Steve Keen: Zombie-to-Be Economies and the Walking Dead of Debt Include China, South Korea, Canada, Finland

Posted on by

Steve Keen, one of the short list of economists to warn of the coming of the financial crisis, gives a very fast paced and informative talk. He explains the workings of his economic model, which contrary to prevailing macroeconomic models, includes the role of banking and credit. He then identifies the conditions that lead to zombification: a rapid expansion of credit in an economy that already has a high debt load. He shows how merely stabilizing the level of debt to GDP leads to a serious economic contraction.

Using new BIS data, he then identifies a surprisingly long list of countries that are destined to become zombies. It’s not pretty.

Print Friendly, PDF & Email


  1. Si

    What is notable it that Steve Keen, who predicted the crisis, has not been raised to the level of ‘he who should be listed to’ but was instead binned from his teaching post in Australia (I believe the course was shut down).

    What we have is the silencing of views which don’t fit the mainstream narrative, and a continuation of the worship of naked emperors.

    Copernicus taught us that having a view which goes against the grain, can land you in a great deal of trouble. The truth is immaterial, what matters is the quasi religious unquestioning of our economic ‘priests’.

    A pox on them all.

    At least I can read Steve’s work to get some small respite from the prevailing insanity.

    1. Disturbed Voter

      If I recall correctly … Professor Keen was guilty of speaking truth to power, and power reacted as it usually does. Power was unable directly dispose of this gadfly, but had to terminate the whole economics department of his university, in order produce a non-yet-dead Socrates, as Professor Keen took to the better part of valor, and went into an exile Socrates couldn’t countenance. Australia has only postponed the consequences that flow from irrationality.

      1. GrueBleen

        Wau, no wonder you’re disturbed. So much power !

        But I seem to have missed all of this, despite being – at least at that time – a fellow countryman of Steve the Keen. Now I do remember that he had a lovely country stroll of about 152 km after his attempt to kill the Aussie housing “boom” failed utterly – and is still failing, year in and year out.

        And I know he was a bit of an Aussie lair [qv] when his Uni decided to close its Economics Faculty, but I just can’t recall any actual “speaking truth to power”. So help me out here, please: what “truth” exactly did Keen speak to which “power” ?

        Your kind assistance is eagerly awaited.

        1. Sound of the Suburbs

          No one can predict the timing of the collapse, but you know its coming from fundamentals that the delusional have lost sight of due to some new paradigm.

          Here is the mainstream laughing at Peter Schiff when he tried to tell them what was coming:

          “The market can stay irrational longer than you can stay solvent.” John Maynard Keynes.

          But reality and fundamentals always win in the end.

  2. Skippy

    I wish Keen would identify underwriting wrt credit e.g. not all credit is the same…

    1. Greig

      Hi Skippy,
      Keen routinely does just that.
      He repeatedly stresses the danger of private debt (founded on dodgy underwriting) in comparison to Govt. debt. The underwriting/credit creation is a mechanism employed to keep the private debt load growing.
      Disheveled Marsupial …. Lol couldn’t resist! BTW love (trying) to follow and learn from your posts @ Macrobusiness.

      1. Skippy

        Hay Greig…

        Aware that Keen does note sectorial differences, my wish – is – that we could differentiate quality for analytical examination w/ some degree of accuracy. Sadly this is difficult due to poor market valuating processes, rating agencies et al. This includes government debt, even those with full sovereign powers.

        All Debt is not created equal and then there is the question of purpose – socially productive or extraction… thingy..

        Disheveled Marsupial…. especially country’s run like hedge – P/E funds…

  3. dk

    I really like Keens model, it’s very clear and seems, by being agnostic of nominal “reasons” for credit demand, to indicate the correlations he uses it to illustrate. But therefor, intrinsically, the events he’s pointing out, while interesting, are not the drivers of crisis, they’re just the consequent evidence that those drivers are present.

    And I’d suggest that fraudulent activities (over-valuations, vapor investments, ponzi-type pools, etc) are some of the drivers of the divergences between GDP and credit demand. The impact of the banking sector is huge, because it has become the major vehicle for fraud (even before engaging in any fraud of its own). Profound swings in resource flows, and impacts of natural disasters, can also affect credit demand, but their impacts may be negligible in (regionally) larger economies.

  4. Dan Lynch

    Yves, thanks for posting some Keen. He does not seem to get as much love from NC as MMT but IMHO Keen is the great economic mind of our age.

    1. diptherio

      I don’t think that it’s a function of NC, but rather a function of Keen. While I respect his intellect and analysis, he’s not nearly as accessible as Black or Hudson. He’s definitely somebody who should be listened to, but I have to say, I only got a couple chapters into his book before I had to put it down. His writing is dry as toast.

