Time to end the Keynesian pretense about fiscal stimulus

September 19, 2011

“The U.S. can pay any debt because we can always print more money.”

–Alan Greenspan
Meet the Press

August 7, 2011

Last week, Nouriel Roubini released a paper, “A Radical Policy Response to the Rising Risks of a Depression and Financial Crisis.” He writes: “Data suggest that developed and emerging markets alike are heading for a massive slowdown in growth, with advanced economies already slumping to stall speed.” Roubini is right, but for the wrong reasons.

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

First, when Roubini, Posen et al call for additional fiscal stimulus, we need to ask them why. The vast fiscal stimulus already attempted in the US failed miserably in terms of creating permanent jobs. More fiscal stimulus funded with debt will not generate real growth. Remember the idea of public deficits “crowding out” private investment? Huge public deficits actually kill private investment and increase inflation, but you will never hear the neo-Keynesians admit to it.

Second, when Roubini and Posen call for the Fed and the ECB to run the monetary printing presses, what they are saying implicitly is that the excessive debt currently killing growth in the industrial nations cannot be repudiated. To the point made in my earlier post on Roubini, we should no longer speak of “capitalism,” but instead of the tyranny of the fascist creditor-technocrats and their captive economists. While Greece faces seemingly inevitable default, many economists continue to believe that avoiding deflation in the larger industrial nations is the chief policy goal. Here again they are wrong.

Years ago, as an earnest young staffer for Congressman Jack Kemp, I expressed worry to my father Richard J. Whalen over the mounting federal debt. An adviser to several presidents and Fed chairman, he looked at me and smiled. “The duty of this generation is to pass the bubble onto the next generation, intact,” he quipped, reflecting the mainstream view in the US today. But as the quote from Alan Greenspan suggests, inflation is the sure result of this strategy. And deflation is the cure.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

Printing money and deficit spending hampers private credit creation. Higher inflation scares private investors and business leaders who refuse to hire new employees and invest in new capital stock. Fear of inflation is driving private capital flight into gold and other non-dollar assets. If the Fed wants to boost the US economy, then it should swear-off further monetary ease, raise interest rates gently, and provide ample volumes of credit to solvent banks.

Roubini is entirely right to focus on providing capital and liquidity to solvent banks, but he does not go far enough. Try this instead: restructure Bank of America and other insolvent US and EU banks and government agencies; Sell bad assets to solvent banks and private investors; Raise new private and public capital to create new, private financial vehicles to support leverage and new credit creation. Think of US Bancorp becoming the largest lender in the US as the zombie banks wither away.

The citizens of the US and EU states need to reject the siren songs of economists who wrongly advocate more debt-funded spending and inflationary monetary expansion. Only by restructuring bad debt, cutting public deficits and limiting the monetary policy caprice of the Fed and ECB can we create a sustainable environment for economic growth. Indeed, the one sure way to ensure the collapse of the fiat dollar system and the return of the gold standard is to follow the advice of Roubini, Posen and Krugman when it comes to monetary and fiscal policy.


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The MMT’ers might think you don’t understand the system.

Posted by coralbay | Report as abusive

finally – someone speaks the truth

Posted by antifed | Report as abusive

All is going according to plan. America was the hog for too long. The redistribution of America’s jobs, wealth, and resources to the four corners of the world is a humanitarian effort propagated by the 100 or so of the most powerful people in the world. After the world’s economies are forced between a rock and a hard place they will acquiesce to a one-world currency managed by one central bank. Afterward, can a one-world government be far behind? The Elite see this as doing the world a favor. The seeming ruination of America’s established order is simply viewed as (chose your metaphor) the needs of the many outweighing the needs of the few, to make an omelet you have to break a few eggs, or the Robin Hood effect. Naturally America’s middle class are unwilling participants in this game, but emerging middle classes in developing Nations aren’t shedding any tears for the loss of America’s middle class.

Posted by GLK | Report as abusive

Thanks for speaking the truth.

Posted by zotdoc | Report as abusive

Christopher Whalen, Where are your mathematical facts?
Keynesian economics helped the USA win WW II with our allies, helped in building our fantastic Interstate highway system, our magical Space program-NASA/NOAA/NESS, and many more beneficial programs.

Keynesian economics worked until Reagan, Bush Sr., and bush jr. began dismantling it with “deficits don’t matter”–“supply side-trickle down economics”–“excessive tax cuts for the rich and very rich individuals and corporations”–“massive increases in the national debt”–and their narrow minded ideology of totally unregulated capitalism that let the “Housing Fraud Bubble” grow without any restraints. That bubble burst, resulting in the almost financial market collapse and then the Great Recession.

National debt:www.lafn.org/gvdc/Natl_Debt_Chart.h tml

The after effects of the almost financial market collapse is at:
http://www.lasvegassun.com/2011/jul/19/r epublicans-push-country-toward-precipice .

In addition to the info. at the above link there are
millions of home lost to foreclosure, millions more facing foreclosure, and millions of homeowner’s underwater in their homes. www.lafn.org/Natl_Debt_Chart.html

Posted by ghostcommander | Report as abusive

You lost me after “Government intervention is the root cause of the financial crisis and the maladies identified by Roubini.” I think you could use a recent history lesson. This financial crisis was well under way before any government intervention. Also, this financial crisis was in free fall until the government intervened a la Bush, then continued under Obama. Polling a minority opinion of professionals is why we are the only developed country in the world that can not accept global warming.

Posted by smarcus | Report as abusive


Who loaned the money for the real estate bubble? And are those entities public or private? If you want to live in a utopia, I suggest Cuba or Venezuela, where a central planner can act without worry on pressing issues such as global warming and financial catastrophe.

Posted by Byanyothername | Report as abusive

Many people in their 60’s and older have worked hard and saved their whole lives. They are too proud to complain, but riduculasly low interest rates and fear of inflation are ruining the last years of their lives. I will never forgive our government or the Fed for what they are doing to these people. Good article.

Posted by minipaws | Report as abusive

Blame it all on Keynes and his followers! Amazingly convenient logic. Thirty years of pumping by the Friedmanites and the von Mises economists and you blame Keynes!!!Let’s start by levying the taxes that the rich should have been paying all these years and then let us take a look at the deficit.

Posted by Biscayne | Report as abusive

Umm no, the rich have paid plenty in taxes.

In FY2008 the top 50 percent income earners paid 97+ percent of all taxes. And the top 5 percent paid MORE after the vilified Bush tax cuts back in 2002.

This ‘spending to prime the pump’ garbage has been tried so many times ( not just by the US, see Japan in the 90s ) it amazes me people still think it has merit.

Oh yeah, there is still NO proof of AGW. Zero. Stop calling opinions SCIENCE because it isn’t.

Posted by DavidM01 | Report as abusive


1) Keynes did not get us out of the great depression. His econonmic model actually prolonged it.
2) Do you understand Keynesian economics at all? It had nothing to do with the space program, NASA, NOAA or anything else. For all of his lameness with “aggregate demand”, at least Keynes expected the government to “pay back” any outlays during a downturn – this has *never* been done.
3) We’ve undergone 40+ years of living beyond our means. Period. Our economy can only take about a 17-18% combined tax rate – yet we spend beyond that (we’re spending 24% now). Blame it on Reagan? Hogwash!

YOU expect too much from government and *I* DO NOT WANT to pay at the required rate for you to get your goodies…

18%…that is all you get

Posted by not.progressive | Report as abusive

Knowing and speaking the truth is only the first step in acting upon that truth . . . which WILL set you free.

Posted by rbblum | Report as abusive