Reviewed by Francis Lee for The Saker Blog

It would be true to say that in official or mainstream ‘left’ political circles the economic theories of J.M.Keynes (1883-1946) enjoy a dominant and in my view somewhat privileged position. He was a life-long Liberal and member of the fashionable ‘Bloomsbury Group’. *(see below). He joined H.M.Treasury and in due course became the UK’s chief negotiator during the Bretton Woods conference in 1944. He was never a particularly physical robust man and died of a heart condition in 1946.

Given his class background it was hardly surprising that Keynes himself was a Liberal – large L – and his view of the working class ran as follows. ‘’Ought I, then, to join the Labour Party? Superficially that is … attractive, but looked at closer, there are great difficulties. To begin with the Labour party is a class party, and this class is not my class … the class war will find me on the side of the educated bourgeoisie.’’(1) Moreover: ‘’How can I adopt a creed, preferring the mud to the fish, which exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of human advancement.’’ (2) Sounds almost like a declaration of class-war! He obviously had no truck with the Labour movement.

Suffice it to say that most leftists have not bothered to read this particular theorist in any great detail. Moreover, this lack of attention is also true in spades when consideration which should be given to Schumpeter and Veblen (let alone Marx) is not forthcoming. Ms Pettifor’s contribution to recurring economic theories and issues represent little more than a paean to Keynes who apparently could do no wrong. Accordingly, as understood from the Keynesian perspective, malfunctions and recurrent breakdowns in the capitalist system are situated in the circulation process of capital. But this process of circulation is complementary to the process of production, but this latter related process does not merit a mention by the good lady, not because she does not agree with it, but because she is simply unaware of it.

She writes that:

“… money is nothing more than a promise to pay” and that as “we’re creating money all the time by making these promises … “it makes no difference where the government invests its money, if doing so creates employment”(3) Oh, but it does make a difference where the government invests its money. The various privatisation policies and projects have been government boondoggles whereby public monies were indiscriminately thrown at various projects which more often than not collapsed into a financial black hole of indebtedness which had to be rescued by further state injections of cash. These companies had in any case used the cash to downsize the work-force and in so doing actually increase unemployment. This was instanced in the UK, and Australia with their government sponsored Private Finance Initiatives and Public Private Partnerships which saw the public purse looted by opportunist rent-extraction predators. And it made no difference whatsoever that this was carried on by both Conservative and Labour governments.


Ms Pettifor apparently believes money supply is infinite and can be used to invest in various programmes without any adverse consequences. The first half of this sentence is perfectly correct; the second part is not. Increasing the money supply, does not necessarily translate into an increase in value or an increase in demand in the broader economy. Money at least fiat or paper money, is not value, it is simply a claim on value. This money printing policy seems like an updated version of ‘Say’s Law’: supply – in this instance fiat money – creates its own demand and through the Keynesian multiplier effect, incomes and jobs can expand. Yes, but we must insert a caveat: only if the multiplier is greater than one.  There is also the assumption that during this process of circulation the velocity of money will remain constant. But this begs the question. There is no reason to suppose that such injections of fiat monies will reach the real, value-creating, economy like salmon swimming upstream to spawn. This explains why large inputs of QE injections never got into the real economy; indeed some of these monies went straight back into the reserve fund at the Fed, which even paid interest on the deposit. Moreover, most of this QE free money which did get into economy was diverted into property speculation and stock buy-backs.

This notwithstanding Ms Pettifor continues to argue that all that it is necessary to do is to keep the cost of money, i.e., interest rates, as low as possible, and trusting that this expansion of money will drive the capitalist economy forward.  Thus there is no need for any change in the mode of production – which is not even a consideration for Keynesians – all that is needed is to crank up the money machine ensuring an infinite flow of money and – et. voila! ‘’God’s in his heaven, All’s right with the world.’’ (Robert Browning).


