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Keynesianism's Ugly Secret

by Nelson Hultberg

Nelson Hultberg is a freelance writer in Dallas, Texas and the Director of Americans for a Free Republic www.afr.org. His articles have appeared over the past 20 years in such publications as The Dallas Morning News, American Conservative, Insight, Liberty, The Freeman, and The Social Critic, as well as on numerous Internet sites such as Capitol Hill Outsider, Conservative Action Alerts, Daily Paul, Canada Free Press, and The Daily Bell. He is the author of The Golden Mean: Libertarian Politics, Conservative Values. Email him at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it


It is now five years since the crash of 2008. Today's media and much of our academic crowd, of course, believe that the crisis has been handled, and that we can settle back to "business as usual."

But such pundits are so immersed in the Keynesian paradigm that they are viewing only the trees, not the forest. They are viewing only the specific recessionary cycles and not connecting such cycles to the big picture of the overall boom / bust nature of 20th century economics. Since they have accepted Keynesianism as valid, they see in today's economy normal activity and business cycles. They see correct Federal Reserve policy and legitimate fiscal policy on the part of the Federal Government. But this view comes from a false concept of economics and from a major failing of humans - their use of "euphemism" to evade the fact they are trying to circumvent natural law so as to get something for nothing.

For example, almost all of today's scholars and pundits use the term "liquidity" to describe what the Federal Reserve injects into the economy to manage it. Tune into CNBC or Fox Business on any given day, and you will hear repeatedly about how the Fed needs to "inject liquidity" into the system.

But if we do not use euphemism in this discussion and call "liquidity" what it actually is, then we get a considerably different picture about what the Fed is doing. The Fed is not injecting "liquidity" into the system when it performs its FOMC functions. It is injecting "credit" into the system. But what is credit? Simply another word for DEBT. So this is what the Fed is injecting into our economy when it performs its Keynesian mandated functions. It is injecting massive DEBT into the system, which means it is enticing Americans to go substantially in debt to live their lives and likewise with the government to perform its functions.

This is the essence of Keynesian theory: economic growth and wealth can be brought about by government injection of debt into the marketplace. Let's examine this premise more closely and then look into the "ugly secret" that no one talks about.

Debt Saturation and Malinvestment

The flaw in Keynesian theory is that central bank credit expansion ultimately leads to massive "debt saturation" and "malinvestment" throughout the economy, which reverses the boom that the credit expansion was meant to perpetuate. Ultimately, the system must go through a severe purging in order to eliminate the heavy levels of debt and malinvestment before a genuine growth cycle can be reignited. Such a purging leads to a mega-crisis that brings on either severe deflation or inflation, or a combination of the two that is called stagflation. Which one of the three occurs will depend on how the political-monetary authorities in charge react to the events that unfold.

This crisis takes place because central bank credit expansion brings about healthy growth like heroin brings about well-being. In the early stages of the process businesses flourish, and the Fed is able to manipulate expansions and slow downs in a tolerable way. But once an economy becomes thoroughly "debt saturated" from the massive injections of credit over the years, borrowing drops off drastically. This slows the rate of monetary growth by inhibiting the central bank's power to pyramid credit, which threatens the economy with a deflationary crash. If the Fed tries to stop the deflation with faster and heavier credit expansion, it brings on hyper-inflation and then a crash. In addition to the debt saturation, Fed credit expansion also creates widespread "malinvestment," i.e., capital expenditures for which there is no genuine demand and which cannot be sustained.

This is the basic Austrian business cycle theory of Ludwig von Mises and Nobel prize winner, Friedrich Hayek, first formulated in the 1920s, and which predicted the Great Depression of the 1930s. Eventually large loads of debt and malinvestment must build up in any country that expands credit in its banking system irresponsibly. Such debt loads must be worked off before real demand and growth can be restored, which requires a recessionary period. If the credit / debt expansion has reached a high enough level, the result will be a more severe deflationary collapse.

How much debt is there exactly in today's economy? Stratospheric amounts. The Federal Government owes over $17.5 trillion in just its "funded debt." When everything is added up, total public and private American debt today is $61 trillion. But when we add in the government's "unfunded debt," i.e., its future obligations for social security, medicare, and employee pensions, the figure becomes stupefying. Total public and private American debt today is in excess of $150 trillion.

