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John Maynard Keynes Is The Economist The World Needs Now

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http://www.businessweek.com/articles/2014-10-30/why-john-maynard-keyness-theories-can-fix-the-world-economy#r=rss

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. Greece took its medicine as instructed and was rewarded with an unemployment rate of 26 percent. Portugal obeyed the budget rules; its citizens are looking for jobs in Angola and Mozambique because there are so few at home. Germans are feeling anemic despite their massive trade surplus. In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession, according to Sentier Research. Whatever medicine is being doled out isn’t working. Citigroup (C) Chief Economist Willem Buiter recently described the Bank of England’s policy as “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions, and half-developed insights.” And that, he said, is better than things countries are trying elsewhere.

There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.

An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment.

Keynes said that when companies don’t want to invest and consumers don’t want to spend, government must break the dangerous cycle by stepping up its own spending or cutting taxes, either of which will put more money in people’s pockets. That is not, contrary to some of his critics, a recipe for ever-expanding government: Keynes said governments should run surpluses during boom times to pay off their debts and soak up excessive private demand. (The U.S. ran small surpluses in two boom years of the Clinton administration.) Far from a wild-eyed radical, he said economists should aspire to the humble competence of dentists. He wanted to repair economies, not overthrow them.

The trouble is you can't follow the Keynesian policy when you are already in the bust. His plan was a get out of jail free card for the great depression followed by sensible government expenditure policies afterwards with govts saving surplusess. What we got was perpetual deficit govt spending during the boom and busts. I'm sure Keynes would feel policitians now are just fecking morons, especially with Dave's economic illiteracy wanting ZIRP forever.

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http://www.businessweek.com/articles/2014-10-30/why-john-maynard-keyness-theories-can-fix-the-world-economy#r=rss

The trouble is you can't follow the Keynesian policy when you are already in the bust. His plan was a get out of jail free card for the great depression followed by sensible government expenditure policies afterwards with govts saving surplusess. What we got was perpetual deficit govt spending during the boom and busts. I'm sure Keynes would feel policitians now are just fecking morons, especially with Dave's economic illiteracy wanting ZIRP forever.

Eh? When else would you want to?

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Is the current style of QE - basically creating money to buy financial assets to prop up banks and sovereign debt really Keynesian anyway?

My vague recollection is that Keynes suggested investing in public works to create work and hence income for individuals who would then go on to spend it; restoring aggregate demand in the economy. If the BOE money had been used to fund the building of a raft of new social housing, railways, schools etc then it would probably have been in line with Keynes' policy prescription.

QE as we have it is in my view just a way of propping up banks through deliberate inflation of asset prices - I'm not sure it's got anything to do with raising the level of aggregate demand.

I would be happy to be corrected by those with more knowledge.

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Eh? When else would you want to?

Well the Keynes policy of deficit spending was to get out of the great depression.

As we left the great depression many decades ago, Govts now should be spending the surpluses they saved from the fecking housing boom! Did we save anything?

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My vague recollection is that Keynes suggested investing in public works to create work and hence income for individuals who would then go on to spend it; restoring aggregate demand in the economy. If the BOE money had been used to fund the building of a raft of new social housing, railways, schools etc then it would probably have been in line with Keynes' policy prescription.

For keynes style counter cyclic investment to work, the long term economic value of what you pay people to build has to exceed what you are paying them to build it otherwise you can never clear the accumulated debt during the following up cycle.

Edited by goldbug9999

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Wouldn't you rely on the increased tax revenues from the recovered economy to pay the debt down by running a fiscal surplus?

(sorry - can't use quote feature)

How could that ever work ? - when you come out of the recession your in the same position as when you went in only with more debt. Unless the debt paid for something which improved output each recovery will be shorter and each recession deeper (think labours "dash for growth" in the 70s).

If pure monetary stimulus worked then you would never have recessions in the first place since you would have ever rising rising tax revenues and ever higher growth and be able get into a perpetual vertuous cycle.

Edited by goldbug9999

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How could that ever work ? - when you come out of the recession your in the same position as when you went in only with more debt. Unless the debt paid for something which improved output each recovery will be shorter and each recession deeper (think labours "dash for growth" in the 70s).

If pure monetary stimulus worked then you would never have recessions in the first place since you would have ever rising rising tax revenues and ever higher growth and be able get into a perpetual vertuous cycle.

I think that answers a question that I asked on another thread, and it seems to make sense to me, so thanks. But I suppose it could be argued that a "kick start" might sometimes needed to get an economy going again, in the same way an "external shock" can be the thing that tips an econonomy into recession (not that it applies in our current case, as the problems that caused the bubble and recession in the first place haven't been resolved)

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We've spent the last forty years following one Keynesian prescription after another and in aggregate all they've done is bring the world to the point of total economic collapse. Post-Keynesian economic models are what we need, a Copernican revolution in how economics is taught and understood.

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Just an idea I have been thinking about.

Say I had a million pound in my bank account that I refuse to spend.

Can't the government just print up another million pound and spend it for me?

