"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Wednesday, August 24, 2011

Classic Keynes, and Why the Credit Card Refutes Him.

As this video shows, modern Keynesians still believe what he wrote many years ago, that recessions are caused by hoarding.
Before we knock the poor fellow down, let's summarize his position.
He writes that:

Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.

Keynes considers this a big mistake. It might be true in poor countries, but in rich countries people have what is nowadays called disposable income. And they may not dispose of it, but rather hide it under the mattress.

This is very bad, because it means some goods will be made but not sold. The only thing that will make those tightwads spend their money is if they see great investment opportunities, [investment in the company being another way the employer gets his money back]. And in rich countries, great investment opportunities are
few and far between.

Bottom line, the richer the country, the more disposable income its citizens have, and the less likely they are to invest it. Thus they will hoard it. Meaning the employers will not make a profit, meaning they will have to lay off workers.

So we see the assumptions he makes here. First, that in a rich country there are few investment opportunities. Second, that few investment opportunities means very little investment. Third, that in a rich country people have so much more money than they can spend on consumer goods.

Put these all together and you see that in a rich country there will be a tendency for there to be so much money that not all of it can be invested or consumed. It will thus be hoarded. Which means producers will not make their profits, which means they will fire workers.

Thus with great wealth comes great unemployment.

So now we know what created our great recession, which has no end in site. It's everybody having so much money they just don't know what to do with it. Yes, that's the problem, says Lord Keynes. And the reason the recession is continuing is because we still have too much money, and still insist on hoarding it.

Everything we wrote till now is Keynes position, to be found in Chapter 3 of his book. Now for the knockdown, which is going to be really easy. He's saying that our problem is that we have too much money stashed away somewhere. Can there be anything more out of line with reality?

How much money do you have under your mattress? I bet you are not hoarding anything, but quite the contrary, deeply in debt. And if you think you are the exception, let's read this:

...according to the Federal Reserve Bank, Americans collectively owe $2.5 trillion in consumer debt – excluding their mortgages...Throw in another $14 trillion in home loans, and it’s clear we have a major issue with debt that won’t go away any time soon.

And this:

Average per household debt in the U.S., not counting mortgage debt, is about $14,500 -- especially noteworthy because before the 1930s, most middle and working class people had no major debts. Banks would not lend to them; they rented their homes and if they did own a house, it was paid for as it was being built.
Some 40 percent of American families annually spend more than they earn.
Average credit card debt among all American households is $8,400.
Average card debt among people who have at least one card is $9,205 -- triple what it was in 1990.

Lastly, let's look at this, which puts it all together:

Usdebtclock.org estimates total personal debt at $16.6 trillion, mortgage debt at $14.1 trillion, consumer debt at $2.5 trillion, and credit card debt at $848 billion...each US citizen, on average, owes privately $53,525. Adding the public and private debt together totals $117,181 per capita, or a total Debt/GDP ratio of 248%...

Finally, the unfunded liabilities of Social Security and Medicare are nearly $109 trillion, or about $352,000 per US citizen... That number alone is a Debt/GDP ratio of 745%...

And we are hoarding our money? When the average person owes $53 thousand dollars? When we owe the credit card companies alone close to a trillion dollars? What kind of incredible Bizzaro world are these guys living in?

This humble article doesn't talk about why Keynes' crackpot theory is wrong, where the mistaken assumptions are. We content ourselves with the easier task of showing that the real world is nowhere close to the one he is describing.

In other words, we haven't shown why his plane was doomed to crash, only that it has in fact crashed.

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