What's important, however, is to grasp how fast debt is growing and what it's relationship is to national income. The chart below shows us what the growth of just "funded debt" in America looked like between 1957 and 2008:

http://grandfather-economic-report.com/debt-nat-a.htm


Notice how the red debt line in the above chart is growing at a much faster rate than the blue national income line. This means we are assuming larger and larger amounts of debt each year to maintain a steady amount of national income growth. Herein lies the root of our economic crisis. Since money creation today is primarily Fed credit creation, the Fed's monetary policies are what pushed the country into the economic crash of 2008. Here's why:

As we see in the chart below, the amount of debt needed to generate national wealth today is much more than it was 50 years ago. In 1957 it required $1.86 in total debt to produce $1 of national income in America. By 1987, it took $3.00 in total debt to produce $1 in national income. In 2008, it took $4.93 in total debt to produce $1 in national income.

And per capita debt figures required to produce growth are just as alarming. Per capita debt required to produce growth in 1957 was $29,700 (in constant dollars). In 2008, it was $186,700. How much debt will be required to create economic growth in 2020? How much in 2030?

http://grandfather-economic-report.com/debt-nat-a.htm

The Ugly Secret

What this means is that new debt in a Keynesian economy must be increased every decade at an accelerating rate in order to keep the economy continually growing. If the Fed does not succeed in getting us to assume larger and larger doses of debt every decade, it runs the risk of the economy's business and investment sectors starting to deflate. This is the ugly secret of Keynesianism, never acknowledged publicly and never taught in our schools. But Fed officials know very well that if they were to slow down their increase of debt creation for a few years so as to bring the country's debt accumulation into balance with its debt liquidation, it would dangerously deflate the economy.

Thus overall debt must always rise to unmanageable levels in the Keynesian model because society's annual "debt assumption" needs to exceed its annual "debt liquidation" if the Fed is to maintain economic growth. The fact that aggregate debt has been increasing relentlessly for over 50 years clearly demonstrates this. And since there is always a limit to how much debt any person or any country can tolerate, the credit bubbles upon which Keynesians have structured our economy must always run up against an impenetrable ceiling and eventually collapse into a prolonged depression.

This is why Ludwig von Mises is right in his famous warning that central bank credit expansion, if not voluntarily curtailed, must ultimately result in a collapse of the monetary system and the economy structured upon it. This is why the Mises / Hayek business cycle theory formulated in the 1920s is true, and why Keynes' "new economics" formulated in the 1930s is false. The Keynesian model is dangerously flawed and must ultimately bring monetary destruction to any country that embraces it.

This is all ignored by our mainstream punditry. In their minds the 2008 crash was "caused" by growth of derivative speculation, the collapse of the housing bubble, and the fall of prominent corporate-financial giants such as AIG and Lehman Brothers. On the contrary, these factors were merely concomitants or steps along the way. To understand the real (or root) cause of the meltdown, we have to ask what lies behind the rise in derivatives, the housing bubble, and the excesses of AIG and Wall Street investment banks. We have to look at the big picture.

The root cause lying behind all the Wall Street excess and bank failures was the vast credit inflation and increase of debt that built up in society over the years. Banks are businesses like all others. If they take on too much debt so as to commit their portfolios to highly speculative ventures such as derivatives, then they will eventually risk collapse. If they are prominent institutions such as AIG when they go down, they will act as triggers that ignite further collapses. 

But in order for such a wave of collapses to take place, there first has to be an underlying "debt saturation" throughout the economy. This debt saturation, created by the Fed's excessive creation of credit, is being evaded in all the establishment explanations of our present economic crisis. And, of course, no one dares to talk about the "ugly secret" of a Keynesian economy, that in order for it to produce growth, per-capita debt must be continually increased at an accelerating rate.

