 I'm actually delighted to see that somebody in the audience with a copy of the first edition over there, if you can hold it up. And somebody here with a second that I'm obviously going to sign both of them before I walk out the door. And writing the first, I felt there was a probable crisis coming along. And actually, if you take a look at the second edition, if the first chapter is an extract of all the comments about what I thought was likely to happen, I was delighted to find I could put them all in. It isn't one I had to remove. They've all subsequently happened. It's gratifying and painful at the same time. So to put this in context now, I'll go back to the reason of writing the first book initially later. But we live in a world of crises. We had the one mention of peak oil a moment ago, of course, global warming as well. And it seems to be actually about, you've got to call it Dublin warming right now. It came from all this warm weather clothing that is still in gathering mold inside my suitcase. And of course, the financial crisis. If you look at the three, the first two certainly in my own country are hotly denied. I find it quite bizarre to be in a country which is arguing that climate change is taking place. But you get people who we call denialist versus the scientists. And there are skeptics about peak oil as well versus the geologists who first put the idea forward. Now, the third one, of course, when I first called the crisis back in December 2005, it was a case of going loudly public about it. And I saw one economist, neoclassical economist, being asked about my views and saying, I think Keen isn't a minority of one. I'm now in a minority of 100%, including the other 99, and even the 1% agrees with me. It's happened. You can't deny it. But the other two, if they do occur, there's no way that humanity can say, well, why weren't we warned? Because we certainly were. You can go back to Keeling on the carbon dioxide record from Manoel, Carl, from 1958. The Meadows Group talking about systemic infall, wrink, links, and failure with the entire system from 72. And of course, King Hubbard gave us the idea of peak oil back in 56. And the second line you can't see there with the resolution problem says, I actually have to guess myself what it says. Yeah, it'll occur because professional advice has been ignored. Pardon me, losing part of the screen. I hope that won't be crucial. We'll soon see. Now, they're actually losing the top and the bottom of the screen. That's great. But we'll get there. OK. Now, the financial crisis is very, very different because the consensus of economists not only didn't warn about it. They were saying, look forward to sunny weather. They predicted a blissful economic future. And my favorite quote there came from the OECD, were in June of 2007. They literally came out and said, our economic forecast remains quite benign. Then the patient dies of cancer. Now, in fact, the crisis occurred because we followed the advice of neoclassical economists up to and including, of course, the Maastricht Treaty, which is drafted by neoclassical economists. So we followed their advice and a crisis has occurred, which is not what you normally have happened, which I think is why the public is in such a state of confusion and, to some extent, denial as well. Because we've done what the experts said and we're having a catastrophe. That isn't what you normally have happened. So how could it be that way? Well, to me, we hold onto a set of beliefs which are the neoclassical approach to economic theory despite logical flaws and despite empirical failures, including the massive one we're in right now. And people often look for an ideological explanation for that. And that makes partial sense because it does justify the current distribution of income and power. But to me, it's unsatisfactory. That was all it was. It wouldn't hold on impermanently. And most people I know who are neoclassical economists are amongst the most altruistic individuals I've ever known. They genuinely are doing what they're doing because they believe it's better for society. Despite the fact they're preaching a philosophy of individual gain in every man for himself. They're doing it because they believe it'll make society a better place. It's one of those weird paradoxes. And, of course, in following the advice that they've been given, we've destroyed huge amounts of wealth and power at the same time. It certainly worked for the power structure while the system was rising, but it's been catastrophic. I noticed one of your poor billionaires only has 11,000 euro left. Yeah, that he's letting you know about. So I think there's a deeper reason for the tenacity of the views they have. And that is that, quote, the great American humorist mentioned. He said, explanations exist. They've existed for all time. There's always a well-known solution to every human problem that is neat, plausible, and wrong. And the neat and plausible. Neoclassical theory is neat and it's plausible, but it's fundamentally wrong. And this goes to the level of truly fundamental flaws in the theory as well as the empirical failures. But they ignore them because it comes back. It feels neat and plausible. It explains everything. And as Popper put across so effective, well, not quite effectively enough and belong a long time ago. But if a theory explains everything, it explains nothing. And that's the great problem. You can't contradict it. And even what we're seeing right now, the Neoclassical defining ways to say, well, our models could have predicted this. All we had to know was no one size of shocks were coming along. And now they're putting in variable shocks to make their models fit the data that they couldn't fit without