We are seeing the end game played out over and over in different cultures all over the world. There is one thread of similarity. All of them have practiced Keynesian economics for decades. The belief that more government spending and bigger government to solve society ills has degenerated into a stagnant economy with no growth and in many parts of the world it’s unsafe to walk down the street.
Riots have taken place in “civilized” first world countries. Spain, Italy, Greece, even France and England. Unemployment in some of them is over 20%, and for younger people that have never been hired it can be significantly higher. Even in America, we have seen mini-riots with the Occupy Wall Street crowd and in places like Wisconsin and Ohio that have tried to undo years of bad economic policy. The Arab spring was caused more by economics than it was anything else. An educated populace had no place to work, and no underlying economy to create jobs.
If you don’t understand the technical differences between the Keynesians and the Classical economic principles, you surely have heard iconic words and seen them practiced. You just didn’t realize it. “Prime the pump”, “government stimulus”, “government investment” are typical phrases used to easily translate Keynesian policies. This is just government allocating its resources to different projects. Governments cannot invest. They are not bound by the same constraints as private business.
Classical economics principles rely on the private sector to jumpstart and drive economic growth. Instead of spending money to prime the pump, they adjust tax policy and regulatory policy to change the incentives in the broader economy. Businesses, and people respond to those incentives. Because classical economists see most government spending as relatively useless, they are called “heartless”. The fresh water economists would slash government spending. Since most government spending is on social welfare, the politicians and bureaucracies that benefit from that spending go on a vicious attack.
The problem is that eventually the socialist/Keynesian school runs out of other people’s money to spend. They can’t raise taxes high enough, and the market forces them to pay ever higher interest rates to access public markets. When governments increase spending, businesses cut back. The net present value tables always catch up to them.
At this point in the cycle, they generally have created a situation where there are haves and have nots. Forced to cut spending on the people that receive a government check, those people riot. In Rome, Italy the streets are becoming unsafe.
The killings were “an offence to the Eternal City” and risked turning the Italian capital into “an immense favela where shoot-outs happen as they did in the Wild West,” said La Stampa, one of the country’s most respected daily newspapers. “In one year, Rome seems to have spun out of control.” The violence has spread from the graffiti-clad sink estates on the outskirts of the city to the tourist-friendly piazzas and cobbled streets of the centre. Last year there were two murders and seven kneecappings in Prati, one of the city’s most upmarket areas, lying not far from the Vatican.
Many of the killings have been well organised hits carried out in broad daylight, with few of the culprits caught, spreading fear and trepidation among the city’s nearly four million inhabitants
There doesn’t seem to be a transitional period for this base human behavior to occur. One day things are fine, the next you fear for your life.
When Keynesian economics are practiced, poverty and lower standards of living take hold. I have spoken with college students that spent time in Spain. Every evening people would be scouring city dumpsters looking for morsels to eat. When Oprah visited middle class people in
BelgiumDenmark she asked, “Where’s all your stuff?”. The answer is they don’t have any stuff. They can’t afford it.
When governments ramp up their debt loads and ramp up the amount they spend on government programs, there is only one outcome. Eventually the merry go round stops. People get off and look at each other. Some have enjoyed the ride. They either built a business and got rich, or they used crony capitalism to insulate themselves and are well off. The rest of the poor saps are stuck with nothing. They have to survive, so basic human survival instincts take over.
That is the danger of accumulating so much debt. We are starting to see it played out in various economies throughout the world. Unless America changes it’s ways, or we get a huge upsurge in economic growth that will placate the debt for the short run, we are on the same miserable trail to nowhere.
Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.
- Keynes was right? (cafehayek.com)
- Woody Allen vs. John Maynard Keynes, or Keynesian vs. Keynesian (opinion.financialpost.com)
- The biggest battle of 2012 (politico.com)
- Keynesianism And Big Government (thinkprogress.org)