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Governments and central banks have
invoked the writings of J.M. Keynes to justify the massive increases in
government spending and monetary inflation that have occurred over the past
few years. However, some of Keynes's apologists have pointed out that the
famous British economist would not have agreed with many of the policy responses
for which his work has provided the intellectual justification. They point
out, for example, that Keynes only advocated temporary increases in
government spending as a means of absorbing shocks to the economy, and that
he was dead against currency debasement and the creation of structural
deficits. The problem, though, isn't that Keynes's theory has been applied to
an unreasonable extreme; the problem is that the theory is completely wrong.
For starters, the laws of economics always apply, so if greater government
deficit-spending really did act to strengthen the economy during recessions
then it would also act to strengthen the economy during the good times. On
the other hand, if greater government deficit-spending hurt the economy
during the good times then it would also hurt the economy during recessions.
The point is that there isn't one set of laws that applies during periods of
growth and another set that applies during periods of contraction.
Secondly, the concept that the government can provide a sustainable boost to
the economy by increasing its spending is based on the fallacy that increased
consumer spending causes the economy to grow. It causes GDP to increase due
to the way the GDP calculation is done, but for an increase in consumer spending
to be sustainable it must be an EFFECT of real growth; that is, it must
follow an increase in production. Consumer spending is at the end of the
growth sequence, not the start.
Thirdly, most people realise that the government
usually does things much less efficiently than the private sector. The fact
is that government spending tends to involve a lot of wastage. This is not an
issue for the true Keynesian because he views an increase in spending as an
economic plus even if the spending is totally unproductive, but it should be
an issue for a good economist.
Fourthly, the government doesn't generate any real wealth of its own that can
be 'spent' in order to offset what's happening in the private sector.
Instead, everything the government spends must first be borrowed or stolen
from the private sector. So, how can the private sector possibly be helped by
the government increasing the rate at which it steals and borrows from the
private sector?
Fifthly, recessions occur because of the widespread mal-investment prompted
by the earlier expansions of the supplies of money and unbacked
credit brought about by the central bank and the commercial banks. As a
result of this mal-investment, the economy's structure becomes distorted such
that it is geared to produce too much of some things and not enough of
others. Unfortunately, the Keynesians mislabel the distortion caused by
inflation as an "output gap", which they then cite as justification
for more inflation and more government spending. In effect, recessions are
symptoms of the process via which an economy attempts to rid itself of the
distortions caused by prior inflation and intervention, and yet, in its role
as "economic shock absorber", the central-planning team comprising
the government and the central bank tries to sustain the distortions. How can
this possibly be beneficial?
If an economy is strong enough it should be able to recover DESPITE the
application of Keynesian remedies designed to smooth-out the transition to
the next expansion, but the economic structure will necessarily be weakened
by each successive increase in government spending and each successive
inflation-fueled boom until, eventually, the economy will be in such a
weakened state that it will be unable to bounce back in the face of more
Keynesian policies. At this point, continuing with the same policies will
lead to hyperinflation and/or a totalitarian state as freedoms are rapidly
removed in a desperate effort to maintain control.
Hyperinflation and/or a totalitarian state are the inevitable destinations if
Keynes's theories are relentlessly applied over the long term. The reason is
that each round of policy mistakes creates the justification for even greater
mistakes, setting in motion a downward spiral that will be inescapable as long
as the perceived solution entails more of the same. The only unknown is how
long it will take to reach one or both of these destinations. If the theory
continues to be applied as aggressively as it has been over the past few
years then we could get there this decade.
Steve Saville
www.speculative-investor.com
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