Saturday, November 13, 2010

The Keynesian Vacuum Universe

"Nothing in the world is more dangerous than a sincere ignorance and conscientious stupidity"
- Martin Luther King, Jr.

     If only we existed in a Keynesian vacuum universe, then the current Administration's economic policies may have actually succeeded in fixing the ailing, debt-ridden economy! Here are some of the reasons why:

-   Swapping bad private debt for public debt would not negatively affect the sovereign bond market in any meaninful way, since all public creditors would realize that it is just a temporary measure to clean up balance sheets and restart economic growth. The prior value of that bad debt would eventually be restored, and it would be repurchased by private actors. The taxpayers would recover all of their money, or maybe even make a small profit.

-   Deficit spending would also not affect the bond market for the same reason above. It would go directly to consumers and small businesses who could pay off debt and start productive enterprises that create useful products/services, which could then be consumed. No money would be wasted on pork or in bureacratic institutions, because the government would know exactly where the money needs to go and how to get it there efficiently.

-   A "Deficit Reduction Commission" would effectively deal with any potential possibility of a public debt crisis by making small tweaks to entitlement spending and tax policy, leaving defense spending alone so all Americans can feel safe and secure. As soon as the Commission produced its report, all measures proposed would be instantly voted on by Congress and approved. The minor tweaks, of course, would not have any unintended consequences, such as stifling economic growth (and making deficit/GDP worse) or royally screwing War Veterans by cutting their health benefits.

-   Government backstops and subsidies of the housing market would not be taxpayer money wasted, because the bailed out banks and subsidized borrowers would pick up the housing bubble where it left off in 2007. As credit conditions eased, home prices stabilized and unemployment decreased, the government could draw down its market interventions and aggregate demand for homes would not plummet.

-   The Dodd-Frank Wall Street "Reform" Bill would not create any level of uncertainty or unintended consequences in financial markets, since it would extremely clear and targeted with its new measures. The new regulators would analyze the root causes of the financial crisis, propose measures to address these structural problems, implement those proposals via new regulations and enforce the regulations. All new regulators would be insulated from financial industry capture, and would work solely for the benefit of the American public.

-   Quantitative Easing by the Federal Reserve would not blow speculative bubbles in any financial markets, and even if it did, that speculation would not artificially increase the prices of commodities for consumers and productive businesses (squeezing their profit margins). Money would flow to the banks from asset purchases, and these banks would lend that money out to consumers and small businesses at affordable interest rates. Asset prices would not go parabolic again via leveraged speculation, because investors would have learned their lessons from the last credit bubble.

-   QE would also successfully devalue the dollar enough to make debt burdens more manageable and boost U.S. exports, but not so much as to cause rampant, unchecked inflation. In the Keynesian vacuum universe, other countries do not care about American monetary policy that serves to flood the entire world with dollars used for intense financial speculation.

-   Moral hazard would never be an issue. Bailouts and subsidies for banks, businesses or consumers would not affect the future decisions of these market participants, courtesy of the laws of  the vacuum universe.

     And if we really existed in a vacuum, then we would have never had a global credit bubble or financial crisis in the first place. Life would have been clean, simple and forever productive. It would always be a warm and sunny day outside, with cheerful birds chirping and the faint laughter of little children in the background. In this universe, political leaders and pundits could look their country's population in the eyes, and tell them that their economy is healthy and their country is "the greatest" with a straight face. The people would never question the wisdom of those wielding power, and their minds would always be at ease. That is, of course, until they snap back to reality and are forced to face their existence beyond the comfort of the vacuum.


  1. Many associate Keynes with the Government intervention in the Economy, actually the concept of Government intervention is called Keynesian Economics, and this false predicament is so popular that no one is questioning is it Truthful at all...
    And is not...
    The General Theory of Employment, Interest and Money was publish in February 1936, way deep into "The Recovery from the Great Depression", just before the new slump hit The World, not just America...
    The real question is: Can the system repair itself without the Government interventions!
    The answer is no, it cant...
    Next Question should be:
    Who does the Government interventions really help, or For Who it was design for to help?
    The answer is : Not the middle class, never the middle class!
    And the final question is :
    What was the purpose of Keynesian economics:
    and the answer does not lay in his mathematical formulas, or his detailed graphs, but in his attempt to repudiate the Classics, according to his words:
    Who are those Classics?

  2. Ash
    Thanks again. Informed and entertaining as usual. As NNT recently stated, it seems that there is no real understanding of non-linearity. Dangerous times!