Jeffrey Snider’s post at RealClearMarkets largely consists of one dubious assertion piled on another. Is it really true that you cannot coherently denounce the dollar’s position as the reserve currency without wanting to return to the gold standard? Is it really true that we would be better off if the dollar were not the world’s reserve currency? Could we survive it? Would we really be better off if we returned to the gold standard? Does the dollar’s position really mean that there is no limit to the number of dollars our trading partners can hold on their electronic books?
Whatever the answers to those questions I feel that I need to leap to John Maynard Keynes’s defense. I challenge anyone to find in the actual written works of Lord Keynes support for anything that resembles what governments (and central banks) have been doing for the last sixty years in his name. Quite to the contrary my recollection is that he believed that you needed to compensate for increased government spending during the economy’s troughs with decreased government spending during the peaks.
The problem with our economic policy is not Keynes but politicians. I have never seen a politician with the sort of steely-eyed courage that such a policy would require.
That is mostly what I have been saying. The pre-G-S activity was not destructive because the investment part of the financial sector did not have direct access to the Fed (mostly).
The real problem is that government currency is issued with nothing backing it. The dollar could be allowed to free float against gold, and when government currency is issued, the entity withdrawing the currency is required to present an equal amount of gold. The Fed would always issue gold backed dollars, and those dollars would be worth whatever the price of gold was at that moment.
Until the Star Trek replicator is invented, financial institutions cannot issue dollars for the loans they create without having real dollars backing those loans. The free market would become more free, and investors could trade bank backed notes or securities rather than government backed notes.
Keynesian economics may not necessarily be tied to the present scheme, but it is tailor made for it. The financiers and the liberal progressives made a deal to get what they wanted. The financiers would steadily expand the economy, and the progressives would take a cut off the top.
Using fake money to stimulate the economy is better than borrowing real money money to stimulate the economy. With real money, it must come from somewhere. It is far less effective to rob from Peter to help Paul. It is far better to counterfeit enough to help Paul and leave Peter alone. Now, Joe the counterfeiter is happy because he gets paid also.
The problem is that the non-rich get greedy, and they want in on the action. The progressives start out taking a cut for the poor, but eventually, they are using the system. It is difficult to explain that there can only be a few people who make money in this scheme, and everybody else has to stand by and wave.
The system is like steroids. Steroids can be useful, but they can be harmful. It depends upon how they are used, and their usage needs to be controlled.
Snider’s assertion Keynes opposed long-term thinking is just false. Keynes was making the point that “in the long-run” is not in and of itself a good reason for a particular policy and that circumstances are likely to change more rapidly than can be adjusted for in plans made years ago. He was skeptical of the value in monetary policy and encouraged programs that would work in real-time countercyclically (more in bad times, less in good).
There’s an historical Keynes and then a bogey-Keynes that a lot of people seem hell-bent on attacking.
Let me say a nice word about politicians and tap down slightly on Keynes. (Don’t worry, the moment won’t last.)
Keyne’s judgement that governments should spend generously in slumps and rein in when things are good makes considerable sense. Of course this isn’t what governments did in the 70 years or so since Keyne’s death, and most of the blame can be placed on politicians, It’s sort of a truism that the public likes government spending, but doesn’t like to be taxed for it, so successful politicians will spend more than they tax.
Yet despite “what everybody knows”, in most nations there’s a significant portion of voters with a wary eye on spending and little love for deficits. Generally these are Centre-Rightist types, if economics shapes their politics. But there’s actually a broader appeal — even most American liberals would be happy to see the Federal deficit reduced, if it didn’t come at the cost of whatever other goals liberals are pressing. And there’s no shortage of Europeans today convinced that Austerity is the pathway to economic revival, even if American economists are skeptical.
So budget balancing as Keynes proposed probably would have had a chance of working, in normal circumstances. But the post-WW2 world wasn’t anything close to normal. England and France were getting kicked out of their colonies; Germany and Austria and Japan were under military occupation; the Soviet Union was imposing its rule on Eastern Europe; China went Communist. Also there were some wars along the way.
It was a real fun period, and the restoration of what Keynes might have viewed as “normal” conditions probably didn’t happen until the 1980’s, or maybe 1991. Till then, politicians had ample reason to veiw the world as bing in a state of war, and budget accordingly.
So that’s my kind word for politicans, and now I’ll just go away and barf until the taste is gone ….
Running deficits and carrying enormous amounts of debt is really, really not good, but it is not the end of the world. There are two reasons. As long as the public is purchasing the debt, money is being exchanged for the debt. I, of course, question the value of that money, but there is an exchange nonetheless.
The second reason is that the government has a lot of assets backing that debt. The government has land, buildings, vehicles, ships, etc. that are collateral in addition to its taxing ability. The US is not a third world country. If the US sold off the worthless crap, it could payoff half the national debt.
There is an additional factor. The government debt is still only a portion of the total debt. It contributes to the overall problem, but it is not the whole problem.
I do not endorse or like deficits or debt, but this is why conservative predictions do not pan out. The problem occurs when the credit supply outpaces asset value creation. At this point additional debt will cause a problem but not in the way conservatives predict.
Keynesian economics is not necessarily a problem, and growing the economy using fiat money, fractional reserve lending, and allowing banks access to government backed currency is not necessarily a problem.
The two are tied together because they both require an expanding credit supply, and this is where they are susceptible to abuse. Once you understand how the two work together, you can begin to devise feedback mechanisms to limit the politicians and financiers.
That’s true for certain values of the word “can”. In practice it’s pretty hard since so many extremely wealthy and influential period depend so greatly on Things As They Are for their wealth and power. When a small number, particularly a wealthy and powerful small number, are vitally interested in something, they’ll generally prevail over a much larger number of people who are only slightly concerned.