Archive for financial crisis

The Failure of Keynesian Economics

Posted in Political Rant with tags , , , , on December 29, 2008 by lilburtonboy7489

Even with total financial collapse being possible, our government is looking to a failed economic theory for help. It’s called Keynesian economics. This theory has been shown by both logic and history that it is not a successful economic system. Keynesian economics is the theory that the government can stimulate economic growth by intervening in the private sector.

Many times, a theory will look good on paper, but ultimately fail in the real world. Keynesian economics is not one of those theories. It fails both in theory and in the real world, and I will show a couple of reasons why.

Keynes says GDP=C+I+G+NX So he assumes that if you increase increase any variable in the equation, the GDP will increase accordingly. This is what his entire theory is based on. However, he consistently forgets that simply moving the wealth around is not creating wealth, but rather just allocating it differently. I’ll show some examples of this fallacy.

Before I address these issue, I would like to point out each variable I will use and give it’s definition:

GDP- Gross Domestic Product

C- Consumption

I- Investment

G- Government Spending

NX- Net Exports (Exports-Imports)

T- Taxes

MPC- Marginal Propensity to Consume (How much is spent out of every dollar)

First, consider this: C= c+{MPC*(Y-T)}. So in order to increase G, you have to increase taxes. Increasing taxes adds value to the variable T. Increasing T means that C will decrease. That is unavoidable.

So the increase in G is offset by the decrease in C due to higher taxes.The GDP doesn’t expand, it is just proportioned differently. A decrease in T (Taxes) has more of an effect on the economy than increasing G (Government spending) Why? Because consumers will only consume what they demand. We decide what has value. If we decide that iPods are more important to us than a parking ramp, iPods have more value. That’s because only the consumers can choose what has value by demanding it.

So when G is increased, production may increase, but not necessarily production of something we demand. For example, if government spending is increased to pay for a parking ramp in the middle of a cornfield, is that good? No, because something was produced which has no value because it’s not in demand. So government spending takes from consumers (the only people that can give value to something), and spends it on things which may not have value.

Consider this: According to this logic, shouldn’t the government hire people to run around and destroy things? If that was done, the government could spend the money to repair these things. It’s an increase in G and also gives jobs to people. So shouldn’t Keynes want that?

Of course, the problem is that nothing was created with value. So it did not expand our wealth.

All kinds of porblems arise when employment becomes an objective rather than a result. Keynesian economics is in large part a theory dedicated to fight unemployment. Since this is the case, all Kenesians are opposed to all technological advancements that make us more productive and successful, right? Of course, not, that was be ridiculous. But it would be entirely consistent for Keynesians to hold that position.

Another thing to understand, is that an increase in C (Consumption) is not intrinsically good. This is especially true when NX (Net Exports) decreases when C is increased.

For example, if our nation imports 90% of its goods and services, our NX will be negative, subtracting from our GDP. So what happens if our C increases by 50%? The -NX will increase enormously. So when we have a deficit in NX, when our C increases, the increase in C is offset by the decrease in NX.

Keynes even came up with a concept knows as the “Multiplier”. The concept states that government spending is a more powerful tool of economic growth than letting the market consume. The equation for the multiplier is: 1/(1-MPC). Say that every consumer spends $0.75 out of every $1.00 they make. That makes the MPC=.75. So now apply it to the equation: 1/(1-.75)=4. This is called the “Multiplier effect”. Keynes says that if the government spends $1,000,000 to “stimulate” the economy, you multiply it by this multiplier. So in this case, as I showed above, the multiplier is 4. So you multiply the government spending by whatever your multipler is. So in this case, it would be 4 x $1,000,000=$4,000,000. And POOF! That money taken from taxpayers just quadrupled.

Of course, if you actually think this through, it’s a ridiculous concept. As I mentioned before, the only way value can be added to a product, is through consumer demand, which only the consumers can decide. So when the government consumes, it is taking our money, and spending it on things not in demand. Since worthless things are produced, there is no growth. The only change, is that the consumer who add value to products, have less spending power because the government has taken it and spent it elsewhere.

The entire concept of a multiplier is a joke, yet it is still the most widely accepted economic theory today.

