The dumbest article ever written

[wayneL]

I disagree.
Isn't it obvious that if the present situation was left to run without any government intervention that the recession will be deeper.

I see nothing wrong with the government undertaking infrastructure works that keep people employed which in turn helps to keep retailers etc. employed also.

It's fashionable to bag Keynasian ideals if done properly - and I don't mean the kind of fascist socialism that Bush has employed so far, I don't see what is wrong with smoothing the bumps in this manner.

Keynes' theory was basically to spend in recession, but to build up surpluses in booms to partially pay for it. He also advocated taking monetary and fiscal measures to slow down booms to prevent bubbles.

This is clearly not the case. To invoke Keynes only in a recession isn't proper Keynesianism, it's pork barreling in his name.

 

[aleckara]

I know a bit about Keynesian and Austrian economics and to be honest all of them have their faults. I prefer Austrian but some basics in Keynesian are common sense too. A lot depends on culture and human behaviour.

Saving on its own does not generate investment. Only savings borrowed can create capital for future productivity (i.e you are spending money on a machine in the hope that you will generate more work per unit of time). Someone's work still was required to create that machine and that is the work that stimuluses can encourage.

A stimulus gets people to spend, and the people providing the goods get the work. The assumption that has been violated of course is that spending generates work locally in Australia and gives us an incentive to "work" out of the mess we are in. The real problem of course is that this sort of economics doesn't work when we have outsourced "all this work". Spending stimulus packages so that retailers (who really are just foreign good shopfronts) can keep their shop is pretty much all its good for.

I think in this globalised environment Keynesian methods may stimulate work, but policy wise not necessarily achieve it where the goal of the policy is (i.e to smooth out the pain of the recession here).

Of course in the long run monetary economics catches up and currencies can be destroyed because the cure isn't fixing the problem, it is creating more imbalances. I think this is what Austrian economics highlights - that debt paid off by inflation makes the currencies standing less credible and that gold money naturally rewards those who work straight away and can't be meddled with. If we had gold money I think that most countries would still be highly protectionist as they can't print more 'gold' and would be hemmoraging it.

The system is broken. People want to have their cake and eat it too.

 

[eladamrine]

Keynes' theory was basically to spend in recession, but to build up surpluses in booms to partially pay for it. He also advocated taking monetary and fiscal measures to slow down booms to prevent bubbles.

This is clearly not the case. To invoke Keynes only in a recession isn't proper Keynesianism, it's pork barreling in his name.

Thats only the case because different people who in charge. Alan Greenspan and the Bush administration, the latter which we know is a sped, advocated de-regulation of the financial sector while the people now in charge are Obama and Hank Paulson. So really its not selective application but just different people in charge.

 

[Ageo]

Another question for all you keynesian buffs, if we had the gold standard back (i.e gold/silver as currency) would all these stupendous amounts of stimulus packages be available???? i think not....... you see keynes theory is really based on spending money you dont have! the world is talking about spending more!! Obama is urging that if congress dont pass a $1trillion stimulus the U.S will be hit hard but where if the world is this money coming from????? of course if the gold standard was here none of the stupid bailouts etc... would be put through as they would just be throwing there money away (and you cant just make gold like you can with paper).

So in theory Lord Keynes theory is based on spending money even if you dont have it? hmmmm sounds like him and the Rothchild's have something in common.

 

[Glen48]

Depends on what caused the recession most have been housing slumps, or stock crashes, high unemployment. This one is a credit bubble and any thing associated with money won't help until the debit is cleared or the feds decide to wipe the debt and we start all over again.

 

[aleckara]

So in theory Lord Keynes theory is based on spending money even if you dont have it? hmmmm sounds like him and the Rothchild's have something in common.

I think the Keynesian theory was to try to start a boom and then hold it off when it takes off, like kicking a horse then reining it in. People by their very nature have fits of optimism/pessimism and this causes cycles. Debt driven spending causes work, but the debt itself should rein in future growth when things pick up.

Two problems with this:

1) How much do you kick? How much do you rein in? Governments are probably not the best to make these decisions. A floating rate would be better (i.e the more debt people take on, the more savers are rewarded moderating the debt cycle. if the rate is never able to adjust then there is an issue where people keep borrowing since the price can never move to its equilbrium point).

2) Since governments control it they are very willing to kick, but never really willing to stop people running since it isn't politically good to do so.

Of course gold can't be controlled and solves all these problems. Fiat can work, but only if you let the 'free market' work as it should. There is a number of issues with the system as we have it now that make that not occur.

