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Thread: Why Keynesians are idiots and why artificially controlling interest rates leads to misallocation

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    Default Why Keynesians are idiots and why artificially controlling interest rates leads to misallocation

    Keynesians live by the philosophy that lowering interest rates will increase aggregate demand thereby increasing consumer spending and driving up employment. And while this is temporarily true(stock markets are booming, employment is up. Yet the primary indicator that all Keynesians are taught to judge the strength of the economy(GDP) is stalling.

    First thing to notice is that Keynesians tend to define inflation as an increase in pricing. And as noticed in the CPI the prices haven't necessarily skyrocketed as some Austrian economists have predicted. The problem with this is that there is a flaw in the definition of inflation, and this is noted in the stark differences between traditional Keynesian and Austrian definitions of inflation. While Keynesians tend to define it as an increase in pricing, Austrians tend to define this as simply an increase in money supply. There are many reasons that prices aren't changed as much by an increase in the money supply... the one that is thrown out so often is monetary velocity. Monetary velocity is the rate at which money is exchanged from one transaction to another. So if the bills aren't in circulation at the rate that they were prior to the increase in the money supply, then the prices won't increase. Financial institutions often sit on the money, which prevents it from entering circulation. While this is the reasoning that is often talked about, there is another one that often gets hidden behind the bullshit, and to me this is the primary reason that a credit economy flat out inferior to that of a savings based economy. When Austrians speak of a mis-allocation of resources and hence a bubble, they often speak on the production side. If suddenly as a business you know that there is going to be a sustained amount of liquidity present in the market place, one does not raise prices but instead increases supply of their product. So businesses start overproducing goods in order to accommodate the increase in demand. Since the economy is running based on credit, the longer the demand is present the further individuals go into debt. Over time the economy has to make it easier and easier to get credit in order to sustain the increased supply in order to prevent it from going into recession. If the demand collapses, all these businesses are stuck with this cock hanging out and nobody left to give it a tug. And this is pretty much what's starting to happen now. The next 5 years are going to be quite painful to watch.
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    I think most Keynesians prefer fiscal policy vs monetary policy, but since the monetarist revolution this has become basically impossible. No western country uses fiscal policy to adjust the macroeconomy in the same way they use monetary policy (mainly because rich people hate being taxed or having their assets devalued). Keynes himself would not have responded in the way that most western states (especially the Anglo-saxon model countries) did.

    The response to the crisis on both sides of the Atlantic was, as you described, crashing interest rates (and quantitative easing), which we basically can't do again without going into negative interest rates. The Euro's on a 0.000% interest rate. The Pound is down to 0.2500% (and this despite speculation it would drop to 0.1000%). US Dollar is 0.5000% but still some suspicion it will fall again. We don't have much reserves left, so monetary expansion is not something that can happen again, I think. Something is going to change, just a matter of when. Probably the response to the next economic crisis will be something that we've not seen before.

    Now that being said, your post does not show that Keynesians are idiots, because the response to the crisis that you're talking about came almost all from Monetarists in the central banks using monetary policy, and neither does it show that artificially controlling rates causes misallocation. The Austrian business cycle theory has been quite vigorously opposed on empirical grounds that what Austrians described... didn't actually happen. I can't tell if your post is meant to be an explanation of ABCT or a challenge to debate it or what.

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    Quote Originally Posted by totalize View Post
    I think most Keynesians prefer fiscal policy vs monetary policy, but since the monetarist revolution this has become basically impossible. No western country uses fiscal policy to adjust the macroeconomy in the same way they use monetary policy (mainly because rich people hate being taxed or having their assets devalued). Keynes himself would not have responded in the way that most western states (especially the Anglo-saxon model countries) did.

    The response to the crisis on both sides of the Atlantic was, as you described, crashing interest rates (and quantitative easing), which we basically can't do again without going into negative interest rates. The Euro's on a 0.000% interest rate. The Pound is down to 0.2500% (and this despite speculation it would drop to 0.1000%). US Dollar is 0.5000% but still some suspicion it will fall again. We don't have much reserves left, so monetary expansion is not something that can happen again, I think. Something is going to change, just a matter of when. Probably the response to the next economic crisis will be something that we've not seen before.

