Topic: Monetary Policy
The Stimulus Package Could Work. Unsound economic actions based on shaky principles can sometimes be effective in a goofy world.by Gene DeNardo
(centrist liberal libertarian)
Saturday, January 31, 2009
"If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions." Winston Churchill
Economic Theory is intended to be the study of economic systems. While this is true, many theories lie in wait, hidden deep in thick volumes waiting patiently to be put into practice. Others are slanted perspectives on economic history and how the author would really like things to work as opposed to the reality of the situation.
On the other hand, the theory of Maynard Keynes has become the reality of our American world. From Roosevelt through Reagan to Obama, American government has made Maynard's economic intervention their preferred mode of operation. Neo Classicists may claim otherwise, but the proof is in the budget. Defense spending and corporate handouts are as much stimulus spending as bridges and alternate energy, no matter how much verbage is used to convince us otherwise.
There is plenty of sound logic against the Keynesian method of government stimulus spending in order to augment economic output. It is argued that any dollar spent by the government is a dollar taken from a taxpayer. Since there is a loss there can be no gain. At best, we break even. Furthermore, a dollar is taken out of the private economy where it would be spent where it is most needed, and instead it is directed by the government, an entity far removed from the street action. There is no guarantee it will go to the proper area, where a benefit can be drawn from its utility. This encourages waste at the taxpayer's expense.
This government meddling also displaces natural economic processes. Those receiving the spending benefit while others are disadvantaged as transactions are diverted away. And those who receive the stimulus funding cannot engage in natural economic activity, removing their services and products from the general economy and placing them at the bid of government.
Oh, and inflation! To fund the stimulus government must borrow or print money and with its infusion into the economy produces inflation as its byproduct. The cycle is started and builds and soon the same government must again intervene to cool the same economy it fired up, which has the potential for great harm.
There is no end to the reasons government intervention is not based in sound logic. Why then would it ever work?
For the simple reason we don't live in a world of sound economic principles. The ideal world, a world where economy brings justice and encourages liberty, is as far from the real as Oklahoma is from a NBA championship.
Finance is wielded as a weapon, used to further entrench power and reinforce control. The real economy is but an afterthought. In fact, it was so much off the minds of the power elite in the last decade, they got completely carried away creating false value and nearly woke the world up to their fantasy finances. Actually, they may have, we will find out soon enough!
In this world turned upside down, it is only fitting that the factor that is so much of a concern to those of sound reasoning, debt, is the fundamental reason government stimulus has the ability to actually do what proponents hope it will do; raise economic output.
If it were true that the taxpayer had to pay, in the future, for government stimulus that occurs today, then there would be little point in proceeding with the stimulus plan. It would be better to follow sound principles and try to get our economic house in order. It would hurt a bit now, but as they say, the future would be so bright we would all wear shades! We could work toward less debt, more real economic output, more equitable natural distribution of the resulting wealth and a more just and fair system that encourages investment and real production.
But, there is absolutely no plan to ever pay off the Federal Debt. The debt is now engrained in the way we do business and is part of a financial scheme that is extremely successful in consolidating wealth where it is directed, whether real or imagined. With never ending government credit and money creation, asset values of the financial system and the mega conglomerates can be multiplied without end. The deflation we are experiencing now is just a blip on the screen. There is no inclination to ever return to a "real" economic system. The recent actions of our government to circumvent all laws of supply and demand should clarify that for you.
Of course, the actual economy has to be somewhat functional. If people can't go to work and sustain themselves, they get restless and sometimes get kooky ideas. Ideas that they might be able to take control of the reins and then who knows what can happen. When there is nothing to lose, there is no need to follow rules.
If we never have to pay off the debt, every dollar the government injects into the economy is "new" money. It is not "taken" or taxed from anyone and it is, in this sort of virtual reality, not "owed" to anyone. In principle, there is no principal!
Because of this, that new dollar feels, works and smells fundamentally the same as a dollar that is produced by real workings in the economy. It has the same utility and creates the same demand. If there is pent up output, output will occur. Few question the real value of that dollar and this is the "faith" that this system so depends on. Until people question that dollar to the extent they won't accept it, Maynard's ideas come to fruition. To be fair, despite the inflationary tendencies of his policies, Maynard never condoned federal debt and was a firm believer in attempting to avoid inflation.
In fact, with the combination of debt and stimulus spending it is practically impossible to avoid inflation. The architects, regardless of what they say in public, have little concern for that. They strive to "control" inflation, that is, keep it at a level where it slowly consumes the savings of the commoner while concurrently swelling the asset values of the privileged. When it gains too much speed, the peak of the boom gives way to the doldrums of the bust.
The debt, of course, must be serviced. The interest is paid and notes are reimbursed when due. Our leaders believe this is a small price to pay for the freedom to control the uncontrollable and more debt can always be incurred to fulfill these responsibilities.
Aside from the needed faith that we mentioned, there are two caveats. Both are fairly obvious. The interest and payouts must never exceed the amount of output dedicated to this task and a creditor must always be available.
The first is accomplished quite readily. Although creation of the debt itself exemplifies a lack of governmental self discipline, there must be a bit of discipline in keeping the debt servicing below the level that would bankrupt the budget and cause insolvency. This must be calculated more than a couple weeks in advance!
As of late, Asia has been the region supplying the bulk of the funds that keep us afloat. Funds also emanate from the oil producing regions when oil prices peak.
China has become a leader in capital production. Their manufacturing capacity grows by leaps and bounds. For whatever reason, probably because of a result of greater faith in the dollar than themselves, they have decided to invest this new capital in American securities. They are in essence, producing the goods that we consume in exchange for a promissory note. They are loaning us money, so we can buy their products. The serf is holding the king ransom.
When the day comes that China decides to reinvest its own capital in its own people, building the products and infrastructure that will distribute their created wealth to themselves, we will find ourselves and especially our extremely super sized finance department facing judgment day.
Until that time, our federal debt is much like an unending mortgage. We have put up our country as collateral and periodically make further equity withdrawals to finance our spending sprees or to service our existing debt. We are a working nation, so as long as our payment stays in line with our national output, we stay solvent. Inflation is certain, but we also need inflation to raise the "appraised" value of our collateral in order to continue to obtain "equity" credit.
Because of this, stimulus spending is always "new" money and will have the effect that fresh funds will have, whatever that may be at the time. At least, until the productive Asian nations decide to change "faith".
The views expressed in this
article are those of Gene DeNardo only and do not represent
the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Jake, the champion of the constitution
Date: 2009-01-31 18:00:33
Interesting idea Gene, I for one think the debt to property ratio, for one, is too high. Perhaps a 5 trillion bailout consisting of income tax refund, Keynesian stimulus spending while slashing the size of gov't, etc might have a shot.
And what happens when the Asian nations change from "faith" to gold?
Hi Jake, you probably have a better handle on this: what happens when China changes to faith in itself? why aren't they investing in China rather than the low interest treasury securities? is their yuan so watered down that their interest rates are even lower than the US or do they have so much capital that they are taking both routes?
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