Punchinello’s Chronicles

August 13, 2010

Keynesian Economics and Family Budgets

You’re going to be hearing more and more over the next year or two about the “failed policies of Keynesian economics.” Sadly, and like the word “capitalism,” the reality of what we’re seeing bears little resemblance to the truth. How is it that something seemingly so ridiculous as spending ourselves into prosperity could have won a Nobel prize? Especially back when that prize really and truly meant something? The answer is that the alleged theory is a fantasy, made up by crooked politicians. The actual theory isn’t wrong, it’s been entirely co-opted for an agenda.

I’m not an economist. I didn’t finish college. What I did do is come to the realization that learning something is an ongoing process, usually continuing throughout one’s life. Unlike so many of today’s secondhanders, I like to test my own knowledge, compare it with new observations and new ideas and see whether or not my “belief” system holds up as well as a set of convictions. Beliefs are feelings; convictions are based on convincing evidence. That evidence can (and should) consist of both sensory observation AND logical analysis.

When my existing knowledge doesn’t match reality, then I want to know why. If I have to actually read things, talk with people, research information and THINK about it, then that’s what I’ll do. The result is that I actually have new knowledge now, understanding things I didn’t understand back when I would have been in college. Oddly enough, it’s been my observation that many people rest their entire view of reality on knowledge they gathered decades ago. They haven’t learned a single new thing, and more frightening, they have no intention of learning anything new!

Not being a college-educated superstar, I’ve been told all my life that macro economics aren’t at all the same as micro economics. BIG economics involving states and countries has nothing whatsoever to do with little economics like mine or yours. If I couldn’t accept this or even understand BIG economics, it’s because I didn’t get a degree in economics. In fact, Representative Pete Stark (D-CA) made this abundantly clear only a few months ago.

An ocean liner isn’t at all the same as a rowboat, we’re told. They have no relationship with each other; none whatsoever. But is that true? Only if we wipe out the subsuming set of information about boats. When we examine the fundamentals, both boats will float on water and can be used to transport people and/or goods across bodies of water. An ocean liner moves way more slowly than a rowboat, when changing direction, but it can carry way more “stuff” than a rowboat.

That being said, if an ocean liner sinks, it goes to the bottom of the ocean. If a rowboat sinks, it too goes to the bottom of the body of water. Sadly, when the ocean liner sinks the consequences are vastly more significant than when a rowboat sinks. We’re told that the more water we pour into the hold of an ocean liner, the better it will float. Conversely, unless we start filling our individual rowboats with water soon, all the world’s ocean liners will sink.

Does that make sense? Apparently it does in Washington, Athens, London, Tokyo, Beijing, and every other rat’s nest of political leadership we call national capitols.

There certainly are differences of scale between a nation’s economics and your family’s budget. But those differences are in size only. They’re NOT differences on a fundamental level.

Let’s say that you’re married and have two children. The adults in the family are in their 40s, and the kids are in their teens. You and your spouse have had a lifetime of experience in the job market. That market consists of anyone and everyone who wishes to exchange something of value. In the job market, the value is work in exchange for money.

You’ve clearly learned that the job world ebbs and flows. Sometimes you’re working, other times you’re not. Sometimes you have a lot of money coming in, other times less money coming in. And you might remember a famous story about the Ant and the Grasshopper, which is a metaphor symbolizing the idea of using abundant times to prepare for lean times.

In the old days, people well-understood the idea that in the spring you worked very hard to plant crops. In the summer, you worked very hard to tend those crops. You hoped and prayed for enough rain to make the crops grow, but not so much as to drown them. In the fall you worked hard to reap what you had sewn. After the harvest, you sold some of the crop and put some aside for food, together with the money you gained in the market. Winter was “dead time,” and unless you had money and food, you would be in big trouble.

People understood cycles much more directly, back then. They didn’t have supermarkets providing strawberries in winter, bread at 2 o’clock in the morning, and meat that came in plastic trays. If you were hungry, you had to cook whatever food you had in your home. You couldn’t just go out and pick up a quick burger or some tacos. When it rained, they either got wet or had to stay inside. Cycles of life included birth and death, planting and harvesting, growth and decay, heat and cold and all the other cycles of nature.

John Keynes grew up in those old days. He wasn’t an idiot. He clearly understood cycles. As such, he proposed that any society, large or small must take a portion of abundant revenues during good times and set them aside as a “bank” to be used during lean times. Do you hear about that? No, you don’t.

Here’s where things get crazy, though.

Let’s suppose you lose your job. Even if your spouse is working, you’ve now lost either all your income or half your family income (revenue). At that point, you make certain assumptions. One of those assumptions is that you’re going to get another job within about 3 months. You might decide to change careers entirely, in which case you’re going to have to finance re-education or start over in a new field.

What do you do about your bills?

