What’s so wrong with Keynes and Fiat, anyway?

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  • Mon, Apr 26, 2010 - 10:41pm

    #41
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    Re: What’s so wrong with Keynes and Fiat, anyway?

You can’t deny Keynes theories aren’t alive and being practiced heavily.  Monetarism is, too.  When the economy was -6.7% in Q109, you could put me in the Keynes camp.  Lower GDP, bigger Keynes fan, here.  What most people don’t get when economists preach about a short “window of time” is that in recognition of over-spending to light the mother back up (Keynes), you chase up your debt/GDP and you can’t waste time blowing the whole show by going small with repeated stimulus because you’ll just end up re-priming until you’re up to Greece in debt.  So, it’s better to go big, stop the bleeding and then pay your debts in an ideal world.

Henry Hoover was sort of an anti-keynes and we got Hooverville as a result.  I’m sure the links are entertaining, but what’s frequently lost in among Keynes detractors is how to handle a rational society reacting to what they see as economic destruction.  A society whose reaction to it is to accelerate it by ceasing additional economic activity.  The less spending, fewer jobs, less spending, fewer jobs down draft.  His “contribution”, if I dare call it that here, was that government exists to keep the people from loosing sight of economic potential.  The same for the monetarists, but with the reasoning that demand is less created long-term, than managed short-term. 

Monetarism, by definition adheres to a floating currency.  You can’t play with a currency that is fixed to a 20 meter cube of gold.  You can’t do much with that system, unless you either make it fuzzy and adjust the pegs, or leave it alltogether for a floating currency whose supply can let economies flourish.  A floating currency managed poorly sinks the ship.  If managed respectably, (ala Volcker in the 80’s) it lasts a long, long time.  It lets economies grow just as working capital needs to grow to sustain a growing business.

Keynes policies have been conveiniently abused for political gain in recent US history.  That doesn’t mean we should leave him by the curb.

 

  • Tue, Apr 27, 2010 - 02:59am

    #42
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    Re: What’s so wrong with Keynes and Fiat, anyway?

FinPro,

Interesting perspective. Keynes was a genius – undoubtably.
I also tend to agree his policies were abused, and that the options (staying with a gold standard, staying away from .Gov intervention) were problematic “solutions”, if you can even call them that.

While I can see his accomplishments, I can’t see this process as anything short of belaying a catastrophe until later generations are unable to bear its weight.

Care to argue against this?
Cheers,

Aaron

  • Tue, Apr 27, 2010 - 03:09am

    #43
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    Re: What’s so wrong with Keynes and Fiat, anyway?

Aaron,

I’m not FinPro, but I think the counterargument is that if you actually followed Keynes prescription, the idea was to pay down all the new debt as soon as the economy had clearly recovered. That’s never been practiced by the self-described Keynsians in politics.

What burdens future generations is following only half of Keynes prescription (borrow and spend like crazy), while skipping the harder part of the medicine (paying it back as soon as the economy rebounds).

I personally would argue that Keynes original prescription was inherently unworkable in a democracy, because there would never be adequate political will to carry out step 2. History appears to confirm that argument.

Erik

 

  • Tue, Apr 27, 2010 - 03:50am

    #44
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    Re: What’s so wrong with Keynes and Fiat, anyway?

I would tend to argue that even the first part of Keynes’ “medicine” was flawed. Booms and busts are a normal part of any economy. Booms happen when resources are initially allocated in the most efficient and productive manner.  Not infrequently, these boom cycles may become bubbles, in which investments continue to grow on a purely speculative basis, which results in a misallocation of capital and resources. Busts inevitably follow these bubbles, resulting in reallocation of capital and resources into more productive avenues. Markets overshoot, correct, and redirect. This is normal behavior for a truly free market, and is, ultimately, healthy.

The problem comes when government attempts to intervene, by directly purchasing overvalued assets and/or extending cheap credit, attempting to re-inflate the bubble, in essence. This simply results in further misallocation of resources and capital. It does not lead to a healthy economy. The correction still must come; it has only been delayed, and frequently, made much more severe. The current attempt to re-inflate the housing bubble are an excellent example, I think, and will ultimately be proven to be of more harm than good.

I suppose, in theory, where there has been an outside force that has wrecked havoc on an otherwise healthy segment of the economy, government could potentially step in to provide limited, short-term, support, but this would need to be promptly followed by a withdrawal of the cheap money initially provided. In practice, however, as Erik pointed out, this does not happen.

  • Tue, Apr 27, 2010 - 02:52pm

    #45
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    Re: What’s so wrong with Keynes and Fiat, anyway?

How do you guys explain Volcker’s efforts in the 80’s if you maintain step 2 doesn’t happen?

