Keynesian Economics RIP

Discussion in 'Economy' started by eagleseven, Oct 14, 2009.

  1. eagleseven
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    eagleseven Quod Erat Demonstrandum

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    We are just beginning to pay for the flaws in Keynes' theories. You cannot generate liquidity when there is no reserve without suffering grave consequences, as we are about to learn the hard way.

    Further, entire industries can reduce wages in an effort to control unemployment, without government intervention.
     
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    Last edited: Oct 14, 2009
  2. Maple
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    Maple Senior Member

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    Excellent points, Keynes theories have been proven to be a disastor in the making but liberals still tout his theory as a success. You can not spend your way out of debt, and there is no proof that a tricle UP theory ever works. No one I know of has ever been hired by a POOR person. Government does not create jobs, the private sector does. Government depends on the private sector, ( taxes) to support Government, it is not the other way around. With the current state of this economy- revenues to the government through taxes are at an all time low, the longer this unemployment continues the more debt the nation incurs.

    When Reagan passed across the board tax cuts, he created 20 million new jobs and REVENUE to the government INCREASED dramatically. Everyone was working, everyone was paying taxes. When you don't work you don't pay taxes, it's that simple.

    These libs don't get that. They are not capable of running a neighborhood lemonade stand without bankrupting it.:lol:
     
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  3. Diuretic
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    Diuretic Permanently confused

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    Let me see if I have it right.

    Where there's a lack of demand in the economy that's bad isn't it? So to stimulate demand governments begin spending. They may indeed go into deficit. The economy is maintained by government spending until it recovers and then government reduces its spending and the increased economic activity sees income for the government increase in the form of taxes and other levies.

    That's my simplistic understanding of it. I'm not an economist nor educated in it. I'm still trying to get through the General Theory but it's slow going, it has too many numbers in it for me to be comfortable :D
     
  4. eagleseven
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    eagleseven Quod Erat Demonstrandum

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    In the sterilized world of mathematical theory, that is the idea. It makes some critically flawed assumptions, however:

    1. Governments have practically unlimited credit lines.
    2. Governments are capable of spending money in such a way as to spur demand.
    3. Governments are capable of cutting spending once the recovery is underway.
    4. Government-induced economic growth will outpace the interest on debt incurred.
    5. Demand is down due to a market over-correction, not due to fundamental societal flaws (a broken system).

    #1 is clearly untrue. #2 and #3 are not true for the modern American government. #4 is a crapshoot.

    #5 is the most critically flawed assumption of them all. His theory assumes that whatever issues that caused the initial crash are self-correcting, with time. Any financial expert will tell you that our financial sector is as fragile today as it was this time a year ago.
     
    Last edited: Oct 15, 2009
  5. Toro
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    Toro Diamond Member

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    1. Keynes did not assume unlimited credit lines, nor did he assume unlimited borrowing capacity.
    2. Governments do have the ability to increase demand. GDP is a function of monetary velocity. When velocity collapses, as it did last year, the government can increase spending, which increases monetary velocity and GDP.
    3. Absolutely. It is the biggest problem with getting the government involved. Keynes said that once the economy began growing again, government should cut spending. This is often ignored by modern-day adherents to Keynes.
    4. Hard to say. This is probably true in a normal environment and a normal recession, but when GDP is substantially less than 0, then any government spending with a multiplier of 1 or greater, or even slightly less, will generate growth that will be above the private market.
    5. Your interpretation is completely opposite of what Keynes said. Keynes said that when the system is broken is when the government should act. It is when demand has collapsed for reasons other than a standard inventory-liquidation recession that government should ramp up spending.

    This is a good explanation from Nomura Securities of what happens in a debt deflation, and why it is important for government to support the economy.

    Revisiting the Age of Balance Sheet Recessions
     
  6. Elutherian
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    Elutherian BadMother****er

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    Keynes' ideas ain't dead yet. Bernanke and Paulson are still in power and still printing out the paper.

    We're coming along though. Austrian Economics gonna win out in the end.
     
  7. eagleseven
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    eagleseven Quod Erat Demonstrandum

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    Keynes himself wrote of the devastation of inflation...and thus his stimulus relies upon the presumption that government will explicitly not print money. This means that any stimuli will be entirely funded by government reserves and debt.
    I don't doubt that a generic government can, in theory, do this. I seriously doubt that the current American government, with our current crop of politicians, know how to invest money so as to stimulate growth.

    Look at where the stimulus is being spent, and you'll see what I mean.
    Indeed. Once our government gets its hands into a sector, it never wants to leave...
    It's the multiplier that's anyone guess, yes. This really depends upon the circumstances, and the efficacy of the government in question. In this respect, Washington does not inspire confidence.
    Yes, but he assumed that pumping liquidity into the broken system will fix it. A one-size-fits-all solution for many potential problems.

    I'll argue, and I'm supported by the current state of our financial system, that increasing liquidity cannot spur long-term growth if the underlying political-economic mechanics are broken. For instance, you can pour billions of dollars into a crackpot dictatorship in Africa, and still see virtually no economic growth, because the political-economic system is fundamentally broken.

