Debunking Economics - the podcast

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.

There’s 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 doesn’t 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 bank’s balance sheet. This week Phil brings the textbook arguments to the table for Steve to shout them down.

Does government debt expand the supply of money? According to Modern Monetary theory, yes it does. It’s 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 it’s earning, there’s 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.

You’ll 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 Draghi’s 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, that’s 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.

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 “a beautiful word” 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.

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 £1 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 don’t see intergenerational wealth getting out of control. 

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 week’s episode opens with a student questioning Milton Friedman about the freedom of a man who couldn’t 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 didn’t 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 – and, if decisions can’t be made by free-will, who makes them?

Ever wondered why Britain’s roads are riddled with potholes, why the trains keep breaking down and why there aren’t 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 Berit5ian’s 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.