modifying the shocks. So what we have to get to the stage where the fact that it's wrong trumps the fact that it's neat and plausible. And I'm working on what I might call complex and sensible, but generally right models of the macro economy. And we need to get to the stage where we don't go for the plausibility. It has to sometimes have implausible elements because we're living in a complex system and you don't get straightforward housekeeping answers to a complex system. So that's the ambition of the Bunking Economic to the second edition. And I'm writing to a wider audience because I knew Neoclassicals would not bother reading the book first time round. Okay. This time round, they might actually consult it. So I've actually written more academically. One decision I made I regret in the first edition was to make it less like an academic book. I put years and author references, but not page numbers. Now in the second where I've had a chance you'll now find I've got the references to the page on which I'm taking a quote from some piece of academic research. So that's where they can go and check and see, no, I didn't make it up. That actually is what Mascalel said. So to me, the real truth of the whole problem, the reason the Neoclassical economists continue believing this stuff is that they don't actually know their own theory. They think they do. They've been taught a very superficial level of understanding through the textbooks through which they learnt the discipline in the first place. And that's right from trivia, like Grigory Manku's appalling first year texts through to Mascalel's, what looks like hyper-mathematical PhD texts. They're all superficial. The strange thing is Mascalel actually cites most of the important literature and then misinterprets it. It's quite remarkable to read. So they think they know it, but they don't actually know it. And actually, I'm not going to be totally critical of economists for behaving that way because physicists don't go back and read Einstein's papers to work out whether the textbook's got a equals MC squared right. You don't have, that's what textbooks are supposed to do. They're supposed to mean we don't have to go back and check the graph to ask the master of the research literature because it's summarized, effectively, if rather more pedestrianally, in the text you read. So it's quite a legitimate thing for people trained in a discipline not to bother going back and reading the originals. But that's been something which works in most disciplines, doesn't work in economics. The textbooks do not transmit the state of the actual research properly. If they talk about it at all, they distort it. Normally they don't even know it happened. So if you look at what then comes out of that, you get people like the editor of the American Economic Review, Macroeconomics, a certain Olivia Blanchard, and then we all know, I imagine, now heading IMF yet again, writing about macroeconomic theory at the time and saying the state of macro is good and praising the dynamic stochastic general equilibrium model, DSGE, and saying it's simple, it's convenient, it's replaced ISLM, and the great advantage it has is it's formally, rather than informally, derived from maximization by firms and consumers. And so that is an advantage. Now I've got the 2009 date there because that's when it was finally published in an academic journal. Notice the timing. But he actually put it up as a working paper on the 13th of August, 2008. Now that is one year and six days after we now record the start of this financial crisis with the BNP shutting down three of its funds that were exposed to the American sub-prime market. How anybody could publish that at that stage is a sign of utter delusion. Now, a year later, he's changed his tune somewhat and said, well, obviously what they called the Great Moderation, lulled us into believing we knew how to run the macroeconomy. Clearly we've got a question that assessment which looks like a positive development. Maybe our theories are wrong. He said, of course, we shouldn't throw the baby out with the bathwater. The baby being DSG modeling. And my attitude is that baby should never have been conceived. Okay? And the best way to establish it is to go to, in fact, what you might argue, the father of the, well, I don't know the father, the mother of the theory was Robert Solow because his growth model was used as the basis of DSG modeling. But he rejects it and he's been doing it vehemently for many years. In 2001, he talked about what the model is like and it has an immortal household, a single consumer, who's the only worker and the only firm that he happens to own 100%. They get the wages and the profits and he decides what to produce using perfect markets with infinite foresight, et cetera, et cetera, et cetera. He said, that is nothing but the neoclassical growth model. He said, but do you take a look at it? When he built the model, I was sure that one thing it didn't apply to was short-term fluctuations. He said, now get any article on macroeconomics. It'll be a slightly dressed up version of my growth model. And he said, what I want to understand is, how on earth did that happen? Pardon missing out the final, I'll have to do a bit more reading here than I normally do. The question I want to circle around is, how did that happen? He's incredulous, frankly incredulous, that his theory became the basis of macroe. Now he went back to say, well, how could you defend it? What could you actually use? And he said, you could claim that well-worked out neoclassical economic theory established that that's the only way one can strictly do macroeconomic theory. And he couldn't put it more simply, that claim is an illusion. The reason it's an