patrick.net

... And let me start by saying, by Keynesianism, I mean the current use of economic stimulus in the US and Japan for example.

So in 2006 people in the US were spending a lot of money. They were in fact spending collectively much more than their revenues. The Fed easy money had inflated a housing bubble and people were using their home equity - which they thought permanent - as an asset that they could spend to keep up with Joneses. The extra spending was reflected by a large and persistent account deficit at the country level.

Of course such heresy didn't last long and the whole scheme went bust.

Now what did the government do?: Maintain, at the country level, the spending of borrowed money. If people were not going to borrow money and spend it, then the government would do it in their names. 5 years later they are still largely doing it, and the country is still running its account deficit.

Then they started doing again the same thing that had created the crisis to start with: push easy money to force assets inflation. Easy money can't go to wages, because hundreds of millions of poor workers and new technologies have put a cap on wages. So the only things that they inflate are assets.

The Feds (and bankers) are perfectly happy with that: No inflation means they can continue printing money. Inflating assets means banks balance sheets are cured, while households once again feel rich and (hopefully) will start again spending of money that they think they have (while they in fact don't). The wealth effect, they call it. Massive deception in fact.

It doesn't matter to them that someone has in fact to pay for inflated assets (i.e. young people). And these people won't feel rich and won't spend as much as they would otherwise do.

It doesn't seem to dawn on them that asset prices are anchored in the real world. Just like in 2008 inflated assets will, in fact at some point, realign with the non-inflated wages, with once again devastating effects.

One just has to read what is happening in China to see the stupidity of such policies on display:
http://www.bloomberg.com/news/2014-02-04/china-savers-penchant-for-property-magnifies-bust-danger.html

What problems are solved with such policies: None. Every problem is always postponed and doomed to come back with a vengeance. No problem is ever solved - except maybe when they lose control and a crisis erupts.

Just look at Japan after 24 years of these post crisis policies: still no wage inflation. Still trying to reanimate spending of people whose wages is not going up. Tons of unpayable accumulated debts. And nothing to show for it. Just an unmitigated disaster threatening the world.

http://www.bloomberg.com/news/2014-02-05/japan-real-wages-fall-to-global-recession-low-in-spending-risk.html

That such policies continue to be seen as the best solution is beyond me. The whole thing is just a freak show, led by those that profit from it, at the top.

#housing