Because most Western governments are insolvent, fiscal policy is dead. They maxed out their taxing power a long time ago and have been borrowing ever since. When it comes to the economy, governments are a spent force.
This has put central banks in charge, and they basically do one thing only: they print money. If all you have is hammer, everything looks like a nail, so central banks naturally think the world’s problem is a lack of money, which they are busily solving.
The problem is, a lack of money is not the problem, it’s solvency, and part of the reason for that is too much money, or rather, too much credit.
h/t Mike
No worries . . . Obama is on the case so the problem will be solved with a couple of slick Teleprompter moves and inventing new and improved Solyndras.
Rest easy troop, smoke ’em if ya got ’em.
Mauldin was using some rather uncomplimentary language as he commented on the new socialist government in France. Economically ignorant was the gist.
It makes you wonder about the state of the human condition. I was told the other day that the CEO of Total Petroleum came to Calgary for meetings at Stampede time. He decided to stay a couple of extra days to take in the festivities. A company directive came down to office staff that they should dress in cowboy garb to give the CEO a “feeling” for the event. I mention this because this was the same company whose VP said Canada was rather backward on their knowledge of finance. Now that the new French government is moving max tax to 75% and bringing in a capital tax all should be well in gay Pariee!
Someone, somewhere, some time ago, compared government debt to heroin. The first time you use it, it seems wonderful; you feel warm and happy, and everything seems right with the world. The next few times you use it, it feels good, but not as euphoric, so you try to use more to recapture that wonderful feeling. The Chinese call it “chasing the dragon”.
Well, today, much of the West is at the level of the veteran junkie on Vancouver’s Eastside – dependent on the IMF/Insite for money/needles, and desperate to score ever increasing amounts of bond auctions/junk to keep social upheaval and – gasp! – losing their jobs/withdrawal symptoms at bay.
Trouble is, for debt, there’s not even the equivalent of methadone; there’s only trying to wean yourself off it (which the Feds in Canada have tried, slowly and with backsliding, to do), or cold turkey. Greece and Spain and Italy are paying lip service to ‘tapering down’, but as soon as the monkey on their back starts screaming, who here doesn’t believe their bond auctions will start again?
And of course, since all governments, everywhere – even the vaunted Chinese powerhouse, which increasingly looks like it’s built on a house of cards – need money, you can look for wealth taxes any and everywhere. The “Three R’s” may soon be replaced by the “Three B’s” – “Bullion, buy, and bury”.
That is a pretty good layman’s analysis of the current global economic crisis in the US and Europe – all I would add is that Keynesian economic practices instead of Austrian school economics put them into the current state of impending national insolvency.
Canada is a different story. We do not carry as large a debt load as these Keynesian-nomic nations but only because we had a late start at the spend and borrow debt cycle. It is important to know 2 things when analysing Canada’s debt spiral:
1) Canada has a total debt of 18 billion dollars (owed to citizen bond holders) in 1972. The Bank of Canada printed money on a demand basis commensurate with productivity short falls. The currency was debt free issue. Interest on bond debt was 4 billion dollars owed largely to citizen bond holders.
2) In 1973 under PET we changed the bank of Canada policy to a Keynesian spend and borrow policy where money now carried national debt interest which was applied by unlimited borrowing from international banking consortiums. Our debt ballooned from 18 billion with 4 billion interest to 39 billion debt with 386 billion in compounded interest. It still escalates today.
Canada is far behind other nations who borrow from private international banking resources, we only started in 1973 yet just servicing the debt interest strains our taxation burden) Imagine the taxation insolvency other nations have incurred who now look a debt interest in the trillions.
It is very important to understand that in Canada this taxing to jsut make interest payments can stop tomorrow – no new law need be written and passed, our wholely citizen-owned central bank and the mint have the ability to issue debt free currency for all our needs as per the constitution – we couls see managable debt and massive reductions in taxation levels – just the way we did prior to 1973.
Now you understand why I say there is no difference between conservative, liberal or socialist parties in Canada – they ALL support the current unconstitutional Keynesian policy of borrowing from private banks and servicing a massive compounding debt cycle with increased taxation and inflation.