This view is generally echoed by Ms Pettifor’s contemporaries: Paul Krugman, Joseph Stiglitz, Stephen Keen and most other Keynesian academics. In the UK, the leftish leaders of the Labour party who were once grouped around Jeremy Corbyn and John McDonnell looked to Keynesian economists like Martin Wolf, and Ms Pettifor for their policy ideas and analysis. This was a part  of the struggle between the neo-liberal hard-liners and the (above) Keynesian liberal reformers who form a pseudo-opposition to the existing powers that be. This binary political of reform and reaction is here duplicated in the economic sphere: progressives and reactionaries, Democrats and Republicans, centre-left and neoliberal right.

Insofar as these Keynesian theorists are in opposition to the neoliberal bloc they should be (critically) supported. Unfortunately, however, their analyses of the situation are superficial, and their putative solutions are plain wrong. But they continue to dominate the economic narrative with an assertion that regards finance as the principal force undermining capitalism. This means in effect that the fundamental restructuring of the economy and defanging of the capitalist system cannot take place.


It is worth mentioning that at present interest rates, long term and short, are not only low but increasingly negative. US 10-year Treasuries will give you a yield of 0.65% in nominal terms, but factor in US inflation, currently running at 1.5% and the real, as opposed to the nominal yield, adds up to precisely (negative 0.85%.) Moreover, sovereign debt, is growing faster than national income. Debt to GDP is now 107% in the United States. Bad enough, but when private debt – i.e. household, financial, corporate and municipal debt is added … the total US debt balloons by a factor of 5 at the very least. Then there are the unfunded long-term US liabilities – Social Security, Pensions, Medicaid to add in …

In Europe the same inexorable trend follows the same sovereign debt-to-GDP ratio: 88% in the euro area, 99% in France, 81% in the UK, 130% in Italy and Germany 62%. The same is true of private debt. Now consider private debt-to-GDP. EU area, 139%, France – 266%, UK – 224%, Italy – 166%, Germany – 154%.This creeping crisis has been going on since the ‘recovery’ in 2009/10.

US, Sovereign Debt to GDP – Latest figures below.

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After the 2008 blow-out the world entered a long period of sub-optimal growth, which of course is the definition of a depression. GDP growth is now in a range of 2% to -0.1%, Bond yields are low to negative (see below) and the global debt overhang is growing relentlessly. Everything but the kitchen sink has been thrown at the problem, but the results have been meagre, and ominously it would appear that a second leg of the crisis is beginning to emerge. Growth as such is now little more than asset price inflation in the property and stock markets – fictitious capital as Marx called it.

Bond Yields – May 2020

United States. 0.62%

UK. 0.26%

Germany. -0.54%

France. -0.0.8%

Japan. -0.03%

Spain. 0.76%

Italy. 1.75%


What is happening in the Bond markets is that investors are moving into Bonds due to uncertainty in the global economy. And when Bond prices are rising Bond yields will be falling.

Yet another indication that all is not well in the global economy is occasioned by the inexorable rise in the price of real money, precious metals, particularly gold. It is a well-known fact that both governments and Keynesians hate gold. Basically because if puts a block on their money printing proclivities


It is truly ironic that fiat-bugs like Ms.Pettifor seem blithely unaware of the fact that a gold standard underpinned the post-war boom. She writes:

‘’The Golden Age(1947-1971) was truly golden. Inflation and unemployment … in Britain were low world-wide including even Africa. Economic activity, theatre, sport and music thrived. Inequality declined. Even the public finances were stabilised.’’(4)

The new world order established at the Bretton Woods Conference in 1944, was based on a gold standard, albeit a modified one, whereby the US dollar underpinned the world’s hard currencies at a fixed rate of exchange and trading system, and which was fully convertible with gold initially at $35 per oz. This was an integral part of the Bretton Woods system.

But 1971 was the turning point: the outflow of US dollars resulting from the profligate US spending on the wars in Korea and Indo-China found their way into Europe and East Asia. And those states which were holding these surplus dollars cashed them in which meant that US gold reserves were being depleted. On 15 August 1971, Nixon was forced to remove the dollar’s convertibility and the world has been on a fiat system ever since.

