A year ago I wrote a post regarding Hayek’s comeback as the leading economic philosophy blowing Keynesian economics out of the water. The post can be found here.
In that post, I refer to the fundamental economic equation GDP = C + I + G + (X-M), where C is Private consumption, I is Private Investment, G is Government spending, X is Exports, I is Imports.
I go back to this equation once again because GDP during 2011 has been averaging sub 1 % growth and is slowing. This result was easy to forecast, and indeed, I have been pointing out for the last 6 months that the economy is getting worse in the US despite the stock market’s rise and Delaware’s state government revenue rise. Why was I able to make this forecast, when Keynesian economists associated with the President’s Administration, the FED, and DEFAC have not?
Let’s go back to the fundamental economic equation. I’ve pointed out before that Keynesians have this simplistic belief that equation is linear. Keynesians foolishly think that by simply raising government spending (through increased debt) that GDP will go up. However, Government spending, even debt, has to come from somewhere. In other words, by increasing G through deficit spending, government needs to increase taxes (now or in the future) which reduces current C & I, thereby reducing GDP an equivalent amount to the increased G. And that is why Congress and the Country is stuck.
To state it briefly, the economy is on the edge of a potential recession (or anemic growth at best) — meaning that C & I are not growing. Since the country has a huge deficit, there are no assets in which to increase G without further decreasing C & I. So, a decade of Republican & Democratic deficit spending, and Republican & Democratic policies promoting private sector financial leverage have bankrupt the country. There is no quick solution. We are in for an elongated period of increasing economic volatility, high (aka double digit) unemployment, and decreasing government services.
During my 6 years in the legislature and the 3 years hence, I have continued to warn that this is where we would end up. It is a catastrophe — and was avoidable were it not for the fools & useful idiots who brought us here — most of whom are still in charge.
(BTW, I think that a recession in early 2012 is a 50/50 likelihood — I’m not making a final call, yet. I expect that by the end the year, an accurate forecast for the first half of 2012 will be possible.).