“We a now paying for the funeral of Keynesian economics.”

To echo a recent article by Eric Sprott and David Franklin, “We a now paying for the funeral of Keynesian economics.”  Keynesianism has been the economic religion of the Western world for the past century.  For the uninitiated,  the intricacies of this theory can be summed up in a single sentence: government intervention in the economy is good.

Here are the underlying, and if I might say so,  fallacious assumptions of this theory.

  • Private markets over-produce certain products. This causes a glut, job loss, and deflation.
  • The government can step in with stimulus, via government programs, low-interest rates, and monetary policy (basically money printing) to reverse the above.
  • Government stimulus “grows” the economy by stabilizing prices and maintaining full employment.
  • Subsequent growth in the economy eventually multiplies to the extent that the initial cost of the stimulus (increased taxes, money printing, and/or government deficit spending) is easily eclipsed by overall increase in productivity.

Tweak everything perfectly and we get efficiency, full employment, exponential growth, and gradual inflation.

Since the 1930s we’ve all been dancing to the Keynesian beat.  It worked okay for a while, but now we’re driving right of a cliff.

What do we have to show for our faith in the religion that is Keynesian economics?

  • More debt than we can ever repay.
  • Incredible waste of capital on politically expedient make-work projects.
  • Continual erosion of the value of our money due to inflation.
  • Central-bank sponsored boom-and-bust cycles, each bigger and more catastrophic than the last.

Keynesian manipulation supplants basic supply and demand as the central impetus of modern economies. As such, stimulus creates the very problems it’s supposed to solve: gluts, unemployment, and unstable prices.

Now Keynesianism has reached the point of no return:

Deficit spending can not go on forever. Debt is debt is debt. A Government Accountability Office (GAO) report from January 2010 states the following: “In our alternative simulation, which assumes expiring tax provisions are extended through 2020 and revenue is held constant at the 40-year historical average; roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020.”

That’s in 8 years dude. Only problem is, the economy is so fragile that raising taxes to pay down the debt will crush any recovery.  It’s at an endpoint.   We’re damned if we do, and damned if we don’t.

Thank you Mr. Keynes! (Keynes was actually a damn smart dude, but his name has stuck to this, so bummer for him.)

Even if stimulus worked most of the time, there’s still the final back-breaker:  Exponential growth of debt requires exponential growth of productivity.

Denial of this fact will result in an “epic fail.”  Exponential growth cannot go on forever. It’s a finite planet, with finite resources.

Economics, as presently practiced by the Keynesian maniacs, is unsustainable.  Unfortunately, the only alternatives at this point are 1) radical change or 2) collapse.


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