The bureaucratic-managerial attempt to steer the economy was fashionable across the advanced capitalist countries throughout the 1960s and 1970s; eventually it ran headlong into an  inflationary crisis of overproduction, stagflation, and the eventual collapse of the Bretton Woods system which had buttressed the post-war boom. Keynesian policies had hit a brick wall. The golden age was over.


The great American gold default of 1971 gave rise to a monetary system of freely floating fiat monies (if money is the right word). The dollar – paper standard – so loved by the fiat bugs, had become the base of the world monetary and trading system. In the absence of gold the base currency of the US was the dollar. But there is a fatal contradiction here. The US was to be the anchor of the world currency system. But a country’s currency also has to be flexible enough for the internal domestic economy but rigid enough to act as an anchor for international trade. (See below **The dreaded Triffin Paradox.)

According to the proponents of what is called Modern Monetary Theory (MMT) i.e., Keynesianism on steroids, this was not a problem, indeed it should be welcomed, by enthusiasts like Ms Pettifor et, al. The theory rested on three assumptions.

  • A government that issues its own sovereign, ‘independent’ currency can never run out of money, since it can always choose to pay for any debts by creating more money.
  • Inflation will not kick in if such a government spends lavishly and runs a budget deficit, as long as there is spare productive capacity in the economy.
  • Taxes do not fund public spending. Governments, therefore, do not need to tax first in order to spend later. Indeed, the real process at play (we are told) is the opposite – governments spend on goods and services, and then adjust tax rates in order to manage demand in the economy.

‘’MMT theorists are correct to say that the state can create money. Of course it can, but the state cannot guarantee that this money has any value. Without a productive economy behind it, money is meaningless.

Paper money is only a representation of value. And real value is created in production, as a result of the application of socially necessary labour time. The money that a state creates, therefore, will only be of any worth in so far as it reflects the value that is in circulation in the economy, in the form of the production and exchange of commodities. The only real money is gold, paper tokens are only representations of real money. As Marx noted, the sum of the values in circulation must ultimately equal the sum of the prices of these commodities. (As you will note this is an accounting identity.) Where this is not the case, then this is a recipe for inflation and instability.

The vast bulk of money in circulation – 97% of all money in the economy – is not created by governments but by private banks, in the form of bank deposits.

This money is created in response to demands from consumers and investors, as credit and loans. Where this demand dries up, in terms of falling household consumption and/or business investment, so too does the demand for money.

So the state can create money. But it cannot ensure that this money is put to use. Indeed, the vast programmes of Quantitative Easing that have been conducted across the advanced capitalist world since the 2008 crash are a testament to this.

Trillions have been pumped into the economy by central banks over the past decade, and to what effect? Business investment and GDP growth remain subdued. And yet asset prices – on the stock market and of property, gold, cryptocurrencies, and even artwork and fine wines – froth and fizz like a newly opened bottle of champagne. In short, the speculators are having a field day, whilst ordinary people struggle to make ends meet.’’ (5)

For good measure we can include ultra-low and even negative rates of interest, however all this free movement of fiat ‘money’ is unable to hold back the tectonic force of an historical downturn in the world economy and money printing.

Secondly, states do not necessarily have sovereignty over their money/currency, and therefore their own monetary policies. In the Eurozone the ECB calls the shots. Portugal, Ireland, France, Italy and so forth have to abide by the policies of the ECB. And even if they did have a theoretical wiggle-room – that is those countries in the EU but outside of the Eurozone – they will still have to run with the pack when required. This will apply to exchange rates, tax levels levied on businesses and consumers and other related issues such as transfer pricing. Governments only have a free hand when international finance feels it to be in their interests.

