Year two of two lost decades?

John Maynard Keynes was a brilliant guy, but his socialist big government ideas are going to be responsible for a lot of our suffering for many years to come. Specifically, his ideas for government stimulus to "fill the gap" left by not enough consumer spending are being used in this "balance sheet recession." There's no need to go too deeply into this in order to see the folly. I might as well lead with the fact that it has never really worked before. Japan is in its 18th year of suffering due to this theory. They have tried it every which way to somehow make it work. And we're only in year two of following in their footsteps!

The gist of it is that money was cheap and credit was loose, so Americans spent like drunken sailors, even when it came to purchases like cars and houses. They paid way too much for things they couldn't afford. So they then have a balance sheet problem. When the values of things head back to normal levels, they suddenly owe far more than they have or can pay. This is the crazy part: What our government is actually trying to do now is to reinflate prices to the previously absurd levels. I think I understand. The prices were abnormally high due to cheap, easy money that couldn't last. So, you cure it with far more cheap, easy money? But that can't last, so then what? Won't the prices go even higher to more ridiculous levels? Of course! And what happens when it doesn't last? They are worried about deflation, but mass inflation is no picnic either.

So, the view from 10,000 feet is that people owe far more than they have. The government thinks Keynes would want them to send people a few bucks and the problem will somehow go away. The idea is to get people spending, and the money will cycle around. Let me ask you, if you are $80,000 upside down on your mortgage and the government borrows money in your name and sends you a few extra bucks, is your situation fixed? What are you likely to do with it? Save it or pay off something small, right? Then your taxes go up to pay for the money borrowed in your name. What is fixed? I know it's a simplistic view, but I think people get too wrapped up in the elegance of Keynes' ideas and forget to step back and realize that they have never worked so far, though they have caused a lot of horrendous messes, usually starting with inflation.

It is worth mentioning that inflation has started, though the government still publicly frets about deflation. Assets are going down, but commodities from metals and oil to food are all going up and up. Due to wildly loose monetary policy, there are enough extra bank reserves to loan $154 TRILLION dollars. That is one fact to illustrate the problem of too much money in the economy. If people do start to spend and banks start to lend, what will that look like? It normally takes 18 months for monetary policy corrections to be felt. Consider this, until now a big reaction to a recession would be to increase the money supply by six or eight or twelve percent, and even that could cause a nasty inflation problem. This time the money supply has been increased 220%. Yes, I typed that right.

How can we move forward until prices have dropped back to reasonable levels? Using more of the same easy money to con people into continuing to pay too much for things seems to be just a way to delay the inevitable and make it much worse. I believe it's worthwhile to realize that Keynes wrote his General Theory of Employment in 1936. At that time the whole world thought Adolf Hitler had pulled off a big government miracle to create low unemployment. As we now know, it was part government controlled propanganda, part preparing for war, and part socialist make-work programs. Germany under Hitler never was a model of peace and prosperity as was believed by socialists such as Keynes at the time. There was subsistence for all and a modicum of peace from about 1935 through 1938. Hardly inspiring in hindsight. I certainly wouldn't base economic theory for the next seventy plus years on it!