Keynes and his disciples had a solution to the liquidity trap: increased government spending and monetary inflation. This debases the currency, forcing hoarders to spend. The process by which this was accomplished, worldwide, was World War II. In the name of the war effort, every nation authorized its central bank to inflate.
This is what they are all doing again, in our Keynesian world, in which hardly anyone in the West hoards currency. Central banks are inflating. Governments are running huge deficits...
The Keynesian assumes that in a recession, the world is no longer suffering from scarcity. He believes that there are no remaining opportunities for profit in serving future consumers. The Keynesian believes that the central government must intervene and spend money in order to stimulate the economy. Expected private demand for future goods is insufficient to persuade entrepreneurs to invest money to meet this demand. The expected return on capital is zero. The Keynesian economist believes that the government gets money from lenders, and that by spending this money, the government can increase demand by consumers. This increased demand stimulates the economy. There will be economic growth, and therefore the government will reap a positive rate of return on its investments. This is what politicians are promising. "The government will be repaid." It is a fantasy, but even if it comes true, this will benefit the government, not taxpayers...
If someone believes anything as silly as the Keynesian economic system, he is likely to believe that consumer spending, in and of itself, will create such demand that the economy will be reversed from its recessionary condition. He believes that if he can just persuade enough people to go out and spend money, no matter what they spend it on, the economy will revive...
Stein then cited the source of his seemingly revolutionary idea: John Maynard Keynes.
Look, we're faced with John Maynard Keynes called "the paradox of thrift." If everyone is cheap and thrifty and doesn't spend, the economy slumps and everyone is poorer, not richer.
This really isn't rocket science. It's part of what caused the Great Depression.
No, this was not what caused the Great Depression. Federal Reserve expansionary monetary policy in the 1924–29 period caused it...
The money supply will increase, prices will increase, and we will be back in the clutches of price inflation by the end of 2009. From that point on, price inflation is going to be the major problem in American economic life. The Keynesians will get their wish: spending without investing. There will be more money chasing a restricted supply of goods and services. The supply of goods and services will be restricted precisely because the government has intervened in the credit markets in order to stimulate consumption.
This is why the recession is going to last much longer than normal. It is going to be an inflationary recession. It is going to result in what was once called stagflation. This is what Keynesianism always produces. It is hostile to thrift; it is hostile to investing; and it is favorable to government deficits. The productivity that is needed to get us out of this recession will be restricted by policies of government spending.
My thoughts: A must read article. Consumers and government cannot spend an economy into prosperity. Inflation concerns should have began in September 2007 when the Fed began slashing interest rates. In 2010-2011, when inflation becomes obvious to everyone, people will regret not listening to North, Schiff, and others.
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