Europe Seen Avoiding Keynes’s Cure for Recession

[groovedaddy]

LONDON — The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch.

He argued forcefully that Britons, despite slowing growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle class because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.

In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

http://www.nytimes.com/2010/10/21/world/europe/21austerity.html?th&emc=th

[OHdem10]

1. I thought that Austerity would snap the economy around they

would be well on their way to booming, Sarcasn

Watch them crash. Which of course, will be bad for us.

[Primitive Mind]

2. Keynes also commented.....

That governments should maintain sound tax and spend policies and plan for the inevitible economic downturns by saving money during good times. The deficit he generally referred to was a actually a current accounts deficit in which the government may have spent more than it earned in total tax reciepts in that year. That is actually pretty sound advice.

Governments, being human and all, instead spent everything that came in and then some in the good times. Now, these governments find themselves facing uncomfortable choices during rough times. If they issue too many bonds, then people and institutions that purchase those bonds will demand higher interest. If they make cuts to spending, they will be villified. Raising taxes or having an erratic tax policy will discourage the economic investment that is necessary to get out of a recession. It's a rock and a hard place choice really.

[girl gone mad]

5. Fortunately, we don't live in Keynes's world any longer.

We're not on the gold standard, we've got a sovereign currency. Deficits are not an issue in and of themselves. The Federal government doesn't need to raise taxes or issue bonds to spend money.

[Selatius]

6. Deficit spending is OK so long as the gov't identifies how it will pay it back.

If the government wishes to spend more than the revenue it receives each year from taxation, it can create more money by printing it or its electronic equivalent, raising taxes, or selling bonds. All of this, of course, is done without a gold standard. Zimbabwe took the first route and simply created money. The result was an inflation rate of over 10,000%.

[notesdev]

9. We may have a sovereign currency

but the sovereign for our currency is not the US government but the banking cartel known as the Federal Reserve.

So really the limiting factor is how far they can debase the currency to absorb financial sector losses before the oil shock makes the Main St. economy seize up.

[jtuck004]

3. What I don't think people are seeing is that this isn't anywhere near

what Keynes imagined.

What he saw was people creating and buying and selling. Within a reasonably limited geographic area, except for a few commodities and some food that traded world wide, people would create too much, then sales would drop off, then they would pick up, new inventions would change things, and the whole thing turned into a cycle of up and down. His theories came to prominence after the monopolies and banks of the 1900's to the end of the 30's or so nearly destroyed the equilibrium that the economy had created. They had taken only slightly more of the wealth of the economy for themselves than the top 2% have taken today, and that imbalance just imploded the whole system.

But our investment banks took that to a whole new level. The guess is that, hidden behind the regulations and with the help of the Federal Reserve, they had created a leveraged system of around $140 trillion. The GDP of our country is around $14 trillion. So these people created a leveraged debt of 10 FREAKIN TIMES our productive output. Millions of jobs and homes as well as hundreds of thousands of businesses depended on the existence of that debt, tied up in pension funds, international investment pools, our financial system, our lives. Then it cratered.

Keynes work said we should plan for the bad times by setting something aside for the times when the business cycle would reach its bottom.

He really didn't address a reckless and unregulated behavior by the investment banks and government as they moved all the wealth that we could create for the next deacade into private pockets.

[DoctorK]

4. Keynes understanding of money was severly flawed

he thought you could pump 'money' into an economy and it would magically create employment and wealth.

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

To write such a statement is to completely fail to grasp how a laissez-faire economy directs investment and labor to create wealth. One can't simply hand everyone 'monopoly money' and expect the automatic creation of a sustainable pattern of investment/consumption goods will be created. Money in a laissez-faire economy reflects the production of goods, ultimately everyone is trading produced goods (or services) for the produced goods (or services) they seek from others. Money is an evolved medium of exchange, not an imaginary stimulant of activity that can be dialed abitrarily up or down and generate real profits (production over and above consumption).


Bernanke followed his prescriptions for economic downturns and the result is massively exploding government debt and higher unemployment. The reality that is consequence of their interventions doesn't fit their models, and they don't know what to do next.

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

When Bernanke gave this speech, almost 8 years ago, gold was indeed at $300/oz. Since we've followed these policies the dollar value of gold has quadrupled. Bernanke confuses increasing nominal prices with creating real profits, when profits are built on price differences established by consumer/investor preference (time and goods) irrespective of the size of the money pool or nominal prices.


We give the banks billions to lend to the government, and then pat ourselves on the back when they make 'profits' from this activity off the taxpayers and repay the 'loans' to the government!?!
This economy will remain in trouble as long as we follow this prescription for destroying the value of the unit of account in economic activity. We need a Federal Reserve with the backbone and grasp on reality that Volcker's FOMC showed in the early 80's. Keeping the 'bad actors' in business on the backs of taxpayers isn't 'getting us out of the ditch', it's just digging the ditch deeper while we spin our wheels.

[OllieLotte]

7. I agree with your comments. n/t

[golfguru]

8. 1,000,000 federal workers being laid off in

UK, Russia, Greece, France, Italy, Spain, combined.
US will be next I am afraid. Governments are broke
in several countries.