Tyler Durden pointed out yesterday that just three weeks after Goldman made the case for equities relative to bonds, the muppets who had listened to their advice were getting skewered.

For economics nerds like me the last week has been riveting. Paul Krugman, a Nobel-prizewinning member of the economics establishment, has been debating with Steve Keen, a radical who’s long argued that the conventional economics taught in universities is woefully unrealistic because it ignores important features of the real world like uncertainty, the role of banks, debt and how money is created.

This chart tells millions of stories. I’m trying to get my head around its implications.

I first published this short series of essays in 1992/93. They were a response to the catastrophic application of the tenets of Monetarism to the British economy, the resultant unemployment and social dislocation, the consequences of which persist even now. Much of their content is a criticism on Monetarism, the economic theory postulated by its architect and chief advocate, Milton Friedman.

Despite all the political rhetoric, neither Britain nor America has ever allowed the flourishing of genuinely free markets as propounded by Adam Smith. 

The banks and other financial institutions wield power today much as did the medieval Catholic Church, which premissed its claim to that power upon unsubstantiable dogma, enforcing a doctrine whose consequences at best caused social, intellectual and economic stagnation. At their worst they were the root cause of political upheavals which tore Europe apart. 

The modern financial economy is based upon thinking that amounts to little more than the delusions of the medieval alchemists.

Last week the European Central Bank (ECB) injected another €530bn into the banking system through something that is called LTRO (Long Term Refinancing Operation).

Last month the Bank of England announced another £50 billion of Quantitative Easing (QE), taking the total since the start of QE in March 2009 to £325 billion. The reason for more QE cited by the Bank of England is to stimulate the economy. However when we look into how QE works we will come to the conclusion that this is not the case at all.

Since starting to look into the nature of our monetary system, there is one particular argument I have heard played out time and time again: On one side we have: “Banks can create money out of nothing. They do not need to have somebody’s savings in hand in order to make a loan”. On the other side we have: “Banking regulations dictate that banks are only allowed to lend out a fraction of their depositors money”.