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Bkeepr100 (< 20)

The Crack in the ice



August 10, 2011 – Comments (0)

"If you should go skating
On the thin ice of modern life
Dragging behind you the silent reproach
Of a million tear stained eyes
Don't be surprised, when a crack in the ice
Appears under your feet
You slip out of your depth and out of your mind
With your fear flowing out behind you
As you claw the thin ice" 

                                    Pink Floyd

When I read Gary North's essay title, my mind went to these lines from the song by Pink Floyd. I found this part of the essay to be truely timely for the uproar from the government debt crowd.

The Crack in the Ice
By: Gary North


Keynesian economists have always rested their entire position on one assumption: "Loans to the national government are safe." This was Keynes' view, stated obscurely in The General Theory of Employment, Interest, and Money (1936).

Here is the Keynesian logic. Lenders are afraid to lend. This cuts consumer spending. The economy stays in recession. This is the lipstick on the Keynesian pig.

You want more? Here's more. Lenders want safety. They are afraid to lend to private borrowers, who may default. They will lend to a national government. The government will then pay for various projects that the free market judged were wasteful and loss-producing. This gets the economy rolling again.

This is conceptually stupid. I assume that you see why. Lenders have to put their investment money somewhere, unless they spend it for consumer goods, which Keynesian economists say is a Very Good Thing. Lenders who have enough money to affect the economy do not have their money in currency under mattresses. They have it in banks or mutual funds. If this money does not go to a government to be spent either on centrally planned projects or to buy votes, it will go to some other investment. This should be obvious to anyone who has the faintest inkling of how to follow the money.

This is why Keynesianism is conceptually stupid. But most Ph.D.-holding economists are self-blinded to such an extent that they cannot understand this. They have not read W. H. Hutt's book, The Theory of Idle Resources (1939).

This crucial assumption – "Government debt is close to risk-free" – is at long last being called into question. It is being called into question by the acts of politicians. They are incapable of getting their national governments' budgets under control.

This is why Keynesian economists are apoplectic over the S&P downgrade. They are also upset that anyone should question the ECB's wisdom in extending a helping hand to Spain and Italy. The Keynesian assumption has always been that lenders should invest money in government bonds. Government bond markets are the foundation of all Keynesian theories of counter-cyclical spending by governments.

We never hear a unified cry from Keynesians in boom times that it is time to cut government spending and start paying off the government's debt. We are told that Keynes called for counter-cyclical policy in boom times, not just bust times. That meant running surpluses to reduce the debt. But we never see quotations from Keynes to this effect. We never see signed statements from Keynesian economists calling for debt reduction.

There is a reason for this. Keynesian economics is welfare state economics. It has always been a cover for wealth-redistribution. Officially, this wealth redistribution has been justified in the name of helping the poor. Operationally, it has always been wealth transfers to very large banks.

Every time there is a financial crisis, the government and the central bank bail out large banks. Every time, Keynesian economists hail this policy during the crisis period. Then, after the dust settles, and the surviving banks are larger than ever before, they bewail the fact that Wall Street was bailed out again.

These people are not slow learners. They are non-learners.

Read the rest of the artical at

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