Well our great Premier has Ontario gaining on Quebec in the race to the poor house,Canada will soon have its own version of Greece or Spain take your choice.I wonder how much money has been wasted worldwide on the Glowbull Warming scam and the fallacy of wind and solar power which is nothing more than the enviro-whackos wet dream.
The first 9 paragraphs comprise the best, the most succinct and concise summary of western economies today that I have seen anywhere.
Occam: Keynesianism is an offshoot of the article, but not a central point. Keynesian theories are own way (really the only way AFAIK) governments were able to justify their borrowing. Keynesianism was a way of justifying why they could borrow (when in reality they just wanted more money and power). But it was not Keynesianism that caused them to borrow, it was Keynesianism that allowed them to sell it to the public.
In short, they could justify their borrowing by saying that the borrowing would pay for itself by growing the economy faster then the debt, which is Keynesianism in a nutshell.
If there were some other BS theory that they could have used to justify their borrowing, they would have used it instead.
In short, they could justify their borrowing by saying that the borrowing would pay for itself by growing the economy faster then the debt, which is Keynesianism in a nutshell.
No, that’s just a nutty version of what JMK wrote. Keynes had great respect for entrepeneurs, and he was attempting to deal with the following problem: what happens when the economy enters a deflationary period, or even if business suspects deflation? Say you’re a manufacturer. You buy raw materials at total price X, you pay Y for labour to transform, and you sell at Z, which includes a profit sufficient to give you a return and cover the rest of your overhead. But, in a period of deflation, you pay X and Y today, but don’t sell until tomorrow, when you might only get Z* (less than Z). So, unsure if Z* will even cover overhead, let alone make a profit, what does any rational person do? He cuts production.
JMK saw that, in aggregate, hundreds of manufacturers acting rationally on an individual basis, would cause harm to the economy. They would lay off workers, reducing purchasing power, and they would forestall purchases, raising inventories elsewhere. Workers in turn would reduce spending; primary manufacturers would reduce production until inventory eased. The result would be a deflationary spiral until some new equilibrium was reached at a lower level of employment, production, and output.
The problem is this can happen just because business suspects deflation might occur. Since most businesses in JMK’s time planned six to nine months out – at least! – due to the lack of modern communications, computers, just in time inventory, etc., their hazy fears, reinforced during social get togethers with others in their class, caused them to act skittishly.
JMK’s solution was to use government spending to 1) forestall the effects of these cutbacks, and 2) by doing so, stoke the ‘animal spirits’ (his words) of entrepeneurs. A little inflation was not a bad thing to him; it spurred makers on, as what they bought with X and Y today could be sold for Z+ (>>Z) tomorrow, increasing profits. One could fault JMK for not foreseeing the runaway inflation some countries have had, but, for all his brilliance, he could not foresee the day when Bambam or Nancy Pelosi or (shudder!) Maxine Walters were holding the purse strings.
Now, the flip side of this was Keyne’s generally ignored admonition that governments must ‘take away the punch bowl once the party gets started’ – that is, once the economy is at or near full production, the government should be running surpluses to pay down previous debt and/or build up a surplus for future downturns. Failing to do this is like hearing your doctor tell you to treat your diabetes by taking insulin and stop eating so much sugar, and then proceeding to take larger and larger amounts of insulin while scarfing down a dozen of Timmy’s finest every day. To watch someone do that, and then blame their doctor when the person dies of diabetic complications is absurd, but that is what blaming JMK for the West’s current predicament is.
KevinB: I’m sorry, but as the article states, deflation is not the end of the world. It is in fact a necessary adjustment. For instance, the deflation in the US housing market was an absolute necessity if the market were ever to return to sanity, namely a proper balance between supply and demand.
All the BS from Keynes and his followers doesn’t change that. Deflation is necessary, and creating artificial demand in the Keynesianism fashion doesn’t change that, it just delays the inevitable and increases the pain.
As for your example, if you cannot produce your goods for less than you can sell them, whether it’s because of deflation or any other reason, you either figure out a way to fix it, or you go out of business. You don’t cut production, that would be the last thing to do, because that would make the problem worse! Profits are maximized when production is closest to capacity. That’s the underlying principle behind the industrial revolution.
You cannot see the forest through the trees.
