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The Unholy Alliance of John Maynard Keynes

The Unholy Alliance of John Maynard Keynes

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Published by Ron Hera
The decline of the U.S. economy is the logical outcome of Keynesian economics, which enshrines central economic planning and embraces central banking. The unholy alliance of the federal government, the Federal Reserve and Wall Street has all but eliminated capitalism and has transformed the United States from a burgeoning free market economy into a failing corporate state.
The decline of the U.S. economy is the logical outcome of Keynesian economics, which enshrines central economic planning and embraces central banking. The unholy alliance of the federal government, the Federal Reserve and Wall Street has all but eliminated capitalism and has transformed the United States from a burgeoning free market economy into a failing corporate state.

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Published by: Ron Hera on Feb 03, 2012
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03/29/2012

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Hera Research, LLC
7205Martin Way East, Suite 72Olympia, WA 98516U.S.A.+1 (360) 339-8541 phone+1 (360) 339-8542 faxhttp://www.heraresearch.com/
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The Unholy Alliance of John Maynard Keynes
By Ron HeraFebruary 1,2012©2012 Hera Research, LLCPerhaps the greatest modern champion of central economic planning was the20th century EnglisheconomistJohn Maynard Keynes.Keynes, who was a political socialist and for a time a central banker,advocatedthe idea that the government should play a large, activerole in the economy. Among theconsequencesof Keynes’ economic theories, whether intended or unintended,is the fact that Westerneconomies today are characterized by large, central governments, central banks and massive debts.According to Dr.Andrew Gelman,Professor of Statistics and Political Scienceat Columbia University,“the law of unintended consequences is what happens when a simple system tries to regulate a complexsystem.The political system is simple.It operates with limited information (rational ignorance), shorttime horizons, low feedback, and poor and misaligned incentives.Society, in contrast, is a complex,evolving, high-feedback, incentive-driven system.When a simple system tries to regulate a complexsystem you often get unintended consequences.”ProfessorGelman’s statement seems equally apropos tocentral banking.Government policies based onKeynesian theories andthe institution of central banking form a nexus of central economic planning. Control of the central planning process is a winner-take-all proposition for  businesses.In the U.S.,the result isanunholy alliance ofthe U.S. federal government, the FederalReserve (along with the largest U.S. banks) and the largest U.S. corporations. The logical chain beginning with Keynes’ fundamental idea that government, supported by a central bank, should play alarge and activerole in the economy sets the stage for a centrally planned economy and ultimately produces a corporate state.The U.S. economy is locked in a downward spiral of economic decline.By growinginsize, and byengaging in ever larger economic interventions, theU.S.federal government became itself a materialcause of the recession that began in 2007. By attempting to grow the economy through monetaryexpansion, i.e., consumer spending fueled by debt, the Federal Reserve destroyed savings and fueled aseries of disastrous economic bubbles, culminating in the housing bubble. At the same time, the largestU.S. banks engaged in recklesslending and high-stakes gambling on hundreds of trillions inover thecounter (OTC)derivatives.OTC derivatives, which amount to risky, largely un-backed wagers,were theroot cause of the “too big to fail” doctrine that has virtually bankrupted Western governments since 2008.By seeking ever greater influence over Washington D.C. and by seeking to generate higher profits bycutting production in the U.S., the largest U.S. corporations undermined theU.S.market and economy.The U.S. federal government did virtually nothing to preventthedestructivedevelopments becauseof theinfluenceofthe largestU.S.corporations.FollowingKeynesian economic theories, the policy response of the U.S.federal governmentto therecession that began in 2007 and of the financial crisis that began in 2008 was to expand the governmentfurther and at a more rapid pace. In other words,some ofthe root causes of the economic imbalances thatlead to the recession and financial crisis(the relative size of the government and the resulting economicdistortions)werecompounded. As a consequence, the so-called “double dip recession” in the U.S. that
 
©2012 Hera Research, LLC
2 began in the second half of 2011 will be longer and ultimately more severe than the economic downturnof 2007-2009.The Baltic Dry Index (BDI) indicates international shipping returning to crisis levels. Since the U.S. isthe world’s largest economy and has a large trade deficit, the BDI suggests that the U.S. is inarecession.
Leviathan: The Size of the State
Originallya sea monster referred to in the Bible and,indemonology,one of the seven princes of Hell, aswell asits gatekeeper, the nameLeviathanwas adopted by the Englishphilosopher Thomas Hobbes toreferto an artificial political order, i.e.,tothe institution of the state.Hobbes was concerned with thedistinction between individual rights and the powers of sovereign governments andhe elaborated the ideaof the social contract.Whenagovernment taxesits citizens, itimplicitlyasserts the right of thegovernment over the property rights of individualsand presupposes thatthegovernment can make better use ofeconomic resources than households,individual entrepreneurs,businesses and private investors.In theory,thegovernment’suse of economic resources accomplishes goals that privately owned businesses cannot, such as national defense or emergency response services, i.e., things that, by their nature,arenot economically productiveor profitablebut still necessary for society.In contrast,embarking upon idealistic projectssuch as“creating jobsor “expanding home ownership”encroaches onthe productive elements of the economy.However, governmentsareinefficient compared to privatelyowned businesses due tothe absence of competition. Further,the record of history suggests an inabilityon the part of central planners to make superior economic decisions.
 
©2012 Hera Research, LLC
3Government encroachment on the private sector, like a self fulfilling prophecy,often magnifiesthereasons whygovernment interventionwasoriginallybelieved to be necessary.For example, when theU.S. federalgovernmentbecameinvolved in education throughfederally guaranteedstudentloans, theresult was that the cost ofa collegeeducationrose towardsthe limit of what students could borrow andrepay during theircareerssimplybecause the loans were guaranteed by the government.The guarantees produced more and riskier loans, larger loans and higher education costs.When the U.S. federalgovernment promoted home ownership for minorities and the poor,mortgage loanguarantees resulted in higher home prices andcontributed tothe sub-prime lending debacle where banksoriginated loansto unqualified borrowersin order to sell themto government sponsored entities (GSEs),i.e., toFannie Mae and Freddie Mac,andto investors as collateralized debt obligations(CDOs)and other mortgage backedsecurities (MBS).Bankswerecertainlyto blame for knowingly making bad loans, which isfraud, but theconditions thatmade the problem possible existedsubstantiallybecauseofgovernmentinterventionin the housingmarket, i.e.,opening the door tofraud was an unintended consequence of policies intended to increaselending to unqualified, low income borrowers.Of course, theU.S. federalgovernment did not compellenders to commit fraud, thusaccountability for the U.S. mortgage disaster is shared by the federalgovernment, which interfered with the free market, pursued misguided policies and failed in terms of regulatory oversight and law enforcement, and by banks, which engaged in widespread mortgage relatedfraud.Governments redistribute wealth and manipulate economic activity throughtaxes, subsidies, guarantees,regulations and so forth,buttheydo notproducenewwealth.Government spending may be for good purposes, or at leaststem fromgood intentions,butitunavoidablyfavors businesses with close ties to thegovernmentover those that are taxed butthatdo not benefit.Despite the theoretically higher moral purposes ofloftygovernmentundertakings,governmentprogramsthat overlap the private sectordiverteconomic resourcesto businesses that have the favor of politiciansminus the cost of government,thus producing economic distortions and a net loss of wealth for society.The Rahn curve is an economic theory proposing that there is an optimallevel of government spending,15% to25% ofgross domestic product (GDP), tomaximize economic growth.

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