Keynesian Magic and Wizardry
- Thread starter Tsing Tao
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The bridge analogy had to do with the overly simplistic economic model followed by the Austrians & Monetarists, where debt doesn't figure: the Austrians consider it Original Sin and want to get rid of it, the Monetarists just ignore it.
In real life, debt is omnipresent. A product is delivered to a wholesaler; the invoice isn't COD, it's 30 or 60 days. The wholesaler delivers the same to the retailer, same deal. Everyone owes everyone else. Every businessman maintains a line of credit with some bank somewhere for working capital, and a lot of them do business with factors who take their receivables at a discount, so that in effect the businessman is paying someone a pretty high interest rate in order to get the goods he needs to do business.
Where there's debt, there's risk. Where there's risk, there's instability.
Hence the swings of the economic cycle.
Irving Fisher's debt/deflation screed, written in the early part of the Depression, was Keynes' launching point.
Keynes considers the risk that every businessman knows about: unlimited uncertainty. Not limited by some standard deviation in the head of some economist who could have been a physicist but decided the math was too hard. Actually unlimited risk.
Where risk can't be limited, and the worst happens, nothing will persuade that businessman to make an investment. Hence the idea that the only agent in the entire economic system that can kickstart an economy that has ground to a halt is the government. What Keynes understood, his central insight, was and is that there is no essential reason at all why an economy that has come to a dead stop should start up again; or at least restart in a timeframe less than that of a human lifetime.
His sayings have become worn out jokes, but if you look at each one they tell a defining truth about risk:
In the long run we're all dead: every invalid economic system says that in the long run their way is the right way. Mellon telling Hoover to liquidate everything, or every ETer who thinks if you just let things alone everything would be all right again. Hoover actually believed Mellon, mostly. By the time he was done, three and a half years after the Crash, the economy had come to a complete dead stop. So much for Mellon.
Do you care if you're dead when the solution proposed starts working?
Markets can stay irrational longer than you can stay solvent: that goes for everyone, not just speculators. The idea that markets will correct in time for everyone to be happy and party again is simply not true. There are times, and they happen more often than Austrians and Monetarists will admit, when the markets go nuts and stay nuts and will not be persuaded to become sane regardless of crashing commodity prices that should "clear markets" or anything else.
Keynesian solutions work because they take account of risk. Austerity in times like what we're going through now doesn't work because it doesn't take account of the obvious risk that it will start a self-reinforcing downward spiral.
The eurozone is finding that out again and again and again, and refuses to learn the lesson. It's kind of interesting to watch as they squirm around trying to figure out a way to get austerity to work. It won't. The only question is how long it takes them to figure it out and whether they succeed in destroying the world economy trying.
Nice try but this isn't 1984 where you get to re-create History by telling lies.
The fact is hoover didn't take mellons advice,(which was the advice that worked well in the 1920-21 depression) hoover went on to be the most interventionist president until fdr rolled in making things even worse.
Stimulus always fails:Tell me does this sound familiar it should it's happening right now
Who said that some crazy Austrian guy like Perter Schiff, Thomas Woods, Thomas Sowell, Rush NOPE it's none other than:Henry Morgenthau, Jr. was FDR's Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed.
http://www.artdiamondblog.com/archives/2009/03/_in_new_deal_or.html
The persistent myth of the never ending downward spiral is just plain asinine. Almost as asinine as the claim Europe is now truly following an austerity program in the first place it isn't and neither did hoover or fdr.
Of course that won't keep numbnuts liberals of the future (wrongly) pointing blame at austerity as cause for the interventionist/stimulus hangover.
Well written, you've done it again, trefoil. I missed the bridge analogy, might have come from someone I can't see. I'd like to know more about what Keynes may have thought on the problem of real, significant inequality. Obviously, if there is a lack of demand there is some kind of inequality, but from what I've read Keynes seems to be talking about psychological factors that can keep both seller and buyer out of the marketplace, a lack of confidence. The perceiption of risk, as you mentioned. But what about societies where the currency has actually piled up on one side of the sales counter, so to speak? How is government supposed to put currency back on the other side, so that sales can resume, when the side with all the currency IS government?
Lack of demand: rotflmao there is no such thing.
Human nature dictates Demand is ALWAYS infinite, the problem is there is vast disagreement on the price one is willing to pay and another is willing to accept.
So what? We're not talking about the elimination of debt entirely. We're talking about keeping debt within your means to pay. Not over-extending it. In every single example you cited above, there is a repercussion for taking on too much debt. The wholesaler cannot pay, he is cut off and moved to cash only. The retailer, same thing. Eventually this disrupts the cash flow and the company can no longer get the products it needs, and goes out of business.
It's not borrowing, it's borrowing beyond one's means to pay. THAT is the point here.
Keynesian solutions may work, but only when fully applied. IE, in good times, you must build surplus to that when bad times finally arrive as everyone knows they will, you have the ability to spend your way out of them. You cannot spend like a drunken sailor in good times, run up deficits and when bad times come, double the spending. And that's precisely what we do.
I will agree with you also that austerity in times like what we're going through is not the best solution, as it will bring even harder times on. But what do you do when you're at the end of the line and cannot finance your debt anymore? You have no choice. You've reached the endgame. If no one will buy your debt and all you can do is print and devalue the currency to bring inflation, then you solve nothing, as any stimulus you create is eaten away by purchasing power.
Please show me where Keynes advocated that.
What the Eurozone is finding out now is the Tipping Point. Ireland and Greece have been locked out of the credit market. Spain is right about there, and Italy is next, then France. They cannot get money anymore! They will have two options - default, or print and devalue. That's it.
Show me Keynes's response to this, please.
Don't even try to engage Ricter. He is absolutely useless when it comes to anything regarding economics. He will throw out a comment that is 100% incorrect, then when you call him on it, he'll pretend he never saw it. Refer him to it and he ignores it. You can tell he is greatly relieved that trefoil came into the thread to carry water for him and deflect some of the attention, so all you'll get is him quoting trefoil with "well done!" type commentary lacking substance.
If you do manage to pin him down to try to get him to answer something, you'll get some enigmatic response with a couple of smiley faces. That's Ricter-speak for "uh what?" This is, of course, assuming he cannot Google some article that remotely resembles your topic.
This is what was meant by Jean-Claude Juncker, PM of Luxemborg, when he said... "We all know what needs to be done. We just can figure out how to get reelected once we've done it".