We have attacked Keynes & Keynesian theories, both in our April, 2009 feature, and in the Conservative Debate Handbook, much earlier, as well as in comments in many other essays dealing with economic issues. Our primary focus has previously been on the Fabian Socialist quack; on Keynes & the folly in adopting his deceptive theories. Keynesian economics, as its ideological cousin in Nazi Germany, was sold to susceptible businessmen as a means to save Capitalism from the possibility of a Bolshevik inspired Communist revolution. That it obfuscated a reduction in real wages & profits, to enable the survival of business ventures out of synchronization with the Laws of Supply & Demand, was ignored by those who had come to fear for their very survival.
While the rise of Fabian Socialists, who have bedeviled the Anglo-American World for almost three generations, has not yet led to the mass slaughter of innocents, commonly associated with the Socialist achievements of the Bolsheviks & Nazis; it is by no means certain that it will not end there. What is clear, is that there have been long term effects from the repeated employment of Keynesian methodology to deal with both real & perceived economic crises, which must be considered if the problems of our era are ever to be well understood. Our subject, then, is this: Was the collapse of Security Markets in 2008, a Keynesian harvest?
Keynes was a contemptible individual--in addition to being general point man in a British Fabian Socialist attack on traditional society & Capitalism. But the usual attack on Keynesian theories focuses on the effect of his counter-cyclical policy in impairing the obligation of debtors in an immediate sense; in cheapening the currency of a nation in the near term, and in the fact that a Keynesian claim, that an excess supply of money & money substitutes could later be withdrawn, never materializes. Keynesians may talk about reversing the inflationary effect by reducing & actually paying off deficits when business conditions improve. Yet, given the complex dynamics of the political process, natural resistance to higher taxes, an increasing addiction to subsidies & "entitlements," as well as the fear of choking off an artificially financed boom--and a predictable focus on immediate perceptions rather than long-term concepts;--an adequate retrenchment from Keynesian excess is almost never even attempted.
But despite the predictability that an ongoing Keynesian thrust will always be in the direction of continuing inflation, not stability, the folly continues. The normal tendency among even moderate, non-Socialistic, politicians in Nations with universal suffrage, is to panic when accused of not doing enough to reverse a business slowdown. Few seem to understand, or are too intimidated even to consider, that the best thing any Government can do in a major business downturn is to get out of the way of the normal recovery, which results simply from market forces; from the fact that men produce to be able to consume & need no artificial stimulation to address their personal wants. This has been true, not only in America & Great Britain, but in many other lands where Keynesian folly has become the accepted response to anything that even looks like a recession. After three generations, this has produced an ongoing, as opposed to transient, reduction in the value of non-convertible currencies; and with that distortion in monetary factors, an equally clear distortion of common perceptions of price trends & value.
At the core of this phenomenon is a Keynesian factor that has induced a fall in the value of the Dollar, compounded at an annual rate of well over 4% per year, since the early 1930s. (For the effect this has had in confiscating the capital resources of the people, see the February, 2009 Features on the "Function of Money" & "Inflation & Capital 'Gains'," linked below.) Thus salaries of sports heroes & business leaders soar from one generation to the next, with the result mistakenly seen as a reflection, not of monetary inflation, but of growing actual wealth. But is a baseball hero, today, worth anything remotely like 200 times the record $85,000 that Babe Ruth was paid in 1927? Gold--the actual monetary metal--is up well over 50 times, in dollar terms, in the same period, while those who do not understand money, discuss that as though it were a "bubble!"
What about housing & residential real estate, prices up in many areas the equivalent of gold, perhaps in some special situations even more? There have often been real estate "bubbles," even in the short history of America. But there was more to the sudden collapse of real estate markets, later blamed on the "Sub-Prime Mortgage" crisis in 2008, than just another real estate "bubble." Why did some of America's leading financial enterprises allow themselves to be so exposed to anything, so absurd, as financial instruments secured by bundled "Sub-Prime Mortgages?" Did we witness, in fact, another aspect of the Keynesian harvest--a built-in expectation of never ending price increases; an imaginary continuum of an inevitable appreciation in urban real estate?
Until the last few years, there was a commonplace in American cultural perception, a veritable "urban legend," if you will, that real estate values, at least in or near urban areas, only moved in one direction. The corollary, of course, was that residential property was not only a safe investment, a safe core holding for any owner, but a steadily appreciating one. Behind this almost universal impression, of course, was that steadily compounding decline in the dollar, discussed. Yet so general was the perception of actually rising values, as distinct from mere prices, in the real estate & housing markets, as to explain much of the seemingly reckless abandon with which would be buyers would borrow more than the actual value of a subject real estate, to complete a purchase, even under terms that their present earnings could not possibly justify; or why lenders, even unaffiliated with government subsidized businesses, would willingly lend to such buyers.
The same perception would explain why some of America's leading market makers, leading bankers, money managers & economic "experts," would do something so utterly idiotic, as to bundle "sub-prime" mortgages by the thousands into market vehicles, when no one had any clear understanding of the actual value of either the bundles, or of the underlying securities. It also explains why other market makers, bankers and macro economic money managers, would recklessly adopt double digit leveraging of their balance sheets, to purchase such little understood vehicles, in the absurd hope that they would prove profitable.
Was the bursting "bubble," that rendered bundled "sub-prime" mortgages suddenly unmarketable, to imperil some of the world's largest financial institutions' very existence--that sent world markets spiraling downward--a result of eight decades of Keynesian folly? We have always had examples of speculative frenzy. Yet look at the contemporary players. Consider the methodology for recklessly leveraging balance sheets via never critically analyzed collections of virtually unanalyzed securities, and that popular, if ridiculous, "urban legend" rooted in Keynesian inflation! What better explanation has anyone offered for such madness?
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