Open Letter To Steve Keen, Who Says Stimulus Is Necessary

Dear Professor Keen:

I am a monetary scientist and a fan of some of your work. I admire the courage it took for you to call the Australian housing crisis as early as you did, and to make a bet that you would be right. But I came across this video, wherein you say:

“…when a crisis hits, European governments will be forced into imposing austerity on countries that desperately need a stimulus.”

With all due respect, Mr. Keen, isn’t this the same thing as saying that, “when the delirium tremens hits, the medic will be forced into imposing sobriety on a patient who desperately needs a fifth of vodka?”

My analogy is imperfect in that the European Union is hardly a medic. They are the source of both the free vodka and the motivation to drink it to excess.

There are many problems with the European Union. From a fiscal perspective, one can simply look at the tragedy of the common greens. Every country’s politicians have a perverse incentive to outspend the other countries (with which spending they buy the votes of their electorates). From a monetary perspective, they have the same flaw that the Federal Reserve has in the USA. The central bank holds assets to balance its liabilities. The assets are the bonds of the government, and the liabilities are the currency. But unlike in the USA, the euro is not backed by a single government’s bonds but by the bonds of diverse and numerous member countries. It was a mechanism to (temporarily) prop up the lower credits of countries like Greece with the higher perceived credit of Germany, but ultimately to undermine the credit of Germany by forcing Germany to take on the liabilities of Greece. We shall see how it plays out, but there are no good outcomes that this economist can see.

The only true solution to the increasing frequency and magnitude of financial crises is to go to the root. In a system based on irredeemable paper money, there is no mechanism to extinguish debt. So debt is merely pushed around until the inevitable crisis. In addition, irredeemable paper money systems have two other intractable problems: unstable interest rates and unstable foreign exchange rates. In their desperate attempts to “hedge” these un-hedgable risks, the banking system creates endless derivatives, and derivatives of derivatives. And this leads to the other problem. Markets increasingly become the casinos for speculators. Speculators push interest rates and foreign exchange rates to even greater extremes. And with every fluctuation, real damage is done to the real businesses that produce the goods and services necessary to feed us and keep our economy alive.

We need a gold-based monetary system.


Keith Weiner,
President of the Gold Standard Institute USA


27 comments to Open Letter To Steve Keen, Who Says Stimulus Is Necessary

  • Jesse_Fan


    I wonder if you had taken the time to read the ECB balance sheet. Line 1 is gold and it is marked to market every quarter.

    Euro is the first currency to not only severe its link to the nation state, but also to gold. Euro = medium of exchange, gold = Store of value.

    Read this 5 part essay if you have time. Euro has already paved the way to Freegold.

  • Linus Huber

    I also follow Professor Keen’s theories and had the same problem with his idea of how to resolve the present problem. I do not see any other way but a debt jubilee at one stage in the future but it will probably require another crisis before such ideas take hold.

    I am very interested in his reply.

  • Linus Huber

    Just to add to my thoughts in this regard may I issue some additional remarks.

    I asked some economist who recommends that governments go further into debt by increasing their deficits, how he intends to really increase the component “consumption” in the economy. As I did not receive a reply, I doubt that their recommendations do consider all aspects that those actions will have in the medium to long term.

    As we all know by now, stimulus ends up with the top 1 or 0,1% in the end and benefits them from the start already. We also know that the top 1% spend very little (in percentage terms) of their income but simply try to increase their wealth. As a result of this, the 99% will be relatively worse off after each such stimulus.

    On this basis I do doubt the idea that those 99% are suddenly and miraculously increasing their spending but in view of this overwhelming national debt start to save even more, especially as their real income is massively reduced by the low rate of interest on one side and the rather high rate of real inflation on items required for daily life.

    I would appreciate if you, Mr. Weiner, would agree with my analysis and comment any shortcomings in my line of thought.

    • Keith Weiner

      Linus: It is a problem when people begin to consume their capital. Imagine a farmer on the edge of the wilderness. He has a poor harvest, but sets aside part of it for seeds to plant next year. And someone comes along and “stimulates” him into eating his seed stock. The farm’s “GDP” temporarily rises. But next year, he will starve to death!

      I think one needs to distinguish between the productive class and the parasite class. Both may be rich, but the former is working to produce the stuff needed to support human life, and the latter are of course attacking the former. Inflation bestows no benefits on the productive class…

  • Freegold see FOFOA. It turns their vodka into water.

