Tag Archives: John Maynard Keynes

Time To Shut Down The US Federal Reserve?

One Man’s Thoughts Has Moved To


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Thank You, Vytautas


Ron Paul’s Ideas No Longer Fringe

One Man’s Thoughts Has Moved To


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Thank You, Vytautas

Obama’s Permanent Depression

Obama may be remembered for permanent depression, the way that Leon Trotsky’s name is linked with permanent revolution. Fiscal stimulus combined with near-zero interest rates have proven to be a toxic cocktail for the United States, the macroeconomic equivalent of barbiturates and alcohol.

Keynesian spending creates a deficit that sucks all the available capital out of the grassroots economy and transfers it to the Treasury market. Easy funding terms from the Federal Reserve allow financial institutions to make money in government bonds while shutting off credit to the rest of the economy. It’s classic crowding out, in which the government’s misguided effort to spend its way out of recession pushes the productive economy deeper into the hole.

Panic is starting to take hold at the Obama White House over the relentless deterioration of the job market. US jobs in September declined by about 263,000 jobs, worse than the 175,000 drop expected by Wall Street economists. To the 15.1 million on the official unemployment count, add 9.2 million “involuntary part-time workers” and 2.2 million who were dropped from the tally because they had not sought work in the past month, and the unemployment rate would rise to 17.1 million.

That doesn’t include another three million long-term discouraged workers – those who want to work but who have long since stopped looking. That would take the number up to 20%. In past recoveries, a number of economists observed, all the job growth came from small business, but small business is lagging in the present crisis. The financial crisis crushed the entrepreneurs, as surely as Joseph Stalin crushed the kulaks, the relatively affluent peasants.

Obama inherited a crisis, to be sure, but he has made it much worse. America is in the kind of trap into which Japan fell during the “lost decade” of the 1990s, whence it never really emerged. In the Keynesian world of Larry Summers, director of the White House’s National Economic Council, and the Obama economics team, the problem is that Americans save too much and spend too little. To restart the economy, the government has to spend money for them – hence the US$800 billion stimulus package.

There are two things terribly wrong with this notion. The first is that it is simply a matter of what John Maynard Keynes called the “marginal propensity to consume”. Americans have saved almost nothing during the past 10 years, relying instead on home equity that now has vaporized. The proportion of Americans over 60 will jump to 25% from 19% during the next 10 years, an unprecedented shift. Americans must save to compensate for past profligacy, from a lower starting point after the destruction of so much wealth, and with lower prospective returns. The demand for savings is bottomless.

The second problem is that even if the government borrows money, the money has to come from somewhere. Right now it’s coming from households who choose to save rather than borrow, and from the balance sheet of the Federal Reserve or the banks, as well as foreign investors.

A quick walk through the numbers puts the problem in context.

To read the rest of this Asia  Times article go to http://www.atimes.com/atimes/Global_Economy/KJ06Dj04.html

Weimar 1923 May Have More Lessons Than US 1932

Are we heading for another Great Depression?

Many baffled forecasters are asking just that, and studying what the US did wrong after the stock market crashed in 1929. But the more relevant policy errors might have been those made earlier across the Atlantic – in Weimar Germany from 1919 to 1923.

Policymakers have learned from the US mistakes. This time around, there has been no shrinkage of the money supply and no repetition of President Hoover’s increase in tariffs in 1930 and income taxes in 1932. On the contrary, money supply has expanded rapidly while fiscal policies have been expansionary and protectionism limited.

But look at the Weimar government. Suffering from the trauma of defeat in the First World War and the burden of reparations, it was too weak to raise taxes. It ran large budget deficits instead. Interest rates were kept far below the rate of inflation, while money supply expanded rapidly. About half of government expenditure was funded by newly printed money.

The great economist John Maynard Keynes provided an acid comment in 1920. “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

In Germany, the result was hyperinflation. By November 1923, the mark was worth one trillionth of its 1914 value. Pay packets were collected in wheelbarrows. Foreign depositors in German banks were wiped out.

The problem was solved by Chancellor Gustav Stresemann’s introduction of a new currency, the Rentenmark, worth 1 trillion paper marks. He persuaded the Germans that money supply would be limited, and was able to negotiate more favorable terms with foreign creditors.

The US is nowhere near Weimar territory. At the current rate, it is monetizing 15 pc of its spending, well below the 50 pc of pre-crisis Germany. And foreign creditors are moaning, but have not deserted the dollar. President Barack Obama seems to be unwilling to try further fiscal extravagance. Still, excessive inflation is probably a greater risk than a Great Depression.

Courtesy of  Martin Hutchinson at breakingviews.com