Steve Keen refuses to back down


Transcription of Finance News Network Interview with University of Western Sydney Professor of Economics and Finance, Steve Keen. 
Lelde Smits: Hello, I'm Lelde Smits for the Finance News Network and joining me today from the University of Western Sydney is Professor of Economics and Finance, Dr Steve Keen. Steve, welcome back.
Steve Keen: Delighted to be here. 
Lelde Smits: Now last time we spoke a year ago you predicted a decade of volatility. How have your views changed since then?
Steve Keen: I still think it is going to be a decade but what I'm actually aware of now, probably more than I was when I started doing this campaign about the level of private debt about five years ago, or seven years ago, I'm more aware of the potential for what appear to be recoveries that will then die down. Because, what's actually driving these fluctuations in the level of debt, as the private sector is deleveraging. So, now I've got a way of measuring when it's likely to be we're going to be seeing a bit, what looks like a recovery, and then it's going to peter out. 
So it's still the idea of a decade of volatility, in fact it may be even more volatile and worse than I was thinking because what is happening in Europe now is an added level of chaos we didn't have to have for this crisis. It is very much man made by the Maastricht Treaty. But given that combination, we're likely to see not just economic volatility but I think political volatility as well. And in some ways I'm just counting the days until we see a political coup in Europe. 
Lelde Smits: In the shorter term Steve, what would it take to inspire some optimism? 
Steve Keen: It would take a decision to actually reduce the debt directly. It would take the authorities going from trying to boost the economy by pumping money into the reserves of accounts of the banks and instead direct that government created money towards the private sector and reduce the debt directly. I'm calling this a modern debt jubilee, or quantitative easing for the public.  If they did that then I'd have confidence that we'd actually finally reduce the debt burden and enable growth to occur again. And, to have growing debt where debt finances investment rather than speculation. But, I can't see that coming for at least five years. 
Lelde Smits: It seems from Europe we seem to hear of a debt deal almost every month now, who are investors supposed to believe?
Steve Keen: Well the debt deals are all about maintaining the debt rather than reducing it. They are all about deals about how we can reschedule everything so you can pay us later. But, we already have a level of debt when we know they can't pay. 
Lelde Smits: So you're not at all impressed with these comments?
Steve Keen: They're just pushing it, it's the classic, they talk about kicking the can down the road, well, they're kicking the snowball down the road. It's getting bigger every time. So, so long as they continue to say you must actually honour your debts and creditors can't actually take a loss over this, or losses to creditors have to be limited, they certainly talk about losses for Greek creditors, they're simply delaying the inevitable.  
Lelde Smits: So Steve what do you make of the latest pledge from ECB [European Central Bank] President [Mario Draghi] pledging to do whatever it takes to preserve the euro: What action do you anticipate?
Steve Keen: Whatever it takes in his lingo does not include writing off debt. Once it includes writing off debt or using the ECB's resources to pay down the level of private sector debt, or to use the ECB resources to fund deficits in countries which currently running a massive deficit, then I'll believe him. 
Lelde Smits: In the absence of writing down debt what do you think he means and what we will see?
Steve Keen: What he means is continuing doing bailouts where the bailouts really are about giving national governments European credit which they then hand over to the bank's that lent them too much money in the first place. 
Lelde Smits: In the meantime Australia has not escaped these European shockwaves: How do you believe our economy is holding up?
Steve Keen: Well it's certainly holding up better than the rest of the world, and that's got two factors behind it: The scale of the fiscal stimulus and the first home vendors boost, which is now running out. But, also selling to China. Of course then we have to hope that China continues being the honey pot for Australia, and I think those days are running out. 
Lelde Smits: And the mining boom, which of course some reports have projected it might end in as soon as two years, what's your opinion?
Steve Keen: I think it will end in as soon as two years. Because we had the highest terms of trade in our history at the end of a giant bubble which China actually spiked by its enormous stimulus during the financial crisis itself. And, that's brought on so many projects around the world, including of course Australia. A huge boost while we're building the projects, then we come online now we've got more supply than there is demand in China, huge capacity there, and their economy itself is trending down rather than up. So, the mining boom will end and we'll have had too much investment in the process, we'll have to mop that up later.    
Lelde Smits: Steve, you're well known for your property price predictions, forecasting a few years ago Australian property prices will fall by 40 per cent over the next 15 years: Do you still expect to say to Australia, 'I told you so'?
Steve Keen: Yes I do. And of course I had my words distorted by my property market competitors, claiming that I was calling the peak effectively in September 2008, which I was not. But I'm quite happy to say the peak reached in June of 2010 was the peak. And I would expect to look back and see house prices 40 per cent lower than that in either real or nominal terms, it's hard to say which one will lead because we are in a deflationary world as well. But certainly 40 per cent lower in real or nominal terms than June 2010 sometime in the next decade. 
Lelde Smits: Since you made the call how much have property prices fallen?
Steve Keen: Over 10 per cent in real terms, about 7 per cent in nominal. We're likely to see that continue.  
Lelde Smits: Up to 40 per cent then still by another 15 years?
Steve Keen: These things fluctuate. What really drives house prices up is accelerating mortgage debt. Now we're in massively decelerating mortgage debt. It can fluctuate, as you saw in America, occasionally it turns around again so prices don't have to trend down monotonically. But they'll bounce around on a declining trend. We have a bigger bubble than America. We're finally realising it. The property shortage nonsense has been shown to be so by the last census data. We're realising it was really the same as the rest of the world. We're inflated our house prices using debt. They'll deflate as we reduce debt. 
Lelde Smits: Finally Steve, what are you working on at the moment? 
Steve Keen: I'm actually starting a new book and the book's title is, 'Why won't this depression end'. And it's a repost to Paul Krugman's 'End this depression now'. Because Krugman doesn't understand the importance of private debt, aggregate private debt, and the reductions and that. And, I'm now going to explain it and say why the depression won't end until we abolish large slabs of the private debt. 
Lelde Smits: Steve Keen, thank you as always for your views.
Steve Keen: You're welcome. 


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