          1. Skippy

            Just an old dust up with some people of note over some nuance… such is the domain of economics and monetary theory…

            Disheveled Marsupial…. you would not believe the antics I have been experiencing from the AMI camp lately… file under when things become a crusade..

      1. digi_owl

        And here i found it a page turner like nothing else.

        Perhaps its his Aussie sense of humor…

        1. cnchal

          That was funny when talking about his new book titled ‘Can We Avoid Another Financial Crisis’ which could be written with one word instead of the 25,000 words demanded by the publisher.

          I bet that word has only two letters.

      2. Adamski

        The first chapters would send anyone to sleep but they’re about microeconomics. Skip to later chapters such as Misunderstanding the Great Depression for the good stuff.

  5. jerry hamrick

    Thank you for posting this video of Keen’s ideas. I watched the whole thing, and I am glad I did, because now I will not buy any of his books. I spent my working life designing large systems for large enterprises and all of them directly affected the lives of ordinary Americans. Some of them, in updated form, are still at work and they affect the daily lives of millions. So, my inclination is to try to fix social problems by designing and implementing systems that take advantage of newer and newer technologies and that take advantage of more and more direct experience in how things really work. Economics, at least some economists, do not seem to be interested in solving economic problems so that the people can live long lives that are worth living.

    Keen, in passing, mentions Paul Krugman’s axiom of interdependence. My analysis of this axiom is offered in the following text, all of which is under copyright.

    For all of my life I have heard people say that we should run our government like a family. Economists have heard it too, and they generally respond with the same weak argument. Here is what Paul Krugman had to say about it:

    I’ve spent a lot of time trying to knock down the bad analogy between governments and individuals, and the line that the government should act like an individual family or business, and cut back when times are tough. The key point is realizing interdependence: your spending is my income, my spending is your income, and if we all try to slash spending at the same time the result is a depression. Somebody needs to step up and spend when others won’t—and the government can and should be that somebody.

    Krugman, who is a very smart man, is an expert in his field. He is sixty-two and he is part of the Generalists cohort. When he was in the Experts cohort, he gained considerable expertise—in fact, he was a leading member of that cohort. But now, as a Generalist, he is well into applying and testing his economic expertise in the real world. That activity, over time, is what turns Generalists into Sages. He is not yet part of the Sages cohort, and will not reach that status for more than a decade. By that time, many of his views about economic theory and its application will have changed—I hope for the better. He is after all, an economist, and economists spend the bulk of their careers living in a theoretic world, a world that has very little connection to ordinary family life, a world where economists have all the answers and where we, the people, (as the prevailing attitude of nearly all economists clearly indicates) are not able to understand or correctly apply those countless, ambiguous, conflicting answers. But if he begins to spend “a lot of time” listening to, and thinking about, families and the economy he will learn something. I predict that he will learn that running government like a family means that money should be used to build a better life for all family members. In a family, those who control the money supply should use it for the good of everyone. I think he will learn that our economy should grow from the bottom up, not the top down. I think he will learn that democrato-capitalism is the way to go. In fact, if you and I get busy, we may be able to replace tyranno-capitalism with democrato-capitalism before Krugman reaches Sages cohort status.

    But for now, Krugman’s remarks show the fundamental difference between systems designers and economists. In my working life, I assumed, based on experience, that my customer knew more about her business than I did, and if a customer asked for some system capability I tried to give it to her, and if I couldn’t or shouldn’t I would be able to give her a real reason for it. In America today our citizens are crying out for a system that gives them enough money to meet the needs of their families—they are crying out for a system that will enable them to be secure and build long lives worth living for themselves and their families. And yet, there is no answer from the economists of the world. Krugman does seem to be taking a tiny step, really a nod, probably just a feint, in the right direction when he says, “Somebody needs to step up and spend when others won’t—and the government can and should be that somebody.” But apparently he feels no duty to act on his inclination; he gives us no real path to change—now, or ever.

    Let’s take a closer look at Krugman’s axiom of interdependence: “your spending is my income, and my spending is your income.” He is correct as far as he goes, but there is more to the story. We know from cruel personal experience that if you lose your job you must spend less, which means that someone else has less income, but more importantly it means that your family suffers. And there is no guarantee that large corporations, who earn billions of dollars, will spend their profits back into the economy. In fact many corporations have ignored Krugman’s axiom, and ratholed overseas a total of more than two trillion dollars in profits to avoid taxes. They have sucked money out of our economy thereby making the pie smaller for the rest of us. They have taken the money they obtained from the spending of ordinary citizens and turned it into profits for themselves rather than spending it to create income for others. And we know from personal experience that our system’s perverse incentives are such that an employer can decide to abruptly cut off the incomes of thousands of citizens and suffer no penalty for having done it. This is not a relationship of interdependence. It is a relationship of the powerful and the powerless.

