Re: Austrian & Keynesian Theories Vs. Mathematical Facts
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ericg – neither Austrian nor Kenysian beliefs were able to accurately predict the reason for the meltdown; in fact even today they are clueless as to what actually happened. If you remember back, Austrians like Peter Schiff and Ron Paul were clamoring that businesses and people must be allowed to fail to purge the bad debt; effectively resetting the system. They also pointed to low interest rates claiming that this encouraged a boom so to speak.
The problem was, and remains, that we can no longer sustain the debt. We know from the Crash Course that debt will grow exponentially in a debt based monetary system like ours. As the rate of debt growth accelerates, it requires ever larger amounts of new money entering the system. As CM has stated many times, infinite demand cannot be sustained by any finite system, including money.
What if we would have followed the advice of the Austrians? First, I would agree that the banks should have been allowed to fail as they were and are, mostly, insolvent. But that would not have provided relief on our national debt which is skyrocketing. Our total debt is around $60 trillion; $15 trillion attributed to the national debt and $45 trillion coming from the private sector.
As of 2008, I think the total amount of outstanding mortgages, residential and commercial, in the U.S. totaled around $14.7 trillion. If every mortgage in the country defaulted it would only eliminate a relatively small part of the private debt. My point is that it is long past our ability to eliminate enough debt through defaults to reset the economy.
More importantly, the question must be asked, why do we use a monetary system that requires continuous defaults to operate?
Schiff and Paul, Austrian poster boys, were quick to blame low interest rates. When you recognize that interest is the problem, it should become obvious that their suggestion would make things worse. Sure, people might borrow less, but higher interest rates make the problem of exponential growth worse, not better.
Unfortunately, both Austrian and Kenysian belief systems were crafted to destroy our economy by hiding the greater truth. Either Schiff and Paul are stupid or they are leading the lambs to slaughter. They are not stupid.