illusion is, the Sonnichon-Mantel-Drabour conditions. Now, how many in the audience have heard of those conditions before? I get a rough hands up. A few, that's not bad. That's better than I normally get. Okay. They establish that if you start with disaggregated different consumers, different commodities, and try to aggregate to get a market demand curve, that market demand curve can have any polynomial shape at all. Any curve you can draw, by rubbing your finger along a page, not taking it off the page, and not going back and crossing over anywhere you've been beforehand, can be a demand curve. A market demand curve. That's what those conditions prove. What that means is, you can't assume what they call the law of demand. We say the market demand curve slopes down because individual demand curves do. And yet, not only do they treat the macro that way, they model the entire economy as a single utility maximizing agent who obeys the law of demand. Now, that is mathematically false. And that's not, of course, what Neoclassical wanted to prove. They wanted to find something very different. They wanted to establish that, yes, the law of demand does survive aggregation. That was their ambition. But they proved otherwise. And that applies, even if you're summing up what you might call well-behaved Neoclassical curves. So if you imagine having Robinson Crusoe with a downward-slaping demand curve for coconuts, added to Man Friday with another downward-slaping demand curve for coconuts, when you work out the market demand curve, this is a legitimate market demand curve. Now, if you wanted to equilibrium analysis with that good luck, because being able to overdraw an arbitrary curve and say that's a demand curve, and even if you can draw a supply curve through it, which, strictly speaking, you can't, there's another story that I cover in the book. How many intersections would you like to have with that demand curve, sir? There's no way you can do equilibrium analysis with that methodology. And what actually applies with this theorem is proved by contradiction, because they start from assuming that market demand curves do obey the law of demand. They then say, well, how can we prove this? We have to show you added to their two consumers with different tastes and different income sources, consuming different goods. And then say, okay, under what conditions, starting from that point, under what conditions is it true that the market demand curve has the same characteristics? And you find that you've got a contradiction. You find that it'll be true if you have all consumers are identical, consuming identical products. That's what it really boils down to. Well, that's proved by contradiction, that you cannot aggregate individual demand curves and get a market demand curve with the same characteristics. That's not how they've seen it, but it definitely doesn't obey the law of demand. And the only way it can do it is to have these contradictions, where you're seeing there's identical tastes consumers, consuming an identical products. And that's what really the so-called representative agent models are about. They fundamentally model the economy as one consumer consuming one commodity. And they get into dreadful problems when they try to go beyond that. So they're contradicting a starting assumption of two consumers with different tastes and different commodities and so on. Now, they should have reacted to that by saying, oh dear, even though we wanted to get this result, that you can use market demand curves like individual demand curves, and then of course get to the macro economy and do the same thing, we can't, we then have to accept that markets aren't simple aggregations of individuals and we have to go beyond that. It's a bit like the Pythagoreans finding that the square root of two is an irrational number. They didn't then say, well, the F1 henceforth banned the drawing of equal-sided right-angled triangles. But that's what neoclassicals have effectively done. And Gorman is probably the classic. Gorman actually is the first person to discover this. I find it bizarre that this proof was first established in the year I was born. And he said, you actually get what they want. You know, you'd be affected if the whole society becomes like a large consumer with indifference curves in which you can derive Hicksey and compensated demand curves, if and only if the angle curves, which tell the rising income changes, consumption, if they're parallel straight lines. Now he also ignores the fact, of course, that two parallel straight lines that pass through at the same point are the same straight line, okay? They all pass through the origin. Therefore, they're exactly the same line, even that level of sensible realization of what he said doesn't come through. But he then says, those conditions are intuitively reasonable. And why are they reasonable? He says in effect that an extra unit of dispersing power should be spent in the same way that a matter to whom it is given. Now that's not intuitively reasonable. That's intuitively rubbish, okay? But that's in the rubbish the textbooks then reproduce. So they actually say they go back to the literature. That's what they say to the students. And you have to think entirely differently about this. And what it really means is that you can't treat macroeconomics as blown up micro. Macroeconomics is an emergent property of the complex system we're in. It has an entirely different set of laws, even if the micro laws apply, which empirically they can't. The way we've defined rational behavior is the behavior of somebody who if they went shopping would take, in a normal corner shop, would take one and a half times the age of the universe to walk out. That you can't