Dr. Keynes Killed the Patient

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A morbidly
obese gentleman labored into Dr. Hayek’s office suffering from
severe chest pain. The patient also complained that he was unable
to consume his usual 10,000 calorie-per-day diet; in fact, he was
feeling so sick that he could barely scarf down 9,000 calories.
He plead that his love for food remained as strong as ever, but
his body just wasn’t keeping up with his demands.

After having
a thorough look at the patient, the good doctor could not find anything
wrong outside of the patient’s extreme portliness. After a
moment of reflection, he delivered to his patient a troubling diagnosis.
He explained that the chest pain stemmed from the strain the patient’s
500lb body was putting on his heart, and that the lack of appetite
was his body’s attempt to protect itself from this imbalance.
Dr. Hayek’s prescription was simple: the patient had to dramatically
reduce his consumption while undertaking a moderate exercise program,
with the goal of losing 250lbs as quickly and safely as possible.
Dr. Hayek was aware that it would be a physically painful and emotionally
difficult process for the man, but it was the only way to avert
a life of suffering – or even a heart attack.

Unfortunately,
our patient rebelled against such an austere program. He had grown
very fond of his high-calorie and high-fat diet and didn’t
think that now, when he was already depressed from dealing with
all these ailments, was a good time to deny himself the few pleasures
he had left. In his opinion, the doc’s prescription was just
too simplistic. He thought there just had to be a way to have his
cake and eat it – frequently. So, he waddled out of Dr. Hayek’s
office as fast as he could, shouting over his shoulder: “I’m
getting a second opinion!”

The overweight
gentleman sauntered across the street, where he found the office
of Dr. Keynes. He told the new doctor about his acute chest pain
and lack of appetite, and complained about the previous doctor’s
“heartless” prescription. After a cursory examination,
Dr. Keynes rendered his diagnosis: the patient’s condition
did not stem from the fact that his gigantic frame was causing undo
strain on his heart; instead, the doctor concluded, the patient’s
chest pain was merely causing a temporary lack of hunger. Furthermore,
Dr. Keynes argued, the stress of cutting weight at the present time
would certainly prove detrimental to the man’s already weak
heart. Therefore, his prescription was for the 500lb man to eat
as much as possible, as quickly as possible. Anything less might
cause the man to suffer a heart attack, he noted. Now the doctor
did concede that, at some point in the distant future, it might
be a good idea for the man to shed a few pounds. But for the present,
the most important thing to do would be to consume as much as he
could stomach.

The patient
left Dr. Keynes’ office with a broad smile. After gorging at
an all-you-can-eat buffet, he momentarily forgot about his chest
pain. It looked like he had found his solution; except, a week later,
he died.

The Hubris
of Government

The allegory
above discusses the dangers of quackery, whether medical or economic.
Right now, economic quackery – in the form of Keynesianism
– has overtaken Washington.

American consumers
are trying their best to deleverage. In terms of the story, the
patient is actually trying to lose weight. But the government is
blocking deleveraging and trying to boost consumption. They are
forcing food down the patient’s throat. According to the Flow
of Funds Report, households reduced debt at a 2.4% annualized rate
($330 billion) during Q1 of 2010. Meanwhile, the federal government
was piling on debt at an 18.5% annual rate ($1.44 trillion). Since
every dollar of government debt is a promise to tax the private
sector in the future with interest, this public-spending spree effectively
negated the Herculean efforts of the private sector to return to
a sustainable path.

That’s
where the arrogance of Washington is really apparent. Scores of
millions of American consumers have made the decision that reducing
their debt burden is in their best interests right now. But a few
hundred individuals in government believe they know better than
the collective wisdom of the entire free market. By leveraging up
the public sector, they have used their power to confiscate our
savings. In short, they are forbidding us from following the common
sense path to fiscal health.

Unlike their
forbears, modern-day Keynesians do not argue just for mollification
in the rate of deleveraging. They seek to significantly increase
debt levels in an effort to boost the aggregate demand in the economy.
Apparently, only once the mythical recovery takes hold due to government
spending, printing, and borrowing does a discussion of deficits
become appropriate.

The US has
persisted under this theory for close to a century, though with
a declining quality of life. Unfortunately, the patient has now
gone critical. Curiously, the world has yet to fully recognize our
precarious condition, even as they provide us with life support.
Washington is now entirely dependent on the reserve currency status
of the dollar and the continued hibernation of bond vigilantes.
Without these supports, the United States would face complete economic
arrest. Rather than allowing the American people to get back on
our feet, Washington is stuffing us with even more debt. It’s
almost as if the feds are daring our foreign creditors to pull the
plug. As a consequence, I predict that just as Dr. Keynes killed
his patient, Keynesian economics will kill our economy.

August
19, 2010

Michael Pento is Senior Economist and Vice President of Managed
Products for Euro Pacific Capital. He is a well-established specialist
in the u201CAustrian Schoolu201D of economics and a regular guest on CNBC,
Bloomberg, Fox Business, and other national media outlets. His market
analysis can also be read in most major financial publications,
including the Wall Street Journal.

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