Additionally, it does not necessarily follow that the existence of spare capacity in an economy precludes the possibility of inflation. The 1970s was a decade of stagflation, a combination of spare capacity in industry, rising prices and rising unemployment. The Phillips curve – basically a theory of a trade-off between employment and rising prices – was to all intents and purposes dead. These are facts not theory. And it should be borne in mind that theory must always be subordinated to facts.

Moreover, taxes apparently do not support government expenditures, governments being self-financing. This rather eccentric theory ‘Chartalism’ was initially propounded as a particular theory of money. It emerged in Germany under the auspices of one Georg Friedrich Knapp, a German economist, who coined the term in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. This theory was the forerunner of Modern Monetary Theory.

‘’ The current guru of Chartalism/MMT Randall Wray argues … that money is accepted in order to pay taxes by resorting to a parable about a simple economy in which households (for which term one must read ‘natives’) initially neither have markets nor money. A government then spontaneously arises, and in the interests of benefitting a population, imposes a monetary tax on them in order to get them to work for fiat money with the government printing it on their behalf. Since this is fiat money, the government can spend as much as it likes, and taxes only serve the purpose of getting the natives to work for their own improvement. In the end the natives accept whatever monies the state wishes to issue, dutifully pay their taxes, and end up better off into the bargain. This is a most revealing fantasy: passive populations, no classes, a benevolent and neutral state, and both money and taxes imposed for the common good …

But we know that states arise after money, are never neutral and rarely benevolent, and that taxes are resisted at every stage. Not just in America and southern Nigeria in response to their colonial states but also in every nation in response to its own state.’’ (6)

The glaring hiatus in Ms.Pettifor’s short book *** as well as her co-thinkers, is her failure to understand the capitalist economy as a combined process of production and circulation and a tacit assumption that production will somehow take care of itself. It won’t and it can’t.

‘’The total production process of Capital includes both the circulation process proper and the actual production process. These form the two great sections which appear as the totality of these two processes. On the one side labour time, and on the other, circulation time … This unity itself is motion, process. Capital appears as this unity-in-process, of production and circulation, a unity which can be regarded both as the totality of the process of production, as well as the specific completion of one turnover of capital, one movement returning to itself.’’ (7)

There are recurring breakdown’s in the capitalist cycle of accumulation which of necessity appear in this process. Particularly in the production part of the cycle – the missing link in Pettifor’s analysis – and primarily caused by the tendency of the rate of profit to fall, and/or the possibility that capitalism may not be able to transform surplus value into money profit – C’-M’ But that’s another article.


Top of Form

(1) Am I a Liberal?

(2) A Short View of Russia

(3), Ibid. Pettifor

(4) Ibid.

(5) Socialist Revolution – Adam Booth – September 2019

* Keynes was also a paid-up member of the Bloomsbury Group. An archetypal petit-bourgeois circle consisting of a number of writers, poets, artists and intellectuals; those included inter alia Virginia and Leonard Woolf, Keynes himself, Edward Carpenter, E. M. Forster and Lytton Strachey and who fancied themselves as the cultural enfants terrible of the time with Keynes in the role of leading épatant. It is difficult to see how this particular social stratum could relate to or be sympathetic with the working class as Keynes’ obvious abhorrence of such made this perfectly clear.

(6) Capitalism – Anwar Shaikh – p.687

(7) The Grundrisse – K.Marx – p.620

**The Triffin Paradox. In 1960, Robert Triffin, the Belgian born economist, brilliantly argued that ever-accumulating trade deficits, the flaw of hosting the reserve currency and the result of Bretton Woods, may help economic growth in the short run but would kill it in the long run. Triffin’s theory, aka Triffin Paradox, identifies the current economic crisis and, more importantly, recognizes why the path for future economic growth is far different from that envisioned in 1944.

The 2008 crisis – still ongoing – was an important warning that years of accumulating deficits and debts associated with maintaining the world’s reserve currency may finally be reaching their tipping point. Notwithstanding nine years of outsized fiscal spending and unprecedented monetary stimulus, economic growth is well below the pace of recoveries of years past. Starting in 2009 the cumulative amount of new federal debt surpassed the cumulative amount of GDP growth going back to 1967. In short, if it were not for a significant and consistent federal deficit, GDP would have been negative every year since the 2008 financial crisis.  