    What Krugman and the entire economics profession should realize is that interdependence does not work. What they should realize is that the government should be the primary spender in our system. All spending should originate with the government. For example, Krugman, as quoted above, says that the government should start spending when everybody else stops spending. Nonsense. Why should we wait until everybody stops spending before the government starts spending? Why shouldn’t the government spend to stimulate the economy all the time? After all, it has plenty of money, and we have plenty of genuine needs for it.

    There is an oxymoronic name for the unwillingness of tyranno-capitalists, and the government they control, to stimulate the economy. Economists call it “creative destruction” and it does irreversible damage to the lives of ordinary citizens. It first appeared in 1942 in a book written by Joseph Schumpeter: Capitalism, Socialism, and Democracy. In his book, Schumpeter said (emphasis added):

    The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

    This term has been discussed and analyzed many times over many years, and the conclusions are always the same: capitalism is like evolution by natural selection, it creates and it destroys. But capitalism is not a natural process like evolution by natural selection—it is human-made, and we can change it, or at the very least we can control its harmful effects. Michael Cox and Richard Alm summarized the problems caused by “creative destruction” in an article published in The Concise Encyclopedia of Economics. They set the context of their brief discussion by telling us that creative destruction “has become the centerpiece for modern thinking on how economies evolve.” Then they quickly reveal the bitter truth about capitalism (emphasis added):

    Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

    Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.

    Under capitalism, according to Schumpeter, Cox, Alm, and thousands of other tyranno-economists and tyranno-politicians, society must be willing to sacrifice the lives of citizens who happen to be working in a business that fails—no matter the cause. Such sacrifice is the price that must be paid for economic progress. We know this to be true because we have witnessed it year after year in America and all over the world. We ordinary citizens recognize it as unemployment, loss of savings, loss of homes, less for our children, reduced pensions, loss of health care and other benefits, unhappiness, lowered expectations, and all the rest. But Cox and Alm felt a need to drive their point home. They closed with this:

    Over the past two centuries, the Western nations that embraced capitalism have achieved tremendous economic progress as new industries supplanted old ones. Even with the higher living standards, however, the constant flux of free enterprise is not always welcome. The disruption of lost jobs and shuttered businesses is immediate, while the payoff from creative destruction comes mainly in the long term. As a result, societies will always be tempted to block the process of creative destruction, implementing policies to resist economic change.

    Attempts to save jobs almost always backfire. Instead of going out of business, inefficient producers hang on, at a high cost to consumers or taxpayers. The tinkering short-circuits market signals that shift resources to emerging industries. It saps the incentives to introduce new products and production methods, leading to stagnation, layoffs, and bankruptcies. The ironic point of Schumpeter’s iconic phrase is this: societies that try to reap the gain of creative destruction without the pain find themselves enduring the pain but not the gain.

    So, rather than apply their collective expertise to eliminate the pain while keeping the gain, the professional economists of the world simply throw up their hands and say, “Take it or leave it.” They admit that they cannot solve this destruction of human lives. I doubt that any of them, with the exception of John Maynard Keynes, have ever tried.

    1. Code Name D

      And what does this have to do with Keen’s research? Nothing you said here is relevant to the video.

      1. jerry hamrick

        I think what I said does apply to his research. He talked fast, and he did not talk about how to fix whatever problems he was describing. He and other economists should be trying to fix economic problems for the benefit of ordinary human beings. But he is lost in some academic world that does nothing to help improve our situation. For example, how would you apply his research to the need for funding the projects that we must undertake in order to combat global warming and the poisoning of our atmosphere? How does his research apply to the high cost of education, and to the effects of inequality in several health and social problems such as: level of trust in our government and in each other, life expectancy and infant mortality, obesity, mental illness, drug and alcohol addiction, children’s educational performance, imprisonment rates, teenage births, social mobility and more. These problems are all effects of inequality, economic inequality that is. So how do you apply Keen’s research to these problems. It appears that he is not doing so. He, like so many academics, apparently feels no obligation to solve problems. And, as I point out in my comment, “creative destruction,” a product of the economic system of tyranno-capitalism and a product of an unequal method of income distribution, is a cause of much human anguish. So, how about it, if those things do not appear in Keen’s research, then tell me why not. Why aren’t all economists coming together to devise plans for changing our economic system for the better? How about you? What are you doing to make a change. I am doing all I can, including speaking out here and on other blogs, and I can say that many times I am not welcome there. So, I must do more and I am.