shop that way to begin with. But even if it did describe individuals, then you can't aggregate from that to the collective level. So you have to have a new macro has to be an entirely independent level from micro, which of course is the opposite of the philosophy that's dominated macroeconomics for the last 40 years, where the neoclassicals have tried to derive macro from micro. And if you're again, I've got massive quotes from Robert Lucas and people like that in the book To That Effect. So what they're suffering from is the fallacy of strong reductionism. Now reductionism has been a major, pardon me, philosophical basis of the development of science over the last two or three centuries. But in science itself, true sciences, they've finally realized the limits of that. You can't reduce a one level of science to being applied, the applied lower level of science. And there's a beautiful paper about that in science by Anderson, a genuine Nobel Prize winner. Not one of the forgeries that we get for economics, but a genuine Nobel Prize. With a perfect title called More is Different. Anybody hasn't read it? I recommend reading that particular paper. And he very eloquently argues that what physicists have learned, and we're talking about a physicist's perspective on reality here, that large and complex aggregates of elementary particles cannot do not behave as a simple extrapolation of how the isolated particles do. But every different level, you get new types of complexity, new types of behavior, which require fundamental research as complicated as that which applied at the lower level, but not derivable from the lower level. And he gives a lovely little table to illustrate this and says, you might be able to put the sciences in this sort of sequence. You're starting with many body physics as the ultimate physics of, well, you might even start with elementary particle, you start with particle physics, okay? And then go across to the many body physics and say chemistry is maybe applied many body physics and molecular biology is applied chemistry, et cetera, et cetera. But no, that's not true. It's that the hierarchy does not imply that science x is merely applied y. At each stage, you get an entirely new laws, concepts, which require generalizations and inspiration as deep as the degree from which they were allegedly derived. And he finishes off saying his psychology is not applied biology, nor is biology applied chemistry. And of course, in our point of view, macroeconomics is not applied micro. But that's precisely what neoclassical economists built. And the crowning glory of that, not glory, was DSGE modeling. Now they maintain that by poor scholarship and poor technique and by ideology. And the scholarship is appalling. I would probably, if I had a bunch of neoclassical economists my history of economic thought course, I'm sure most of them would fail, okay? Even on their own literature, let alone anything they haven't read outside that. Now partly because they rely upon their textbooks, and activists, the theory have indicated, they don't know the theory has been contradicted. So Mark Tomer, for example, one of the better modern neoclassicals on the economist type pad, wrote sometime last year that he thought he better go back and read the SMD conditions. Apparently they had fairly strong implications for macroeconomics. He's actually ordered a review copy of debunking, so I'll see whether he takes me seriously on that front. But they just don't know their own theory. And again, as I say, I don't blame them all that much because they're doing what people in a sensible science do, trusting the textbooks. But what I do blame them for is not realizing how absurd what they're being told in the textbooks actually is. Now solo, obviously you're solo to trash neoclassical DSGE modeling, but he shows an example of just how poor the scholarship is. I've got to also forgive him to some extent here in the sense that solo did engage in the Cambridge controversies. And he did have a very miserable relationship with Joan Robinson, and she was capable of making somebody's life very miserable if she decided to take them on. So I can understand the visceral side of his reaction there. But he says, he's him talking about his own scholarship of Keynes. So the dominant framework for thinking about the short run was roughly Keynesian, inverted commas, he then elaborates. I use that label for convenience. I have absolutely no interest in what Keynes really meant. Was it any wonder that the same level of scholarship is applied to him? Because his puzzle, why on earth did people misinterpret my growth model? It's exactly for the same reason, Robert, that you misinterpreted Keynes. So it's a tradition of bad scholarship. And if we have to reverse that, given the state of the discipline, we have to get to the stage where the study of the history of economic thought is the fundamental part of any course on economics, but it certainly isn't right now. The other is the fetish, the technique side of things. This is fetish they have for equilibrium thinking. And they believe that equilibrium models are elegant. Shut them to a physicist. They'll crack up in a laughter that anybody thinks that nonsense can model a dynamic system. Now, again, I find this remarkable when you read a book like Maskelel, which is a difficult thing to do because it isn't exactly great pros, but alone great mathematics. But he's talking about page 700 in this 1,000 page tone that students have to suffer through to get a PhD in America these days. He said, one characteristic that distinguishes economics is using equilibrium as the center of our discipline. Now, the funny thing is whenever I attack them, well, I know you don't know