    This is what I mean when I say "broken."

    The presentation makes a good point, but dramatically understates the risks involved with capital injection and a pro-inflation policy. Even Keynes realized the risks of the course he was taking, and wrote as much, though this part of his counsel was conveniently ignored, by both FDR, and now Obama.

     
    Last edited: Oct 15, 2009
  8. Toro
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    Toro Diamond Member

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    Monetary policy is not fiscal policy. The government spending money when demand has collapsed is not inflationary because of the inherent excess capacity in the system. Also, when everyone saves at the same time- the Paradox of Thrift - economic activity stops and Keynes argued that when this occurs, the government must spend. The government raising debt when the private market is contracting debt is not, by definition, inflationary.

    It does depend on the circumstances, and today's circumstances warrant it. It does not always but in a deflationary collapse, it does.

    Government spending is better than tax cuts in this situation because most tax cuts are being saved, not being circulated in the economy. When this happens, the multiplier effect for government spending is greater than for tax cuts.

    He argued that when demand collapsed, the government should step in and increase demand. When underlying demand is not a problem, then government spending is a waste. This is why not all recessions should be met with stimulus spending. But we are in the worst situation since the 1930s, and today's recession are closer to the Great Depression. Keynes wrote for the Great Depression.

    Liquidity is not designed to spur long-term growth. Liquidity is designed to save the financial system and avoid a deflationary collapse. It is being used to re-equitize the banking system. Once the financial system is fixed, the liquidity will be withdrawn.

    It is a fair criticism that the government will not do this correctly. Central banking has been very poor the past two decades in this country, and I am betting that another bubble is in the making, which is why I own a lot of gold. But consumer price inflation is far, far off.
     
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  9. Paulie
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    Paulie Platinum Member

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    Why should the government dictate demand for me, though? What if the majority of the market doesn't want new bridges, or doesn't want new roadways?

    The government contrives demand for the sake of spending money to keep an economy moving against its natural will. Something is wrong with that.

    When the market decides the time is right to spend again, then so be it.

    Nothing makes more sense than to save up a position of wealth to use for discretionary, and even necessary, spending. To dictate policy that in all essence FORCES me to spend my money because it's more fruitful to do so than to save it for future use, is wrong.

    Purchases should be made from an amount of liquidity in saved reserve. No income is perpetually guaranteed. Why should we continue to be punished for saving our cash?

    The government HATES when we save. They flat out DESPISE it.

    The downturn caused by saving and deleveraging is HEALTHY. We weather that storm until the collective balance sheet dictates a proper time to allot liquidity for more purchases again.

    The government didn't even give us a CHANCE to see if we could handle the downturn on our own. They threw a trillion dollars at the situation on day fucking 1. That says a lot about what they think of us as people.
     
  10. Diuretic
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    Diuretic Permanently confused

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    Why should the government dictate demand for me, though? What if the majority of the market doesn't want new bridges, or doesn't want new roadways?

    It seems to me that the government doesn't dictate demand so much as look to improving the public good. I agree that smashing a perfectly good bridge and then building another one is stupid and a waste. But I think it's beneficial to the public good to replace or fix crappy ones. Government stimulus spending should be on the public good, not just for its own sake.


    The government contrives demand for the sake of spending money to keep an economy moving against its natural will. Something is wrong with that.


    You portray “the economy” as something which has will. It doesn't. The economy is the sum of thinking of a nation of individuals as regards economic choices and decisions. There's no “natural will”.


    When the market decides the time is right to spend again, then so be it.

    Too bad if the national economy has collapsed in the meantime.


    Nothing makes more sense than to save up a position of wealth to use for discretionary, and even necessary, spending. To dictate policy that in all essence FORCES me to spend my money because it's more fruitful to do so than to save it for future use, is wrong.

    I don't think the idea is to force individuals to spend money. I think the idea is to create demand for goods and services so individuals will want to spend money.

    Purchases should be made from an amount of liquidity in saved reserve. No income is perpetually guaranteed. Why should we continue to be punished for saving our cash?

    No-one should be punished for saving, it's a prudent thing to do. But saving is a cause of economic contraction, the money isn't in circulation and isn't doing anything except sitting there.


    The government HATES when we save. They flat out DESPISE it.

    Not all the time. Saving is good in times of expansion and bad in times of contraction I think. The government would be pleased that when a contraction happens people who have savings would use them, it saves government from providing goods and services if people can pay for them and the spending helps the economy. The problem is when we freak out in a contraction and stop spending and start saving just in case.




    The downturn caused by saving and deleveraging is HEALTHY. We weather that storm until the collective balance sheet dictates a proper time to allot liquidity for more purchases again.


    Saving leads to contraction in the economy as I said before. It's dead money. It's not being invested, just held back. Surely that is bad for an economy already in contraction?


    The government didn't even give us a CHANCE to see if we could handle the downturn on our own. They threw a trillion dollars at the situation on day fucking 1. That says a lot about what they think of us as people.


    The downturn wasn't a downturn, it was a crisis. It could have destroyed the US and the world economy. They had to do something.
     
    Last edited: Oct 16, 2009

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