The Appearance of Workability

Thus it is the monstrous credit / debt spirals orchestrated by the Fed over the past decades that have brought us the economic crisis in which we are presently embroiled. What lulled our authorities into this nightmare is that Keynesian economics appears to work at first. For example, the Keynesian debt train that we boarded in 1936 basically chugged along in the 1950s and 1960s with no apparent difficulties. It created mild amounts of debt and appeared to uncritical eyes to be a legitimate means to run an economy. But by the 1970s the debt train began picking up speed in order to keep the GDP expanding. By the time Alan Greenspan and the 1990s arrived, our Keynesian debt train was huffing and puffing at great speed. By 2005 it was literally streaking down the tracks in order to keep the economy afloat. And by 2008 it derailed.

The speed and the amount of the necessary debt creation to float a Keynesian economy have now overwhelmed the consumers and businesses of America. Fear consumes them, and they have undergone a dramatic change of mood in which they refuse to borrow in any substantial amounts. They are ignoring the credit offerings of the Fed in order to bring back fiscal sanity to their lives and are trying to pay off debt instead of incurring more debt. This is reducing the amount of credit desire among consumers and businesses. Keynes failed to factor this "human reaction" into his theoretical analysis.

This reduction of "credit desire" on the part of humans will stifle the Fed's ability to ignite any recovery. So even if the economy has been saved from a 1930s style depression, it's only a temporary salvation. It does not mean our problems of low wealth creation, anemic growth, and unemployment have been solved. What it means is that massive "injections of debt" have been thrust into our economy to ward off a massive deflation. But this is a false cure orchestrated monetarily by government rather than productively by free enterprise.

It's as if the drug addict began injecting heroin again and pronounced himself "cured" from his physiological depression, when what he should do is rest his burnt out system through abstinence while initiating a regimen of high-quality nutrition to rebuild his debilitated physiology. The parallel between physiological drug addiction for individuals and economic liquidity addiction for societies explains our crisis.

As Ludwig von Mises warned us decades ago in his great classic, Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." 

The Federal Reserve, unfortunately, has chosen the latter option. Thus catastrophe looms up ahead, maybe sooner than we think.

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Who Is Really Hurt by Sequestration Defense Cuts?

March 19, 2013

Posted by Amy Davidson
The New Yorker

When it became clear that sequestration meant most of the military branches would have to suspend tuition assistance—a program that allows active-duty service members to work toward degrees or enroll in vocational-training courses—there was a brief squawk of protest in Congress. A couple of Senators introduced an amendment to the Continuing Resolution—the budget bill to keep the government running—that would keep the funding in place. Kay Hagan, of North Carolina, one of the co-sponsors, wrote that while the Pentagon clearly had “difficult budgetary decisions,” tuition assistance “gives our best and brightest the opportunity to continue developing their skills while on active duty, which will ultimately lead to smoother transitions to civilian life.”

That amendment died in the Senate yesterday. (Hagan and James Inhofe, the other co-sponsor, hope to re-introduce it as a stand-alone bill.) So far, the Army, Air Force, and Marines have all cut off the students in their ranks. Grants that had been processed before March 12th are still in place, but that’s it. Stars and Stripes reported that, at Ramstein Air Base’s education center, phones were ringing “with callers ranging from the distressed to those in disbelief.”

“It has been probably one of the craziest mornings of my career,” said Keith Davis, the chief of education and training at Ramstein, who fielded some of those phone calls. “It has been unbelievable.”

Each of the services is looking for ways to keep its members in class—for example, by cannibalizing G.I. Bill benefits that might have gone to their families. There is also a White House petition, which already has more than the hundred thousand signatures needed for an official response, though there hasn’t been one yet. The immediate prospect is education interrupted: young people with debt but no degree. (And it’s always harder to go back to school than to stay in it.)

That isn’t all. Sequestration requires some forty-one billion dollars in defense cuts this fiscal year. There are exemptions, for example, for military pay. And there are less noble work-arounds, too; as Rajiv Chandrasekaran wrote in the Washington Post last week, the F-35 program, whose cost has increased seventy per cent since it was first conceived and is now almost four hundred billion dollars, “will face only a glancing blow from the sequester,” even though it is the biggest single item in the military budget, in part because of contracts that have already gone through.