Bretton Woods and Dollar Hegemony:

The Bretton Woods Agreement ensured that the U.S. dollar became the global reserve currency. The agreement assured that most of global trade was to occur in U.S. dollars, whether or not the United States was involved in such trade. Additionally, other nations would peg their currency to the dollar. This arrangement is somewhat akin to the concept of a global currency.

Within the terms of the historic agreement was a supposed remedy for one of the abuses that countries with reserve currency status typically commit; the ability to run incessant trade and fiscal deficits. The pact established a discipline to discourage such behaviour by allowing participating nations the ability to exchange U.S. dollars for gold. In this way, other countries that were accumulating too many dollars, the side effect of American deficits, could exchange their excess dollars for U.S.-held gold. A rising price of gold, indicative of a devaluing U.S. dollar, would be a tell-tale sign for all nations that America was abusing her privilege.

However as early as 1961, the world’s leading nations established the London Gold Pool with an objective of maintaining the price of gold at $35 an ounce. By manipulating the price of gold, a gauge of the size of U.S. trade deficits was broken and accordingly the incentive to swap dollars for gold was diminished. In 1968, France withdrew from the Gold Pool and demanded large amounts of gold in exchange for dollars. By 1971, President Richard Nixon, fearing the U.S. would lose its gold if others followed France’s lead, suspended the convertibility of dollars into gold. From that point forward, the U.S. dollar was a floating currency without the discipline imposed upon it by gold convertibility. The Bretton Woods Agreement was, for all intents and purposes, annulled.

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The following ten years were marked by double-digit inflation, persistent trade deficits, and weak economic growth, all signs that America was abusing its privilege as the reserve currency. Other nations grew increasingly uncomfortable with the dollar’s role as the reserve currency. The first graph shows that, like clockwork, the U.S. began running annual deficits in 1971.

By the late-1970’s, to break the back of crippling inflation and remedy the nation’s economic woes, then Chairman of the Federal Reserve Paul Volcker raised interest rates from 5.875% to 20.00%. Although a painful period for the U.S. economy, his actions not only killed inflation and ultimately restored economic stability but, more importantly, satisfied America’s trade partners. The now floating rate dollar regained the integrity and discipline required to be the reserve currency despite lacking the checks and balances imposed upon it by the Bretton Woods Agreement and the gold standard.

Enter Dr. Triffin

In 1960, 11 years before Nixon’s suspension of gold convertibility and essentially the demise of the Bretton Woods Agreement, Robert Triffin foresaw this problem in his book Gold and the Dollar Crisis: The Future of Convertibility. According to his logic, the extreme privilege of becoming the world’s reserve currency would eventually carry a heavy penalty for the U.S.

What he described in the book, and his later testimony, became known as Triffin’s Paradox. Events have played out largely as he envisioned it. Essentially, he argued that reserve status affords a good percentage of global trade to occur in U.S. dollars. For this to occur the U.S. must supply the world with U.S. dollars.  Thus the United States would always have to run a trade deficit whereby the dollar amount of imports exceeds the dollar amount of exports.  Running persistent deficits, the United States would become a debtor nation. The fact that other countries needed to hold U.S. dollars as reserves tends to offset the effects of consistent deficits which keep the dollar overvalued. A close up of a map Description automatically generated

The arrangement is as follows: Foreign nations accumulate and spend dollars through trade. To manage their economies with minimal financial shocks, they must keep excess dollars on hand. These excess dollars, known as excess reserves, are invested primarily in U.S. denominated investments ranging from bank deposits to U.S. Treasury securities and a wide range of other financial securities.

As the global economy expanded and more trade occurred, additional dollars were required. Further, foreign dollar reserves grew and were lent back, in one form or another, to the US economy. This is akin to buying a car with a loan from the automaker. The only difference is that trade-related transactions occurred with increasing frequency, the loans are never paid back, and the deficits accumulate (Spoiler Alert – the auto dealer would have cut the purchaser off well before the debt burden became too onerous).

