Video: Welcome back to Keynesian economics

No ‘new way of thinking’ is required, unless it’s new to those who have never studied capitalist economics. Mises, Rand, et al knew decades ago what ideas were required to protect freedom and create prosperity.

JDPerren on December 23, 2008 at 4:27 PM

I took what he mean to be a new way of thinking to move us from here. We are in a sticky spot. Our economy’s ability to produce is unquestionable, given the availability and even the oversupply of both luxuries and essentials. The problem is credit has been exhausted, and alot of people are finding they can go without buying things like electronics, new cars and new homes for a protracted length of time.

Since 2000, according to Karl Deninger, our cumulative growth in GDP is up about $18 Trillion. However, our debt (private + public) has increased $27 trillion, meaning for every two dollars spent we’ve gone 3 dollars in the hole. When you produce a $500,000 home that’s paid for with no money down, things get skewed a bit.

So, if you deducted the aquired debt from GDP you have a cumulative $9 Trillion contraction in GDP from 2000 to 2007. Meaning we’ve already undergone quite a bit of inflation, some have called it hyperinflation, this decade. That inflation has been both masked and inflamed by easy credit and “global wage arbitrage.”

The significance of that inflation is that deflation could be on its heels. People looking for inflation have missed it having been here for quite some time. Deflation will kill this economy because of the inability to pay off the heavy debt burden. And recently, we’ve seen quite a bit of capitulation on prices due to demand destruction in commodities, real estate and other areas. We’ve also witnessed quite a bit of wealth destruction, too.

It’s been a long time since I’ve read Keynes, but I don’t think he advocated taking resources from a healthy economy and dedicate them to public use. Rather, when economic resources are kicked to the curb by a contracting economy, the deflation that accompanies that contraction allows government to exploit those underutilized resources at a bargain price (deflated dollars), and by doing so go into debt to get money into the broader economy. In that situation, as the economy improves the public projects should die off as the private sector pays more for those resources. Then, the government simply lets the improving economy inflate its debt away.

We never stopped deficit spending, no matter how good the economy got. The problem with Keynesian economic thought today is that if deflation comes and the dollar slips in value, say, 50%, then our $50 Trillion debt will be as if $100 Trillion. No amount of public works projects will help the ballance sheet. So, its still better for the government to inflate its way out of debt. But that can’t be accomplished if money sits in banks, untapped and out of circulation. Or, if monetary policy pushes too hard, we get Weimar Republic hyperinflation that kills the dollar altogether and ends our ability to import oil.

Deflation will be the end of everything. Hyperinflation will be the end of everything. The longer we continue in the direction set by the Fed that attempts to avoid either senario simply rolls the boulder higher up the hill, increasing its potential wrath once those rolling it tire and get crushed. That’s some pain, boys.

shuzilla on December 23, 2008 at 5:16 PM

I’m not sure I follow your thinking on the problem with the weak dollar though. Since Treasuries are denominated in dollars and paid back in dollars wouldn’t a weak dollar increase exports, boost economic activity and allow us to pay back the debt more easily? Foreign investors would hate it because the currency effect on top of low Treasuries rates would make for a bad return.

dedalus on December 23, 2008 at 6:56 PM

If the dollar gets too weak, dollar-denominated assets will get dumped by foreigners. Why hold treasuries at even 3% return in US dollars if the dollar is losing, say, 5% annually? Right now, short-term treasuries at near-zero interest are a way to park capital away from risk, seemingly giving us endless and free access to money. But now the dollar is weakening, and we HOPE we can sell new treasuries at equally low rates when those mature because obviously we can’t pay them off.

If treasuries are dumped by foreign investors, who hold several Trillion in our debt, new debt issuance will have to promise ever-higher returns to investors that comfortably exceed dollar deflation – or not have any buyers. If government can’t both keep paying higher interest and cut spending to actual income, we’ll have no choice but default. Just like the homeowners who bought homes they couldn’t afford at teaser rates who got ruined when those rates adjusted through the roof and couldn’t refinance. I think that our government has been accruing debt recently at the teaser rates!

So, I’m thinking an inability to take on new debt or to roll over old debt is coming and will do far worse for our economy than any increase in exports will help, even if the rest of the world can absorb enough exports to make a difference to begin with. The rest of the world is having it’s own problems, so who knows how much it could buy? We have the choice to suffer right along with them, or for “pushing-the-string” Fed action to trash the dollar independent and on top of the global economic downturn. If we lose the dollar as a fiat currency due to defaulting on any part of the national debt, we couldn’t even afford to import oil and other raw materials needed to produce exports to take advantage of the weak buck; imports which will be cash-only deals in someone else’s currency, BTW.

Of course, I could be as wrong as anyone else has been.

shuzilla on December 23, 2008 at 7:57 PM

You should realize that the spending buck stops at the front door of the White House. It was Bush who promoted unrealistic tax cuts for the wealthy…

As for Obama, we know that deficit spending is the only way to prevent a repeat of the 1930’s collapse that almost wiped Western democracies off the face of the earth.
bayam on December 24, 2008 at 1:15 PM

You should realize that tax cuts for the wealthy produers ARE deficit expenditures meant to sustain the economy. And as a reminder, the “robust economy of the Clinton years” ended in an equally serious tech bubble burst that destroyed Trillions of dollars in capital. After that and 9-11, stimulus was required to replace lost capital.

The question this thread centers on is which deficit spending provides the most stimulus: government spending or tax cuts going towards private investment? National debt grows either way. However, a rise in taxes collected from the fruits of private investment can erase the deficit. In fact, that’s the ONLY thing that will erase the deficit.

Without a deflationry depression, government expendatures will rack up huge debt that the stimulated economic activity may not pay for in extra revenue. Just imagine that, through a combination of stimulus packages and bailouts, we manage to keep businesses open and people shopping but at no taxable profit. How do you pay the deficit off? This seems to be where we’re headed.

However, deficit spending for public projects had at bargain prices due to substantial deflation will not help the economy either. Deflation would be catastrophic. We have so much debt to service that deflation guarantees ever-larger portion of the federal budget go to debt service, wiping out any gains from cheap labor and material. And we’d lose the ability to sell our debt overseas unless their deflation is worse.

The Fed is trying to deflate our debt away but the money is ot getting into the hands of consumers because we’re saving cash and we don’t want to, or can’t, borrow. Money, when available, gets hoarded or goes toward debt service and therefore is not contributing to inflation.

Deflation looks to be in the cards unless people somehow get more money to spend without having to go any more into debt.

shuzilla on December 24, 2008 at 3:42 PM