At the same time, as representatives of the various service branches testified before the House Armed Services Committee last week, they have been left to look for cuts in programs like on-base child care. Lieutenant General Darrell Jones, of the Air Force, testified that “military spouses comprise an estimated twenty-five per cent of our Child and Youth Program workforce,” and so furloughs, in addition to meaning that the hours of day-care centers may be cut or children put on waiting lists, “will create a direct financial hardship to some of our military families.” The Army’s Lieutenant General Howard Bromberg testified that some of the potentially vulnerable programs were “family intervention programs such as New Parent Support Home Visitation and other Family Advocacy programs that prevent domestic violence.” And the week of the tenth anniversary of the Iraq War, there will be cuts to scholarships for the children of the troops who died serving there, as well as in Afghanistan.

There are exemptions for health care for active-duty members and “wounded warriors,” but the whole system is likely to slow down as the people who process claims and retirements are furloughed—this at a time when there are six hundred thousand veterans with backlogged disability claims. The average waiting time for benefits claims is two hundred and seventy-three days.

Is there some gamesmanship in the Pentagon’s plans? Could it be smarter about allocating cuts? Probably, but the money has to come from somewhere, and the odds favor it coming from programs and affecting interests that don’t have strong lobbyists. Most of us might not notice it, if we’re not soldiers with marriages falling apart or trying to sign up for a class. The illusion of sequestration harmlessness, brought about by delays in furloughs, is going to end. There is no question that there are very large cuts that could be made to the Defense budget. (Not fighting wars saves money, too.) Sequestration avoids and distracts from them.

The sequester, of course, was never supposed to happen—applying mindless cuts to both domestic and military spending was supposed to be enough to make both sides act. But the Democrats, in particular, may have miscalculated, perhaps in thrall to a cartoon image of Republicans who, upon getting last-minute calls from desperate defense contractors, would run to the floor of Congress to pass some sensible legislation. That image relies, though, on a misunderstanding of both the G.O.P. today and of the Defense budget. As Ryan Lizza recently wrote, there are more Tea Party–influenced Republicans who are comfortable with military cuts. There are also contractors whose calls may be about how to maneuver around sequestration, not stop it. Beyond that, there is a good part of the Defense budget that looks, and functions, like the sort of social spending that reflects more liberal than conservative interests. One way or the other, while Congressmen seem to be learning to love the budgetary laziness sequestration allows them, there are soldiers who won’t get help going to class.

Seen in The New Yorker, Photograph by Jabin Botsford/The New York Times/Redux.


Read more: http://www.newyorker.com/online/blogs/closeread/2013/03/who-is-really-hurt-by-defense-cuts.html#ixzz2O2r39ijI

 
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90 Sheriffs and Two Sheriffs Associations Have Pledged to Ignore "Obama Gun Control"

 
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How Did We Get to This Point?

March 28, 2012

By David Sheldon

David Sheldon, is the founder and president of Michigan Stop Smart Meters and this link provides valuable updates to this serious worldwide concern.


Why are smart meters now being forced upon us?  The easy answer would be because it is profitable for the utility industry to do so.  It is not hard to conjure up a bogeyman in the big bad corporation.  But Detroit Edison had an enviable reputation, built over many decades, as a reliable provider of electric service, and as a business that treated its customers fairly.  In a free market, corporations, in pursuing their own best interests, tend to realize their own goals by doing the things that best meet the needs of their customers.

But wait a minute – who or what made it so profitable of late for Detroit Edison and most of the other utilities in this country to, all of a sudden, so mistreat their customers?  Why did they all decide to risk their customer goodwill and the security of the entire electric grid on unproven technology?

One must come to grips with the fact that it was decisions by policy makers at the national and international levels that brought all this on us.  There is a breakneck rush to install these cancer causing surveillance devices on every home and business in practically every industrial nation.  How and why were such decisions reached, and how did it happen that essentially the same decisions were being made at about the same time in all these nations?

We all like to believe that democracy matters, that we can elect politicians to carry out the will of “the people”.  In school most of us learned that this country is great because, in the words of Abraham Lincoln, we have “government of the people, by the people, and for the people.”

But was this ever strictly true?  And if it was once true, is it still true? One of the troubling things about our “democratic” republic is that certain things, at the national level, keep moving always in the same direction, no matter who we elect to Congress or the Presidency.  One of those things, we think, is an inexorable tendency for laws to be passed and policies implemented, often by executive fiat, that chip away at our privacy, our civil liberties and our personal autonomy.