Back in the old days, people understood that they might have a shortage of cash and income. And so they put some money in savings accounts, under a mattress or into some kind of investment portfolio. They held money in banks, gold, silver or revenue producing assets (like rental properties). They kept this money as an emergency fund in order to tide them through until they had money coming in again.

Nowadays, we live an entirely different concept! We don’t set aside savings, we get more credit cards! And that’s where the Keynes theory of economics has been stolen and completely derailed by modern politicians.

Stipulate for the moment that the job market is working and that you could actually get a job within 12 weeks, instead of the 39 weeks that’s more the case today. Suppose you don’t have any savings? Suppose your bills are WAY beyond your ability to pay them in cash? What’s the solution?

What people think Keynes was proposing is that you use credit cards to live for 3 months. After all, it’s not THAT much money to put on the cards, right? And yes, there’ll be an increase in debt for the short term! But during that time, the money you’re borrowing is going for gas, job applications, interviews, rent, food, and the bare essentials!

Another assumption that nobody uses anymore is that when you DO NOT HAVE MONEY then you CUT WAY BACK on your spending! You live at the most basic level, spending only what you absolutely must spend. You honor ALL your obligations, but work out ways to keep as much cash as you can until you get back to work. Who does that anymore? Nobody.

What Keynes suggested was that the government should act in a similar fashion to the adults in a family. Right there he was screwed, because today we don’t have many adults left. The majority of people are living in arrested development, and almost the entire political class is definitely in arrested development. Somewhere around the mentality of a 14 year-old.

Both Keynes and Ludwig Von Mises (Keynes’ main alternate theorist) accepted that there would be lean times and times of abundance. Where they disagreed was in what to do about those cycles. Von Mises said to leave things alone and let time, nature and public effort handle it. Keynes wanted the national government to “even out” the peaks and troughs of those cycles.

You and Mr. Keynes would probably agree that it was “okay” to go into a slight amount of debt in order to keep “approximately” a similar lifestyle during the “short period of time” between jobs. Additionally, you and Mr. Keynes would likely agree that having a savings account to dip into INSTEAD of using a loan would be better.

As such, Keynesian economics suggests that when the economy is doing well, the government should set aside a portion of its revenues (income from taxes). That money set aside should be then used to “stimulate the economy” when the cycle was in a recession…a downturn.

On the outside chance that a recession would last longer than the amount of money set aside, then the government should borrow money to keep things going. The major assumption was that “it’s okay to demand that people keep their same lifestyle, regardless of whether or not they have an income to support that lifestyle.”

Von Mises didn’t agree. He proposed that whatever income we have, that’s what creates and pays for our lifestyle. If our income drops, then our lifestyle consequently gets reduced. If our income goes up, we can either invest the extra or improve our lifestyle. Either way, it’s up to each individual as to how they’re react and respond to economic cycles.

John Keynes and his theories became the leading “system” for government spending. Mostly because Keynes wrote in English, while Von Mises wrote in weird languages like German. But the truly outrageous problem is that politicians took the spending part of the theory and ran with it, totally ignoring everything else.

What we see today is a perfect replication between government finances and family finances. Just as the government can print money by issuing treasury notes and bonds, individual citizens can now print money by opening up a credit card account.

In exactly the same way citizens have borrowed huge amounts of unsecured debt, using nothing but their word of honor that they’ll pay it back, the governments of the world have issued massive amounts of sovereign debt. The reason national governments have spent money decade after decade, administration after administration all comes down to one delusional belief:

If we spend money to keep things going today, we’ll pay back what we spend in the future when “things get back on track again.” This will only be for a little while, and we’ll use the surplus from a great economic cycle to pay off the debt. Therefore, Debt is Good!

The tiny little part that’s missing is that they leave off the “infinite.” In other words, the truth is that Infinite Debt is NOT the same thing as short-term debt! You and I would agree on that, but apparently in Washington, infinite debt never happens. If you and I object, we’re told we’re too stupid to understand the finer points of complex economic theory.

There comes a time when we realize we’re not going to get another job. We’re not going to get “back on track.” Things are NOT going to “be the way they used to be.” We realize that we live in a changed world. At that point, we had damn well better discover that we didn’t “extend” our debt borrowing for too long, “pretending” that everything would somehow work out in the end.

That time is now. Families have run out of money, can’t get jobs, and there’s no more borrowing to be had. Spending more money solves nothing. Either getting work, creating work, or cutting our lifestyle is the only solution. Just so, the world governments have run out of money. They just print more, then tell us that fake money is the same as real money. Do you agree?

We’re done with “the old way.” Things are never going to return to that happy time. Without a total make-over, returning to the fundamentals of reality, we’ll just continue to descend further into madness, extending and pretending until at last there’s nothing left. But it wasn’t Mr. Keynes who proposed all that. It’s the politicians who “somehow” neglected to define the concepts of short term debt, savings accounts, and variable spending according to the natural cycles of the economy.

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