Monetarists evolved after Keynesians, where step 2 was addressed under the recognition that practicing monetary policy yields no effect on long term economic growth.  I think, but may be wrong, that Keynes actually believed his policies could create demand.  Monetarism that introduces liquidity, unhinged from gold, with low interest rates and money supply blunts the economic troughs, but then latter results in muting the peaks as that liquidity must be withdrawn.  I bet a good survey of America’s “step 2” moments could come from searching ‘Fed “pulled the punch bowl”‘.  Politicians were more in tune with this stuff in the past and less focused upon dumbing themselves down to serve an electorate that itself is dumbed down by the MSM’s efforts to fuel polarity, for entertainment’s sake. 

This is a tangent, but there was a time early in the 20th century when the “populists” were the half of GDP that was agriculture.  The 19th century industrialist wealth (preservation) establishment was the other side in monetary policy.  Then, THE POPULUS KNEW how monetary policy worked and it was a big election topic, where they favored inflating the money supply to provide the seeds for growth and at the expense of permanent marginal gains in inflation.  The hawk/dove debate was alive.  It would be unthinkable today for our electorate to grasp the growth verses monetary inflation trade off.  Its managed for them like too many other things.

Regarding cycles, I see a lot of municipalities under the ARRA (Recovery Act) that have hardly begun to cut the public sector sacred cows.  While I agree the economy needs free market cycles as a cathartic reallocator, doing nothing about 15-20% budget deficits would have been chaotic.  The Act strong-armed the states into maintaining certain funding levels for Medicare and education (“maintenance of efforts”), or else the funds would be withheld.  While that was a bothersome expansion of federal power, I think doing nothing as the other side virtually proposed (tax cuts and that’s it) would have been worse.  Worse not only for the public sector, but private as well because that money had velocity and helped more than the first hands it touched.  The hindsight of -6.7% GDP growth in Q1 2009 only made the Stimulus more of a no-brainer.  My two cents is that Stimulus 2 will be a real political battle, as a depression has been averted and many are more apt to let the cycle take its course, including myself.

  • Tue, Apr 27, 2010 - 05:10pm

    #46
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    Re: What’s so wrong with Keynes and Fiat, anyway?

FinPro,

This conversation is really interesting – I can’t speak for the others, but I think that the feeling is generally that we’re arguing about how to milk a dead cow. Techniques that were used don’t really matter if ultimately the system is too insolvent to persist.

That said, I can see where Keynes was coming from during that period in history.
I can see where FDR was coming from.

But that doesn’t mean that their plans and foundations weren’t “Penny Smart, Pound Stupid”.

Especially considering the Derivitives scams, Lending houses, Poorly thought through bills like the Community Reinvestment act, and predatory lending practices facilitated by a government eager to loan money into existence.

I don’t have much to add, because Erik and Chris really summed up my perspective as well, but I am interested in hearing their responses (Quite frankly, I don’t know the answer to your questions) and pose this question in return:

How do you think we’d be worse off if we had not altered our fiscal approach, had left Capitalism Laisse Faire and kept the Government out of the “economic stimulus” business?

Cheers,

Aaron

  • Wed, Apr 28, 2010 - 03:45am

    #47
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    Re: What’s so wrong with Keynes and Fiat, anyway?

FinPro,

I am certainly not well versed on all economic matters, as I’m still very much a student in this regard. I probably shouldn’t have even responded earlier, but I’ll try to respond to your questions, regardless of how ill-informed my impressions may be.

I tend to view Volcker fairly favorably, granting that those views are based largely on what I have learned from others. In any case, from what I understand, Volcker was dealing with something much different that we have now. In the early 1980’s, he was dealing with stagflation, which he had inherited from the previous Fed Chairman, and was a remnant of governmental policies and outside influences in the 1970’s. Chief among these outside influences was the OPEC-led oil crisis of 1973. The stagflation (stagnant economy + inflation) that followed, which was previously not thought to be possible according to Keynesian theory, led many, including Volcker, to question that Keynesian theory. And, as I understand it, inflation at that time was not due to the previous excessive supply of cheap dollars by the Fed (unlike what many of us are fearing now). Still, it would seem that Volcker’s actions, dramatically raising interest rates, resulted in a marked slowing of inflation.

I certainly would not argue that the Fed cannot influence economics through their control of the money supply. I would even tend to agree that what Volcker did in this instance was the right move. But, I don’t think I can see how this event equates with a “step 2”, meaning a pull-back in a previously expanded money supply which is comparable to what we have seen recently. I would also continue to argue that a truly free market would likely have regulated itself, without outside influence by an entity such as the Fed (regardless of who the Chairman was), and that it would have accomplished such regulation with less waste.