 

[Ageo]

Its an interesting thing fiat money, i mean the only reason why its better than gold because its much easier to transfer.......... other than that its crap! can be duplicated, manipulated etc..... gold simply cant........

 

[Stormin_Norman]

Its an interesting thing fiat money, i mean the only reason why its better than gold because its much easier to transfer.......... other than that its crap! can be duplicated, manipulated etc..... gold simply cant........

and what's gold other then pretty pieces of dirt?

 

[Ageo]

and what's gold other then pretty pieces of dirt?

At least its looks nicer than paper

oh and did i mention its been used for 1000s of yrs???

 

[aleckara]

At least its looks nicer than paper

oh and did i mention its been used for 1000s of yrs???

And its physical and takes work to produce. It represents work done. i.e if I want a gold bar I either have to pay for it (work), or work for it (dig it up). In the end the gold is worth a certain unit of work. Doesn't have to be gold, just not a stamped piece of paper. It's past work traded, not future work to be done.

 

[Temjin]

and what's gold other then pretty pieces of dirt?

Yeah, go back 200 hundred years ago and ask the same question and people would think you are crazy. Fiat money has an extremely short history and statistically has a 100% failure rate beside for the one that still exists today.

Of course gold can't be controlled and solves all these problems. Fiat can work, but only if you let the 'free market' work as it should. There is a number of issues with the system as we have it now that make that not occur.

Unfortunately, the "free market" concept has been highly criticised as the cause for this crisis. Not enough regulations and rules to prevent those who lend recklessly as well as the number of frauds that are beginning to show themselves.

I'm definitely a pro for free market, but unfortunately the public never had the patience to wait for it to work out and instead begged for more "interventions" to protect their own interest at the expense of the greater good.

I know a bit about Keynesian and Austrian economics and to be honest all of them have their faults. I prefer Austrian but some basics in Keynesian are common sense too. A lot depends on culture and human behaviour.

Saving on its own does not generate investment. Only savings borrowed can create capital for future productivity (i.e you are spending money on a machine in the hope that you will generate more work per unit of time). Someone's work still was required to create that machine and that is the work that stimuluses can encourage.

A stimulus gets people to spend, and the people providing the goods get the work. The assumption that has been violated of course is that spending generates work locally in Australia and gives us an incentive to "work" out of the mess we are in. The real problem of course is that this sort of economics doesn't work when we have outsourced "all this work". Spending stimulus packages so that retailers (who really are just foreign good shopfronts) can keep their shop is pretty much all its good for.

I think in this globalised environment Keynesian methods may stimulate work, but policy wise not necessarily achieve it where the goal of the policy is (i.e to smooth out the pain of the recession here).

Of course in the long run monetary economics catches up and currencies can be destroyed because the cure isn't fixing the problem, it is creating more imbalances. I think this is what Austrian economics highlights - that debt paid off by inflation makes the currencies standing less credible and that gold money naturally rewards those who work straight away and can't be meddled with. If we had gold money I think that most countries would still be highly protectionist as they can't print more 'gold' and would be hemmoraging it.

The system is broken. People want to have their cake and eat it too.

Unfortunately, the very same traditional monetary policies being encouraged by the Keynasians have NEVER EVER WORKED in the past to solve recessions. If one thinks the 2001 recession was solved by pulling down interest rate alone, then he is dead wrong because it simply extended the problem further by creating a much bigger bubble.

Japan was one good example why "stimulating" economics never worked. Of course, they only pursued traditional policies. But if Ben Chopping & Co start using some of the more unconventional ones, in which some of them are already in action (plus the possibility of bypass the banks and hand out money directly to the public), it will create serious inflationary pressure on their currency.

The biggest underlying problem is still everyone (ok, except the Chinese and other "idiot" savers who should be blamed for this recession) has lived beyond their mean with their reckless spending. This inflated production capacity and put everyone deeper in debt, both privately and by the government.

The only way to solve it is to let everything crash, liquidate all mal-investments, a serious deflation, more bankrupcies and a few more suicides. Then we can start all over again.

Unfortunately, this is a political unacceptable move. Any politicans who dare to pursue such things will surely get himself thrown out of the office faster than he filled out the forms to apply for position.

Solving too much debt with more debt will never work and I still have absolutely no idea why people still believe it would. Because Keynas was a genius and he all figured it out???

