.
Steve Keen: Lovely to be here.
Lelde Smits: Now Steve, 2016 will be known as the year that the forecasters and the crystal-ball gazers really got it ridiculously wrong. We ended up with Brexit, we ended up with Trump.
In 2017 let’s forget about why it happened and instead look at what this really means for our global economy. Starting with the basics – How do governments and money work?
PART 1: Governments & Money [0.45]
Steve Keen: This at the moment is the economy. Now, what I’m looking at, I’m not looking at the goods and services produced in the economy, like all the stuff behind us here at the bar. I’m looking at money. How does money turn up in the economy?
What most people think is the government makes the money. They think the government just pours a certain amount of money in, and that the government pours in too much… (Turns tap on and starts to drip wine into glass)
Lelde Smits: And I’m sure the government has a much easier tap…
Steve Keen: A much easier system than that.
Lelde Smits: One that goes far more than a few drops at a time.
Steve Keen: That’s actually a bit like what governments are doing right now. Because they think they can’t put too much money in there otherwise they’ll run out.
Lelde Smits: And what do we have on the other side then… Don’t worry I’m holding on to the government here, it’s tipping along…
Steve Keen: It’s dripping at a very slow pace.
Lelde Smits: Right and over here, what’s this?
Steve Keen: Here we have the banks.
Lelde Smits: A skeleton’s arm…
Steve Keen: The banks are quite happy to give you money as well, but there is a condition. They’ll only give you money over here if they also pour an equivalent amount over here…
Steve Keen: We have money coming in through here and we have debt, exactly the same amount of debt as money is stored by the banks and then you owe them what’s turned up over here.
So we have a dribble of money coming in from the government. Most of the money in the economy is actually created by the banks. What the banks do is they lend you money, which is what is happening over here, and now you are having a pile up of debt over here, into the debt hand.
Lelde Smits: Sure thing.
Steve Keen: Government’s create by spending. Bank’s create by creating debt.
Lelde Smits: Well I think we’ve got to turn these taps off before this debt explodes.
Steve Keen: That’s the trouble. We haven’t. That’s because the government has decided in its infinitely low of wisdom, this is where the politicians come in, we might call the politicians over here, a bit of a debt skull. They believe the government can run out of money.
Now in fact what the government has at the same time is called a central bank. The Central Bank has a limitless capacity to add money up there. So there actually is no possibility of the government running out of money.
But that’s the belief that we have, so they say we are going to run out of money, what they say instead is, “We’re going to tax you – we’re going to run out of money, if we don’t tax, you won’t have any money to spend”
Lelde Smits: So Steve these are really the fundamentals here of government, bank, debt. If we look at actually how this is playing out in the global economy – and let’s move to Europe. And we have, let’s say here. I might do some pouring here, rather messily, but all the smaller EU [European Union] economies – all 28 of them.
PART 2: Impact of Brexit [3.05]
Lelde Smits: So here is the EU, 28 countries, smaller, larger. Obviously Brexit has occurred. Article 50 will be triggered in the coming months. When we take the UK out of the EU, Steve Keen what is going to happen?
Steve Keen: Well I’ve always said not very much. Because one thing that England did not do is join the Euro (currency) – so we should use a different colour here, if I can just top this up a bit and call this the British pound.
Lelde Smits: Right.
Steve Keen: What we have here is a different currency and there is no limit for the British capacity to continue creating its own money.
Lelde Smits: So are you at all concerned about the impact of Brexit to the EU, what will it be to the EU?
Steve Keen: Moderately.
Steve Keen: But my feeling about Brexit has always been that England is only a partial member of the club to begin with, it never joined the Euro, which is a gigantic difference between itself and the other economies.
Steve Keen: I think, England has got out thinking, “We’ve got away and what a big mistake
we’ve made, we’ve lost access to this big market, etcetera, etcetera…”
I think at some stage the club is going to disband. Because quite possibly Italy, and certainly is Marine Le Pen wins in France, they’re going to leave the club. And once they are gone, the club won’t be there anymore.
Lelde Smits: But Steve -
Steve Keen: Brexit may be Britain getting out of the whole thing before the others getting out and being in a better situation because they are more prepared.
Lelde Smits: Sure thing. Now if we get to the other surprise of 2016 it was of course Trump [US President Elect Donald Trump]. So let’s use this club for old America, maybe also some Havana Club.
Steve, who is Trump going to be pouring drinks for, as in economic growth and benefits, in 2017?
