Monday, December 30, 2013

New Keynesian Economics

The global financial crisis has clearly illustrated that there is a serious vacuum of ideas on what to do next as a civilization. Majority of the public senses (on various levels) that key leaderships of many Western states do not offer much more beyond printing more money, socially brutal austerity, etc. Playing for time and looting are not solid ideas and everybody knows it. This inevitably opens up society to ideas from below which will eventually result in part of the elite siding with these ideas to co-opt them and ride them to power.
In United States, we saw the libertarian critique meme and the reactionary "going back to FDR policies" meme rapidly become dominant online over the last 2 years. Collapsist and neofeudalism memes are also about to become dominant. Collapsism in particular forces future oriented thought. The non-Internet world is quickly following behind since it took researchers a year or so to educate themselves about the fraud that caused the crisis, to put their books out, and then another few months for people to read the books. Various socially visible pundits can now defer to books as authoritative sources in speaking up. The market for new type of demagogy (talk radio being the old type) is nowhere near to being saturated.
This awakening resembles a sort of a popular front in the making since people from diverse ideological backgrounds are creating a consensus of what they are against (federal reserve corruption, military eating most resources, financial oligarchy and its personal lawyer/butler [US congress]). A marriage of convenience of this sort is usually created when all other options are exhausted and it will split into petty infighting once the current regime is changed.
All the accelerating muck racking and massive corruption exposures going on currently will begin to create a dissident critical mass in the near future. This is due to the gently exponential curve that is word of mouth communication and most importantly due to some elites sensing that popular sentiment now allows certain things to be safely discussed on a national level. Like in a jury herd dynamic, a minority of consistent and tireless individuals can swing the entire group whether at elite level, the level of a bar or church, or national level. The vacuum of workable ideas in leadership allows such informational waves to spread and take hold rapidly. It may have taken Christianity 300 years to become a dominant meme but with present communication technology, informational "viruses" can do the trick in just years.

Sunday, December 29, 2013

Seinfeld Economics - Monetarism

One theory of inflation is called monetarism. This theory says that inflation is always present and that it is a monetary problem. This theory also says that the amount of money that exists will determine the amount of money that people spend. The idea is that the price of items will go up only if the supply of the items is lower than the demand for the items. The price of items will also go down if the demand for the items is higher than the supply of the items.
This theory also says that since the amount of spending is determined by the amount of money in circulation the demand for items can be determined by calculating the amount of money in existence. Because of this theory, one could assume that if the amount of money in circulation goes up so does the amount of spending and so does the demand for consumer goods. Using this theory, the only reason that prices would go up is if the amount of money in circulation goes up.
Another theory of inflation is called the rational expectations theory. This theory says that inflation has to be looked at as a long-term projection and not just due to the here and now. Although it is a lot like monetarism the rational expectations theory believes that the monetarism theory reacts too quickly to what is occurring now and that what happens down the road is more important. One reason that the rational expectations theory wants to avoid reacting too quickly to slight changes in inflation is that when people react too quickly they often cause drastic changes in inflation simply by trying to avoid them.
The Austrian theory of economics says that as people will spend more money as they get more money to spend. This is kind of a spend what you earn philosophy. The lifestyle and spending habits of people are equal to their disposable income. This theory is different from the others because it doesn't believe that the production of goods will increase in order to meet an increase in demand. This theory believes that these kinds of changes in the economy don't happen as quickly as some of the other theories believe they do. And this theory also believes that the distribution of goods and money will not always seek to achieve some sort of balance.

Business Cycles Explained: Monetarist Theory

Economics: New Keynesians versus Monetarists

Will President Barrack Obama's love affair with Keynesian economics bring us out of this mess?
During the 2008 Presidential campaign I was of the opinion that if McCain were to be elected that he would be blamed, by the general public, for every downturn in our country going forward, but if Obama were elected that he would get a free pass or at least the benefit of the doubt for quite a while because the general perception in America, with the help of mainstream media, would be that all of this is fallout from the "terrible and incompetent" Bush Administration. With this new completely partisan stimulus bill, which will be the largest expenditure in America's history, President Obama will sign away that free pass. He doesn't need Republican support for this bill to pass, but he wants it because if the boat sinks he doesn't want to be known as the one who single handedly pulled the plug.
Keynesian Economics
Keynesian economics is an economic theory coined by British economist John Maynard Keynes. I will give a very quick and very basic description of the general premise. Keynes believed that, during times of recession or depression, the government should step in and "prime the pump." The general idea is to borrow a massive amount of money and spend it. This is what Barrack Obama meant when he said "some say this is a spending bill; yes this is a spending bill; that's the whole point." In Keynes' theory you have three major bodies, The Government, the People, and the Economy. The idea is for the government to "deficit spend," the government would borrow money and put it in the hands of the people (ideally through social programs that would effectively increase the size of government.) The people would then pump the money back into the economy. Two obvious questions this raises to me is "what if the people put it under their mattress," and "Where does the money come from?" (If we are borrowing it from domestic sources, there is no new money being pumped into the economy, it is just being moved around. If the Federal reserve is just printing it, we all know what inflation will do. If we are borrowing it from China It's all up to the imagination as to what that means.) One of the major tenets of Keynes' theory is based on The Phillips Curve, which shows an adverse relationship between inflation and unemployment. If unemployment goes up, inflation goes down and vice versa. According to Keynes' theory, the two can never co-exist. Keynes' theories, according to many economists, were not only discredited but dis-proven in the 1970s when The United States was faced with very high unemployment and massive inflation. The occurrence was nicknamed "stagflation" because of the combination of stagnant growth and inflation.
In 1982, when the economy was worse than what we are seeing now, Ronald Reagan used the concepts of economists Arthur Laffer and Robert Mundell's supply side economics or "trickle down economics," by slashing the top marginal tax rate from over 70 to under 30%. Reagan also used Milton Friedman's Monetarism or a free market economy and also used basic principles of Keynesian economics (the spending being largely on defense which does not increase the size of government.) Reagan led the U.S. into one of the greatest periods of economic growth in it's history.
Keynesian Economics and The New Deal.
Its funny how there can be such drastic accounts of the same occurrence. You could conceivably line up a mile of Ph.D. Keynesian Economists that will tell you that The New Deal brought America out of the great depression. You could also find the same amount of Ph.D.s that will argue that The New Deal was the beginning of an irresponsible welfare state. Many Economists believe that the New Deal prolonged and deepened The Great Depression and that only World War II saved America from it.
I think the answer can be found in a direct quote from FDR's own Treasury Secretary Henry Morgenthau. "We are spending more money than we have ever spent before, and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started and an enormous debt, to boot." -Henry Morgenthau, Treasury Secretary 1939.