silver investors god. called today leave the room to avoid service go. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. and we are on vacation and you see we've been broadcasting since october so that means were a little overdue for a break but in that time and in just the last few months we've interviewed so many amazing guests from jim grant to mark father to jim rickards even joining me as a co-host and we've covered so many topics that are relevant on any given day whether it's the fed or the eurozone crisis so we put together some of our very best and most popular episodes from the last few months for your viewing pleasure and the time while we're off and you can look forward to all the new shows starting september fourth so mark your calendar and don't forget interviews can all be found

in their entirety on our you tube channel you tube dot com slash capital account but for now let's get to today's capital account. all right you heard the headlines a lot of debt throughout them throughout the news throughout the world so how do you know if we are approaching a point of no return when it comes to debt well how do you know when you're approaching a black hole in space well there's the black hole and then there's this take a look. surrounding that it's an invisible shell called the event horizon. this is the cosmic point of no return. once inside the right.

nothing not even wrong can escape. the point of no return you just saw it in physics or in space are we approaching that when it comes to debt there have been many efforts to paper over it but it hasn't gone away it hasn't really been dealt with so to answer that and much much much more economist and neoclassical debunker professor steve kean is here he is author of debunking economics the naked emperor dethrone and he comes all the way from down under by way of toronto where he's been spending time at the university of toronto special to us in washington to be on our show and be in studio with us which is such an honor thank you so much steve he wanted to be here so was it is always fun so even when the mrs is about a black hole it's all was fun i know i know it's a little perverse. pleasure of being sucked into something you can't escape from but let's talk about it yeah i guess the only pleasure about it is a nice and lightning conversation with someone who has

a different take on things that can help us understand better because how can you really know what to do if you don't understand the situation exactly exactly so let's start first because you've been at the fields institute which is for research in mathematical sciences at the university of toronto and a little bird told me that they don't see a lot of economists like you come around very often there are more years to the neoclassical varieties so how is the reception how it how do they react well it's all gone the twenty years ago there would have been. nothing out of that because mathematicians a bicycle there are guns they work with any area where they can improve the knowledge that a particular area has biting them mathematical now so they work with chemical engineers they work with geneticists they work with geometers they work with this is a. and so i could have a good idea here let's just deal for the mathematics more day playing and they take it all as written that the people who work in the area know what the model is and they just improving the right model so that's what they did with efficient market hypothesis in the capital i said crossing model in the black holes model and all

the various things that they used to churn over the finance sector including capital which guy was the disaster of say day squares and so on so that's what they were doing unto all that is i mean what does that mean in english for our viewers who may not know all that there are these all traditional matter of national new classical models that assume stock markets and a lot of the markets are either in equilibrium a very new to it and they converge to equilibrium and this is unusual that most most old genuine saw and says don't think you live in a cooler b. and i say you live in a dynamic system equilibrium might be a property of some particular part of the system but you're going to be you know floating around fluctuating around you're not going to be an equilibrium and the dynamic stunt moved from one equilibrium point to another they move through time all the way but economists and i were in equilibrium and the market just gets moved one equilibrium to another by exhaustion the shocks cetera et cetera and they build mathematical models of this some people then use those models to process things

like options on shares and so on and that's what's led to this huge draw one of the many things led to this huge rise in debt which i think doesn't matter because they don't factor and banks money and debt right that's your big credit that's right yeah so the field is you didn't think it was anything wrong with that because i thought the economist must know what they're doing along comes two thousand and seven two thousand and i actually close to the colloquium with financial economy mathematical financial economists and they were completely flummoxed they had no idea what the cross' happened they couldn't explain the downturn and i was obviously totally ga ga about what i was supposed to be experts on so the mathematicians looked around and said well there's anybody out there x. understand sought holes and pressures and they were told read kindleberger they read and the first thing in buggers minsky greater than full pretty. sing argument and sing kindleberger which is mainstream must be a mainstream argument must be many mathematical models out there let's go looking for mathematical models of misc they didn't quite fond only one but the only one of

them had more than a trivial level of dynamics which is my model so it's not hold of me aha and that's how you arrive and then they said well let's look at it my model actually describes the world as having three that the simplest one i do has three dimensions to a level of employment with his share of output which is like income distribution and debts and i said well we can actually characterize this model and say that it's got one good equilibrium where you get positive employment positive ways you share and if a positive profits as well and positive a negative did very much work but that was a that was a good day for the brim with a bad equilibrium was their own plummet zero zero wages share and infinite did ok and yeah let's break this down a little bit more i want to talk about a number of things and kind of the conventional neo classical wisdom because yesterday we had central banks several of them and now it's that they're lowering rates further or they're going to print money and there's a debate going on over whether or not certain economies are in a liquidity trap yeah so first of all just briefly summarize what is