        If we are going to save ourselves from ourselves we must control ourselves, we must direct our creativity and energy to solve the immense problems we have created for ourselves. Instead we just seem to rattle along with no inkling of what is happening. Doing nothing is suicidal. Our civilization, perhaps even our species, are at risk. So, tell me again, just what is the value and the purpose of Keen’s research?

        1. Joe in NYC

          I’m sorry, but this is just nonsensical. Criticizing Keen by saying that he didn’t address drug addiction or teenage pregnancy is like criticizing a mechanic by saying that he didn’t do your dry cleaning. Of course he didn’t, and it’s utterly baffling that you would expect such a thing.

          Keen’s entire professional life has been devoted to the study of credit, its effect on a macroeconomic level, and the ways in which current economic views fail to properly analyze this effect. That’s what this presentation was about.

    2. reslez

      > Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

      Shorter work weeks and better jobs came from unions willing to get their heads knocked by Pinkertons, not some mythical conception of “creative destruction”. The first thing businesses do when they amass power is turn off the magic capitalist faucet and replace it with monopoly control of industry and bought-out government. There was no creative destruction during the financial crisis. All that happened was a demonstration of brute financial control.

      > A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term

      In the US, it seems like we not only accept individuals will be worse off, we make them fend for themselves and subtract years of lifespan. The only “persons” the US cares about are the fictitious legally created kind, or the ones with bags of stolen money.

    3. Yves Smith Post author

      Your comments are violations of our written site policies. You used the post as a thin excuse to market your pet theories, and not engage with the material. Get your own blog and stop hijacking ours. One more comment like this and you will be blacklisted.

  6. EndOfTheWorld

    I’m a layman and didn’t try to wade through all the terminology (combined with the Aussie accent, which I’ve always found a little difficult)—also he talks fast. But I think there is something amiss with his system if the US didn’t make the list of future zombies.

      1. Ian Ollmann

        I believe he was just telling us that the US had its credit contraction in 2008-2010, which caused a worldwide economic slowdown. If you are looking for it to happen again, then you need to look for accelerated US GDP growth accompanied by a large expansion in borrowing.

        Status: Already Zombie
        Outlook: Depends on amount of debt to be unraveled — not extreme relative to GDP in the US case.

  7. Ian Ollmann

    What I find interesting about this analysis is that it seems to imply that there is a natural rate of economic growth. You can boost it temporarily with borrowing, but as debts need to be paid back, so too will the economic growth be clawed back. This probably isn’t too surprising.

    What is intriguing, however, is the notion that debt forgiveness can therefore drive potentially permanent economic expansion over and above what would be natural.

    1. Tonydd

      Ian, Keen generally concludes that once you are there, that is you are ‘zombified’ the only way out is debt forgiveness, repayment demands is what makes the economy a living dead economy.

      He has for more than 10 years railed against ‘unaffordable’ debt growth.

      1. digi_owl

        In particular household and corporate debt.

        Just looks at Main Street vs Wall Street in USA. The former is barely functioning, while the latter is going “crisis, what crisis?”…

    2. tony

      There is no ‘natural economic growth’. He is just saying that aggregate demand is one driver of the economy, and if you rely on increasing private debt to create demand, it can’t last. Money itself is not natural, it is a state creation. It is a public utility and using terms like ‘natural’, when referring to money makes little sense.

      Also, debt forgiveness works, but so does the state deficit spending money into existence. If enough money is created by the state, it can be used to service the private debts.

  8. Mark Ó Dochartaigh

    So if the (Socialist) government would seek to expand credit as soon as credit crossed the line, and if the (Socialist) government would use the credit expansion to employ workers (WPA etc.) would this attenuate the crisis and assist in the management of the crisis? Also, it is a bit odd that Professor Keen’s Australian accent was rendered so imperfectly by the caption bot.

    1. digi_owl

      Pretty much, for the short term.

      but unless changes to laws and such are made to curtail future private debt growth, things will be right back where it started shortly.

      The perfect example is Japan, that has been doing this for some 2+ decades now (helped along by exports that are quickly drying up).

  9. GDX

    Why does economic terminology so often flirt with dimensional inconsistency?

    E.g. the debt/GDP ratio expresses a quantity with the units of time–

    ( $ / ($/t) ) = t

    –but is always cited as a bald percentage. Maybe it is more convenient to express it that way (and the term “annual GDP” of course makes the time span in question transparent) but the 100% debt/GDP figure seems to very often get treated as though it were a watershed over and above and beyond simply being a large round number.

