Why the Keynesian Economics Have Failed

People say Keynesian economic was a success. Yes, it is true that cutting the deficit will not create employment now. Deficit is 1.5 trillion. That is 15 million jobs each paying 100K! If there were no deficit, money supply would seriously fall short and the money to earn would not exist! So, if you want jobs now, deficit must continue. But, if you want jobs years from now, deficit must be reduced. Spending now and accumulating debt is only borrowing from the future! It does not fix anything.

You may be asking: Please, show me where Keynesian Economics failed. Anyone? Any examples?

Keynesian economics failed and the proof is the 2007-2010 depression. This is the end of Keynesian economics. You cannot spend your way out of recessions. Recessions are the cure to our debt problems. If they are delayed, the problem grows bigger until it is too big to fix! This is a deflationary depression.

The truth is we borrowed more than we could afford. And the whole mess is because of government intervention. FED has inflated bank credit for the last 70 years and they made it easy to borrow. We did not have free markets. FED, FDIC, Fannie, Freddie are all designed to inflate credit. They are government interventions to free markets to ease monetary policy. Americans borrowed form the future and spent. The future is here. Pay back time. It is not reasonable to expect that all will be fine. Our debt caused inflation when we borrowed, and excessive debt is causing deflation as we pay debt.

Why did FED and the government do this for so long? Because political aspirations of a democratically elected government is bigger than their desire to make long term healthy choices for their country. The past government took the easy way out by inflating the money supply (as the current government is trying to do). Compare this to the recession of 1920. President Warren Harding ignored it. And the free market economy roared back a year later.

Government intervention makes the economy worse. If the free markets are making some sectors shrink, maybe we should let them shrink and we should focus our energy on other parts of the economy. But no, to get votes, the government had to please the voters and lobbysts. Here is how government wanted housing bubble to inflate the money supply so that they could declare economic victory:

Our problem is NOT housing, or it is NOT unemployment. Our problem is debt. And we have more of it now! When we borrow, banks create new money. This inflates the money supply and causes an economic boom.

Today public debt debt per household is around 200K USD. That is more than the average home price in America. What does that mean? It means even if you paid your mortgage, you still owe as much as an average house! You will be paying it's interest just like your mortgage payments.

The private debt is even worse! Our entire money supply is borrowed money. When we borrowed, we promised to pay back with interest! Principal + interest does not exist. Therefore it is not possible to earn it to pay it back with interest! That is why previously fine individuals and businesses are going bankrupt! the crash is built into the monetary system. It cannot be avoided. There is no free lunch. What was borrowed from the future will be paid back.

Let us say when we borrowed 50 trillion, we promised to pay back 100 trillion. The economy is built on the assumption that the money supply would some day reach 100 trillion. That could happen if borrowing continued. But there is a catch! The real economy cannot sustain the interest payments on debt if debt keeps increasing exponentially. That is why the deflationary crash has started.

After sub-prime, we exhausted borrowers. There is no one left to borrow. Baby boomers are beyond their peak spending years. Money supply is deflating. 100 trillion will not exist and the economy that is built on that assumption will have to shrink back to lower levels, 40, 30, 20 trillion. Whatever the money supply shall be at the bottom.

All prices around you, homes, stocks, pickles, salaries, everything is based on this inflated money supply. When the money supply fails to expand under the weight of excessive debt, current prices cannot be sustained. People are asking, where is the next bubble? The bubble is the debt. Debt is the money supply. We borrowed all we could and we created all money we could and it is deflating now! Prepare for the biggest crash the world has ever seen! Great Depression is nothing compared to this bubble!

People think this is all Obama's fault. No folks, this is the mistake of 70 years. The mistake was to inflate the credit bubble for decades. The cause is in place. The effect will follow. Credit will deflate! That makes a deflationary depression. That is because we will stop borrowing and we will start paying off debt and start saving. That is a good thing. Depression is the fix! Once we are done with it, we can grow and prosper again.

That does not fit Obama's re-election plans, thus he is paying 8K home buyer credit so that you may borrow again. Maybe he can delay the inevitable for a few years, but as the debt grows, so does the debth of the coming crash!