patrick.net

And Krugman, being a Keynesian, still believes that aggregate demand is the one and only solution to depressions. This is bad, bad reasoning. You should never extrapolate a rule from only one example, especially when that example ignores many lurking variables.

To quote myself from a previous thread,

Keynesians falsely believe that WWII ended the depression by increasing aggregate demand rather than the real reason: WWII restored the trust in the economic engine by ensuring payments for production. Trust, not demand, is the oil of the engine. There was plenty of demand for goods and services during the depression, but no trustworthy means of payment. The same is true today.

The solution is to stop the accounting fraud and realize losses quickly and accurate. Prosecute those who committed fraud and let companies in which fraud ran rampant go bankrupts. Let smaller, more honest firms feed of the carcasses of the too-big-to-fail firms. Then overhaul the system so that it is transparent and people don't have to rely on trust.

Everyone knows that the losses must be fully realized eventually. Nothing can stop that. The approach Keynesians are taking is to realize the losses as slowly as possible spreading them over decades. To do this they must continue the accounting fraud that caused the financial crisis. And in doing so, they prevent trust from being re-established. The end result is that this depression will continue for at least another five years. This depression will be as long as the last one. Unemployment and real wages together won't return to normal levels for at least another five years.

To continue with the lurking variables, before WWII there were two industrialized economic centers: America and Europe. After WWII, Europe was devastated. Europeans were starving. The factories were all destroyed.

Meanwhile, America was completely untouched by the war, except for Pearl Harbor in Hawaii. So America was the only industrialized nation at the time. It had absolutely zero competition. Gee, you think that might have contributed to America's boom. An entire continent of people demanding the production of an industrialized economy but unable to produce it themselves and having to turn to America, the only country that had the ability to produce goods at the time. Fuck, if we had that today, nobody would be unemployed.

WWII killed off all the economic competition for America. To make today like the 1940s, we'd have to nuke all of China, India, and many other 3rd world nations. We need a different solution.

bgamall4 says

austerity cannot work.

Austrian economics isn't just about living within your means. Austrian economics is not synonymous with austerity despite what sound bytes the media mindlessly parrots.

The difference between what we are doing and what we should do are:

1. We shouldn't debase our currency through inflation. This is simply stealing wealth from savers to pay off the debts of people who gambled. This is neither socially just nor wise as it encourages reckless behavior and taking on debt and discourages savings and honest investments.

2. We shouldn't spend money on whatever special interest has the best lobbyists. Contrary to Keynesian philosophy, paying men to dig holes and fill them in is not a path to prosperity. Neither is the aggregated demand generated by warfare. Using wealth to destroy infrastructure is always counter-productive.

3. Instead, we should carefully spend what we have and what money we borrow on investments that provide a real, not imaginary, return. Investments like better power grids, fiber optic Internet access, solar and wind energy farms, hydroponic farms, mass recycling centers, carbon sequestration. What you spend money on matters. Simply spending does not lead to prosperity

4. The money should not be borrowed from the Federal Reserve, nor should the Fed be allowed to increase the money supply. Lack of money is never, ever, ever the problem. Money is an imaginary measuring stick and nothing more. It is not wealth. Increasing money does not increase wealth. It transfers wealth from responsible people to the central banks.

5. Instead the federal government should directly issue government bonds with 8% tax-free interest rates and sell these bonds to U.S. citizens only. If the gvt does this, there would be absolutely no lack of cash for government spending as millions of citizens would gladly take a 100% safe investment with 8% tax-free real return (remember, no inflation!). This is what got the U.S. economy out of the First Great Depression. Back then, they were called war bonds. (Technically, my bond idea is a better stimulus, but those are details.)

6. The massive amount of resources being allocated to the defense industry should be almost entirely reallocated to internal infrastructure until the depression is solved and then should be freed by eliminating federal income tax on the first $100k/yr of earnings.

Also, any idea that you can grow your way out of debt is ultimately doomed to fail. The Earth has finite capacity and cannot support indefinite economic growth. Therefore,

7. Our economic system should be based on maximizing the per capita production rather than blinding seeking unbridle growth. Not only would our economy be better, but so would our environment.

8. Money removed from the economy by any means (deflation or hording) does not decrease wealth. Wealth is determined entirely by present and past production and waste and deterioration. Decreasing the money supply does not decrease wealth, it increases the purchasing power of savings and earnings. If the wealthy were hording money, we'd be better off. Instead, they have dropped all their money in exchange for gold and other assets. The wealthy are hording wealth not money.

bgamall4 says

End demand is a function of an adequate supply of money and of desire to buy.

No. I could run the entire world's economy on one dollar. And I could run it better than our economies currently run, with no bubbles and bursts, no business cycle, no environmental damage, and maximum long-term productivity.

Most important of all, it only takes a single dollar to conduct all present and future business. For more details, read this old thread.