a liquidity trap for people that might not know and who are the economies that are debatably and one will divide up the whole worlds in one particular america where your interest rates are at point one two five percent say when i have one percent spinning the reserve right and the owner of a liquidity trap is it's a way of trying to explain where we are you know is it reality that some of the question but it's is. the model they have of banking is the banks that exist or done and all lending is people who save money lending to people who want to borrow money so you know you might be a profit spender on shoes on the responsible. of the money to go shopping and therefore you can buy most use but i can buy less computer gizmos because my money's gone down so in the aggregate your shoes sure shoes spending is counterbalanced by my drop in spending on computers and there's no a great impact on the economy that's their model ok then. with this some change that occurs in society we get worried about the amount of debt you've taken on and

therefore we say you've got to reduce your debt so you start reducing your dead now and ordinarily all should therefore increase my spending on computer gizmos this is the model but i don't because interest rates. that when the rights dropped closely the process. they had to drop below zero to encourage me to balance your dropped spending on shoes with mine crew spending on computer gizmos right and that's the explanation of why we can't get out of the cross and so basically no matter how low rates are or how long there is zero people are borrowing to spend working here is how it is saying what the borrowings dropping on the that's a good thing i've had to say spending hasn't risen to balance that it's isometry because the people like reagan put it that way so what they say you've got to have the government spending to make up for the lack of spending by the side is you need to be encouraged by rice of interest the reserve contrary it's a fantastic pools of oil needs theory unfortunately it's imperiously falls out it's a bad event for the for the prestigious guys that fit on their ivory tower and i

knew about this and i think this come out with this theory and they don't go and check the data to see whether it's real or not because what it actually is so how do you prove that it's not what you say is what this is hypothesis pontus is that the level of debt doesn't matter actually say that an improvement which is that news blog battle with a little of that doesn't matter and change and it doesn't match up on the lists you are and is there adequate to the trip and then. because the peach temple i people in debt to pay the down is not counterbalanced by additional spending so only after you get the zero lower bound as i call it should you have any correlation of gold between changes in debt and variables like unemployment ok ok so let's talk more about unemployment your own text of we just got a bad jobs are out in the us let us bring up the numbers to show our viewers they may be familiar with them but in june eighty thousand jobs were added that was not good one hundred thousand works that did it didn't move the unemployment rate at all it stuck at eight point two percent the broader measure of unemployment which

measures the unemployed and underemployed it's not to be perhaps more accurate of a representation of the jobless situation is ticked up a little bit to fourteen point nine percent it's been around fifteen percent this is another bad jobs report we had one last month that was really bad too it's been it's been the trend it's been there a long trend and you're saying that beyond these numbers debt factors and so what is it one relation between debt and unemployment will and why is it significant it's the correlation according to paul krugman and all the liquidity trap people should be pretty much zero before we get the zero bound and then after we get the zero down you should find some sort of correlation over the period from not in eighty two two thousand and twelve the correlation is about point ok so what is it that may not get it well it says when dick goes up on employment falls involves supposedly negative correlation ok goes up unemployment fall yeah because people are going up on shoes you know and up goes the number of people employed to sell

shoes to people buying shoes that's the that's the basic theory that the trouble is according to cruden that shouldn't be an issue except when we have the zero lower bound but since not from ninety nine to two thousand and twelve the correlation is a lot of them on this point i know that's a really big correlation the biggest of these minus one ok so rather than zero that's my mana side is the point i was a long way from zero. so what it's saying is that it doesn't just matter you know the zero abound that matters all the time and my explanation for that is that the chinese. demand and that involves banks and that's what people are going to understand now that i think lending is you give money to make which is you take money out of your deposit account and plunk it in mine i think what lending really is is if you go to a bank and so i've got a great idea i want to open up a computer shop to sell shoes and the banks is fantastic idea is a million dollars by the way you i was a million dollars and that has no impact upon my spending but it increases yours

now you then start a business that would be good right is what we need to actually knew that draws and did to finance investment that's good that's financing the economy that you're not just gambling on on higher price but on fortune is what we have done mainly for the last twenty years of the gambling is driven the debt levels from when they were trivial back at the end of the second world will forty five percent of g.d.p. pay up to one hundred percent of g.d.p. by the mid sixty's and now three hundred percent of jay pay and if you look at what how long it took us to do from similar but lower levels of debt in the great depression it could take fifteen years of the leverage and before it sold out let's watch dangerous what's going to people are wrong you can't just cure this with deficit spending you've got to abolish the death as well the private debt is a fraud that is going to use the private did by by some government operation that draws a government that draws profit down ok so let's talk about that after the break hold that thought we're going to go to a quick right quick one and we will have more with professor author and economist

steve keen also still ahead you responded now i'll answer checkout if your comment caught my eye this week and your feedback but first a closing market numbers. the

climate of american power continues. things are so bad that might actually be time for a revolution. and it turns out the killer drink of starbucks has a surprising ingredient. i'm going. going going to.

