November 6, 2010
The Keynesians Get Their WishBy Peter Raymond
The Keynesians finally got their wish. The Federal Reserve plans to inject $600 billion of the most caustic debt imaginable into the economy. This is the Agent Orange of monetary policies that has the potential to wreak financial havoc.
In the hope of generating inflation, the central bank is going to enable deficit spending by buying treasury bonds. You read that correctly: the primary goal is to erode the value of the dollar, and we get to watch our currency and wealth literally dissolve before our eyes.
Only a desperate government would consider debasing its own currency. The resulting inflation will be an insidious tax on every American who will suffer as wages lag behind increasing prices. It is doubtful that countries like China will react favorably to the precipitous drop in the value of the debt owed to them.
This strategy of monetary sabotage will punish savers and creditors, but Keynesians simply will not tolerate anything that impedes deficit spending. Since deflation hamstrings spending, they will stop at nothing to reverse deflationary pressures.
Despite the misinformation propagated by these big-spending liberals, deflation has existed during extraordinary periods of economic growth and did not adversely affect consumers or wage earners. In fact, deflation is not only a common occurrence in a free economy, but it is also indicative of a vibrant and healthy economic expansion where the innovations and efficiency that competition engenders lower the costs of production. These lower costs translate into lower product prices benefiting the consumer.
Consumers were not harmed by the significant deflation of personal computers prices over the last two decades, and despite these falling prices, there has been explosive growth and profits. No credible economist could argue that consumers, manufacturers, or the economy would have been better-served if the government intervened and forced computer prices higher. Yet Keynesians propose that our economic woes can be ended by forcing the price of all products higher.
And in spite of the fact that the government intrusion in the market was the root cause of the mortgage crisis, Keynesians continue to affirm that capitalism and central planning can coexist. This is patently false. You can have either a centrally planned economy or a free economy, but not both.
Like all Keynesian economic theories, our mixed economy has failed in its real-world application. It is unworkable because of the extreme market distortions caused by policymakers and regulators who continually demand more control to "fix" the problems their social engineering schemes caused in the first place. Justifications for more interventions are just excuses to incrementally take over the economy and demolish any remnants of capitalism. And without capitalism, there are no individual rights.
Even though the U.S. economy has been steadily devolving into either socialism or fascism for over a century, the dramatic acceleration of change has caught the attention of unsuspecting Americans. But make no mistake: the economy would have eventually reached this point with or without the housing crisis.
It is astonishing to watch the self-proclaimed experts preach the falsehood that the fascist polices of the FDR administration that was enamored with the "triumphs" of Stalin and Mussolini successfully ended the Great Depression. Quite to the contrary, they were a colossal failure that resulted in years of unnecessary misery.
And these same charlatans credit the recent multi-trillion-dollar spending orgy with preventing a depression even though they cannot produce a shred of evidence that it yielded any sustainable economic growth or created a single long-term job.
In actuality, the only thing the abhorrent spending accomplished is an historic theft of wealth from future generations, who will bear the awful burden of our malfeasance.
Now there are troubling signs that indicate that the crisis has entered a coffin corner, where any corrective action will lead to catastrophe. Deficit spending to increase aggregate demand will eventually bankrupt the nation, while budget cuts will cripple our increasingly fascist economy that has grown dependent on government spending.
Unfortunately, with the student pilot who fancies himself an airline captain currently at the controls, the prospects of avoiding a financial crisis that could dwarf FDR's man-caused disaster of the 1930s would be a miracle at this point.
There is one ray of hope, however. Americans are beginning to shrug off the fallacy that government spending and other interventionist measures improve the economy over the long term. Many now understand that it is the government that is causing the increasing amplitude and frequency of boom and bust cycles. They also recognize that floating prices in response to competition for limited capital resources is a far better regulator of economic activity than these central planners could ever dream of becoming.
Whatever remedial action is taken, there are very scary times ahead that will test the steadfastness of even the most ardent supporters of capitalism and limited government. Panic-stricken policymakers will undoubtedly act irrationally in trying to prevent the inevitable plunge off the cliff.
We reach the edge of the cliff when the interest on national debt exceeds approximately 18 percent of GDP.
According to the Heritage Foundation, total tax revenues historically average 18% of GDP no matter how high the tax rates are set. When interest expenses equal 18 percent of GDP, then every dollar collected by the government will be consumed by interest alone.
The federal government will literally have to borrow money just to turn on the lights.
Does anyone think private property rights will have any meaning when the federal government runs out of money to fund its own existence?
Nobel laureate economist Edmund Phelps: "I'm hoping that the weakening dollar that quantitative easing brings will finally be a chance for the U.S. to pump out exports."
Federal Reserve Chairman Ben Bernanke: "Quantitative easing that is sufficiently aggressive and that is perceived to be long-lived may have expansionary fiscal effects."
Nouriel Roubini: "The worst of the coming fiscal train wreck will be prevented by the Fed's easing."
Paul Krugman: "Deflation, not inflation, is the clear and present danger."