 

[Stormin_Norman]

At least its looks nicer than paper

oh and did i mention its been used for 1000s of yrs???

i understand the history of gold very well. i was more continuing along the lines of the underlying worthlessness of it.

whatever is a 'storer' of value is by logical terms valuable.

if people think that the value of fiat money is waining, then they will look to other storers of value - ie precious dirt.

and to that means, gold is just like fiat money. the main difference is however its supply is constrained by what comes out of the ground rather then what rolls off the printing press at the federal banks.

for an interesting read check out the initial US currencies issued by banks in the 1800s. it was a very successful venture, until the US government got the irks with it because they couldnt tax it (either directly, or through inflation).

very very few private banknotes failed, dispite the common assumption that they would.

 

[Temjin]

i understand the history of gold very well. i was more continuing along the lines of the underlying worthlessness of it.

whatever is a 'storer' of value is by logical terms valuable.

if people think that the value of fiat money is waining, then they will look to other storers of value - ie precious dirt.

and to that means, gold is just like fiat money. the main difference is however its supply is constrained by what comes out of the ground rather then what rolls off the printing press at the federal banks.

for an interesting read check out the initial US currencies issued by banks in the 1800s. it was a very successful venture, until the US government got the irks with it because they couldnt tax it (either directly, or through inflation).

very very few private banknotes failed, dispite the common assumption that they would.

Assumptions? EVERY Fiat currency have it is in practiced have FAILED, except for those being used currently. They all shared the same fate, massively devalued until the collapsed.

You might have mistake the different between fiat money without backing (which will eventually fail) and fiat money under the gold standard. (which will work but those in power hated the restrictions for being able to freely distribute it)

http://www.dailyreckoning.com/rpt/fiathistoryWP.html

 

[eladamrine]

Another question for all you keynesian buffs, if we had the gold standard back (i.e gold/silver as currency) would all these stupendous amounts of stimulus packages be available???? i think not....... you see keynes theory is really based on spending money you dont have! the world is talking about spending more!! Obama is urging that if congress dont pass a $1trillion stimulus the U.S will be hit hard but where if the world is this money coming from????? of course if the gold standard was here none of the stupid bailouts etc... would be put through as they would just be throwing there money away (and you cant just make gold like you can with paper).

So in theory Lord Keynes theory is based on spending money even if you dont have it? hmmmm sounds like him and the Rothchild's have something in common.

Yes you are dead right, Keynesian economics is in some ways spending money you don't have and thats why you result in a budget deficit. To increase government spending you can either borrow money from the public i.e. by issuing bonds or by printing more money. I'm not quite sure where the bailout money is coming from, but it the treasury could also have accumulated surpluses.

Assumptions? EVERY Fiat currency have it is in practiced have FAILED, except for those being used currently. They all shared the same fate, massively devalued until the collapsed.

You might have mistake the different between fiat money without backing (which will eventually fail) and fiat money under the gold standard. (which will work but those in power hated the restrictions for being able to freely distribute it)

Fiat currency is obviously not full proof, it is only worth something if people recognise its value and mainly because the government backs it. But didn't the gold standard have it's faults too, like when trade breaks down and the flow of gold was disrupted the exchange rate got screwed?

 

[Stormin_Norman]

Assumptions? EVERY Fiat currency have it is in practiced have FAILED, except for those being used currently. They all shared the same fate, massively devalued until the collapsed.

You might have mistake the different between fiat money without backing (which will eventually fail) and fiat money under the gold standard. (which will work but those in power hated the restrictions for being able to freely distribute it)

http://www.dailyreckoning.com/rpt/fiathistoryWP.html

i love the daily reckoning. great comment on the markets.

the thing you rightly point to is the government devaluation of the notes. its a tax. one which most people dont even realise is happening until its too late.

is that a fault of fiat money? no. its the fault of those in control of its distribution.

which is why private banknotes throughout history have done well. its not in the bank's interest to reduce the value of their notes, so they store their value far better then the govt issued notes.

again the problem comes back to governments stuffing around with the markets.

friedman's idea of a constant 5% monetary growth is a good one. rather then set interest rates, set the money supply growth. during high demand for money, interest rates rise, during low demand the interest rates fall and the currency holds its value as the supply side of the fiat market is held consistent.

over supply of gold is the same, its just harder to do. in the 1500s spain took mountains of gold back from the americas to europe. it caused them huge inflation which they only controlled just before they went to the euro. they went from the european powerhouse to a basket case economy because of oversupply of money (in this case gold).

