The Flaws of Keynesian Economics

One of my most avid readers and I were having a lively debate about Washington spending tonight and he sent me an article explaining Keynesian Economics.  He stated that this model got us out of the great depression and that it is what the Obama administration is using to get us out of our current fiasco.  Well, you can read the link for yourself to get an idea of what I had to work with if you’d like to follow along.

On the surface, this model seems simple enough to be sound.  It states that economies exist on a circular flow of money and that is true.  Money that just sits in someone’s wallet does nothing in the economic flow of a nation, I can dig that.  Keynes explained that redistributing wealth (gee, where have I heard THAT phrase before?) to the lower classes would prompt them to spend it and get the economy moving again.  Therefore, our government spending trillions on projects all over the country should work to get things moving again, right?

Not necessarily.

You see, there are several flaws in this way of thinking.  The biggest one is in how this model treats money saved versus money spent and the effects each has on the economy.  This model states that a hoarding of money hurts the economy because it doesn’t flow within the market.  The problem is that this only works if that money is kept under someone’s mattress or home safe.  That’s not how most Americans save their money.  Americans save their money in banks or bonds.  Money kept in these places do anything BUT just sit around.

I always find it funny when liberals complain about how rich people have all that money “just sitting around” in the bank.  Well, where do you think bankers get the funds to make loans?  See, all that money isn’t just “sitting around.”  It’s getting loaned out to people to start new businesses or buy homes.  It’s the ultimate irony for someone who praises this model to also praise Obama’s bank bailouts because an increase in savings would have done virtually the same thing without using taxpayer money.

I do like the FDIC and find it to be a valuable tool in our economy.  This office helps put faith in the banking system so that people will turn to it to handle their savings.  This allows those banks to loan out that money.  New loans are created and investors make more on interest; everyone wins.

Another article on the subject mentions that President Roosevelt initially rejected this model of economic recovery as being “too easy.”  The sad thing is that he was right.  He was right because this model doesn’t take one very important point into account: the value of the money being used.  See, the stimulus package cost $787billion and our nation didn’t have one red cent of it to cough up.  There are only three ways for a government to make more money, borrow it, earn it or print it.  Earn it is right out because the national debt divided amongst every single taxpayer in America already comes up to $113,066! Since that’s really the only way the government can collect a paycheck, it would be impossible for it to earn all that money, PLUS more to fund this bill.

So, we go to the next option, borrow it.  China and other nations have been buying our bonds for years and we owe them an astronomical amount.  Remember, treasury bonds need to be paid back WITH INTEREST!  What happens when China and these other nations stop buying our bonds?  Borrowing has become our lifeline and a cut off would mean the total collapse of our system.  It’s the same with our dependence on foreign oil.  If the OPEC nations found a way to self-sustain their economy they could cut off our entire flow of oil and completely paralyze this nation overnight!  This is why we MUST start to drill for our own resources right now, but that’s a subject for another post.  Also, what happens when these nations finally call our tab?  Wars could erupt over this kind of a fiasco!  You’ve seen how ugly it can get when one person borrows a large amount from someone else and never pays it back, lawsuits, fights and even horrible crimes can erupt.  Imagine if those two parties were OPOSING NATIONS!

So we move to option three, print it.  This is another option that Obama seems all too eager to use and it’s a testimony to his complete lack of economic understanding.  There are two facts about money that people always seem to forget.

1)      The value of money is only equal to the value it is perceived to have.

This is why the dollar started out on the gold standard.  Each dollar in the economy represented an amount of gold held by the treasury at Fort Knox.  Over time, we have printed more money than we have gold to back it up.  You know what a dollar represents today?  NOTHING!  It’s nothing more than a piece of paper with some ink on it!  The only reason a $100 bill is worth $100 is because the people of the economy perceive it to be!  How scary is that?!

2)      An increase of money into an economy lowers its value.

It’s a simple, common sense, fact.  The more readily available something is, the less valuable it becomes.  A tiny diamond costs thousands of dollars because you can’t exactly go dig up a few dozen of them in your back yard.  If you increase the number of dollars in the economy then those dollars will lose value and you’ve only made things worse.

The point I’m making here is that these are the ONLY three ways to increase the amount of money you have and none of them are capable of adequately producing the amount needed to fuel these stimulus packages without having DIRE consequences.

I’ve always been intrigued by the Christian story where Jesus fed hundreds of people with only five loaves of bread and two fish.  It seems that Obama actually thinks he IS the messiah because that’s exactly what he is trying to do.  He’s trying to boost an economy with money that doesn’t exist!  If we had the funds for the stimulus package then it might have worked but the complications that will arise from how we got the money will overrule the good it does in the economy!

We are seeing some positive results from the stimulus right now because the negative effects from how we got the money in the first place haven’t kicked in yet and probably won’t until the next generation takes the reins.  We are setting up our children for a bigger catastrophe than we are facing now!  I’m sorry to say it, but we’re going to have to get out of this the right way: spend less, save more.  It’s the model that has worked for every person or business’ financing since time began and it will work here.  It will take more responsibility and a lot of scraping by for a while, but we can make it work.  We owe it to our children to make it work.


4 Responses to “The Flaws of Keynesian Economics”

  1. 1 Noah February 2, 2010 at 5:02 am

    Well, you know we disagree. History says you are mostly wrong here. Depressions and recessions have come and gone all over the industrialized world over the past 100 years by way of this Keynesian theory. You are right to point out that Keynes and FDR initially butted heads but they eventually reconciled after the nation went back into a recession following the depression and he realized Keynes was right.

    You are also right that future generations will pay for this spending…just as we are paying for the spending of past generations now. Sadly that is what happens in today’s world. We are no longer self-sufficient farmers. As much as I would love to go back to those simpler times, its just not a possibility unless our economy completely crashes and we are forced to rebuild. My children will pay for the mistakes that I make with money, and their children will pay for theirs. Its a vicious cycle.

    • 2 freedomwatchnews February 2, 2010 at 5:12 am

      Also, Noah, you’ve said that my theories stated in this post are flawed but not how. How is it that these ideas won’t work? All you’ve essentially said is just that I’m wrong.

  2. 3 freedomwatchnews February 2, 2010 at 5:06 am

    So why not try a new way that DOESN’T leave a heavy burden for our children? There are other options.

  3. 4 simon December 21, 2010 at 3:31 am

    See the problem is intinsic value. keynesian economics is a progressive concept. Progressive socialist and communist do not realize that inherently these idealogies pre suppose thare is no such thing as intrinsic value. Which in turn devalues people, time, everything around us.

    They don’t understand socialism needs capitalism to make arbitrary values, like our dollar in it’s current use. An arbitrary note, with no intrinsic value.

    This is an instance where we have come this far inspite ourselves, not because of ourselves.

    keynesian theory is destroying our sovereign nation, thank you.

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