Afleveringen
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When central banks declare a new interest rate, how does that magic into existence? Steve explains how they trade in bonds, to drive yields close to their target rate. If they are buying up bonds held by pension funds and the like, are they also adding to the money supply? Could that have more impact on the health of the economy than playing with interest rates? But the problem is, the money created is circulating in the financial sector. If the central bank really wanted to boost the economy, it should find ways of pushing new money to those less well off.
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Thereâs a common myth around banks. That banks are the intermediaries who collect deposits from customers, keep a bit in reserve, then lend out the rest at a higher interest rate. That argument then extends to a multiplier effect, where the money loaned out is deposited in banks, freeing up more money for further loans. The multiplier is how textbooks argue that banks create new money for the economy. This week Steve argues that the multiplier doesnât exist. Not in that way anyway. And banks create money, not by lending out deposits, but by creating new money to lend out, which appears as deposits in the bankâs balance sheet. This week Phil brings the textbook arguments to the table for Steve to shout them down.
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Zijn er afleveringen die ontbreken?
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Does government debt expand the supply of money? According to Modern Monetary theory, yes it does. Itâs all down to simple double-entry book-keeping and an understanding of the role of financial equity. As Steve explains, in this step-by-step guide, for the private sector to experience positive equity, the government sector has to have negative equity. In other words, without the government sector spending more than itâs earning, thereâs no new money being added to the private sector. As Stephanie Kelton puts it, their red ink is our black ink. This is one episode to share with your friends.
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Youâll know the name Mario Draghi. He was the President of the European Central Bank and, for a short while, Prime Minister of Italy. Earlier this year he produced a report EU Competitiveness. It called on the need for more Europe-wide investment, particularly for innovation, emerging industries and the transition to green energy. Phil and Steve talk through the ideas and the challenges they present to the structure of the EU. Are the challenges insurmountable? Is that why Draghiâs plan already seems to have been lost at the back of the bookshelf. There is one competitive edge of Europe though. Steve says if the US successful cuts government spending by the touted $2 trillion, thatâs money pulled out of their economy. If Europe was to take the opposite tack, it could tip th balance in its favour Particularly, suggests Phil, if the extra public money is spent building Europe-based AI data centres to challenge the US dominance in this rapidly growing sector.
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At least half of America is elated with its new choice of President. Money is already flowing into the country, with early gains on the NYSE and the dollar shooting higher in value. Tariffs will be front and centre early in the new Presidency, with Trump describing Tariffs as âa beautiful wordâ recently. But will it have the intended effect. Could the strength in the dollar wipe out any of the benefits from domestic production? Will higher tariffs add to the cost and drive inflation? Does America have the skills base to manage the onshoring of so much productive capacity? Phil Dobbie and Steve Keen discuss what will happen next in America.
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The UK Labour party seems top have scored another own goal, with their inheritance tax on family farms. Previously farms were exe pt from inheritance, but that meant wealthy landowners, with massive stately homes set in sprawling estates could buy a few sheep and claim they were a farm. Hence, the government limited the exemption to properties worth less than ÂŁ1 million, a threshold which Steve Keen suggests is well below a realistic level. Thresholds should only be there for th every rich, which is the US approach to inheritance. This week Phil and Steve look at ways of managing inheritance and ask whether there are better ways of ensuring we donât see intergenerational wealth getting out of control.
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The classical economic assumption, from the days of Adam Smith, is that we all have free will and this freedom ensures the best possible outcomes for the economy, provided those decisions are based on greed and self-interest. This weekâs episode opens with a student questioning Milton Friedman about the freedom of a man who couldnât afford to pay his electric bill, so the power company cut him off and he died. Friedman says the fault lies with friends and neighbours who didnât step in to support him. Perhaps they were too busy acting in their own self-interest. In a far-reaching discussion Phil asks Steve whether this is a failing of economics â and, if decisions canât be made by free-will, who makes them?