    Now that being said, your post does not show that Keynesians are idiots, because the response to the crisis that you're talking about came almost all from Monetarists in the central banks using monetary policy, and neither does it show that artificially controlling rates causes misallocation. The Austrian business cycle theory has been quite vigorously opposed on empirical grounds that what Austrians described... didn't actually happen. I can't tell if your post is meant to be an explanation of ABCT or a challenge to debate it or what.
    Well many state that the Austrians are wrong because we haven't had skyrocket inflation, but this only fits into a certain group of Austrian theorists. There is quite a bit of capital that is being sat on currently(a big chunk of it has been exported), but it'll start flowing into the system if they ever raised interest rates. They are pretty much setting up a stagflation scenario. When the unsustainable demand dies down, growth will fall.... prices will probably even fall a bit, but that won't last. Eventually the price drop will stop and even start to go up.. and we're going to have negative growth into inflation.
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    Quote Originally Posted by Hitta View Post
    Well many state that the Austrians are wrong because we haven't had skyrocket inflation, but this only fits into a certain group of Austrian theorists. There is quite a bit of capital that is being sat on currently(a big chunk of it has been exported), but it'll start flowing into the system if they ever raised interest rates. They are pretty much setting up a stagflation scenario. When the unsustainable demand dies down, growth will fall.... prices will probably even fall a bit, but that won't last. Eventually the price drop will stop and even start to go up.. and we're going to have negative growth into inflation.
    The main thing about the Austrian Economists is that they aim for truisms over predictive accuracy in the moment. For example, they can tell you *if* a given system will collapse, but there is no way in hell they can give you an accurate date and time as to the occurrence of the collapse. Ludwig Von Mises himself refused to be the head of the Austrian Central Bank when offered the position because "A great crash is coming and I don't want my name anywhere near it." He *knew* it was all going to hell, but he was humble enough to know that there was no way for him to know exactly when it would happen but the odds were high enough that it could happen on his watch that he refused the very prestigious and powerful position of resident Head Central Banker.

    The main problem with Austrian Economics (and I say this as an avowed Austrian Economist who really does think that Market>Government) is that its base ideology was formed during the dawn of the Industrial Revolution. The economists at the time never dreamed that "Capital" (i.e. the actual factories, computers, ect.) and labor (thank the internet for making "remote development" possible) would be absolutely mobile. For them, a "British" factory could be built anywhere from London to Dublin and anywhere within the borders of the UK, but there's no way in fucking hell it'd be built in Beijing. The workers available for the factory would likewise be necessarily the local "British" population". Just like there's no way a Toyota factory could ever be built in Detroit instead of Osaka and also employ Americans instead of Japanese people. Given the realities of the time these ideologies were developed, the cost of doing that shit would be so high as to make it utterly impossible on its face. Nowadays? Well, what are we seeing as the status quo? Yeah, that which I just said was supposed to be impossible. The old theories do not and cannot account for that. Thus, we need new ones and they are not in accordance with hardcore free market ideology.

    I love freedom and all, but, well, I get how times change. Once gunpowder became a thing that meant the end of bows and swords. Guns are just plain better, ya gotta deal with it or die off. Absolute Free Markets are nice and all, but given human nature they just aren't optimal. They benefit the elite at the cost of sacrificing the common man who just wants to raise a family. That's the most victimized class of people in the world currently, yet ya never hear about it because that means you're an evil Patriarch if ya feel that way. And ya wonder why so many nice people are joining common cause with Neo-Nazi groups... Intolerance breeds intolerance y'know, if the left really wanted to make the world a better place they'd stop being so hardcore but I guess they just never learn from history. Just like damn near everyone else I talk to. God DAMN they are *so* fucking ignorant .

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    what are your views on the concept of flexible accumulation (jointly with the concept of inclusive capitalism)?
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    Quote Originally Posted by kalinoche View Post
    what are your views on the concept of flexible accumulation (jointly with the concept of inclusive capitalism)?
    I don't know what those terms mean but hell, why not, let's shoot from the hip!

    Flexible accumulation sounds like being an international stock broker. In regards to that there isn't much to argue against. As Gordon Gekko said, Money Never Sleeps. If you can rock out and profit in a globalized stock market that allows players in the USA to buy stocks traded in China then good on ya. My only regret is that you're probably able to do so through Crony Capitalist connections which are ultimately immoral. Insider trading is seen as a bad thing for a reason, insider trading via foreign interests? Double plus ungood! The "Alpha" seeking domestic traders are bad enough (look up the term "Alpha" from a stock traders perspective to see how this all can spiral into hell). Involving outsiders in that mad dash for Alpha? Dear god you've just opened a portal into hell!