So that’s my shallow critique of the problems associated with Keynesian economics and basically any type of government intervention in the economy. Our economic problems will continue of we don’t break away from this mindset that the government can fix the economy by interfering and printing money.

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The Real Financial Crisis

Posted in Political Rant with tags , , , , , on December 14, 2008 by lilburtonboy7489

According to the many of the world’s leading economists, the free market has resulted in a catastrophy. There is not enough credit to go around, and the main culprits are the people who will not consume. So now comes the time to find solutions. What are we to do in this mess when no one seems to have the answer? Well the financial crisis is not what it seems, and I will show you why.

First, I will address the fallacy that the free market is part of the reason for failure. The first industry to fail was the banking industry. The banking industry is the most heavily regulated in the U.S. The Federal Reserve manipulates the interest rates, controls their reserves, regulates who get the loans, buy and sell them bonds, and insure them with funds they do not have. This is not a free industry.

The FED bought bonds from commercial banks, increasing their reserves. When they do this, the interest rates decrease. When the interest rates are extremely low, people borrow more than they normally would. This results in unwise investments which were made because of the low interest rates. If this were to happen at 1 or 2 banks, it wouldn’t be a problem. However, this interest rates effect every bank in the country. This is the cause of fake booms and very real busts. If it was not centralized, booms and busts would not be possible.

Now to the credit shortage. Excessive borrowing is how we get into this mess in the first place. People borrow much more than they have, so the marginal propensity to spend is above 1. An economy cannot sustain itself when the participants are spending 1.2 of every 1 dollar they earn.

Besides, if there is not enough money to go around, the easiest solution of course would be to legalize counterfeiting.

Next is the lack of consumption. The equation for GDP is GDP=C+I+G+NX. The problem is that C (consumption) is too low, so our GDP is going to shift to the left, showing a decrease is total GDP. Of course that sounds awful, but is it really?

Before I show the cons of consumption, I will show the difference between hoarding money and saving money. When people spend less, the assumption is that they are keeping their moey hidden under their bed. However, the truth is that hoarding does not happen. Instead, people put their money in the bank or in the stock market. When the money is put in the bank for saving, it becomes available for the banks to loan out. The alternative of that, is to invest it in mutual funds, bonds, or the stock market. This causes an increase in I (investment). This increase in I is more important than the decrease in C because I is investment in production, where C is spending alone. Also, most spending is on imports, which causes another decrease in NX (net exports), causing the GDP to shift to the left.

Our current GDP is way beyond the potential GDP. How can we be beyond the potential? Borrowing. As I mentioned before, people are borrowing much more than normal due to the low interest rates. So people borrow this money, and plug it into the equation GDP=C+I+G+NX in the form of C and I. So the GDP is boosted, but not because of increased production wealth, but borrowed funds. So the level of GDP we have had is fake. It is beyond the potential because of the borrowing. This is called an inflationary gap.

In time, the bad investments and massive defaulting on loans results in an economic crash, which we have just had. We fall back to the potential GDP, or slightly below. This is called a recessionary gap. It is healthy for the economy, as long as the market is allowed to make the corrections needed.

However, inaction is political suicide, so the market will not be able to correct itself. The government will attempt to boost GDP by increasing G (government spending). However, this will fail because C= consumption+[MPC(Y-T)]. T (taxes) is increased in order to increase G. By increasing G, it will decrease C which means the GDP will not increase at all.

This is the real financial crisis which you will not hear in the media. It will not get better anytime soon because the only solution is to free the market. When people are in a state of panic, which they are right now, people want the government to help. Too bad no one realizes that they will only make it worse.

The only solution to the financial crisis

Posted in Political Rant with tags , , , , , , on November 24, 2008 by lilburtonboy7489

We are in a credit crisis. Turn on the tv, and all you will hear is how there just isn’t enoug money to go around. On top of that, you have something even more intolerable than lack of fiat money: Banks are acting responsible!

Where do they get the nerve to do something like this when the free market has caused all of this chaos. There is only one obvious solution to this crisis, and it must be done right away.

We have to legalize counterfeiting.

Instead of printing money, which takes forever to distribute, just let us print our own. This way, the government won’t have to worry about stimulus checks, bailouts, responsible banks, or anything. Let us just print our own fortunes so that we can have all the credit we need…and a little extra.

Problem solved. Nobel prize please….