 

[ducati916]

What if you are given the option that your, yet to born, grandkids can repay your debt. What will you do then? Leaving the morality issue aside.

Ducati,

In your example, you mentioned a saving of 20% but because of fractional reserve banking, wouldn't it increase by a multiple of 10? Or if we take an average increase by only a multiple of 5, would it change the model, or the relationship will remain the same.

mayk,

I am assuming no "fractional lending" simply savings from earnings. Keynes argued that "savings" were a very bad outcome for an economy and would choke it. This simply is not the case.

jog on
duc

 

[ducati916]

I disagree.
Isn't it obvious that if the present situation was left to run without any government intervention that the recession will be deeper.

I see nothing wrong with the government undertaking infrastructure works that keep people employed which in turn helps to keep retailers etc. employed also.

It's fashionable to bag Keynasian ideals if done properly - and I don't mean the kind of fascist socialism that Bush has employed so far, I don't see what is wrong with smoothing the bumps in this manner.

Knobby,

This is simply one of the Keynesian fallacies. Keynesian economics argues for deficit spending usually on infrastructure and lowering of interest rates.

With numerous governments once again committed to deficit spending to address and cure “unemployment,” just how effective has it been historically? It found it’s first trial-by-fire through the Roosevelt administration during “The Great Depression.”

Year……………..Deficit[Billions]………..Unemployed……..As %
1931…………………$0.5……………………8.0……………..15.9%
1932…………………$2.7……………………12.1…………….23.6%
1933…………………$2.6……………………12.8……………24.9%
1934…………………$3.6……………………11.3……………21.7%
1935…………………$2.8……………………10.6…………..20.7%
1936…………………$4.4……………………9.0…………….16.9%
1937…………………$2.8……………………7.7…………….14.5%
1938…………………$1.2……………………10.4……………19.0%
1939…………………$3.9……………………9.5……………..17.2%
1940…………………$3.9……………………8.1……………..14.6%

The second policy is the cult of the low interest rate as practiced currently by Ben Bernanke, and previously by Alan Greenspan. Again, has it worked historically?

Year……………Interest Rate [CP]…………….Unemployment %
1929………………….5.85%…………………………..3.2%
1930………………….3.59%…………………………..8.7%
1931………………….2.04%…………………………..15.9%
1932………………….2.73%…………………………..23.6%
1933………………….1.73%…………………………..24.9%
1934………………….1.02%…………………………..21.7%
1935………………….0.75%…………………………..20.1%
1936………………….0.75%…………………………..16.9%
1937………………….0.94%…………………………..14.3%
1938………………….0.81%…………………………..19.0%
1939………………….0.59%…………………………..17.2%
1940………………….0.56%…………………………..14.6%

Low interest rates do not eliminate unemploment. They do not in fact in this example even help unemployment, rather, they exacerbate the situation.

The current low interest rate, is admittedly, to ostensibly save the banks and financial system by relieving pressure on the mortgage rates that were “causing” high default rates. Rather, it was bad loans, made by banks, who no longer exercised any credit risk on the loans, rather than interest rates, that are responsible for the default rate.

However, Greenspan, used interest rates for precisely this purpose [reducing unemployment] after the bursting of the stockmarket bubble in 2000 and the resultant recession.

The recovery was known as the “jobless recovery” for the very reason that while economic metrics were showing improvement, unemployment didn’t really respond to the monetary stimulus. It was only really with another bubble developing in housing, and home equity lending [spending] that the “illusion” of prosperity returned.

