…is doing the same thing over and over and expecting different results. Standing on the sidelines and seeing this slow-motion car crash unfold seems a bit like heckling a steamroller. Nonetheless, the truth shall set you free and all that, so let’s examine the current proposed remedies for the economic malaise.
Well, on the one hand we have the usual suspects, Krugman, Bernanke, Geitner, Mervyn King et al. What do they make of the current situation? More of the same please and this time let’s really have a good crack at it.
We get the usual criticism of the non-existent austerity, then calls for more government intervention, cuts in base rates and pressing Ctrl-P on the keyboard of some central bank computer. Thus the great and the good are now promising us QE3 in the United States. They have only printed nearly $2 Trillion thusfar so we can hardly expect such trifling chump-change to have any impact apparently. The ECB balance sheet is up more than 50% since 2008 and if they are to avoid bankruptcy, if any European country falls down watch for much, much more. The Bank of England almost looks like a small player in this having printed only £375B (anyone think we’ve seen the last of this?).
Realistically the kind of neo-Keynesianism advocated here died in the 1970’s. The theory went “if you have inflation, that is a sign the economy can’t produce enough goods and there is over-consumption and too much money chasing to few goods, so raise interest rates and taxes to stifle demand and choke inflationary pressure” Anyway, if you still have a straight-face and haven’t decorated your computer screen with cornflakes it continues “but if there is unemployment and a slow economy, cut interest rates and taxes (the last bit tends to be forgotten) do some public-spending (never forgotten) and hey presto, all will be okay”
Well the Stagflation of the 1970’s destroyed this theory; killed it stone-dead. Yet like some kind of George Romero creation, the zombie of Keynesianism still stalks the corridors of power. There are basically two reasons for this; first Krugman and many a lesser known establishment economist runs a kind of intellectual cover for this nonsense. The media swallow this dross more or less whole and so when the shadow-chancellor goes on TV and talks about the ‘cuts’ being ‘too-far, too-fast’ there are those who take him seriously.
It seems like the mainstream media is an unofficial accomplice of the banking crime syndicate which is running/ruining our markets and economies. Nowhere is this despicable relationship more apparent than in its deliberate efforts to grossly misinform investors on the critical subject of risk. Honestly, does anyone think it smart to keep money in bust banks that pay sub-inflation interest rates?
So who is advocating the alternate position? Well not the government obviously. No actual cuts are being made and they continue with near zero interest rates and QE. Nor anyone much they let near a TV camera. It is simply a case of looking for yourself on the internet or reading some of the excellent stuff Murray Rothbard or the Mises institute put out. We can hardly be surprised by this. What politician would say “You need less of me, less taxes and we also need to abolish the fiat magic money tree” But at the risk of sounding all Fox Mulder ~ the truth is out there. Sure there will be plenty of people to mock and ‘Scully’ you, but when this nonsense reaches its endgame, at least you can be prepared. And what will that be?
Well the only trick in the bag of governments and banks is ‘stimulus’ via cheap money be it QE or low/zero* interest rates. At some point, confidence will disappear in paper money and the government bonds that promise it. As we can observe from many examples from history, money will become hot (i.e. people will want to hold goods not money). Real interest rates will climb as investors disengage from bonds and pile into tangible assets (thus further stoking inflation). Also the government’s ability to borrow will decline sharply as we have seen in Southern Europe already. Thus serious inflation and really spicey interest rates. I hate to sound gloomy and I wish it wasn’t so but the worst is yet to come.
(*I discount ideas about negative interest rates. If you want to kill your own banking system in about 14 days, this is how to do it. Not even our politicians are that dumb. Ditto price controls ~ I can’t imagine anyone thinking this is a good idea)