    • Keith Weiner

      Elaisa: If freegold is the idea that on the one hand are government-issued paper currencies and on the other hand is gold, and the market can freely price the one in terms of the other, I disagree that this is the ideal (and I think it is basically what we have now).

      My job as president of the Gold Standard Institute is to present a proper, unadulterated gold standard and show why it is correct.

      In short, repeal the laws that force creditors and long term contractors to accept paper, repeal the taxes that make owning or trading in and out of gold and silver expensive, difficult, or punitive, and open the mint to the (seignorage) free coinage of gold and silver–people can bring in their metal and get a like amount in coin form.

      It is absolutely essential that people own gold and silver coins. One could call this a gold coin standard.

      Then they will choose to enter into credit relationships such as real bills and bonds, but one cannot reverse cause and effect and one cannot achieve anything good by trying to compel these things by fiat.

      One other thing. In a gold standard such as I describe, it is the people who set interest rates in an elegant process that leads to stability of the rate of interest. The floor under the rate is set by the marginal saver; if it falls below his preference, he sells the bond and buys the coin. The ceiling is set by the marginal entrepreneur. If it rises above his productivity, he buys the bond.

      Interest rate stability is important because every change in the rate of interest destroys capital (and capital destruction is the defining characteristic of our present era).

  • Dave Holden

    Unless the crisis causes the current monetary system to collapse I see there being about as much chance as Keen’s modern debt jubilee, NGDP targeting or MMTer helicopter drops happening as I see a return to the gold standard.

    My own preference would be for a non debt based monetary system –

    On Fiat vs Gold standard this article I found interesting.

  • Squire

    Perhaps Keen, like many economists who talk against austerity are really just saying, in lieu of debt liquidation we should just do like Japan and stimulate.

    I don’t know what his idea is about a debt jubilee. Will the government pick winners and losers? Could we have 6% inflation while freezing government spending? Or, could we have seriously negative interest rates for a decade and reduce everyones wealth?

  • In defense of ”…when a crisis hits, European governments will be forced into imposing austerity on countries that desperately need a stimulus.”
    Perhaps, as Roger M Mitchell and others say, “Mitchell’s laws: The more budgets are cut and taxes increased, the weaker an economy becomes… Austerity = poverty and leads to civil disorder.”

    Perhaps as Ellen Brown says,
    “Today… governments and gamers alike are convinced that the only alternatives for addressing the debt crisis are to raise taxes, slash services, or sell off public assets. We have forgotten that there is another option: cut the debt by borrowing from the government’s own bank, which returns its profits to public coffers….”Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession. ”


    Yes,stimulus, but lend them the currency.WE MUST STOP THE STUPID PRACTICE OF PAYING INTEREST ON OUR OWN MONEY. The banks have proven they are not trustworthy to issue our currency and Fractional Reserve Banking should be taken away from them.

    Read: “Great News !! Zero Income Taxes Solves Worldwide Economic Crisis.

  • Jesse_Fan

    I see that my earlier comment was not approved. Was there something factually wrong with what I stated?

    /* I disagree that this is the ideal (and I think it is basically what we have now).*/

    How is that true when US Treasury and the Fed value their gold at the transactional value of $42.22 an ounce?

    And how is that true when there are punitive capital gain taxes on gold? (long term 28%)

    And how is that true when there is a huge OTC market (LBMA) and a COMEX market where gold is traded much more in paper than in physical, but in effect affects the physical price discovery mechanism?

    Overall Keith – I don’t think what we have today is Freegold.

    • Jesse, I was out of town and the system automatically puts on hold comments that contain more than one email link. When that occurs I have to manually approve them. Keeps the spammers away. JH

    • Keith Weiner

      Jesse: I don’t think accounting fictions at the central bank make any difference.

      You’re right, capital gains taxes throw a spanner in the works.

      My point was that if you have money and interest in the realm of pure and perfect fiat, and gold off to the side, then gold cannot perform its function. People can hoard it, but that’s about it.

      • Jesse_Fan


        /* My point was that if you have money and interest in the realm of pure and perfect fiat, and gold off to the side, then gold cannot perform its function. People can hoard it, but that’s about it.*/

        I would appreciate if you would take the time and study this write-up How Credit suppresses the gold price . The author writes it with crystal clarity and should convey the essential idea.

        Gold will perform its function par excellence, which is value retention .

        Yes people will hoard it, but they can also trade for goods and service with outright gold settlement, therefore gold can be exchanged freely as well.

