Why Keynesian deficit spending will fail

2 May

In a previous post, I established that it is demand that creates jobs and I explained the mechanism and mathematics behind that fact.  In another post, just recently, I showed that Keynesian deficit spending is powerless to help the current dysfunction of the American economy, and the wider world economy, as well.  Now it’s time to explain why a Keynesian “spend our way out of this” approach is not only hopeless for America today, it is actually the equivalent of putting America on an arsenic diet … eat all you want.

The premise behind federal government deficit spending to lessen the effect and quicken the recovery from a recession is precisely to create demand, and instill confidence.  Both are required for a recovery, otherwise a jobless recovery, with hording by those individuals and corporations who are able, is the result.  Sound familiar?  I’d love to retroactively claim foresight, but of course my ability to see the future is only slightly better than the formally trained economists.  Where the formally trained economists fail spectacularly, in ways I can only envy, is to take all the wrong lessons from history.

Demand creates jobs, and confidence results in spending.  Why isn’t it working?  Two problems, two reasons.

First, the problem of “lack of confidence in the United States”.  The world has never seen deficit spending like the United States is doing right now.  Perhaps no other nation could.  Since much, most, or all international commerce is conducted in US Dollars, other nations are impelled to maintain discipline, otherwise their currency will shrivel in relationship to the reserve currency.  We in the United States, on the other hand, can and are creating as many US Dollars as we need to sustain our unsustainable lifestyle.  This sends chills down the spines of much of the rest of the world, but the markets are taking care of this.

As the United States spends in deficit, and worse yet prints rather than borrows the money, the world markets are solving the problem for us.  They are making these US Dollars worth less with ever passing day.  The more we spend in deficit, the less each dollar is worth.  And the less confidence that foreigners, and our own reasonably successful citizens, have in the federal government.

Everyone who is able is moving away from the US Dollar, either to more stable currencies, or to gold (or other commodities).  In time, if the federal government doesn’t balance the budget and reduce the debt, the only people who will accept US Dollars will be poor Americans, because as dependents of the government, they will have no choice.

Second, there is the issue of “creating demand and jobless recoveries”.  Frankly, I don’t know the cardinal order of ‘lack of confidence’ and ‘lack of jobs’, I wouldn’t argue with anyone who put either first.  But lack of growth in well paying jobs is certainly a crippling problem and a major factor in the inevitable failure of Keynesian deficit spending.

Federal government deficit spending is intended to stimulate demand, thereby creating jobs.  The problem is, of course, that demand in the United States creates jobs in China.  So the federal government’s deficit spending is simply pouring an increasingly diluted (inflated) transfusion of American currency into an economy that is bleeding out on the other end.  At least during the Great Depression, there was a glimmer of a hope that increased demand from government deficit spending would reinvigorate the mines and factories and farms of America.  Today, that line of reasoning is simply retrospective and reactionary.

So in summing up, there you have it.  Federal government deficit spending decreases confidence in the currency and in the Nation.  As confidence crumbles, each new dollar is worth less.  And it doesn’t create demand for the labors of the citizens whose children will stagger under the debt load they will receive in bequest.

Starting this year, 2011, the rest of the world doesn’t care a snap whether we have a “social contract”, Medicare, Medicaid, Social Security, welfare transfer payments, or any other government largess for the citizens. The rest of the world knows two things.  We have the 101st Airborne Division, and about 1500(?) thermonuclear weapons that we can deliver to any spot on Earth in 20 minutes.  The value of a currency is based on the level of confidence that the holder has that the issuer can meet their commitments.  You now know what the guarantor of that promise is.

G’nite, all, and may God continue to bless America!

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