Spengler is not optimistic (II)
Even if you don't agree, this is some of the best policy writing you will read:
"Even some of the bitterest critics of the Obama administration and Keynesian economics in general hailed the coming 'V-shaped recovery'. American consumers, right after suffering a US$6 trillion loss in wealth in the form of household equity, and right before the greatest retirement in American history, decided that they did not have to save after all. The savings rate fell and consumer spending rose.American corporations in the S&P 500 index stripped down to skeleton staffs and stopped investing,and declared a 60% rise in profits between the second quarters of 2009 and 2010. And the latest employment data show real improvement in the labor market.
It was Keynes' "money illusion" writ large. Inflate the currency, and the workingman will still see the same number of shillings in his pay packet,Keynes wrote at the beginning of his 1936 General Theory. Inflation thus will stimulate economic activity. This crude example illustrates a broader principle that might be called "wealth illusion":reduce the yield on low-risk investments to almost nothing, and investors will have to shift portfolios to riskier assets, stimulating investment and hiring.
As a closed-economy, short-run model, Keynes' approach has had two quarters of real success, and it behooves the Keynesians to declare victory and go home, as a Vermont senator proposed during the worst of the Vietnam War. After the sovereign debt crisis erupted in Greece and spread globally - to the surprise of this writer as well as every forecaster he knows -the Keynesians must feel a bit like the hero of Pushkin's story The Queen of Spades, who plays cards on the advice of a ghost, only to win the first two rounds and lose everything on the third. One can imagine Lawrence Summers going as mad as Pushkin's gambler: 'He is in the Obuhovsky hospital, room Number Seventeen; he does not answer any questions, but keeps muttering with astonishing rapidity: 'Three, seven, ace! three, seven, queen!'""
Read on .
"Even some of the bitterest critics of the Obama administration and Keynesian economics in general hailed the coming 'V-shaped recovery'. American consumers, right after suffering a US$6 trillion loss in wealth in the form of household equity, and right before the greatest retirement in American history, decided that they did not have to save after all. The savings rate fell and consumer spending rose.American corporations in the S&P 500 index stripped down to skeleton staffs and stopped investing,and declared a 60% rise in profits between the second quarters of 2009 and 2010. And the latest employment data show real improvement in the labor market.
It was Keynes' "money illusion" writ large. Inflate the currency, and the workingman will still see the same number of shillings in his pay packet,Keynes wrote at the beginning of his 1936 General Theory. Inflation thus will stimulate economic activity. This crude example illustrates a broader principle that might be called "wealth illusion":reduce the yield on low-risk investments to almost nothing, and investors will have to shift portfolios to riskier assets, stimulating investment and hiring.
As a closed-economy, short-run model, Keynes' approach has had two quarters of real success, and it behooves the Keynesians to declare victory and go home, as a Vermont senator proposed during the worst of the Vietnam War. After the sovereign debt crisis erupted in Greece and spread globally - to the surprise of this writer as well as every forecaster he knows -the Keynesians must feel a bit like the hero of Pushkin's story The Queen of Spades, who plays cards on the advice of a ghost, only to win the first two rounds and lose everything on the third. One can imagine Lawrence Summers going as mad as Pushkin's gambler: 'He is in the Obuhovsky hospital, room Number Seventeen; he does not answer any questions, but keeps muttering with astonishing rapidity: 'Three, seven, ace! three, seven, queen!'""
Read on .
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