your old fashion, we've moved on from equilibrium analysis, blah, blah, blah. Like a moving target. Every time he throws an allegation at us, oh, this paper doesn't use equilibrium, or we're using dynamic equilibrium, blah, blah, blah. It's equilibrium, and you'll find it when they don't realize they're under attack. They'll say it honestly. Then he says, other sciences put more emphasis upon determining dynamic laws of change. He says, in contrast, again, honestly, it's page 700 roughly, I think page 620. We have hardly mentioned dynamics. The reason, informally speaking, is that economists are good, well, so we hope, at recognizing a state of equilibrium that poor predicting how an economy in disequilibrium will evolve. That's nonsense. They have a good at assuming that everything is a state of equilibrium. And even Solomon Rudding, his 2003 paper, spoke about what's the possibility of the neoclassicals responding to a pathological event in the future, like across as we're going through now, by saying the economy is actually in equilibrium and just adjusting to large, exogenous shocks. And he then put a beautiful line after that, which I've now concluded in some more recent papers, not in the book itself. He said, but why should reasonable people believe that? But that's when neoclassicals are trying to get reasonable people to believe that the crisis has been caused by exogenous shocks, which varied in size throughout the crisis, up and then down, and back up again, and back down again, but never turned positive. And that's strange, a random process with an equilibrium of, with a mean of zero that never goes positive. And Bernanke on being an expert of the neoclassical, the expert of the Great Depression, this is, again, what we're suffering through is how did they interpret the last major event, like as we're going through? He's not an expert on the Great Depression. He's an expert on developing a neoclassical explanation of the Great Depression. And since the neoclassical theory says, capitalism can't have fundamental crises, the only explanation you can give is the butler did it. The butler in this case being the Federal Reserve, which is terribly bad because he now got the job of the chief butler. I'm delighting in his discomfort right now. Now he actually had alternative interpretations you could have taken notice of. Kindleberger and Minsky being the most important, of course. And this is the entire extract on Minsky in the, and Bernanke's essays on the Great Depression. There are 48 words to it. That's in the text. Kindleberger and Minsky have argued for inherent instability, but in doing so, I've had to depart from the assumption of rational economic behavior. Then in a footnote, he says, I don't deny the possibility, possible importance of irrationality, but it seems the best research strategy is to push rationality as far as it will go. End of consideration of Minsky, some expert. And when I try to see what is the key starting point for, if I wanted to find the floor in the apparent diamond, it's actually a lump of coal, but the apparent diamond of neoclassical theory, where would I strike? I'd strike on the theory of money. That to me is the fundamental floor. And what they do is they ignore the level of debt, which is why we've got into a debt crisis while they've been stewards of the economy. And the logic for doing it is the following. They say, well, an individual has two sources of spending power. You can spend out of income or you can borrow money. So your two sources of income as an individual are your income plus the change in your debt level. Now, in macroeconomics, they count the first but ignore the second. The argument being that one person's asset is another person's liability. So the actual aggregate level of debt doesn't matter. This is Krugman in his most recent paper trying to model the financial crisis. And what he sets up as a model of lending being a patient agent lending to an inpatient agent, ignoring banks and the whole mechanic. So his vision of what's going on is something like this. You have a patient person with lots of money, inpatient person with none. And what happens is that this is bank-acted gang of intermediary. Some of the money goes across from the patient to the inpatient, which means the patient agent spending power declines, the inpatient ones goes up, and the aggregate, there's no change. And that's fundamentally why they ignore the role of debt in analyzing the state of the macroeconomy. And they ignore banks as well, of course. Well, that is wrong from first principle. So I've actually got my slide out of sequence. See, I might just jump a slide. I didn't realize that happening there. This is more what happens. You have an entrepreneur who approaches the bank for a loan. And the bank says, that's a great idea. Here's a million dollars or a million euro. By the way, you owe us a million euro. The simultaneous creation of the deposit and the liability. Though nobody has to forgo spending power for the additional spending power of debt to be created. And that's an argument which was actually put forward by a senior vice president of the New York Fed back in 1969, when he was trying to argue against the monetary experiment, saying it won't work. And his reason was in the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The exact reverse of the causal process that Friedman argued was how money is created. What that means is that new loan puts additional spending power into circulation. It's not spending power that's been taken for somebody else, it's new spending power. So you have to therefore look at change in debt because aggregate demand exceeds demand from income alone. So what I'm calling the Vollerach-Schumpeter-Minsky