One of the drivers of this is the fact that this nation always seems to be on a war footing – whether it is a cold war or a hot one.  We can have differing opinions as to the wisdom of becoming involved in this or that conflict – but the long run tendency of things is that we have now what then retiring President Eisenhower warned us of in 1961 – the permanent military-industrial complex.  With that we have an increasingly powerful and all intrusive national security state.

But there is another driver that has arisen in the last few decades and that may better explain why the whole industrialized world is seeking to increase its monitoring and control of what goes on in individual homes and businesses.  While most people today do respect our natural environment and want reasonable steps taken to protect it, there is also an environmental extremism that, if not checked and balanced against other values, will lead to a society where our national government, or possibly even a world government, will be telling us all how we must live.

This environmental extremism plays right into the hands of yet another driving force – the belief in some quarters that scientists, engineers and elite policymakers can better manage “society’s resources” than we can through our individual decisions and market forces.  This movement once went under the name “technocracy” and had its heyday in the 1930s.  Our nation repudiated that doctrine then but the “technocrats” never really gave up and are re-introducing their program under the guise of protecting the environment.  It may well be that the real danger to our once free and constitutional republic will come not from the socialists or from the fascists, but from these technocrats – who are neither of the left nor of the right.

Policies have been put in place – particularly in the last 20 years – during the administrations of two Republican presidents and two Democratic presidents, that are based on the notion of practically doing away with private property rights and individual freedom of action.  Instead these policies would establish an order of things where a central government will tell us all where we may or may not live, how much energy each of us may use, how much water we can consume, how much and what kind of food each of us may eat, how much land we can occupy, how much we may travel, and a hundred other things.

All this is being done supposedly in order to radically reduce the world’s “carbon footprint” and to make the world a paradise for every species but our own.  The first President Bush got us started on this program when, at the Rio Conference in 1991, he informally committed this nation, to something called “Agenda 21”.  Because it was an informal commitment and not a treaty, he needed no ratification by the U.S. Senate.  Yet policies began to be implemented by Executive Orders through many federal agencies.  This program continued under President Clinton.

During the term of the second President Bush, laws were pushed through Congress to outlaw the incandescent light bulb, to outlaw toilets with 3 gallon tanks, and then to establish something called a “smart grid”.  It was a comprehensive plan to establish a system whereby government, acting through the electric, gas and water utilities, could monitor and perhaps ultimately control resource use at each and every individual home and business.  Of course we were told at first that these programs would be “voluntary” on the part of homeowners and businesses who would be rewarded with lower rates for their “participation.”

Part of this “smart grid” would be the “smart meters”.  These, when fully integrated with a new generation of “smart appliances” would enable the utility companies to know exactly how much energy we are using at any given moment and even which appliances we are using at any given time.  But we were promised, in the federal legislation, that these smart meters would be voluntary – that they would not be forced on homeowners.

Then came the “stimulus bill” under President Obama.  There was appropriated the sum of 3.5 billion dollars to virtually stampede all the utility companies to convert their meters to smart meters.  This was to cover up to 50% of the cost of the new meters.  The other half would be recovered by having the various state regulatory bodies approve passing those costs on to electricity customers through their monthly bills.

Now let’s step back for a moment.  Was it the people of the United States who wanted this new system?  Did the people create a market demand for the new meters?  Did the people ever communicate to their legislative representatives that they wanted society transformed in this way?  I think we all know the answers to these questions are NO.

And what about the people in all the industrial nations of Europe and South America and South Africa?  Is it just coincidence that the same policies were being quietly implemented in all industrial nations?

We are talking here of ‘smart meters’, but we could as well be talking about so many other facets of the modern surveillance society.  We could be speaking of the over proliferation of cell phones that are bombarding us with cancer causing radiation and constantly, without our knowledge, reporting our GPS locations back to big telephone company and big brother. So how did it all happen?  Was it the warfare and national security state, the global warming crowd or the technocrats?  Or all of the above?  Do we still have “government of the people, by the people and for the people”?  If not, what are we going to do about it?

For further information on Smart Meters visit michiganstopsmartmeters.com.


 
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