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Ever wondered why Britainâs roads are riddled with potholes, why the trains keep breaking down and why there arenât enough hospital beds? Simple. Britain is not making enough capital investments. Taking the public and private sector together, it amounts to about 6 percent of GDP, well below the 22% in the US - which has its own infrastructure problems. China can spend as much as 40% of GDP on capex projects.
Steve says there are two reasons why Berit5ianâs infrastructure is failing. First, not enough engineers. There needs to be more teaching of STEM subjects in schools. But more importantly the adherence to the notion that governments need to balance budgets means capex investment is often pushed aside by more pressing short-term spending. Phil asks whether the sensible way forward is to allocate an amount of money for capex investment that sits outside the budget that the government tries to balance each year.
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Steve Keen says he builds his economic model based on the motivation of three types of actors. First, the worker, who wants to maximise his or her wage. Then thereâs the capitalist who wants to maximise profits. And the financiers who wants to lend out as much money as possible with the best possible returns.
How does Steveâs model change if most businesses became cooperatives. Workers would also become shareholders, also wanting to see strong profits. They might also have other considerations, such as working conditions, which will impinge on the returns won by the capitalists. Financiers might lose out as the cooperatives seek to reinvest their funds in new lines of business.
This week Phil and Steve examine how co=operatives change the model of the capitalist system and ask why we donât see more of them.
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What causes an economy to fall from a peak? Many economists will argue itâs exogenous shocks but, as Phil and Steve discuss, thereâs not too many of those around. Maybe COVID was one, but even that came about because our economic system has drawn us closer to wildlife habitats.
Or is it a lack of resources? We run out of capacity to produce more, whether itâs factories, people or natural resources, like fossil fuels. Does the shortage relative to demand force prices up and its inflation that ultimately kills growth.
No, says Steve. Karl Marx had it right when he postulated that the rising pressure on wages will cut the profit that capitalists thought they would be earning, which would mean they cut investment. Talk about cutting off your nose to spite your face.
So, if thatâs how economies peak, what is it that pulls hem out of a trough? And is there anything we can do to minimise the impact of business cycles, or are they simply the natural order of things?
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Itâs a sad fact that war can pay. The US arms industry is one major beneficiary. The UK is a long way behind, but it also a big supplier of armaments to the world. If governments of the world upped their defence pending to 3 percent of GDP that would see a massive increase in demand for weaponry. In Britianâs case it could re-engage the manufacturing sector and maybe even lead Britain back to a trade surplus. Phil asks Steve why we seem happy to see government spending on defence, supporting growth in the private sector. What a shame we donât apply the same logic to helping other sectors grow â sectors that donât involve killing people.
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Phil tells Steve that heâs always struggled with Karl Marxâs idea of surplus value. The idea that workers work for themselves, then a bit more to create the profit for a business. Phil says, that seems like a cost-plus approach, whereas in his marketing days, it was all about creating a brand that people would pay more for. The extra value was created by the goodwill associated with the brand. How do you apply Marxâs theory of surplus value to a $1,000 Gucci handbag, for example. Steve says it still applies and explains why in this weekâs episode.
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Europe and the US are both recovering from the same problem â COVID and the inflation that followed. But last week the Fed in the US dropped interest rates by half a percent, with markets expecting a soft-landing for the US economy. Europe, meanwhile, is struggling, with Germanyâs economy heading backwards for more than a year. So, when the big difference when both economies are coming from the same place? Steve Keen tells Phil Dobbie that the US would be struggling just as much if it restricted itself to the Maastricht rules on fiscal policy and government debt. Instead, Joe Biden spent big on the Inflation Reduction Act.
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The UKâs unemployment rate is 4.1%, the inflation rate is growing at 3.1% and the economy is growing at 0.6% quarter on quarter. Thatâs how the economy is doing, what more do we need to know?
Well, it would be useful to know whether the unemployed are predominantly in certain income groups, or that income growth was greater in particular parts of the economy Like, more for capitalists and less for workers?
