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    jk's Avatar
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    Default monetary - not fiscal - keynesianism

    [i had posted comments in 2 different threads that i thought were worth combining to initiate a separate discussion.]

    the problem with keynesianism is that it's never been tried, and it never will be. that's because keynes said that during good times the gov't should run surpluses to pay back the debts run up when applying stimulus during slowdowns. but the political system neither wants to cut spending nor raise taxes, so they're happy to run deficits pretty much all the time, under all conditions. the lack of discipline in the political system thus precludes keynesianism.

    Quote Originally Posted by karim0028
    … the concept of saving for a rainy day and then spending it when it rains works for individuals, but when it comes to pandering politicians and ever expanding govts, it will never work, bc the temptation to give out goodies that you don't personally pay for before elections or to curry favors is as old as time itself....
    in a similar fashion, the lack of moral restraint among private capitalists prevents a free market system from ever being tried. those with money will use it to gain power and manipulate the marketplace. so no free market system can exist in the real world.

    so, in real life, during times of economic contraction or weakness, the fed prints money under the name of "quantitative easing," pushes it out to the banks. meanwhile, in fed research papers addressing hypothetical times of high inflation [coming soon to an economy near you], the fed will restrict or even reverse its money printing under the name of reducing seignorage.

    it seems to me that the we have a kind of monetary keynesianism.

    to reiterate, keynes wanted the government to help regulate the economy through its FISCAL actions over a FULL CYCLE: to engage in deficit spending when the economy slowed or shrank, and to generate offsetting fiscal surpluses when the economy had healthy growth. but politicians being politicians, they don't want to cut spending or increase taxes, so they never generate the surpluses [FISCAL drag] to pay back the deficit spending. and now, because of political paralysis and in reaction to the frightening growth of the deficit, neither can we increase deficit spending [FISCAL stimulus] if the economy remains weak or weakens further.

    since our political process is broken and incapable of sensible economic action, we defer the regulation of the economy to the unelected monetary authorities. they are insulated from the electoral process and less engaged in political posturing, and thus more able to focus on the stability of the financial system.

    in a setting of debt deflation, "quantitative easing" [i.e. money printing] replaces fiscal stimulus since the very possibility of fiscal stimulus is severely restricted by the political system. in similar fashion, the restriction or reversal of seignorage [i.e. the restriction or reversal of money printing] replaces the generation of fiscal surpluses during periods of excessive price rises.

    we have a system of monetary [as opposed to fiscal] keynesianism.
    Last edited by jk; 12-28-10 at 10:48 AM.

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