Because I refuse to spend my money it therefore becomes sterile just pretty numbers I like to look at.

If at a later time I change my mind and decide to spend it and stimulate the economy government can cut back on it's spending.

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I think that your £1million would be supporting £950k of bank lending (assuming 5% capital ratio's) while it was in the bank - some someone else would have spent your money.......

Yes but say my million had been spent on houses that are now worth 2 million. Does this make any difference?

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I suggest it is impossible for the uk to ever clear the national debt. I would go as far as yo say we will never have a government that runs a budget surplus for more than 50% of a parliamentary term ever again.

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I suggest it is impossible for the uk to ever clear the national debt. I would go as far as yo say we will never have a government that runs a budget surplus for more than 50% of a parliamentary term ever again.

Yes but I am starting to wonder if it matters. The market knows how much the debt is. So wouldn't it all be priced in?

Can't see why Sterling should suddenly drop tomorrow the debt has been well and truly flagged for a long time.

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Yes but I am starting to wonder if it matters. The market knows how much the debt is. So wouldn't it all be priced in?

Can't see why Sterling should suddenly drop tomorrow the debt has been well and truly flagged for a long time.

If debt is perpetual, maybe it only matters if your competitors are viewed as a better risk than you. But that is a function of the size of the debt of course, so using it for wise purposes remains sensible. I don't see much evidence of that

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If debt is perpetual, maybe it only matters if your competitors are viewed as a better risk than you. But that is a function of the size of the debt of course, so using it for wise purposes remains sensible. I don't see much evidence of that

I am still trying to make sense of it all. So forgive me if I say something silly.

Say I gave you a million pound tomorrow but told you you must never spend it. (Well it might be nice to leave a bank statement lying around when a friend come over) You may think it's pointless having the money but it might make you feel good.

The rich have a problem they have more money than they can possibly know what to do with. At some point spending more money doesn't make you happier.

The debt is just the other side of the rich man's coin. He has got money he will never ever spend therefore there is debt that will never ever be paid off.

As he gets richer the debt grows larger

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The rich have a problem they have more money than they can possibly know what to do with. At some point spending more money doesn't make you happier.

Uh, to be frank, that's utter crap.

Elon Musk is rich. He wants to go to Mars. You think he has enough money to do that?

Just because you can't think of things to do with any amount of money you're given, doesn't mean the rest of us have a similar lack of imagination.

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Uh, to be frank, that's utter crap.

Elon Musk is rich. He wants to go to Mars. You think he has enough money to do that?

Just because you can't think of things to do with any amount of money you're given, doesn't mean the rest of us have a similar lack of imagination.

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Buffet hasnt "made" a penny.

He hasnt contributed a single KW of Wealth.

All he has done, is to collect assets and add them up into a pile.

He is the man who through double six more times than anyone else. Like the gambler he is, all he has done is removed assets from the control of others.

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All the QE money hasn't gone into stimulating "aggregate demand" for anything except housing. Stimulation of "aggregate demand" might occur if the money was used to create real jobs. The potential for the creation of serfdom though globalisation is being exacerbated by the huge pool of surplus money (the savings of Chinese, Russians etc.) that's sloshing around the global economy. Keynsian economics might have worked in the microeconomic context of the nation state but it can never work in a world where global capital can move at will in a world that still has such a disparity of income and downward pressure on wages. The commoditisation of once well paying jobs adds to the recipe for further decline and a further decimation in living standards and income.

The great equaliser that globalisation was hailed to be is nothing more than a levelling of the playing field for excess capital when the playing field for ordinary people is still as uneven as the Himalayas. The economic processes that were once contained inside relatively small geographies have been expanded to encompass the globe but in the absence of global regulation in employment, investment or otherwise. Unfettered capital speculating in the world during the industrial revolution was mostly directed at building money making enterprises that created employment and gave people the means to afford housing. Now it's housing that is providing the means for those with jobs and savings in far off lands, as well as the rich, to gain a return for their excess capital.

The capital expenditure of somebody in Japan or Russia doesn't care about economic progress or unemployment in Europe or elsewhere. It doesn't care about job creation, it just cares about speculative profit and riding the seemingly never ending succession of global booms and busts. In the long term this will render the victims helpless and the assets worthless. Who wants to own property in a war zone?

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For keynes style counter cyclic investment to work, the long term economic value of what you pay people to build has to exceed what you are paying them to build it otherwise you can never clear the accumulated debt during the following up cycle.

...this is a great point. And post Financialisation that is never going be the case. So we spend eternity paying off bankers from the last 'boom'. I'm away to watch the wolf of wall street.

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Yes but I am starting to wonder if it matters. The market knows how much the debt is. So wouldn't it all be priced in?

Can't see why Sterling should suddenly drop tomorrow the debt has been well and truly flagged for a long time.

As long as the debt gets serviced there isn't a problem. However sevicable debt can very quickly change to unservicable debt especially when you have deflation. This is the reason why the worlds central banks fear deflation as it would suddenly make lots of servicable debt unservicable. It's also the reason why we now need perpetual growth to keep the illusion alive.

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