The American Bubble?

Catastrophic failure wonderfully concentrates the mind – unless it causes its architects to adopt a ‘much more of the same’ suicide pact. The late John Maynard Keynes is the poster child for the mischief that results when economic theory becomes economic doctrine. The current economic mess is just a warning of the catastrophe to come. The leaders of congress, blithely ignorant of the failure of thirty years of Keynes-inspired deficit spending, are on a suicidal course. It would be a good idea for the country to get off that train before the collision.

It is time for new thinking.

If I am correct, later generations will lump Keynes’ ideas in the same category of ‘good intentions with bad consequences’ category now occupied by the permissive child rearing theories of Dr. Spock.

In 2008, I posted an article titled “The Great Keynesian Collapse”. It still holds up very well and is linked below.

Keynesian economic theory is a spectacular 21st century failure. This can be traced for three major economic factors, all of which now operate to discredit the entire edifice of Keynesian-derived policy: (1) the utter lack of discipline of popular democracies, whose politicians are ever seduced by the promise of a free fiscal lunch; (2) the profound impact of the world economy, the monetary effects of which are fully capable of swamping local currency and money supply policies; (3) the complete incompetence of government bureaucracies when it comes to the creation of wealth-generating enterprises.

Avoiding the Great American Collapse

Following the huge deficits generated by the WW II economy, fiscal sanity and economic progress gradually reestablished themselves during the Eisenhower years and, briefly, during the first three years of the brutally truncated Kennedy administration.

The great fiscal watershed was the administration of Lyndon Johnson. Following JFK’s fiscally cautious approach to Keynesian economics, LBJ wholeheartedly bought into the notion that the USA could finance a major cold war military engagement and a major domestic spending commitment simultaneously – via deficit spending.

The Vietnam War and the Great society set the stage for the later collapse of Keynesian economic theory in much the same way that an intoxicated teenage driver in an ultra-safe Mercedes sedan sets the stage for a highway disaster. The padding, the crush zones, the airbags, the seat belts, the safe brakes and all the rest are mere illusions in the hands of a reckless teen – or a master politician.

This was the beginning of the modern American economic fantasy, the notion that the US economy could forever spend its way into eternal prosperity using unearned funds borrowed against an imagined brilliant future whose exponential growth would always carry the debt load like a thoroughbred racehorse carries a 120 pound jockey.

Note for future reference: No racehorse has even been able to finish the Kentucky Derby while carrying a dead elephant on its back.

The Nixon administration muddled through without repudiating the LBJ-Keynes bargain, but did not greatly aggravate its effects. After a brief transition under President Ford, the grand LBJ Keynesian bargain suffered its first major collapse, resulting in the Carter recession, a period of rampant inflation and dismal economic performance.

Every succeeding administration – Reagan, Bush I, Clinton, Bush II and Obama – have been seduced by the perverse Keynesian notion that we can continue to borrow against a bright future, while all the time relentlessly ruining that future beyond recovery by digging a debt crater so deep that no sunlight can reach the bottom. The current administration seems committed to a course that will put us in deep in that dark, unscalable pit before the end of its first – and possibly only – four year lease on executive power.

All of the post-Eisenhower GOP administrations played the Keynes game, too, succumbing to a dangerous trade-off: “Please fund our defense and security priorities and we’ll look the other way when your domestic ‘social justice’ priorities are met with borrowed money”. This is what is meant by two cooperating elites. Bargains like these explain more than any other single factor why the Tea Party movement is so threatening to all current federal office holders.

Think about it from a common sense perspective for a moment. Virtually 80% of elected federal officials actually think it is reasonable to discount worries about annual deficits as long as they represent an arbitrary ‘acceptable’ percentage of overall civilian spending for goods and services (the GDP). As if these new deficits aren’t adding to a mountain of unpaid indebtedness. As if they aren’t placing us in the path of fiscal collapse when, inevitably, fewer and fewer willing lenders are available.

This is exactly like a family ignoring its practice of always borrowing and never repaying because “it’s only a little bit at a time”, while continuing to redefine “a little bit”.

Yes, we Americans will soon face some heavy lifting. But our nation’s full recovery is possible, but only when the borrowing addiction is broken.

New thinking starts with study and reflection. The private enterprise engine that created American prosperity can save us, but only if we are willing to save it.

Food for thought and discussion: Follow the links to four articles on this developing topic below.

The Great Meltdown [2008]

The Great Keynesian Collapse [2008]

Recovery 09

Guide to Recovery

Stay tuned….


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