    The only real mathematical significance to the 100% threshold is that that is the debt at which interest payments on the debt ,as a proportion of GDP, are equal (disregarding compounding) to the interest rate.

    Here Keen is using the measure debt + GDP, but such a sum adds an amount ($) to what is really a rate ($/t) and so is invalid unless one includes a proportionality constant in one of the terms. Simply adding the two headline figures together, as in the video, amounts to multiplying the rate (i.e. the GDP) by 1 year, but why 1 year rather than 2 years, say, or six months? What is the objective macroeconomic significance of that span of time?

    I realize Keen isn’t unusual in doing this sort of thing, but it unnerves me that hidden assumptions seem to get snuck in to these discussions wholly unremarked.

  10. Plenue

    I’ve been thinking about South Korea lately, and how its huge economic growth is actually based on a truly epic private debt bubble. When it bursts it’s going to be horrific. And afterwards many South Koreans are going to look backward to ‘traditional values’ for safety and comfort, and what they’re going to find is Joseon Neo-Confucianism, which have their own huge set of unique problems. In fact those ideas and values were never really abandoned in the first place; instead they’ve merged with consumerism in some crazy ways, especially in regards to female conformity. I certainly wouldn’t want to be a South Korean woman, either right now or after the inevitable collapse.

  11. Chauncey Gardiner

    Thank you for continuing to feature Steve Keen’s work. His presentations and articles have aided my understanding of monetary macroeconomics as a layperson .

    However, I would like to see more on the distinctions between public and private sector debt; and the role of control fraud, securities fraud, and financial derivatives in increasing the risk and severity of financial crisis.

    I also am interested in the potential applications of MMT to this issue. Economics journalist Pedro da Costa had a chart from Bloomberg up on his twitter site the other day that showed China has securitized a very modest amount of low quality, non-performing bank loans, sold them for whatever price they could arrange, and subsequently recapitalized the banks. The source of funds for both the purchase of the bad debts and recapitalization of the banks was unclear, but the transfers were said to be to other state-owned banks and enterprises.

    IMO the debt-based “Private-Public Partnership” monetary system is running up against economic, political and social constraints from a variety of perspectives, including its role in fostering inequality and environmental issues stemming from its need for ever-increasing development of land, energy and other natural resources for incremental debt, and to pay interest on the debt which underlies most money. This is creating significant social tensions, and I believe that at least some elements within the One Percent are beginning to recognize this.

    From Keen’s short video, it is clear that if private sector debt growth substantially exceeds GDP growth, that increases the probability of a financial crisis. But there is also a feedback loop from private sector debt growth to GDP growth. So what is the optimal growth rate of private sector debt, and what is the threshold beyond which an economy should not pass?

    Whether this process will continue to be abused until it ultimately destroys the current monetary system; and if so what will replace it?

  12. Keith Newman

    Isn’t Keen engaging in double counting? Credit finances consumption or investment. Isn’t counting each one separately then adding them together double counting? If I borrow $100,000 and use it to renovate my house the quantity of goods and services produced by the economy increases by $100, 000 not $200,000.
    It seems to me Richard Koo has it right. If credit becomes unmanageable in some sectors they will cut back, causing a recession. For example if repayment of the $100,000 loan strains my finances I’ll spend less on restaurants, travel, etc. Greater borrowing and spending will resume only once balance sheets are in order. Hence the need for the government that issues the currency to deficit spend to offset the decrease in spending.

    1. Yves Smith Post author

      From Steve Keen via e-mail:

      This is a twist on the usual reason people fail to comprehend my argument that credit adds to demand–and I explain why this very standard belief is wrong from the 5 minute point in that video. It appears he thinks that I’m adding entries on the diagonal in my expenditure table to items on the off-diagonal.

      I’m not of course: The negative sum off the diagonal is the expenditure measure of economic activity in the economy, and the sum of the off diagonal is the income measure. The same transaction is recorded twice in each measure but not added together–and in fact if you do add them together as he thinks I’m doing then the sum is zero, not twice the transaction, since once it’s shown as a negative (expenditure) and once a positive (income).

      I suggest he watches the video again, and rather more carefully. And buy my forthcoming book on which this was based too: “Can we avoid another financial crisis?” By Polity Press, hopefully at the end of the year.

  13. John k

    For me he’s a great writer but terrible speaker. Is there a way to get the slides without the lecture?

  14. Ruben

    Keen mentions a database he is using presumably with info on private debt by country over an annual time series. I am missing any indication as to how to find this database, if it is available in the open.

    So I’m asking whether anybody got an idea about the availability and location of the database that Keen is talking about.

Comments are closed.