As Steve and Phil discuss this week, economists are building business models built on aggregates. Breaking down aggregate data into functions in society, or income, will add a lot of extra complexity to models, but they would do a much better job of showing us whatâs going on. For example, central bank policy right now aims to restrict spending and wage growth to tame inflation. But, even if that was the cause of inflation, what if those creating inflation by spending more on services, are distinct from those facing the consequences of central bank policy, losing jobs and paying higher mortgages?
Steve points out that as the economy slows â and it has to because of climate change - knowing the distribution of income and consumption becomes vitally important. Unless we are prepared to see the rich grow richer at the expense of everyone else.
Economic models are built on aggregates of key variables. Those aggregates hide distribution impacts. That makes it easier for central banks to pursue monetary policy without worrying about the consequences.
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The pandemic was the biggest economic disturbance since the second world war. In both cases supply chains were severely disrupted, either by German U-boats or, more recently, factories and borders closed to stop the spread of disease. On the face of it, though, we have got off relatively Scot-free. We havenât seen the massive fall in GDP experienced after the war. In fact we saw a sharper fall in GDP in the 2008 financial crisis.
What is different is how we have handled the readjustment. After the war the focus was on growth, with very low interest rates, even though the inflation rate in Britain almost reached 17%. This time weâre told growth is again the focus, but the policies being applied, by governments and central banks, seem to suggest otherwise.
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A couple of years ago, when warning of the need to fight inflation, Jerome Powell, Governor of the US Federal Reserve says interest rate would rise and jobs might disappear. Yet, interest rates have risen, and unemployment hasnât fallen anywhere near as much as expected. So, whatâs going on? Does it mean, thankfully, that monetary policy isnât working as well as expected? Now the talk is of a soft landing, where jobs have been protected and inflation has come down. The work of fine tuning by the central bank, or just a coincidence. Phil Dobbie and Steve Keen talk about the interplay between jobs, wages, inflation and central bank policy.
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Some call it the silver tsunami. The wave of old people putting pressure on government budgets. And, as baby boomers retire and young people produce less and less children, western populations will continue to age. That means less productive capacity and more people dependent on welfare. On todayâs podcasts Phil & Steve talk through the three options open to governments: flood the country with younger migrants to pay more tax, pay less and create a cohort of elderly poor, or rethink the idea that budgets have to balance. The last one is always quickly dismissed.
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The last time interest rates were this high they came down rather fast. This time central bankers are determined to manage a slow unwind and deliver a return to growth without wreaking havoc on the economy. Will they be successful? This week Steve Keen argues the high interest rates are inflicting damage without treating the problem. Inflation is being caused by businesses increasing their mark-ups. But, Phil asks, surely they are only able to do that because demand is outstripping supply. And what should interest rates return to? Central bakers call it the R* - is there a danger if they assume itâs too high we could drive ourselves towards debt deflation?
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Complex systems donât have to be complicated to provided deep insights into the real world. Thatâs the view of Doyne Farmer, special guest on this weekâs podcast. Itâs an approach he shares to economics with Steve Keen. Steve develops systems from the top-down, whereas Doyneâs work focuses on agent-driven bottom-up modelling. But they arrive at similar conclusions. Phil Dobbie talks to them both about how we could arrive at a more accurate understanding of the economy and financial systems, which could result in better regulatory and planning behaviour by central banks and governments. Doyne also describes how he started down the road of complex modelling, using science to beat the casino tables in Vegas. Or more, get a copy of Doyneâs new book: Making Sense of Chaosâ A Better Economics for a Better World.
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Itâs curious isnât it how we talk about household savings, rather than net debt. Many people do have money squirreled away in savings accounts, for a rainy day. That rainy day comes when hey lose a job and need that cash to pay their mortgage. So we are saving to help pay off an existing debt at a later date. How cockeyed it that? A lot of that money tied up in savings, including funds weâve put away for our pension, ultimately become the source for investment. Thatâs supposedly a good thing. More money for investment means businesses can borrow more, and the bigger the availability of funds the lower the interest that will be charged to these businesses. But the more we save the less money we spend, therefore the less demand businesses will have and the less the appetite for borrowing for investment. Phil discusses all of this with Steve Keen, who challenges a lot of the conventional logic around savings, debt and investments.
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