Readers of this blog know that I have a high-level of disdain for the neo-Keynesians who have unleashed a wave of global, government-fed, fiat currency debt across the globe. I believe that 2012 will be a year in which we will really have an opportunity to see whether my disdain is well placed or that I am wrong — which I may be. Readers of this blog also know that I believe in data. By 2013, we’ll have a lot more data. With Europe in recession (and it is a larger single market than the U.S.) and China likely headed to a significant slow down (China’s government recently lowered the asset quality requirements of financial institutions either a clear sign of bad-debt capitulation or a bubble-inducing stimulus), the U.S. economy will not be rushing forward. This means, what is a fiscal or monetary policy neo-Keynesian to do…
The chart below shows the level of debt to already expended across the western economies. Reinhart & Rogoff have already shown that at 90% of GDP, excess debt has, at least, a negative 1% impact on GDP. Above this level, the negative impact just gets worse. But can the printing and spending of conjured money bring the world back from the brink. That is where 2012 will bring us loads of new data which may help answer the question — who is right, neo-Keynesians or the Austrian school? I know where I’m putting my money…
Over the holidays I read “A Secret Gift” by Ted Gup. It’s a true life tear jerker Great Depression era story. Just before Christmas 1933, Gup’s grandfather posted an ad in a Canton Ohia newspaper offering $5 to those with the greatest need. “A Secret Gift” is a compilation of hundreds of 1933 letters begging for help. Gup found the letters years later in a dusty suitcase. The letters tell of unspeakable poverty. Human suffering of unimaginable depth and scale. Suffering we’ve managed to avoid for almost a century now thanks to modern ways of thinking and caring.
The point being, economic theory, Austrian or Keynesian, must always be subservient to the needs of the people. Not the other way around. American economic theory is based on doing what we have to do, when we have to do it. Not for the purpose of pursuing theory, but for the benefit of the greatest good.
We eliminated depression era starvation in America by following our hearts. That in itself is not a bad economic theory. It’s worked well for us.