Keynes would be sick to his stomach.

We've received quite a nice response to the ideas we put forth in our latest Global Investor promotional push. If you missed those ideas, you can check them out here.

But real quick, let us address a couple questions one reader posed:

1) A "worse" crisis than 2008 gentlemen? Surely it's the same one, just few years older - or did we exit the previous debt deflation? 2) As for "Keynesianism" - you really do use this term a little too freely - what exactly is it? 3) What was it that Keynes faced back in the 1930's and how is it similar or different to today?

Here it goes with our answers:

1)      Correctly identified in 2008 as unsustainable, global economic imbalances are still massive. Global growth is weakening and private deleveraging persists. Emerging market liquidity is leaving, spooked by a banking crisis in Europe. Then consider a potential implosion in financial system confidence while the political system is on the ropes.

Credit is at the heart of it. Belief that ongoing manipulation of money by central banks will save the day is misguided. This idea stems from the Keynesian fallacy on savings and investment.

2)      Among other things, Keynesianism centers on the need to stimulate demand, i.e. worry about the consumer as the only means to drive economic activity. But this amounts to neglect. Neglecting to let the market decide the true value of interest, wages, or goods is the game of the delusional. His theories aimed at producing incentives for only one side of the market equation.

More specifically, deficit spending should be used to fill a short-term demand gap. Keynes believed the additional debt created could easily be alleviated by governments during prosperous times. To Keynes credit, we do think he would have "reconsidered" a lot of his theories knowing:

  1. Western governments now lack discipline to reduce debt during prosperity - spending is political power.
  2. The fabulous degree of global leverage and dangerous financial system linkages created by derivative instruments.
  3. The degree to which the developed world has outsourced real work to developing world economies, driven by the extreme differential in labor rates and supply now available.

3)      Possibly, if fiscal stimulus remained inside a relatively closed-loop economy (more like it was when Keynes was thinking about these issues), the impact may likely have been very different (even though we still believe his ideas were flawed). But the developed world economies no longer work that way and it seems the incredible degree of debt overhang continues to eat away at any beneficial effect that might normally flow from government spending. 

From 2008 thru 2011 and collective global debt thrown onto the market by governments was about $25.7 trillion and it produced $2.9 trillion increase in global GDP during that time. This is not exactly a good payback. In that light, even John Maynard would be sick to his stomach.

Bottom line: The current government demand policies, and Keynesian fallacies upon which they are based, is not letting the market clear. Here are six examples, as outlined by Murray Rothbard, of how government policies interfere with needed adjustment:

  1. Prevent or delay liquidation.
  2. Inflate further.
  3. Keep wage rates up.
  4. Keep prices up.
  5. Stimulate consumption and discourage saving.
  6. Subsidized unemployment.

Government and central bank action are only prolonging the crisis, yet telling us they must take on these measures under the guise of compassion. Would it not be more compassionate to implement policies (or opt not to interfere with the market process) so that real growth is generated and real people get back to work as quickly as possible?

We are in the midst of a deep balance sheet recession, the likes of which we haven't seen since the Great Depression. It's time for those who won't let Mr. Market do his magic to step aside.

They may not do so willingly. But the market usually forces the issue.

Where will you be when investors realize that global policymakers have lost their clout? 

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