It is purported that back in 1971 after Nixon defaulted the U.S. and took us off of the Gold standard, he made the comment “we’re all Keynesians now”. This phrase was taken from it’s original author and monetarist, Milton Friedman who first uttered it in 1965. John Maynard Keynes was a British economist who believed that it was the government’s job to smooth out the business cycle through the use of fiscal and monetary policy with an emphasis on the fiscal side He also coined the phrase “Gold is a barbarous relic” as he was an advocate of fiat money as opposed to real, hard monies. His opposition to hard money was because it could not be printed or it’s supply easily manipulated by those in government pushing and pulling the economic levers to “tweak” the economy.
What has happened over time is that each “tweak” required more and more force. It was virtually imperceptible at first (the first 20 years) until the 1990 recession. That recession was the first one experienced since the beginning of the debt buildup. No problem though, they dropped interest rates a bunch and all was well EXCEPT this was the first “jobless” recovery. It was also the first recession since manufacturers had gone full bore sending jobs overseas for less pay. Then we had the 2001 recession where rates were dropped even further and the deficits expanded even more which brought us to the latest recession which started in 2007 and “supposedly” over in 2009. Rates got hammered to zero (negative in some parts of the world) and the deficits blown out beyond any reasonable level. As I said, it has been a progression but it has taken more and more brute force to create expansion and now the Keynesian theory is all out with both fiscal and monetary policy just to prevent contraction.
I do want to add that it used to be that our business cycle was roughly 4 years in length. I believe it was Fed Chairman William McChesney Martin who coined the phrase that “it is the Fed’s job to pull the punchbowl just as the party is getting started.” In other words, raise interest rates just as the economy starts to heat up (which was generally every 4 years or so). You see, recessions in the old days were actually “engineered” by the Fed as a way of not allowing too much debt or malinvestment to build up. That ALL changed by the 1990 recession as that was the very first one that was NOT engineered. In fact, 1986-1987 was a prime time to “pull the punchbowl” which they tried and resulted in the ’87 crash. It was at this point in time that our puppetmasters realized that the business cycle needed to be repealed because the financial sector had gotten too large to “fail”… Which led us to the current position of being far FAR too large to bail! I wanted to write this brief account of history so that if you weren’t aware of it, you are now and have a better understanding of the “how and why” we’ve gotten to where we are.
“Where we are?” We are toast with no options left. Interest rates are at zero percent and pledged to stay there for at least another couple of years. Killing the retired “savers” which did work in the early 1990’s but is not working now. We have completely blown out our fiscal balance sheets with deficits never even dreamed about 10 years ago. This strategy “kinda” worked in the 2001 recession and we went right along as Dick Cheney reminded us that “deficits don’t matter.” Now, they have not worked and the option to “try harder” with bigger deficits is not available because the marketplace has deemed that deficits in fact DO matter!
I know, all of the above is not news and probably boring as hell…but I do have a point here. The phrase “we are all Keynesians now” has taken on a new meaning, It means that we, collectively are all screwed! NOTHING that was “conventional” (though flawed) has worked. Nothing “conventional” has worked no matter how extreme, forceful or large the effort. Keynesianism has now, at our expense, been proven not to work and is the flawed crock of crap that the Austrians have said it was for the last 40 years (actually 100+).
I really must wonder how any thoughtful person could have thought that taking a stable, medium of exchange and measure of value OUT of the system could ever have worked? How could any person have believed that financially, we could have “in the long term,” arrived anywhere OTHER than where we are right now? EVERYTHING paper is now worth NOTHING! It is all worth nothing because it is based on nothing. Everything is valued today, based on man made interest rates at zero and debt, accumulated and created by man that has engulfed everything, everywhere. This “debt” is the cornerstone and foundation to the entire system, how do you value the system if the collateral has no equity left in it? There are no sectors left to “reflate” and this is the flaw, the end game to Mr. Keynes economic theory.
I will finish by saying that the sooner the system is allowed to collapse and be replaced by one with a real foundation, the better! High Schools and colleges and business schools of “the best pedigree”, still to this day teach “Keynesianism” to their students. I can just picture the kid, who would ask the simple question, “interest rates are at zero %, the Fed has flooded the system with money and our government has taken on banana republic amounts of debt, how come the economy sucks and my parents don’t have a job? What would Mr. Keynes propose now?” Since we are “all Keynesians now,” we’re listening…