Steve Keen's magical accounting

An Austrian response to "balancing books"

Look, I need to tell you something about economists that you probably already suspect: they’re terrible at economics but absolutely brilliant at explaining why YOU don’t get economics.

I just watched the above economist named Steve Keen spend 19 minutes explaining why government deficits don’t matter because - and I’m not making this up - the accounting identities balance. He’s responding to Niall Ferguson saying “hey maybe spending more on interest than defense is bad” and Keen’s like “actually you don’t understand double-entry bookkeeping”.

Which is true. Ferguson probably doesn’t.

But here’s the thing: neither does Keen. Well, no. That’s not fair. Keen understands double-entry bookkeeping perfectly. What he doesn’t understand is that you can have perfectly balanced books while your currency becomes wallpaper.

Let me explain why this drives Austrian economists absolutely insane.

Keen’s whole argument goes like this: government spends money. This creates deposits in the private sector. Those deposits are assets for the private sector. They’re matched by negative equity on the government’s balance sheet. The central bank accommodates this by letting the treasury run an overdraft. Everything balances. Beautiful. Elegant. Mathematically perfect.

And completely beside the point.

It’s like explaining to someone worried about a house fire that actually, from a chemistry perspective, combustion is just rapid oxidation and the mass-energy is conserved throughout the process. Technically correct. Completely unhelpful.

Here’s what I think what Keen’s really wants to say: the government can create infinite money because it owns the printer and the accounting identities will always balance. Private sector equity can only be positive if government runs deficits. Therefore deficits are good, actually. The U.S. being at 120% debt-to-GDP with 6% annual deficits forever? Not a problem. The books balance.

But let me tell you a little secret that will save you years of frustrating economics debates: when someone starts talking about accounting identities, they’re about to tell you why reality doesn’t matter.

You know what else balances? My personal budget after I rob a bank. Revenue up. Expenditure stable. Net worth improved. The accounting is flawless. The methodology is questionable.

The Austrian school has a different take: maybe we should care about what money printing does to the actual economy instead of whether the ledger entries sum to zero.

Let’s start with inflation. Keen waves this away by saying inflation depends on total credit growth, velocity, and capacity constraints. Which is technically true in the same way that “getting shot depends on bullet trajectory, impact velocity, and tissue density”. All true. You’re still shot.

When government creates money without corresponding real production, prices inevitably rise. Not because the accounting is wrong. But because there’s more money chasing the same goods. This shouldn’t even be considered controversial. It’s pure arithmetics.

In Keen’s model when the government spends more than it taxes, the private sector gets net financial assets, thus everyone’s richer. Except… nope. Everyone has more nominal claims in a currency that’s being diluted. It’s like saying you’re richer because I gave you Monopoly money. Your balance sheet looks great. Your grocery budget is screwed.

The Austrian critique goes deeper. When government deficit spends, it’s not creating wealth. It’s redirecting resources. Those resources were going to be allocated by market price signals. Now they’re allocated by political decisions. Every dollar the government steals taxes, creates or spends is a dollar of real resources pulled away from private use. You can’t eat balance sheet equity.

And the price signals that coordinate resource allocation? Now distorted. Prices no longer reflect real scarcity. They reflect scarcity plus however much the government decided to print this quarter.

This creates malinvestment. Businesses make decisions based on false price signals. They build things that wouldn’t make sense in an undistorted economy. They hire people for jobs that only exist because of monetary expansion. Then when the expansion slows, all that investment was waste.

The Austrian business cycle theory is entirely about this. The boom isn’t prosperity, it’s misallocation. The bust isn’t failure, it’s correction.

But let’s get back to Keen’s central claim: government can run deficits forever because it owns the central bank and can go into overdraft without consequences.

This is true.

It’s also completely insane.

Yes, the government owns the central bank. Yes, it can force infinite overdrafts. No, this doesn’t mean there are no consequences. It means the consequences show up as inflation, currency debasement, capital flight, loss of reserve currency status, impossible economic calculation.

Let me give you the absurdist version of Keen’s argument. Imagine I start a country called Keenland. I issue Keenbucks. I spend 1000 Keenbucks into existence every year. I tax back 400. The private sector has 600 net Keenbucks of financial assets. My central bank account is -600 Keenbucks. The books balance.

Year two: I spend 2000, tax 400. Private sector now has 1800 net. Books still balance.

Year ten: I’m spending 50,000, taxing 400. Private sector has 496,600 net Keenbucks. The accounting is flawless. The only problem is Keenbucks are worthless and I’m buying bread with wheelbarrows.

But hey. The private sector has positive equity.

This is the fundamental disconnect. Keen is describing the plumbing. Austrians are describing what happens when you run sewage through it.

The relevant constraint isn’t accounting identities. It’s real resources. Real production. Real savings. Real capital accumulation. These things don’t appear on balance sheets because balance sheets measure nominal claims, not real wealth.

You can have a government that’s “solvent” in the Keen framework while presiding over economic collapse. This isn’t theoretical. The Weimar Republic’s accounting was impeccable. The reichsmark’s purchasing power was gone. Venezuela’s balance sheets worked. Their economy didn’t. Zimbabwe could print infinite Zimbabwe dollars. Zimbabweans preferred US dollars anyway.

The accounting identities held. The currencies failed.

Keen would probably argue these are special cases. Hyperinflation is different from moderate inflation. Running 6% deficits forever is fine as long as you don’t go crazy.

Except the Austrian response is: why is moderate debasement good? Why is slow capital misallocation better than fast? The accounting framework can’t answer this because accounting doesn’t measure human welfare. It measures nominal claims.

Here’s the core Austrian insight: money is not wealth. Money is a claim on wealth. When you increase claims without increasing wealth, you haven’t made anyone richer. You’ve made the claims worth less.

Government can create infinite dollars. It cannot create infinite resources.

Keen’s model shows this without realizing it. When government runs deficits, private sector equity goes positive. Government equity goes equally negative. Zero sum. No new wealth created. Just nominal claims shuffling around.

But in the real world, that shuffling has effects. It bids up prices. It distorts signals. It enables malinvestment. It makes economic calculation harder. It punishes savers. It rewards debtors. It creates boom-bust cycles.

None of this shows up in accounting identities. All of it shows up in the economy.

The Austrian answer is simpler: maybe giving one entity monopoly control over the monetary system and letting it create infinite nominal claims is a bad idea regardless of how the accounting works.

Maybe the question isn’t “can government run deficits forever” but “should it”.

I’ll end with this: Keen says only he and Richard Murphy understand money because only they understand double-entry bookkeeping. But maybe the Austrians understand something Keen doesn’t.

The ledger isn’t the economy. The menu isn’t the meal. And you can’t eat accounting identities no matter how perfectly they balance.