PART 3: Impact of Donald Trump [3.05]
Steve Keen: He is trying to pour it just for his own economy. And this is going to be the dramatic challenge he faces. Because he is someone who actually knows a lot about money and banks and debt, having used it extensively in his own professional career.
Lelde Smits: And succeeded and failed and hopefully learnt from the failures.
Steve Keen: He’s turned failure into success in many many ways, and let’s not go there in terms of how beneficial that was for his various suppliers but he understands going bankrupt, he understand re-organisation, he understands finance.
Lelde Smits: So where is this liquid (holding a glass with liquid representing America’s economy) in 2017?
Steve Keen: He’s going to realise at some point he owns his own bank now. Because he’s running the country he is going to spend.
Lelde Smits: So we have the Federal Reserve right?
Steve Keen: The Federal Reserve is there right, the Federal Reserve can top him up as much as it likes.
Lelde Smits: So when does this stop Steve? That’s the magic question.
Steve Keen: It never has to stop. He’s going enable the American economy to spend dramatically.
Lelde Smits: I assume this is going in here…
Steve Keen: Taxation is going to be cut. There will be an increase in government spending. There will be a large deficit coming out of that. So the government is going to be creating a lot of money and running a lot of infrastructure projects and so on.
There are 4 million America’s who aren’t employed now who were employed in 2000. They are people who are going to get jobs in construction and start spending domestically and so on. And Trump is going to see that as boosting up the American economy. It’s all about Buy America, Made in America and so on.
Lelde Smits: So Steve, Trump has made no secret of being friends with Putin, and conveniently we do have some vodka here, how do you think this friendship is going to play out over the coming year and how will it impact our European economies?
12.28 Steve Keen: Putin gets demonized in America. I can understand if they’re demonizing [Joseph] Stalin or [Nikita Sergeyevich] Khrushchev even because they were competing political systems, you had a market-based system competing with a centrally planned system. That’s no longer the case. So, seeing this level of animosity, which is still being extended as if the cold war is still going forward, to me is quite remarkable. What you have got is a power struggle.
Lelde Smits: And out of this power struggle here…
Steve Keen: Well the power struggle is really directed at Europe over here…
Lelde Smits: This transfer of liquid… We’ve got Russia here, the US, what will be occurring in the EU?
Steve Keen: Well Russia is trying to move in and have influence on the European Union.
Steve Keen: …Trying to break down the power of the European Union.
Lelde Smits: And where do you think Trump will be moving in this scenario?
Steve Keen: He will no longer be over here blocking. What you have with America in many ways is saying, we’re coming from the other side. We’re going to block your attempt to extend your power.
And what is really being said by Trump is, we’re not going to bother about that anymore. Europeans, you’ve got to handle Putin on your own.
Lelde Smits: So Steve we have the revolt against globalization very much in place now. If this continues over the next five years which of these economies are going to have the most liquid in their glass and which are going to be completely left dry?
Steve Keen: Well I think what’s going to happen is this little club here [the European Union] is going to break up. Because I simply can’t see the Euro making it to 2021. By that stage I think the Euro is over.
Lelde Smits: That’s your call?
Steve Keen: That’s my call by that stage. Which means this little corral here breaks apart, which is actually going to be good for quite a few of them, particularly Italy. Because Italy has suffered so badly.
Lelde Smits: And the US? How are they going to fare in five years time if we separate these guys?
Steve Keen: I think America is still going to be the strongest economy on the planet. We actually haven’t spoken about China here at all. We need a bit of Maotai (distilled Chinese liquor) on the scene.
I think the main rival is not going to be the European and Russian situation over here, it’s going to be what’s happening with China. Let’s bring, I mean this is rather Mexican, but we’ll take it has being one of the clay warriors. So in enters China.
Lelde Smits: In enters a new player.
Steve Keen: That is the main struggle, between America and China. Because, Trump is quite right to say, a huge part of American industry has relocated to China. And, that has undermined the working class jobs that meant people voted for him in what is called the rust belt.
So they have lost their jobs to China. All the economists said he doesn’t know what he is talking about. Trump has got a much better handle on that than the professional economists have.
Lelde Smits: Well Steve this is the space to watch and perhaps that’s our next installment. For now, you certainly deserve a drink after all of this work. I must put the disclaimer on that neither of us are cocktail makers.
Steve Keen: No way.
Lelde Smits: But, if you want an exceptional cocktail you should come here to Papa Gede’s Bar, down a lane way off Kent Street in Sydney.
And in the meantime, Steve thank you so much for your economic mixology and all the best for 2017.
Steve Keen: Thank you.