The financial markets, which have no ideology, have rendered their short-term verdict on the alleged resurrection of John Maynard Keynes' thinking.
Since the sweeping Democratic victory on Nov. 4, the Standard and Poor's 500 stock index is down 23%. Investors and speculators have placed their bets not in the resurgence of business anywhere in North America, Europe or Japan, but on gold and silver, as well as on Government securities.
This is in part because The American Recovery and Reinvestment Act of 2009, aka the "stimulus" bill, is an odd mixture of tax cuts, multi-year spending plans, and non-job related priorities such as expansion of Pell grants for students. None of this is funded.
The markets see that the Democrats, who rushed the unfunded TARP bailout legislation into law last fall to spend nearly a trillion dollars without paying for it, have a President of their party who is going to hold on Monday a meeting at the White House on fiscal responsibility and who is intent on blaming George W. Bush for the deficits, notwithstanding that his party controlled Congress and passed every spending bill and that rushed the "stimulus" bill into law this year. Whether Mr. Obama can fool the people is irrelevant to the markets, which see through the rhetoric of any politician to the facts. The facts are that if the Feds run gigantic deficits, there is little left over to finance private business growth other than from retained profits, which look to be in short supply.
In the Great Depression, when actual production was down well over 20% and prices were down similarly in addition to physical output, leading to an enormous depression in the nominal value of output, Mr. Keynes theorized that Government could help revive "animal spirits" by temporarily taking on debt, thus making the private sector feel richer, thus helping the business cycle move upward. Keynes felt that in good times, Government would then retire its debt by damping down the economic expansion and perhaps even go into a surplus financial position, thus moderating both the booms and the busts. President Roosevelt and the Brits adopted some of his policies. After Lord Keynes passed on, a bastardized version of Keynesianism was adopted by Government. This version involved permanent Government deficits.
What markets know is that the current mess globally has nothing to do with insufficient demand. What may or may not have been true at the depths of the Depression- a deficit of demand- is untrue today and is an unnatural concept. The debt deflation theory of Irving Fisher and Garet Garrett rein triumphant. That is why the current carnage is in financial companies.
"Stimulus" cannot stimulate when the "stimulator" is as poor a credit risk as the Federal Government, which even when it was running nominal surpluses in the 1990s was running large deficits under Generall Accepted Accounting Principles.
What is really happening in the markets and the economy is what Newsweek celebrated on Feb. 7: "We Are All Socialists Now".
Markets see that the sham arguments propounded by Democrats trying successfully to regain control of Congress in 2006 and early on in 2007 that they were the fiscally responsible party that would reinstitute "Pay as you go" fiscal policies have given way to the greatest orgy of deficit spending in the history of the Republic outside of major wars, probably greater even than during the Great Depression.
Rather than letting the debt-based companies such as AIG and Fannie/Freddie fail and be liquidated, the Government has helped destroy investor faith that traditional business models built on equity are preferred. By going all out to fight for the continuation of the financialized economy, culminating in the "stimulus" package which is entirely financed by more and more borrowing (or money-printing) that no one expects ever to be paid back, Government has helped create one of the greatest stock market crashes in history. Every important long-term trend line for the S&P 500, NASDAQ and Dow Jones Industrial and Transportation Averages has been violated. Worse, the fact that the S&P 500 went to a new high in 2007 and then undercut the 2002 low last week is a horrible technical indicator.
There is now no obvious bottom for this stock market or for the economy. In fact, it serves the purposes of the "We Are All Socialists Now" econo-political model to have a poor economy. In this way, Government can masquerade as the savior of the economy and thus fulfill the long-held goal of the Left to increase Governmental power.
FDR took office many months after the economy bottomed. He pronounced in his First Inaugural Address that the only things Americans should fear was being fearful. The Dow Jones Industrial Average proceeded to triple in FDR's first term. In contrast, President Obama has predicted catastrophe if ARRA/"stimulus" was not passed. It was passed. The markets have responded.
Keynes is dead. The classical economics that he built upon remain for us to rediscover. There is no free lunch. One way or another, everything has to be paid for. The debt-based economy of the last many years is imploding because it was built on a lie, in part by misrepresenting the thinking of Keynes.
In equity, not debt, lies the economic Promised Land. The Establishment in Washington is fighting tenaciously to continue the debt-based economy. GWB or BHO are the same in that regard. They were/are in league with the Merchants of Debt.
Moving to a culture of equity, not debt, will take sweat and toil.
A peaceful mass movement is needed. Please spread the word.
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