Protect Your Nest Egg from Keynesian Economics

The last infamous experiment with Keynesian Economics was successfully killed off by President Reagan and PM Thatcher. The problem is many of the economists today have been brought up on Keynesian economics even though it was discredited in the 70’s.

History is repeating.

The great financial leap forward in the early 80’s was based on freeing up the markets and releasing the government control on capital(ism).

It worked well until government and big business got in bed together to push the economic growth further through unregulated exotic derivatives used to distribute risky mortgages taken out with cheap money made available by the FED’s low interest rate policies.

When it all fell in a heap and we had the credit melt-down governments around the world did not want the party to stop. Once before with the Dot Com bubble they had managed to stem the crisis and put the economy back into growth through low interest rates, deficit spending and money creation. It worked and the economies recovered or so it seemed.

In fact it was just pushing the inevitable financial crisis further down the road. The cure was to use Keynesian economics and it appeared to work for a time.

Back then I don’t recall ever hearing much about Keynesian Economics. Even if I had I doubt I would have taken much notice. But today as I try to find ways to protect my nest egg I am fast becoming of the opinion that I need to understand how the economy works in broad terms.

I don’t have time to read all about Keynesian Economics but there are sites where I can quickly learn some key issues. Such a site is Futurecasts.com. The site has book reviews on many economic topics and writers. One worth reading with this post is on the book by Nobel Prize winner Paul Krugman (who maintains the Stimulus was not big enough even though less that 20% has been spent so far). The book reviewed is called, “The Return of Depression Economics“.

You see to my mind governments moving money around swamps anything the private sector could ever do. It can create money out of thin air and trillions of dollars-worth of it at that. Plus it puts all that money into things that the private sector would not do (like bank bailouts) and so diverts it from where it could do the most economic good.

That has a significant impact on the investment climate and ultimately your nest egg. That’s why it is important you appreciate what economic theory is being implemented by government policy. Right now it is Keynesian Economics.

We have a situation where governments have given billions of tax dollars to banks and other companies “too big to fail”. They have printed billions more currency to prop up their economies hoping to ride through the recession until the private sector picks up the ball and runs with it once again with “borrow and spend”.

This is all Keynesian Economics at work. It basically says the government will replace the private sector and then try and “kick-start” the economy with massive injections of money from tax-payers, bond issues or printed money. Once consumers start spending again all will be well with the world once again.

This time though after 25 years of borrowing and spending the consumer is exhausted and even though Keynesian economics says to drop interest rates so low and encourage “some” inflation so that people will spend their money rather than save it – it has not worked. People are saving and they are paying down debt. That’s not in the Keynesian rule book.

That means another “stimulus” is on its way. We’ve already had cash for clunkers and  tax credits for home buyers. The U.K. are about to introduce Stimulus II I believe.

The banks have used the tax-payers money wisely 🙂 – I really mean that.

They have actually protected tax-payer bailout money as they should have done with their own money. They have not made loans because small business in general are not good investments right now – it’s a fact.

But they have used that money for massive speculation with proper risk management in place. They have set up sophisticated algorithmic trading systems to take advantage of the stock markets inevitable bounce from the massive drop last November. Billion of dollars of profit have been made by the big banks with the likely bonuses before Christmas of $20 billion being paid out.

The excess cash they have got for virtually no cost which is not being lent out has been banked with the FED and they are getting interest on that money. Nice safe stuff. Prudent for bankers to do don’t you think.

Banks are all about managing risk (except when they are not being watched) and right now algorithmic trading and FED bank deposits are the safest options with the biggest rewards.

It’s all about speculation.

When you don’t know what the government is likely to do next, it makes good sense not to INVEST in anything real, with a long term view. The banks know it and so should you.

It’s what is happening now that we need to understand. For us Baby Boomers it means sitting tight with the majority of our money in banks or bonds rather that the markets. It won’t be for ever as the wealth managers try to make out.

Remember Keynesian Economics long term effects are inflation and unemployment. Governments who commit to these economic policies only get in deeper and a change of government will be required to stop the rot. Read the inflation and unemployment history of the 70’s if you need proof.

Keynesian Economics is politically palatable because it sound good. It’s all about employment and supporting the economy until we all start borrowing and spending again. This is an unstable economic system at best.

However what would you rather hear from your politicians when the economy falters?

We are going to keep people in jobs by taxing you more, borrowing money and printing it. Whatever it takes, we are going to look after you.

Or

We are going to cut spending and there are going to be hardships. We are not going to bailout any business. If you personally haven’t saved for a rainy day, or you have borrowed too much you could be in trouble. Charity begins at home – your home not my home, so go back to your family if you have to. Recreate the strongest economic and social unit there is – the family. We will do what we can but we are not going to take on more debt, tax the people who have saved or print more money.

The vast majority of the people do not think of tomorrow and so the first option has more appeal and as such is the easy thing. They will only vote for change when they have seen their finances destroyed and/or their jobs lost.

Only then will governments have the fortitude to do the hard thing – cut spending and lead us out of the economic abyss.

That’s why your nest egg is in jeopardy of not recovering quickly and is still in danger of being taken from you to prop up the economy and those that have not bother to save for a rainy day.

But the longer this madness goes on the closer we are to it being over. You need to protect your nest egg for that moment.

Leave a Reply

CommentLuv badge