war. in iraq. on my. morning morning long. welcome back we ended the segment before the break talking about debt and how

classical economists don't factor it into their models so what about something like student loan debt which is rising in the u.s. delinquencies are rising and student debt is actually the fastest growing area of u.s. household debt which you can see right there it's surpassed a trillion dollars in this country very high and then in the next chart you can see that the youth unemployment rate and the delinquency rate on student loans are out about the same level so i want to ask our guest steve keen what this means because professor king we've been talking about debt not being acknowledged in the use of the economy something like student loan debt which is increasingly delinquent and increasingly being taken out how does that factor into the u.s. economic situation that we have to look at the fact that students have to borrow the money so that they spend into the economy through the university sector in that draws up in the demand in the economy is that one of the the bottom line on making

that puts me outside conventional look economics but mathematically correct as i've proven in the fields and she just recently aggregate demand is income plus change and it should i begin to imagine as income plus the trench and it so that pledge and it adds to the man that's part of what keeps the economy ticking over but of course it were a loss upon the debt continuing to go up now if you get to the stage we're going bankrupt and they can't high that that then that's taking equity out of the banking sector and causing the system to implode on the other side that these things should be sustainable you but you don't want to have the debt rausing fos than j.d. pay indefinitely because when it starts coming down you go into the sort of crosses where in so it's a component in the overall downturn in the economy ok so that is that this debt this rising debt is a component the downturn helps you boost the economy when it's going up right draws it down when it starts to fall and if you have people who got into so much that they conned services then their inability to service they didn't is also they can. spend as well you want to do believe we're doing process right and so when you look

at something like private debt to g.d.p. which we have a chart of and i'm sure the bring it up right there that's a scary one that is scary because you are looking at that gigantic is that a giant deal leveraging period nearly oh yeah well looking if you're just taking the right which we do leverage now we we picked a three hundred percent of g.d.p. you know that's sixty percent plus in the great depression and the great depression was to boost it by deflation we haven't experienced on that skiles so the great depression of fifteen years to pay the debt down from the pit reached down to the low levels off of the end of the second world war if we continue doing it the right we're doing now it will take us one of the half decades to get back to the situation we were in knowledge in sixty so what do we need mass bankruptcy if we need to we have to find out what i believe the debt jubilate of being one of the for the private sector yeah you know we have to have got to call a profit but you can actually call quantitative easing for the public now that he's given that names to prove quantitative easing you give the money to the public

rather than to the banks but you say you must pay your debt down first if you have that you pay it down if you don't you get a cash injection which benefits. but it reduces the income flow of the banks reduces the power and gets the dick good and otherwise we're on the wrong side of that event horizon we have to get back on to the out the sod but i think we risk being sucked into that we're already in the black and already this is what people don't realize because they don't even think about it well if you're in the black hole from that physical us and you can't get out of it not even liking it i can't get up because a lot kind of bullish part of the mess of the black hole that we could abolish part of the mass of the black hole simply by saying let's reduce this debt level by converting it from public from private to public but not by putting it into the banks put it into the public the people rather than the banks aren't isn't that what bankruptcies are supposed to do what i personally don't do as well but i'm sure that bankruptcy is like a bit like the whole kings right. with the bus hole loses mass of its own natural

dynamics and that can actually limit a black hole over time and if we can get that way too if we were a law upon the natural dynamics of the black hole of the debt bankruptcy reducing it then we could wait fifteen years and have it it's a single use of this process well let me throw in another aspect of this which is very low interest rates because a report came out that bankruptcies in the us are actually way down they're down fourteen percent for the first half of the years for consumers and businesses and one thing that's attributed to according to some is because interest rates are so low so maybe more people can manage that burden of debt for now but is that bad because now that the debt is not getting cleared that again let's take another analogy that's a bit like reducing the force of gravity going from one when i made this mistake and square down to a smaller force and therefore it's not quite the black hole isn't as good as much power sucking you in so it does work both those thing seems work but if you rely on just one you can spend your entire loss on the border of the event horizon like japan yeah i mean if i had told people in not in eighty nine i'm not going to use