KevinB: Keynesianism is like communism. You will always find people like yourself who claim it was never tried the right way. In reality they both ignore fundamental reality. They are both flawed in theory, not just flawed in practice.
(sigh)
Only people with a tiny understanding of economics think that a change in values within a single market represents “inflation” or “deflation”. The price of computers, for example, has been dropping dramatically since 1985. Has the Canadian economy been “deflating” for 25 years? I hardly think so. It’s quite possible to have different sectors moving in different directions simultaneously, which is why anyone who’s serious defines inflation/deflation as a rise/fall in the overall price level.
What do you think would happen in Canada if L’il Stevie Harper started rapping:
Canadian economy,
It’s gonna be a crashin’,
So you best be wise,
And get all your cash in
People start withdrawing all their money from banks and investment funds. They stop spending to save for the terrible days ahead. What do you think happens to the economy then, moron?
I’ll tell you – stripped of purchasing power only because of people’s fear, NOT ANY REAL EVENT GDP contracts, and if they stay scared long enough, it contracts so much that more people lose their jobs, GDP contracts further, people spend even less, etc., etc., until finally we reach a new equilibrium of lower output, employment and wealth because of.. what? People’s irrational fear. If you don’t think this happens in real life, look at the history of bank runs. Sometimes a bank is brought down because of terrible lending practices, fraud, whatever, but often sound banks have been caught up in a frenzy and failed simply because of people’s fear. This is not theory, this is economic history.
Profits are maximized when production is closest to capacity
Hahahahahahaha. You’d get an “F” in any course in micro-economics for that fantasy. Profits are maximized when marginal cost = marginal profit; both are irrespective of capacity. The traditional micro argument against monopoly is that, quite often, for the monopolist, MC=MP at far less than maximum output.
In a nutshell, to use your phrase, Keynes recommended governments act just like you and me – build up a surplus in good times that you can spend during bad times. Think about what families or extended clans have done over the years – when one of their members falls on hard times, others help him out, and then he repays the favour later. Western governments have discovered in the bond market the great-aunt who will always lend you $100, and abused her until she’s finally turned off the tap. For the past 70 years, most Western governments have been as “Keynsian” as current Wall St. investment banks have been “capitalists” – i.e. not very much. Your analogy with communism doesn’t work, because the Canadian government, for example, both Liberal and Conservative, were pretty much Kenysian through the 50’s and early 60’s, only going nuts when PET took power.
No one ever mentions that one of Keynes’ goals was to destroy all labor unions, as their contracts prevented wages from adjusting downward to a level low enough that a greater number of labor hours would be demanded.
( Occam, I believe you meant to write the profit maximization rule ( for the typical firm, where MC rises as output rises ) :
Marginal Cost = Marginal Revenue. )
I blame declining productivity. Not only, but especially in the public sector. Productivity is key to a countries’ living standards.
A big problem with Keynesian type stimulus using borrowed money? – the funds gathered from the taxpaying productive sector are usually “invested” foolishly by the politicians in unproductive ways. Think Solyndra.
Communistic adage: You pretend to work and the gov’t pretends to pay you.
But western ways have become even more unsustainable than that: You pretend to work and the gov’t keeps paying you – alot!. With borrowed money. With tenure.
It is all coming home to roost in Europe and NA are not far behind.
The biggest problem is that government employment produces no goods…no loaves of bread or pairs of shoes……..
JMK’s solution was to use government spending to 1) forestall the effects of these cutbacks, and 2) by doing so, stoke the ‘animal spirits’ (his words) of entrepeneurs.
Like Preston Manning said, government using a flashlight battery to try to start a 747.
JMK was a socialist thinking it’s possible to ‘manage’ private enterprise. He also thought entrepreneurs were too stupid to realize if there is demand for their product, if “business suspects deflation might occur”. As though gov’t is more clever. heh
He was one of the first communitarians.
government using a flashlight battery to try to start a 747.
To quote aging goat Bruce Sprinklesteen (turned 62 this week):
You can’t start a fire without a spark.
Or,
From little acorns, mighty oaks grow.
Or,
A journey of 1,000 miles starts with a single step.
I’m sure I can find three opposite analogies for every one you post.