        The beauty of keeping gold out of the Medium of Exchange function is that there can be no fractionalization of real wealth .

  • Squire

    Michael Moore, Ellen Brown, and now justaluckyfool, the great modern monitary thinkers.

    Just like with the Social Security Trust Fund that has IOUs from the U.S. Treasury, making it a complete farce because you can’t owe money to yourself, you can’t lend to yourself either.

  • To Squire,
    Thank You,but if only I were in there class !
    You can’t owe money to yourself,you can’t lend to yourself either.
    Does that mean the Fed cannot purchase assets?
    The Fed cannot purchase the billions of dollars of “MBS”s
    The Fed could purchase ALL of the assets of All of the banks and financial institutions of all and any of the “Too Big To Fails”
    But just imagine if they LEND them the money ($100 or more Trillions) AND THIS TIME CHARGED THEM INTEREST,
    Read “Great News !!Zero Income Taxes Solves Worldwide
    Economic Crisis”
    They can do it, but they are scared of “moral hazard”
    So they say. But really they are scared of taking back from the rich and powerful what belongs to the people!

  • The social welfare state was intended to off-set the growth of communism. But when communism died, the social welfare state spent the peace dividend on more social welfare state. Bankruptcy and currency wars are the last mating calls of the social welfare state as the meteor augers in.

  • cyrusp

    “We need a gold-based monetary system.”

    A gold based monetary system is a stupid, stupid, stupid idea if you continue to allow banks to endogenously create money out of thin air.

    That is the root cause of our problems today. Banks have no restrictions on how much money (credit) they can create – so they fund one ponzi scheme after another. Even during the days of the gold standard banks created far more credit than the underlying gold supply.

    If you truly want a gold standard you need to move towards the Biblical/Islamic banking systems:

    – Ban debt
    – Ban usury
    – Ban endogenous money creation and fractional reserve banking
    – Only allow investments through equity partnerships

    Before criticising Professor Keen’s ideas at least familiarise yourself with his positions on endogenous money. This article is a great primer:

    • Keith Weiner

      Cyrusp: Stupid, eh? With all due respect, … no, nevermind.

      Freedom is considered a “stupid, stupid idea” by all too many.

      The gold standard is based on the radical idea that people can run their lives better than a central planner even if the central planner were somehow smart, honest, and had no perverse incentives (all three assumptions have been proven FALSE).

      As to credit creation (banks cannot create gold of course), there is no particular reason why credit should be limited to the amount of money. For example, if I lend you an ounce of gold due Dec 31, and you lend it to Jeff, Due Nov 30, and Jeff lends it to Jesse due Oct 31, now we have one ounce of gold and 3 ounces of gold credit. Is this fraud?

      As to religious dictates, since they offer no reason they deserve no response.

  • Perhaps, we all should re read ,”Must Read Posts:
    “The Smartest Guys in the Room” by dailycaoitalist.
    Economic gurus are in the same class as investment guru
    in that they are trying to predict a future event.
    Past perforance is no guarantee of fure performance !
    As for Steve Keen,justaluckyfool believes this statement to be dead on,”The Debtwatch Manifesto by Steve Keen (Jan 3rd, 2012)
    “The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century …
    This was made possible because banks and financial institutions are allowed Fractional Reserve Banking,a system that allows them to “print” money.
    As for Michael Hudson ,justaluckyfool has as a guide
    his explainations of …”"…. The Mathematics of Compound Interest
    A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at five per cent per annum.”
    This is the MO used by the banks and financial institutions to “gain all the words wealth (gold?).
    This is the core of “Great News !! Zero Income Taxes Solves Worldwide Economic Crisis”

    Anyone that attempts to predict the a future event is a fool,if by chance correctly then they are just a lucky fool, yet still a fool.

    • cyrusp

      “if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon.”

      That’s a great insight justaluckyfool…

      It’s why our ancestors in their wisdom forbade usury.

  • Fool, why doesn’t the Fed just print $100 or $200 Trillion and just give it to us? Isn’t that the solution according to the brilliant theorists you cite? Just think, everyone would be rich. There would be no need to borrow or lend. We’ll just buy, buy, buy and everything will be perfect. JH

    • cyrusp

      Printing money and giving it to the people does NOT create purchasing power and Professor Keen never said it did.

      It is merely a transfer of purchasing power. Away from the usurious ponzi merchant shylocks in the banking industry back towards the people who were defrauded in the first place.