Thursday, December 3, 2009

MACRO CHANGE! The Myth is: Keynesian Economics will succeed in the Obama Presidency

Hello World,

MACRO CHANGE! The Myth is: Keynesian Economics will succeed in the Obama Presidency

Economic Myths can persist for many years and undeservedly some become truth. The Myth Buster and time has debunked many of them. Like:

"What is good for General Motors is good for the Country," or

"The Federal Reserve is independent," and

"The US dollar is as good as gold."

You get the drift. But, there is one persistent economic myth that has survived for over 70 years and has resurfaced (for the umpteenth time) as the solution to America's and the world's financial dilemma created by the abuse of power by capitalists and Wall St. greed.

That myth is the Keynesian Theory of Economics.

A short history is in order and is taken from a research paper "Keynes at Harvard, Economic Deception as a Political Credo," compiled by the Trustees of the Veritas Foundation. The Trustees were all graduates of Harvard and it was published in 1962 in an attempt to prevent the Economics Department at Harvard from being dominated by Keynesian radical socialists. Unfortunately, the Trustees failed in their mission but their research is even more valuable and appropriate today. Veritas in Latin means truth.

John Maynard Keynes (JMK) was born in England in 1883 and was the son of a Cambridge professor who, when Keynes was seven years old, wrote a book attacking the principles of Laissez-Faire (government should not interfere with business and commerce) and the free enterprise system. Greatly influenced by his father JMK, "banded together with a group of radicals who were destined to become the outstanding socialist leaders of Great Britain." (Page 43 of "Keynes at Harvard"). At age 20 JMK became a member of the Fabian Socialists at Cambridge. Despite his ideological disdain of profits for individual gain, JMK built up a sizable fortune of 500,000 pounds ($2.5 million) by 1937, which reveals the hypocrisy of the man and his comrades who railed against capitalism and personal wealth.

Despite the fact that JMK visited the US in 1931 and met with officials at the Federal Reserve and President Herbert Hoover, it wasn't until he published "The General Theory of Employment, Interest and Money" in 1936 that his reputation grew throughout the world. With the Great Depression impacting all corners of the globe JMK's theory was immediately heralded (in desperation) as a panacea but in reality it opened pandora's box. Franklin D. Roosevelt "blessed" JMK's theory on the basis that "Socialism would save Capitalism."

What were the basic tenets of Keynesianism?

-- Capitalists are the cause of business cycles and unemployment and the primary villains are the money-lenders.

-- Capitalism should be regulated and controlled by a central authority. The US Constitution should be scraped so as not to interfere with government.

-- The economy can be controlled by variations of the rate of interest, budgetary deficits and surpluses, public works and a redistribution of personal incomes in the egalitarian direction.

-- A scientific facade is necessary to create the illusion of modern progressivism. (Think global warming.)

-- Large scale deficit financing by government is necessary during recessions to achieve full employment.

Roosevelt as well as Stalin, Hitler and Mussolini all drank JMK's Kool-Aid. FDR's New Deal cocktail was spiked with sugar Keynes. What most readers will not know or recall is that despite all the stimulus provided by the New Deal, the US economy fell into a deeper recession in 1937 and 1938. On May 9, 1939 Henry Morgenthau, FDR's Secretary of the Treasury wrote:

"We have tried spending money. We have spent more than we ever had before and it does not work...After eight years of this administration we have just as much unemployment as when we started...and an enormous debt to boot!"

That says it all. America's version of Keynesianism did not work. World War II ended the Great Depression. And, that could happen again. When Obamanomics fails, start a war. (Think Iran.) Keynesianism was not economic theory, it was political ideology!

JMK died in April 1946 but his ideology was re-ignited in the 1960s by Lyndon Johnson and his "Great Society." It converted Richard Nixon and lead to the disastrous inflation during the Presidency of Jimmy Carter (1976-1980) when the Consumer Price Index (CPI) reached 13%, the prime rate topped out at 21.5% and residential mortgage rates peaked at 17%. Milton Friedman, one of America's foremost economists, originally supported JMK's theory in the New Deal era, but in the 50s he reversed his position and challenged the premise that government could manage the economy. Friedman forecast the "Stagflation" that did occur in the Carter era. Friedman's theory of Monetarism and unabashed belief in Laissez-Faire and free enterprise greatly influenced Ronald Regan. It is interesting to note that in Friedman's last interview in 2006, he forecast that Islamofacism would be the greatest threat to the free world. If Friedman were alive today, he would surely add Obamanomics and the rebirth of Keynesianism as a threat to America.

All this history could be a prelude to what is ahead given President Obama's acceptance of JMK's theory of governance and deficit spending. Within the next 12 months, the US Treasury will have to refinance $2 trillion in short-term debt plus approximately an additional $1.5 trillion in deficit spending. Where in the world will the Treasury be able to borrow $3.5 trillion in one year when the last T-Bills were at a negative rate? That's equal to approximately 30% of the Nation's GDP! The Greenspan-Guidotti Rule states that any country should maintain hard currency reserves equal to at least 100% of their short-term debt. The US has only about $500 billion in reserves. The bottom line? The US is headed for a default on its sovereign debt. Massive amounts of public and private debt will never be paid. When? No one knows.

In The Myth Buster's book "How To Profit From The Coming Inflationary Boom and Avoid the Next Crash", he said:

"One of John Maynard Keynes' most oft repeated line's was, ‘In the long run, we are all dead.' Meaning — don't be concerned about the aftermath of massive deficits — we'll all be dead when the problems arise. Advocating and utilizing his theory today will ultimately lead to monster inflation and quite possibly hyperinflation and a "crack-up boom." Maybe then, we will be able to bury Keynes forever."

The problem is that in the end we'll all be alive and our children and grandchildren will be burdened by the myth that deficits don't matter. Our President and Congress took "intellectual cover" in Keynesianism as sound economic policy. If they had read history they would have discovered that Keynes and his theory were a fraud.

-- H. L. Quist

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