The world has grown dependent on this arrangement as there are benefits to all parties involved. The U.S. purchases imports with dollars lent to her by the same nations that sold the goods.  Additionally, the need for foreign nations to hold dollars and invest them in the U.S. has resulted in lower U.S. interest rates, which further encourages consumption and at the same time provides relative support for the dollar. For their part, foreign nations benefited as manufacturing shifted away from the United States to their nations. As this occurred, increased demand for their products supported employment and income growth, thus raising the prosperity of their respective citizens.

While it may appear the post-Bretton Woods covenant was a win-win pact, it involved considerable costs. The U.S. is mired in economic stagnation due to overwhelming debt burdens and a reliance on record low-interest rates to further spur debt-driven consumption. The rest of the world, on the other hand, is her creditor and on the hook if and when those debts fail to be satisfied. Thus, Triffin’s paradox simply states that with the benefits of the reserve currency also comes an inevitable tipping point or failure. Questions arise:

  • When can our/US debts no longer be serviced?
  • When will foreign nations, like the auto dealer, fear such a day and stop lending to us ( transacting in U.S. dollars and re-cycling those into U.S. securities)?

It is very likely the Great Financial Crisis of 2008 was an omen that America’s debt burden is unsustainable. Further troubling, as shown below, foreign investors have not only stopped adding to their U.S. investments of federal debt but have recently begun reducing them.  This puts additional pressure on the Federal Reserve to make up for this funding gap.

Assuming these trends continue, America must contend with an ever-growing debt balance that must be serviced. By 1. Default and/or paying down debt, or 2. the Federal Reserve continues “printing” dollars required to make up for the lack of funds which debt servicing and repayment requires. Given the Fed has already printed approximately $4 trillion to arrest the slight deleveraging that occurred in 2008, it seems likely that this will be their modus operandi in the future.


America’s ability to run deficits and accumulate massive debt balances for over 40 years, while maintaining its role as the global reserve currency, is a testimony to the power of our politicians and central bankers to “manage the surplus of other countries.” Questions arise.

  1. How much longer can the United States manage this tall and growing task?
  2. What is the tolerance of foreign holders of U.S. dollars in the face of dollar devaluation?
  3. Is the post-financial crisis “calm” the result of a durable solution or a temporary façade?

If in fact 2008 was a first tremor and signal of the end of this arrangement, then we are in the eye of the storm and future disruptions promise to be more significant and game-changing.

Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors.


***Ms Pettifor speaks highly of this money reformer thus.

‘’John Law the Scottish genius (sic!) who understood credit or bank money way back in the 1700s.’’ p.94

FYI – John Law was a colourful fellow: Scottish mathematician, gambler, and early economist who left his homeland after killing a man in a duel. He decamped to France where he insinuated himself into the establishment who seemed eager to listen to his crackpot theories of money. He was the first to implement monetary easing. Trade, he argued was held back by lack of money. No problem, paper money or assignats would be created in abundance to get trade and commerce moving.

The Duc D’Orleans decreed that all taxes and revenues could be paid in notes to Law’s bank the Banque Générale. To cut a long story short the French authorities gave Law a plan to develop one of France’s possessions in what was then America. This was essentially another get-rich-quick racket similar to the earlier forms, namely the Dutch Tulip Bubble and the South Sea Bubble. As with all Ponzi schemes, however, things at first went swimmingly. But, as was to be expected, the bubble burst among a wailing and gnashing of teeth. The Mississippi Bubble collapsed in the same year as the South Sea Bubble. Speculation gave way to panic as share prices fell to 4,000 livres per share, a 73% decrease within a year. It was under these circumstances and the cover of night that John Law left Paris in disgrace some seven months later.

So this is the chap whom Ms Pettifor regards as a genius!

Enough Said!

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