the same analysis than what i had the analysis develops if i told people that japan would fall into a two decade long slump in the other nine hundred on i don't know watching the rising sun on t.v. that what would they have that would allow me i would have been wrong this time around it sounds the sake of lost one of the cards but it could ok. ok i want to get to the library because you also say that neoclassical economists don't factor banks into their model and then we have this huge library scandal where traders were on the one hand trying to manipulate the rate in order to benefit their positions on the other hand trying to manipulate the rate to make the banks look better during the financial crisis yeah that people didn't get freaked out so how what's your take on that oh gosh you know bill black is the man on that sort of stuff that's out right fraud and what we have is is a market index right which is supposed to give the real economy an idea of what it's financing call should be and therefore there should invest in projects on the . and here we find that these turkeys and the not eagles the turkeys in the finance

sector manipulating this their own advantage quite a cavalier fashion and they're behaving not like a service sector for the economy but like a parasite on a host not very efficient really quickly before we go steve king your famous let's play the sound bite. if you will hate to something that john has never done though . i can also not going to listen now to the nothing no and will have to. see the pacific this is the only the seeds of this scene and we're not heading. back in this thing in the video went viral hundreds of thousands of views on the internet how that happened i have no bloody idea i got contacted by the by the producer ultimately i just said that this my stuff could largely through russians have shows yourselves in mexico. it's my great penetration you definitely you are out there you are i wouldn't be reaching the audience on reaching without you gone

providing a sign intelligent forum for critical research into finance and economics wow thank you steve can i can't think of a better note to end on that he apparently missed on your own right and i just appreciate you coming on the show that's not there and professor steve keen. all right it is friday so let's quickly wrap up with some viewer feedback yesterday we had reggie middleton on and he broke down the difference between money printing and wealth creation and pully you know fully know said on our you tube channel i think money printing does create wealth just not for everyone it creates wealth for

those that get it and poverty for those that don't well we want exactly agree money is a claim to wealth so printing money transfers wealth that's not creating new wealth for those who get it it's transferring wealth to them from everyone else who had money in their pocket so a bankers get access to that cheap cash to speculate it drives up prices taking money or purchasing power out of my pocket and that is the difference now nigel watson tweeted me and he had a special question for professor steve king he said to me could i ask professor steve kean about the moral hazard created by a debt jubilee what about savers and sound money so why don't we ask professor steve keen how do you avoid the moral hazard that jubal later tell are those who are that's why i call it a modern aaa because an old fashioned jubilate i'm not joking here i said with the capital that the money will end right off the debt and it was only the model of the

sausage but the modern digital a conduit that because of the debt the moat the money lenders all the banks and not as as well as creating too much debt to finance speculation they've also given that money bottled up and security was the debt and sold it to people who think they have bought over time and asset for their pensions so they're the side. it isn't week we come up with then be disadvantaged by this so that's one idea of a modern day jubilee with the money would go from the federal reserve to the public via the bank accounts if people were in debt they did they'd be reduced by the amount of the q.e. if they didn't have debt they get the q.e. is cash so they it's symmetric if exposed peoples in the same way there's no advantage to being in debt or being a saver now of course society is a loser in the sense that their assets which the loans are going to be worthless and therefore they're going to lower income stream as well but they compensated by a very large cash injection so hard to balance a two out it's not going to be not going to be straightforward but in this we do it with stock on the wrong side of an event horizon there you go thank you do you game

for that your feedback cameo now earlier this week we talked about this post about the quote unquote smartest man in europe an anonymous source talking about the decline in western civilization the debt caused was making big headlines we said why trust any anonymous man when you have smart very public men and women coming on our show talking about that very issue we had jim rogers on that day and renaissance said jim rogers is better than the smartest man in europe you know thank you i am glad you agree with our premise there and we stand with you on jim rogers now when jim rogers was talking about inflation in that episode i said i thought of him when i noticed my cab fare and a pizza place downstairs was raising prices because he talks about how just look around you prices are rising a matter what the government says you viewers fire back they said boring stop eating pizza to ruin your career and lauren you eat pizza well yes folks i eat

pizza it is right downstairs welcome to the glamorous side a working on deadline all the time sometimes you just need a quick piece of pizza and really quickly steve two three two three pointed out how come capital account doesn't have a. featured playlist on artie's may you tube channel most people looking for the real news go to the main r t channel and capital account is nowhere to be seen so f.y.r. if you're looking for it there it doesn't exist but it does exist in reality at youtube dot com slash capital account i'm going to go check that out because i looked into it and you are right we should be there and that is all we have time for thank you so much for watching and make sure to come back next week and in the meantime you can follow me on twitter at lauren lyster you can give us feedback on their show any you missed and subscribe of course at youtube dot com slash capital account you can always watch us in h.d. this is the only place you can watch us in h.d.

which is on hulu at hulu dot com slash capital dash account come back on monday we have a very exciting show and next week we're planning some very special possibly on location but until then from everyone here thanks to have a great night. for . floor look. like you go to. church. coming up.

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