Again, I do not pretend to be an expert on such matters, so if you or others have useful insights, I’m happy to learn!

  • Thu, Apr 29, 2010 - 02:39pm

    #48
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    Re: What’s so wrong with Keynes and Fiat, anyway?

Aaron,

The cow has a structural deficit.  It isn’t dead, yet.

[quote]Pound Stupid…Especially considering the Derivatives scams, Lending houses, Poorly thought through bills like the Community Reinvestment act, and predatory lending practices facilitated by a government eager to loan money into existence. [/quote]

Without arguing how to weight the effects of these problems, I agree they’re part of “Pound Stupid”.  Personally, that is because I believe the biggest six banks have too much power with their aggregated assets to the US GDP rising from ~17% to 60% in the past ten years.  That’s after some of the heaviest deregulatory lobbying of the 80’s and 90’s.  Since the crash they’ve gotten bigger, still, blurring the lines between government and banking.  An agreement over Goldman conducting “free-market” activity verses the government conducting activity is becoming moot because we are headed to a place where the two are dangerously intertwined.  The Brown-Kaufman amendment stands a chance of seeing the Senate floor, but needs public support (Right Now!) because the banks who blew away health care and all other lobby money with 400+ million spent through 2009 will spend even more this year on both sides of the isle to thwart it.  Even if it should prove too far “left”, public debate over excess power in banking won’t happen without it.  So, please, call you Senators.  Its already disheartening to see imigration reform take a front seat, while the central issue affecting that 10% unemployment thing is left to the most heavily influenced group of politicians on the Senate Banking committee.

We’d be worse off without monetary and fiscal management, IMO, if you dial the clock back to early 20th and 19th century economics, where it wasn’t practiced or practiced much less.  That was Lassie Faire, where the terms “bank panic” and economic cycles were more frequent and vicious.  Today, I think its important to separate entitlements and the long-term fiscal damage they cause vs fiscal stimulus (and QE) when the time calls for it.  Both get thrown into current anti-government sentiments, while one may have saved our ass and was almost unanimously supported by economists.  I think the long term problems lie in management, not a need for revolution in economic theory.

ccpetersmd,

I think you summed up Volcker perfectly, but that whether stagflation, recession or depression, tightening monetary policy is effectively “step 2” monetary management and, further, its execution is only necessary when there is indeed excess inflation.  There has been money supply expansion, but until it chases CPI assets we won’t see inflation.  It won’t come from wages.  Asset bubbles, housing and investment re-flation will happen all over again as the lesser evil to flirting with deflation and the Japan scenario.  Is it tinkering?  Yes.  Will we allow the forms of “innovation” that propelled the US home value to income ratio from 3, to almost 4 times again?  Probably not.  The place we get to is one where household and institutional balance sheets get repaired, so the tough decisions ahead can be made. 

FinPro

 

  • Thu, Jul 29, 2010 - 02:21pm

    #49
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    Re: What’s so wrong with Keynes and Fiat, anyway?

Just to add another perspective to the discussion.

There are many problems with academia,  but it does offer some good things.  Like alot of other social ills I always countenance not throwing out the baby with the bath water.  So here is a simple reality based issue with professors:  There is a HUGE difference between professors especially tenured versus adjuncts.    Adjuncts on the positive side are usually still working in their fields.  On the negative they are usually underpaid, undersupervised and over micromanaged (no those two things are not counterindicated)

Many professors suffer from the most human of fears – the most common human fear is public speaking.  Many people who become professors become so because they wish to pursue research into one area or another that is often not financially supported in our economy.  The world of academia is often the only resort.  Then  you take nerds who spend huge chunks of their lives buried in research mode and tell them to speak before the most demanding audience you can contrive in one place.   Many, many, many of them develop this incredible arrogance as a form of self defense.

I am NOT approving or forgiving of it,  I am just giving  a perspective on it.  Others can handle debate,  but for the sake of classroom decorum and timing obviously don’t want students to be confrontational.  Many will listen to a cogent politely stated altering position.  Those who will not are best either left (switching many not be a viable option for you – dropping classes often costs both money and semester hours) or worked around.  Look for other profs in the department.  Look for others at other schools.  I don’t know any professors who don’t respond favorably to the ego stroking of a person asking for their opinion.  Often a good way to stroke a professor you dislike is to e-mail them and tell them you are not certain you understood their point and could they give you further suggestions as to reading material that would support (use the word re-explain) their position.  This person may be an arrogant fool,  but arrogant fools are often the easiest to manipulate.  And even people who are wrong can be learned from.  Discussions with people that you disagree with a extremely valuable.

Good luck!

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