law is a generalization of Vollerach's law for a credit system. And that's aggregate demand includes the growth in debt and is then spent on not just goods alone, which is the way economics is analyzed so far, but goods and existing assets. So aggregate demand exists of expenditure financed by the sale of goods, which is where Vollerach law applies, plus also debt financed entrepreneurial spending is what we want, and that's what Schumpeter focused upon, but also debt financed Ponzi demand, which is Minsky's emphasis. And then that's spent on goods and services, but also buying financial claims on existing assets. And I call that part of the supply and so to speak, net asset turnover. And you can break that down into the price level of assets multiplied by the quantity of assets multiplied by the turnover fraction of assets. And that means when you look at the change in aggregate demand, that's in the change in GDP plus the acceleration of debt. And that's what drives change in asset prices, fundamentally. So to take you through that, why did they ignore, why did they ignore the level of debt? The argument comes back to saying, again, this is Bernanke, that even debt deflation is merely a transfer from debtors to creditors. Now you'd think somebody writing about the Great Depression would be whether the few of those debtors went bankrupt, and therefore gave nothing to the debtors, okay? But the level of ignorance in leading neoclassicals is simply breathtaking. And again, when I wrote Demunking 2000, the 2001 version, I got the argument about Keynes attacking old textbook economic, we've moved on since there. Well, I'm now up to 2011 in the references I quote in the book, and I'm taking on Krugman, Bernanke, et cetera, et cetera. And I yet again still have that sort of claim thrown my way in an audience. So I had a leading regulator comment in a seminar that I gave in Citi that I'm just attacking a straw man. I said, well, I'm attacking a straw man. I'm attacking Krugman, Bernanke, Blanchard, and Lucas. I said, if I'm attacking a straw man, you're avoiding Nobel prizes to straw men. You're making straw men the head of the Federal Reserve and leading bureaucrats. Forgive me a break, it's not straw men at all. So again, Krugman again, ignoring the level of debt. So they're wrong to ignore private debt, and you can actually then take a little bit, three factors that matter in terms of the level of private debt. One is the level of debt itself, outright. That is an issue, the rate of change of debt, and how fast the rate of change of debt is changing, the acceleration of debt. And when you look at the level of debt, this is what they were ignoring. And of course, the Federal Reserve collects this data. This is the ratio of debt to GDP in America for the last 90 years. The first peak was the Great Depression. The second peak is where we are now. That peak in the Great Depression involved two years of massive deflation. From 1930 on, the debt level was actually falling in nominal terms. So the real comparison of where we are now is that level of debt, and we cracked through there pretty much at the time of the stock market bubble in the 80s and slump afterwards. We're running, with this crisis began, with the debt ratio 1.7 times as high as the Great Depression. So that's why, it's one of the many reasons, it's a bigger crisis than the Great Depression itself. And you can actually quantify just how large and impact did the change in debt have, and how rapidly did the turnaround and the rate of growth of debt caused the crisis. And this puts a bit of a perspective on the austerity programs that are being tried right now, because they're seeing the problem as being too much sovereign debt. The actual cause of the slump we're in right now is the reduction in the level of private debt. That's what's actually causing the degree of the macro slump. But here, if you look at the level of change in debt in America, it peaked at $4 trillion per annum, increase in debt, when America's GDP was roughly $14 trillion. And then, at the depth of the downturn, the reduction in debt was running at $2.8 trillion a year. So that's a turnaround from $18.3 trillion in total turnover, both goods and services and asset markets, to $11.5 in just two years. And what I'm doing here is showing the blue line shows, adds the change in debt to GDP, to give you what aggregate demand really is. And it's pretty obvious why it was a sudden and sharp crisis. And also why there's been an apparent recovery, because you can't maintain that rate of decline of debt indefinitely. So therefore, it turns around at some point, that's a slowdown on the rate of decline of debt. It's still reducing demand at this stage. And we'll continue doing so, which is why the debt level is so intractable. Now, yes, there's been a rise in government debt, and that's what's the focus of current political debate, the sovereign debt crisis. But in America, that was about 30% of GDP, versus a 47% fall in private debt. And they're still ignoring the level of private debt. Now, if you take a look at the aggregate picture, it's fairly obvious which one matters more. Private debt levels are far greater than public debt. And of course, when you're in debt as a private person, you can't print money to pay off your debt. You can in the government, when you have a sovereign currency, which the Europeans don't have. But that is the scale. You can see just how drastically that private debt levels paid down. And yes, the public debt was risen, but it's rising in response to this. And therefore, we're misdiagnosing the problem to focus upon sovereign debt. The crisis is fundamentally one of private debt. Now, this is looking at the correlation and the