Keynesian Economics and Inflation the Next Nails in the Economic Coffin

If the government inflates the money supply then this will inflate prices once that money has filtered down from  the banks to the borrowers and finally to the wage earners. It is the last ones in the chain that will feel the effect of inflation first as prices adjust to put the new money back into equilibrium with the products and services available for sale.image

You would do well to read a review of a book by Robert J. Samuelson entitled, “The Great Inflation and its Aftermath.”

“Inflation is always caused by government. Only government can expand the money supply sufficiently to generate chronic price inflation. The Great Inflation was caused by the greatest domestic policy blunders since WW-II, and the federal government is now at risk of repeating them.”

So why don’t we have rampant inflation after the FED, courtesy of Helicopter Ben has doubled the money supply?

Well maybe it is because the banks are not lending. The banks obviously believe they can make more money at less risk by using algorithmic trading system to manipulates the stock market using billions of tax dollars.

They also have stashed their “surplus” cash back with the FED and are being paid interest on that money. They have tax payer money but they also have FED interest free money. Billions has be deposited with the FED.

So why would a bank loan small business any money when they see the Congress and White House massively manipulating the economy of the nation by choosing to give some industries billions and ignoring or attacking others?

Any bank would take the safe route and do exactly what they are doing now. Hanging onto as much cash as they can, getting risk free interest on some and speculating on the stock market with the rest.

The first thing you need to note is Keynesian Economics has come back but this time it is “turbo-charged”. In the 70’s it finally failed after about 40 years of trying. Put in its grave by Reagan only to be resurrected by the likes of Paul Krugman and the Keynesians (they sound like a rock group :-)) and most economists today all taught at universities that have politico-economic agendas based around strong liberal democratic ideals and deeply committed to  Keynesian Economics. Even though it was completely discredited in the 70’s.

The problem is neither the Democrats nor the Republics have the stomach for cutting government spending like Reagan did and ramping up interest rates when required. Well actually it was Volcker who is now an adviser to President Obama. At the time,

“Politicians from both parties, along with the liberal press and a wide variety of interest groups howled in pain and called for Volcker’s head, but Reagan’s support for Volcker remained unflinching. Even as unemployment surged into double digits, inflation remained his “number one enemy,” and he continued to express confidence in Volcker.”

Have you noticed how President Obama seeks out those experts that might have credibility with the public and asks them to become his personal advisers? Once caught in this net they are effectively gagged from saying what they believe because they don’t want to appear disloyal.

I watched Volcker being interviewed by Maria Bartiromo and he appeared decidedly uncomfortable with what she was asking him.

Going back to the book review Mr Samuelson states,

“America’s most protracted peacetime inflation (60’s & 70’s) was the unintended side effect of economic policies designed to reduce unemployment and eliminate the business cycle. This inflation was a self-inflicted wound that resulted from collective hopefulness and intellectual overconfidence.”

If you want to know why governments around the world are embracing Keynesian economics once again read what Mr Samuelson says,

“However, the politicians were in fact primarily to blame. The reason why Keynesian concepts triumphed was because the politicians loved being told they could deficit spend and employ monetary inflation, so they hired Keynesian economists despite the patent ridiculousness of Keynesian theory.”

If we don’t learn from the Inflation of the past we are doomed to repeat it. Baby Boomers should ensure they know what they need to do to protect their nest egg should history repeat.

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