Politicians ignore Keynes at their peril

[CHIMO]

John Maynard Keynes explained the dynamics of an economy in a prolonged period of high unemployment more than 70 years ago in The General Theory. Unfortunately, it seems very few people in policymaking positions in the United States or Europe have heard of the book. Otherwise, they would be pushing economic policy in the exact opposite direction than it is currently heading.


Most wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the US and many eurozone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.


The outcome of this story is not pretty. Cutting deficits means raising taxes and/or cutting spending. In either case, it means pulling money out of the economy at a time when it is already well below full employment. This can lower deficits, but it also means lower GDP and higher unemployment.


This might be OK if we could show some benefit from lower deficits, but this is a case of pain with no gain. Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.

http://www.guardian.co.uk/commentisfree/2010/may/17/keynes-danger-deficit-reduction

[DJ13]

1. A very good article, thanks for posting it

And to the unrec'ers, you dont know your butt from a hole in the ground.

[RM33]

2. Keynes said

Keynes said during good times the government should run surpluses. Basically, the thinking was the government has savings, a war chest if you will. So when the recession hits, you spend your money, and run up the debt.

The US government has been running up massive debt during peace time. Now that the recession hit, revenues are just not there. So they have to run up a bigger debt to do Keynsians economics. But the Bond vigilanties are not having it. So the discipline of the market is forcing governments around the world to reign in debt.

If the Federal government and states government had budget surpluses like Keynes recommended, then government would have had a lot of elbow room to run up the debt. But to start from a hole, and to go deeper into debt, it a major problem.

The market is impatient with governments and their sky high debt. Rating agencies have been threatening to downgraded government ratings. Even the US triple A rating might be downgraded. And even if these agencies do not downgrad government ratings, the market will do it for them as they move money out of debt into other investments.

[orwell]

3. Oh brother...

...Bond vigilantes...discipline of the market...rating agency downgrades...

You got just about all the buzzwords...

I used to sound like you 20 years ago. I never made a dime with any of that hogwash.

Trade the market for a living and then get back to me.

Next thing you know they'll be digging up the good old Kondratiev Wave...

[Scruffy1]

4. Right on the money

The anti-keynesians have been in control of the propaganda machine for far too long. They have basically brainwashed the American public to the point that a rational discussion of economics is impossible. First it was Raygun as the spokesperson and Greenspan as the point man. You would think that by now this whole thing would be thoroughly discredited. These policies are great for the very wealthy and suck for everyone else.
The American public needs to be reeducated and it won't come easy.

[sendero]

5. His comments....

... have nothing to do with trading, they have to do with macro-economics.

Obviously the Fed/Treasury is walking a tightrope between stimulus and debt, but it is a clear and present FACT that we cannot just print our way out of this.

If you think a currency collapse is not possible just because it has not happened yet you are fooling yourself. If you think that the "markets" will always act like you expect in the face of unprecedented circumstances I hope you have a big backup war chest yourself.

[RM33]

6. Currency collapse?

If by currency collapse you mean hyper inflation, then we might be close to it.

A recent article in Forbes talks about this. Our current deficit is financed by low interest rates. We have trouble selling debt now. If rates start to climb, we will need even more money to finance the debt. But the market is not buying. For example, China has their own problems and they are spending their money on China, not US debt. If the government can't sell debt, they will monetize it.

We might just be in for a heavy dose of inflation. So forget the war chest. Maybe invest in gold? :-)

Regards

http://www.forbes.com/2010/05/18/federal-budget-deficit-personal-finance-inflation-yield.html?boxes=Homepagelighttop