Year…….Interest Rate…………….Unemployment %
2000-01-01 5.50………………………4.0%
2000-02-01 5.73………………………4.1%
2000-03-01 5.86………………………4.0%
2000-04-01 5.82………………………4.0%
2000-05-01 5.99………………………4.0%
2000-06-01 5.86………………………4.0%
2000-07-01 6.14………………………4.0%
2000-08-01 6.28………………………4.1%
2000-09-01 6.18………………………3.9%
2000-10-01 6.29………………………3.9%
2000-11-01 6.36………………………3.9%
2000-12-01 5.94………………………3.9%
2001-01-01 5.29………………………4.2%
2001-02-01 5.01………………………4.2%
2001-03-01 4.54………………………4.3%
2001-04-01 3.97………………………4.4%
2001-05-01 3.70………………………4.3%
2001-06-01 3.57………………………4.5%
2001-07-01 3.59………………………4.6%
2001-08-01 3.44………………………4.9%
2001-09-01 2.69………………………5.0%
2001-10-01 2.20………………………5.3%
2001-11-01 1.91………………………5.5%
2001-12-01 1.72………………………5.7%
2002-01-01 1.68………………………5.7%
2002-02-01 1.76………………………5.7%
2002-03-01 1.83………………………5.7%
2002-04-01 1.75………………………5.9%
2002-05-01 1.76………………………5.8%
2002-06-01 1.73………………………5.8%
2002-07-01 1.71………………………5.8%
2002-08-01 1.65………………………5.7%
2002-09-01 1.66………………………5.7%
2002-10-01 1.61………………………5.7%
2002-11-01 1.25………………………5.9%
2002-12-01 1.21………………………6.0%
2003-01-01 1.19………………………5.8%
2003-02-01 1.19………………………5.9%
2003-03-01 1.15………………………5.9%
2003-04-01 1.15………………………6.0%
2003-05-01 1.09………………………6.1%
2003-06-01 0.94………………………6.3%
2003-07-01 0.92………………………6.2%
2003-08-01 0.97………………………6.1%
2003-09-01 0.96………………………6.1%
2003-10-01 0.94………………………6.1%
2003-11-01 0.95………………………5.9%
2003-12-01 0.91………………………5.9%
2004-01-01 0.90………………………5.7%
2004-02-01 0.94………………………5.6%
2004-03-01 0.95………………………5.7%
2004-04-01 0.96………………………5.5%
2004-05-01 1.04………………………5.6%
2004-06-01 1.29………………………5.6%
2004-07-01 1.36………………………5.5%
2004-08-01 1.50………………………5.4%
2004-09-01 1.68………………………5.4%
2004-10-01 1.79………………………5.4%
2004-11-01 2.11………………………5.4%
2004-12-01 2.22………………………5.4%
2005-01-01 2.37………………………5.2%
2005-02-01 2.58………………………5.4%
2005-03-01 2.80………………………5.1%
2005-04-01 2.84………………………5.1%
2005-05-01 2.90………………………5.1%
2005-06-01 3.04………………………5.0%
2005-07-01 3.29………………………5.0%
2005-08-01 3.52………………………4.9%
2005-09-01 3.49………………………5.1%
2005-10-01 3.79………………………4.9%
2005-11-01 3.97………………………5.0%
2005-12-01 3.97………………………4.9%
2006-01-01 4.34………………………4.7%
2006-02-01 4.54………………………4.7%
2006-03-01 4.63………………………4.7%
2006-04-01 4.72………………………4.6%
2006-05-01 4.84………………………4.6%
2006-06-01 4.92………………………4.6%
2006-07-01 5.08
2006-08-01 5.09
2006-09-01 4.93
2006-10-01 5.05
2006-11-01 5.07
2006-12-01 4.97
2007-01-01 5.11

The most recent data appears as a chart.
Top chart is the interest rate, bottom chart is unemployment

As can be ascertained from the data, it would seem that lower rates are not closely correlated with reducing unemployment rates.

In summary, deficit spending [Fiscal Policy] and reducing Interest Rates [Monetary Policy] do little to nothing in preventing or reversing unemployment. Why then are the politicians once again embracing the very inflationary policies that will rather damage the economy in the longer term?



jog on
duc

 

[Stormin_Norman]

mayk,

I am assuming no "fractional lending" simply savings from earnings. Keynes argued that "savings" were a very bad outcome for an economy and would choke it. This simply is not the case.

jog on
duc

no he didnt. he talked about the paradox of thrift causing a drop in consumption.

 

[ducati916]

no he didnt. he talked about the paradox of thrift causing a drop in consumption.

Fraid not old chap, I can quote you chapter and verse if you wish from "The General Theory....."
And what is "thrift" by any other name?


jog on
duc

 

[Bushman]

They all shared the same fate, massively devalued until the collapsed.

They have not all been destroyed by hyperinflation. In this study of 775 currencies, the following has occured to the currencies :

23% are still in circulation
24% ended due to 'monetary reforms' (i.e. the creation of the Euro)
12% ended due to Acts of Independence
21% have been destroyed by Acts of War
20% have been destroyed by hyperinflation.

http://dollardaze.org/blog/?post_id=00405#fn00405_2

However, given enough time, I think the fate for most currencies being run under a centralised government system will be oblivion.

Here is a list of 599 dead currencies. Interesting 'roll of valour'.
http://dollardaze.org/blog/?page_id=00017