change of debt to unemployment. And again, from a neoclassical point of view, this correlation shouldn't be zero, but it should be fairly small. A correlation is 0.96 between change in debt and the level of unemployment. Okay? A bit better, a bit different than insignificant. The only way they can get any significance in their own theories is the rather hobbled version of the credit accelerator that Bernanke had as a financial accelerator, where he still argued the distribution of debt matters, not the aggregate level. That's changing the aggregate level correlated to unemployment. But that itself is, I wasn't surprised to have a correlation of that nature. They even are surprised by the scale of the R squared. But the argument about the credit accelerator then says the acceleration in debt should be correlated to the change in unemployment. I've got to admit to being a statistical coward here. I knew that was implied by my analysis, but I didn't dare look at the data. I thought it just won't support it. It's just too, that's a bridge too far to expect the economic data to support, even though theoretically it was correct. So three guys, Biggs, Myron, Peck beat me to it. And they defy what they call the credit impulse. And then once they'd shown it was there, I took a look at the data myself. And this is the correlation between the acceleration in debt and change in unemployment. Turned around so you can see the correlation visually. And you get an R squared of minus 0.75, which is you're correlating a second differential to a first in the economic data and still getting an R squared that big. It's not something you can ignore, but neoclassicals continue to ignore it. And it even applies at the stock market level because when you argue acceleration of debt is the factor in the change in aggregate demand, that is then going to be the driving factor in change in asset prices. So to maintain continuous rising asset prices, faster than GD, faster than consumer prices rise, you have to have accelerating debt, which is why asset bubbles always crash. They have to be, you can't maintain positive acceleration forever. And even looking at something as volatile as the Dow Jones over 20 years, that's going back to 1990. That's the correlation of acceleration in debt to change in the Dow Jones on a monthly basis. It's not big, but it's still positive, positive and certainly significant. Much more obvious when you take a look, pardon me, at the housing though, I haven't got the housing correlation as 0.8. If you correlate the acceleration in housing debt to change in the case shield index, you get a correlation coefficient of 0.8. So fundamentally, rising house prices are due to accelerating debt. And of course that would apply in Ireland as well. So to get a realistic theory, we now need to go to Minsky. Has anybody here read Minsky? A few hands, many more, there would have been some years ago. So Minsky's thesis starts with an economy in historical time. The both those elements are missing from neoclassical theory to begin with. If you're in historical time, there's been a debt induced recession in the recent past. And that means that after that crisis, both borrowers and lenders are conservative about the amount of debt they'll take on, which means that only conservative projects are put forward. But because the economies recovered, most of those projects are going to succeed. And since they succeed, firms think, oh, we were too cautious. If we'd borrowed more money, we would have made a greater levered profit. So debt to equity ratio is rising. You start to put a high valuation on assets. And Minsky's classic phrase, stability is destabilizing. A period of tranquil growth in a capitalist economy with sophisticated financial institutions and an uncertain future causes expectations to rise. And that rising expectations leads to rising levels of debt, rising levels of investment and so on. Now, for a while that gives you a genuine increase in economic activity. You're investing more, the economy grows more rapidly. That's more the Schumpeterian side of things. But ultimately, you start getting what Minsky calls the euphoric economy, where people are so caught up in the growth of the whole system and the financial side as well, that they are literally using the word euphoric to describe the moods they're in. There are other reasons for the euphoric in the finance markets. We're all quite aware of those, I'm sure. Now, also you have an endogenous expansion in the money supply. The money supply will grow. Again, this is the endogenous money argument. And that of course supports the growth of both riskier investments, which are likely to have more losses in them, and asset speculation, which is a 100% losing game. But when somebody is borrowing money to gamble and rising asset prices, they're not producing new assets. If they do, they play, as I think I was told, some 500 billion euros for a small bit of land on the outskirts of the Dublin Business Center, which now sells for 75 billion, okay? It's, they might build something ultimately, but the main thing they're doing is gambling, the asset price will rise, and they're actually producing additional cash flow producing assets. So Ponzi financiers, from Minsky's point of view, people whose cash flows from their businesses are less than their debt servicing costs. So they only make money by selling assets on a rising market. But until they sell the asset, they've got a desperate need for cash because they're losing money. They've got to continue borrowing to amortize the money they've already lost from the comparison between their cash flow and their debt servicing costs. So they've got a dramatic impact on the demand for money and the price of