    Inclusive Capitalism also sounds like a bad idea spawning from the "Good Old Days" of Capital and Labor immobility. Again, back then nobody could even conceive of both Capital and Labor being so absolutely mobile that we may as well have wormhole generators at every corner. Need to commute to X workshop? Take five steps out your door to where you are now in a Wi-Fi hotspot and boom! There you are, consulting with your team who is all over the world yet, thanks to the internet, are effectively standing face to face in the same space. That... won't work out well in the long run as we humans are very tribal creatures and the tribe needs to PHYSICALLY connect to actually feel like a tribe.

    I sadly must bring this up because I am almost certain we are standing on the precipice of it happening again. There's a good reason each "nation" as we currently know it in the way it is. Their ancestors killed off anyone who wasn't them genetically. I'd like to avoid that but given how politics works right now we are just circling the drain in that respect. If nothing changes, a new secular Crusade will occur and it will not be pretty for the refugees...

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    Quote Originally Posted by Hitta View Post
    Well many state that the Austrians are wrong because we haven't had skyrocket inflation, but this only fits into a certain group of Austrian theorists. There is quite a bit of capital that is being sat on currently(a big chunk of it has been exported), but it'll start flowing into the system if they ever raised interest rates. They are pretty much setting up a stagflation scenario. When the unsustainable demand dies down, growth will fall.... prices will probably even fall a bit, but that won't last. Eventually the price drop will stop and even start to go up.. and we're going to have negative growth into inflation.
    In my humble opinion the main purpose of keynesian policies are to temporarily satisfy the rebellious underclass through injecting stimulus, to respond to external threats, and to structurally adapt the economy to forces outside the market and capitalize on opportunities outside the market. The louisiana purchase is a good example of that. Often this means adapting the economy to changes in foreign policies and foreign markets. I do not think the keynesian principles were ever intended to manage a local economy. Nowdays the overprinting of money is, to some extent, a desperate effort to stimulate and satisfy the lower class who are moving toward revolution. Though there is massive corruption in government also, and these policies can be easily abused which is probably the main problem we're dealing with and why they have been so overused. China is also constantly abusing trade policies and manipulating their currency which could justify a good use of keynesian policies among other things. But realistically its probably, mostly, corruption which is responsible for our problems. Corruption or stupidity, maybe even both at the same time. Which is one more reason for people not to vote Clinton.
    Last edited by crazedrat1776; 10-24-2016 at 02:17 PM.

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    Quote Originally Posted by ratrevisits View Post
    In my humble opinion the main purpose of keynesian policies are to temporarily satisfy the rebellious underclass through injecting stimulus, to respond to external threats, and to structurally adapt the economy to forces outside the market and capitalize on opportunities outside the market. The louisiana purchase is a good example of that. Often this means adapting the economy to changes in foreign policies and foreign markets. I do not think the keynesian principles were ever intended to manage a local economy. Nowdays the overprinting of money is, to some extent, a desperate effort to stimulate and satisfy the lower class who are moving toward revolution. Though there is massive corruption in government also, and these policies can be easily abused which is probably the main problem we're dealing with and why they have been so overused. China is also constantly abusing trade policies and manipulating their currency which could justify a good use of keynesian policies among other things. But realistically its probably, mostly, corruption which is responsible for our problems. Corruption or stupidity, maybe even both at the same time. Which is one more reason for people not to vote Clinton.
    Eh, Keynes definitely intended government spending to be used as a supplier of aggregate demand as he really believed in his Keynesian multiplier(which is beyond ridiculous). He thought governments could spend their way to high gdp and employment numbers.
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    "The Keynesian multiplier was introduced by Richard Kahn in the 1930s. It showed that any government spending brought about cycles of spending that increased employment and prosperity regardless of the form of the spending."
    It probably does result in cycles of spending that create stimulus and, you could say, 'increase prosperity'; yet there's still a net loss (unless the move is sufficiently justified by some force outside the market). It is necessary to give stimulus to the lower class, ... to some extent this is always necessary and government must always be a supplier of aggregate demand. But it isn't clear whether these economists actually believe this Keynesian multiplier should be our general way of actually growing the economy. I mean, I hope that isn't what they are thinking. Maybe some very corrupt people have convinced others this is the case. In my view this is a misunderstanding of the actual principles at play though. Maybe Keynes and Kahn were both delusional and took their principles to the extreme, and I'm wrong, ... it wouldn't overly surprise me. I haven't read them though.

    EDIT:
    Thinking a bit more about it, I do think there is a need for some small inflation that slightly redistributes wealth and keeps things moving in the economy though, otherwise you may end up with people saving up large sums of money and things stop moving. This is what the whole 'stimulus of the lower class' looks like in practice I think.
    Last edited by crazedrat1776; 10-25-2016 at 12:52 AM.

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