Tag: Keynes

Keynesian Economics: A Misleading Policy

By Jack Parkos | United States

Imagine a kid doing chores for his parents. One day there isn’t a lot for him to do, so the parents make a huge mess for him to clean up. Does this make sense? Of course not. But, this logic is similar to the Keynesian school of economics. Keynesianism has taken over both American parties and severely hurts the economy.

What is Keynesian Economics?

During The Great Depression, economist John Maynard Keynes developed a new school of economic thought. He hoped that his Keynesian economics would bring an end to the decade’s stagnant economy. Keynes’s theory focuses on demand-side economics. Keynesian economics asserts that a mixed-market economy will be the most successful in the long run.

Governments employ this by increasing both spending and the money supply. Keynesians would argue that the government should spend on programs such as infrastructure in order to boost the economy.

The Critical Flaw: Increased Spending

Despite such common adherence, Keynesian economics has a number of key problems. The first of which deals with spending increases. The money for this spending must come from somewhere, and it usually lands on the taxpayers. Otherwise, US debt levels just increase even more.

The wealthy, who play a key role in economic growth, often see the worst of tax hikes. The government taxes those who provide jobs and products, then uses for the money on a bridge, for example. The idea here is that government created jobs and a product. However, they only did so by robbing the same opportunity from a private company, which is more likely to use the money more efficiently to provide a greater number of jobs and better services. Allowing all classes of wealth to have more disposable income will simply lead to more economic growth.

Keynesian Economics and Government Monopolies

Keynes often criticized the free market, claiming it created monopolies. But government is also capable of doing this. In fact, the creation of monopolies is a huge fault of Keynes’s theory. A government, with its reckless spending, can easily create monopolies and ruin private businesses, which only spend more if profits increase.

On the other hand, the government has a tax farm of millions of citizens. Thus, it can take money from any one of them, or simply print more of it. For example, Keynesian economics would have the government spend more on infrastructure. But what happens to the companies that the state does not fund? They will likely lose business, even though they may be the best ones for the job.

On the other hand, government services are usually subpar and inefficient. There are just some things government can’t provide that the market can. Government is not meant to produce, it is meant to protect rights. A business owner, to keep customers, has to make an effective product or service. This forces him or her to improve the quality of service.

State services simply do not work the same way. Don’t like the service? Too bad. They don’t need to rely on supply and demand. Rather, they can tax people or drive further into debt and provide a subpar service. We have established that under Keynes’s model, there will be more state services. This will be an atrocity! Instead, the state should seek to lower taxes and lower spending in order to improve the economy.

The Danger of Increased Money Supply

The last and possibly the most dangerous part of Keynes’s model, increasing the supply of money. Simply printing out more money will not help the economy but will do the opposite, it will cause inflation which hurts the economy. This has happened a lot in history.

Hyperinflation in the Weimar Republic

The most infamous example of this is 1920’s Germany.  The problem started when Germany abandoned its gold standard during World War 1. After the war, the Treaty of Versailles forced Germany to pay reparations that they simply could not afford. The government then printed out more marks to pay off these reparations, but this caused hyperinflation. Money became worthless to the point where Germans used it for kindling. Children would use paper money to make toys to play with. If someone went to the store with money to buy two loaves of bread, they would only be able to afford one by the time they arrived. In fact, by late 1923, 1 US Dollar was worth a staggering 4.2 trillion German marks. The German Mark was worthless.

(Image Source.)

Of course, hyperinflation will not occur every single time money is printed. But history repeats itself with many other examples of hyperinflation. Zimbabwe also tried this and, like Germany, saw hyperinflation in its economy. Keynesian economics would suggest printing more money for the economy during times of recession. However, history shows this does not work.

The Keynesian School of economics suggests increasing spending, debt, and taxes. It also replaces market services with the government and calls for the risky activity of printing money. Most of the last century’s policies have been Keynesian. Without a doubt, they have raised taxes and sent the country further into debt. Hope, however, is not lost. By looking towards more free-market schools of economics, the American people and state may create a freer and stronger economy.


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Central Bankers are Losing Control, and They Know It

By Vaughn Hoisington | USA

For years, the U.S. Federal Reserve has partaken in quantitative easing in an attempt to keep the market stable and keep inflation at the intended rate. These large asset purchases by central bankers have tended to maintain control of the stock market by using Keynesian tactics, but with the central bank asset purchases set for 2018 being the lowest of the decade, Citi’s Hans Lorenzen believes control of the stock market will be lost.

The low stimulus package isn’t the only red flag Lorenzen sees. The nearly historic low volatility has maintained its level for longer than ever, while “more risk than ever before is being issued into a credit market where spreads, on a like-for-like basis, are close to the 2007 tights and where breakevens are wafer thin.” These are just some of the reasons that the Citibank strategist views 2018 as being a very vulnerable year for a mid-cycle, technical correction.

Lorenzen stated that removing policy accommodation at a rate that wouldn’t cause a chain-link reaction of market backlashes “seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines…. Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.”

The central bank asset purchases are no longer stimulating the market, they are only prolonging the inevitable crash. “the longer we remain in the current paradigm, the greater the chance that it ends up being both sharp and painful.”