"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

Tuesday, November 29, 2011

Steve Keen as Santa Claus

Steve Keen, an Australian [not Austrian] economist, has a great idea to save us all. Bring in a Santa Claus with a big bag of money and hand out cold cash to everyone.

Sounds like a great idea, no? Over at mises.org, someone asked about it, and I quote his q in full:

Steve Keen gave an interview on Hard Talk a few days ago in which he called for a "modern debt jubilee" where the government "gives money" to the citizenry who are required to use it to pay mortgage debt if they have any, and can spend it however they wish otherwise. He claims this is the way we can avoid the  "grinding twenty years" and associated social unrest needed to unwind the current global mess. He doesn't give any numbers, just the concept and qualitative arguments for it.

I have a lot of respect for Austrian economics, what little I know of it. I wonder if a learned Austrian could comment on the wisdom or folly of Keen's proposal. I can imagine it would be politically very popular with voters.

His explanation of the plan starts at about 7 minutes into the above You Tube video.

What can I say? That Santa Claus is really a Grinch in disguise. Here's my answer to his q:

You don't have to know much AE to see the folly of this scheme.

Let me paste a bit from my blog about what money is:

How does one make money? By working. In other words, you only have money  if you have first produced something worthwhile, which is what working is . After you have done your share, being productive, then you get money. The money in your wallet allows you to go out there and reap the rewards of your productivity, by consuming what you want. 
The point of this obvious little exposition is that before you spent any money, you have contributed to the wealth of the nation by producing something. Otherwise you wouldn't have the money to spend.
In short, having a dollar in your wallet is at once a Certificate of Productivity [a proof that you actually contributed to the nation's wealth],  and a License to Consume [which is why we want money in the first place, to spend it]. Your consumption will not reduce the wealth of the nation, because you have already increased the wealth [by working for the money] before you ever took any wealth for yourself [by spending the money].
But what happens if the supply of money is increased? This means, in practice, that the govt prints new money for itself, either paper money or digital money. They are giving themselves a License to Consume with that new money, but it certainly is not a Certificate of Productivity. They did not contribute anything to the economy to get that money; they just printed it up for themselves.

So what happens if we do as Keen suggests? Without having produced, everyone will go out and consume. It will be like a plague of locusts hit the country. There will be little left of anything. Prices will then naturally go up, by the law of supply and demand.

After the initial spending binge, we will be worse off than before, because there will be less to go round. Every day will be like Black Friday, with people fighting in the stores over what little is left.

Now there might be one earthly place we can look to salvation in such a situation, and it's called China. Maybe they will be stupid enough to take our piles and piles of dollars and sell us things in return. After all, they have been doing it for years. But if our economic policy is going to be "Let's pray the Chinese keep on playing the fools", then we are being fools ourselves.

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