money because they have to have it, otherwise they fold. So you get rising debt levels, rising interest rates, you ultimately get to a crisis. It can come from people selling assets to liquidate them because their own costs have risen. It can just come from that acceleration slowing down. That's what actually causes it because you can't maintain that constant acceleration. So the asset market stops rising and as soon as it does, the Ponzi to bankrupt. They're the first ones to fold because they can't sell assets for profit anymore and they can't roll over their debt. So they've had it. And then of course, asset prices collapse at that point. The expansion of the money supply goes into reverse, investment evaporates you back where you started again. That's basically Minsky's model. And it's a cyclical model, but it also includes the repeat of the process when debt levels fall, but you normally start from a higher level of debt to GDP because fundamentally you take on the debt during a boom, you've got to repay it during a slump. You get a ratcheting up effect coming out of it. Ultimately, you get to the stage where you take on such a degree of debt that the economy gets overwhelmed and collapses and that's where we are now. And the only way out of it is to abolish the debt in some sense. You've got to reduce the private debt. The slow way we do it is by bankruptcy. The difficult way would be by doing it by treaty in some sense, but that'd be a far better way to go about it than what we're doing through right now. So I've built mathematical models of the spike in blinding Goodwin's growth cycle model. Anybody here aware of the work of Richard Goodwin? Okay. One of the few economists worth reading in the last 60, 60 years, a leading developer of complex systems economics and built a brilliant model of the economy, the growth cycle model back in 1967. I then incorporated Minsky's financial instability hypothesis in that in my work in 1995. And then I've since added a theory of indulges money creation working on the, using the basis of work by European economists who call themselves circuit theorists who couldn't do the mathematics, but I put it in mathematical form. And it's quite easy to show Goodwin's growth model. You start by staying level of capital, determined the level of output via an accelerator relationship. And then you say output determines the level of employment. Employment, of course, determines the rate of employment which you feed into a Phillips curve to get the rate of change of wages integrate that and you've got the wage level, subtract that from output and you have profits, integrate, Goodwin simply had all profits being invested, integrate that and you come back to where you start from again and you get a cyclical model. It's an inherently cyclical model of capitalism. The equilibrium is neutral. For those who know the Reagan values, the dominant Reagan value has got a real part of zero. I've integrated that into Minsky's theory by adding in this process, I'm repeating this slide, this dive right past this one, you've already seen that, pardon me. And what I've worked out is it's possible to model endogenous money creation very, very simply by borrowing an idea from accountants. And that is double entry bookkeeping. But rather than putting numbers in there, I'm putting flow rates. So I simply say that there's and it's a modeling 19th century free banking where you have to lend physical notes to actually create a loan. If you have money in the vault, you have to lend it across to the firms. You then record the loan. You charge interest on the loan by compounding the debt, which means the firms have to make a payment into your safe. You then record that they've done it. You pay wages to workers and workers and bankers both consume, paying money to you. You repay the loan to the bank by putting money back on the vault again, record that it's done and when investment takes place as a creation of new money, where you increase the deposit and simultaneously increase the asset. Now, that's simply fed into a symbolic, of sensible terms for each of those elements. So for example, B is going to be the rate of interest on loans times the outstanding level of loans. Now from that, I can derive a continuous time model of financial growth. I stole the equations out of there because I was talking to a lay audience last night. I didn't want to freak them out and haven't put them back in here again. But what you then get is a model which when I include Goodwin's components to it, I can reproduce something like this. This is the American data on inflation, unemployment, which Neoclassicals took seriously and the level of debt which they ignore. Smooth data heading out of course to 2010 before a turnaround began to occur in inflation and a bit in unemployment. But that's the data in the American economy before the rescue schemes began. This isn't one of the outputs of my model. I'm not trying to empirically match the data but qualitatively I want to match the behavior. And structurally what you get out of the MISCII is an explanation that includes both the Great Moderation and the Great Depression. And one thing I was delighted by when writing my first paper on MISCII back in 1995, I got exactly the same dynamics in a model with implicit money. A period of rapid cyclical cycles then became a smoother period, very little fluctuation and then bigger cycle leading to a breakdown. And I entered the paper with what I thought was a rhetorical flourish. And I said the chaotic dynamics in this paper should warn us against treating a period of tranquility in a capitalist economy as anything other than a lull before the storm. Boy, I was glad I was rhetorical 15 years later. Thank you.