Plain Sailing — the Keynesian Way

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Do you remember the old joke about a guy who jumps off a fifty-storey building?

As he passes each floor he thinks to himself, "Well … so far so good."

I don’t believe it’s any exaggeration to say that the US economy, and therefore the world economy, is in a very similar position. The nonsense being talked about a "recovery" and the general level of ignorance, both in and out of government, is mind-boggling.

Stimulus packages, bailouts, the "Cash for Clunkers" fiasco, proposals for socializing health care, cap-and-trade madness etc. etc. etc. What the hell is going on?

The current administration inherited a disaster; but with President Obama a real opportunity was missed. Given the man and his background, he could have held many disparate groups together. Had he chosen small government, non-interventionist, free market advocates as advisors I believe there was a good chance that the majority of American people would have stuck with him — that they would have put up with the tough medicine which would have brought about real "change" rather than just more of the same.

But that’s all water under the bridge now.

Frank Shostak begins this article with a quote from Obama:

"I know how to ask good questions of my doctor. But ultimately, he’s the guy with the medical degree. So, if he tells me, you know what, you’ve got such-and-such and you need to take such-and-such, I don’t go around arguing with him or go online to see if I can find a better opinion than his."

This makes perfect sense providing your doctor knows what he’s talking about. Unfortunately, whatever Obama’s talents, he is not a businessman and certainly not an economist — of any stripe. He has put his faith in a bunch of economic quacks and the result is, and will remain, a moribund economy for years to come.

Frank Shostak goes on in his article to leave the economic policies of the present administration in shreds — he does so in a very patient and erudite fashion. It’s clear, it’s logical and it’s a must-read for anyone who wants to get a no-nonsense explanation of just why "Obamanomics" won’t work.

But it’s not as if we haven’t been here before. We even know the cause — fiat money!

"[The current crisis is] payback for a decade of reckless monetary policy … The recession is not the problem, the recession is the cure. It’s not fun, just like heroin withdrawal is not fun … but it’s necessary.” ~ Peter Schiff.

The problem is that no-one in government has either the guts or understanding, or both, to do what is needed. The last time anyone had the courage was during the Regan administration. Fed Chairman Paul Volcker stopped pushing counterfeit money into the system and let interest rates soar. In spite of incredible public hostility Ronald Regan stood by him. Of course, the healing process was painful but recovery followed and the USA, as usual, dragged the rest of the world back with it. Nothing has changed here. Recovery in the USA is still required before the global economy can recover.

But "real" recovery in the USA is no-where in sight.

The fact is we are no longer in a boom-bust cycle. We are in a Depression. And there’s worse to come. The next shock is imminent. Adjustable rate mortgages on commercial property are due to begin re-setting upwards:

"By some estimates, two out of every three will no longer meet the original loan conditions and won’t be able to refinance … [a]nd with prices for commercial properties expected to plunge … [t]he falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults."

Worse still:

"This could lead to future additional taxpayer assistance for the banks."

I wouldn’t bet against it. As regards any semblance of sane economic policies, the current administration is, like the previous one, intellectually bankrupt. They will carry on blindly trying to dig themselves out of the same ever-growing hole.

Amongst currently elected politicians there are very few voices of reason. Ron Paul is of course the most notable. Peter Schiff is thinking about throwing his hat into the ring and running for the US Senate.

I’d vote for him. Why? Because first, he is a highly successful businessman, second, he has been spot-on with many of his predictions about the economy and, third, his understanding of Austrian economics is fundamental. On all three counts that puts him miles ahead of the vast majority of career politicians.

Visit his archives. If you haven’t read any of his articles you’ll be pleasantly surprised. No formulae, graphs, tables or charts — just plain speech and common sense (e.g. "Cash for Clunkers"). No-one needs a degree in economics to understand what he’s saying — in fact, it may well be an advantage not to have one!

He focuses on the repercussions of economic policies not their initial impact. Down the line their effect is almost invariably adverse. In a word, like Ron Paul, he’s "honest" about what the future holds if we continue on our present course:

"Unlike most politicians, he does not traffic in unbridled optimism … if painful and drastic changes aren’t made soon, he foresees an economic depression lasting at least a decade. The future … will be marked by rampant inflation … food shortages and rolling blackouts, unless government sharply shrinks and the free market is allowed to flourish."

Until this happens, we continue the inevitable plunge into economic catastrophe.

However, ask one of Obama’s Keynesian advisers how we’re doing and the reply would probably be:

"Well … so far so good."

Chris Clancy [send him mail] is Associate Professor of Financial Accounting at Zhongnan University of Economics and Law in Wuhan, Hubei Province, People’s Republic of China.

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