Friday, February 17, 2012

Keynesian Economics 101

"If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three,"- Winston Churchill

Such a remark often attributed to Winston Churchill was met by Manyard Keynes with the stout academic reply of " When the facts change, I change my mind. What do you, sir?". Without historical contextualization my point is without merit as the ability to change one's mind by my estimation highlights intelligence not ignorance. The year is 1931 the place is London, England and Keynes has just published his famed denouncement of the Treaty of Versailles entitles Treatise.  Nominal interest rates are high and prices on consumers goods are low and unemployment is over 20 percent. Keynes publicly encouraged mother's, daughters, and wives to spend and was pushing a public works program to lower unemployment.  Treasury Chancellor Philip Snowden in response wrote a memorandum illustrating how "continued state borrowing on the present scale without provision for repayment....would quickly call into  question the stability of the British financial system." Ergo, the fear that continued spending by the British government without repayment would echo fears throughout the already debt ridden super powers of Europe that the English government would renege on its debts prompting a run on the pound sterling.

Having read the memorandum Keynes made an about-face opting for temporary import levies to gain capital.  Citing Hayek's criticism's of Keynes, Hayek could not accept Keynes believe that the divergence between investment and savings was that it adversely affected the stability of prices. As a corollary Keynes naturally would insist upon public works 'investments and an increase in household spending to promote inflationary price measures that would in the short term trigger employment opportunities. Introducing Knut Wicksell's thesis from The Influence of the Rate of Interest on Prices I believe illustrates there is no finite answer to such an economic problems as they fluctuate like the ebb and flow of the tides. However, the noble and sensible gentleman would ascertain from Keynes capricious calls to action in the mist of Hyper inflation in Germany and Austria and the stock market crash of 1929 that his doctrine is not ingrained in stone. Keynes believed it was the duty of the government to assist its people in a time of crisis, a crisis that not only affects the individual and company, but a sovereign's solvency. To allow the free market to correct itself to Keynes politically would be peripatetic in that the free market would inadvertently be directing fiscal and monetary policy as opposed to the other way around. Therefore in a democracy, autocracy, or totalitarian regime, the natural rate of interest has the power unless reeled in by the government to shift power from the public sector to the private. According to Wicksell's thesis:

            "   The thesis which I humbly submit to criticism is this. If, other things remaining the same, the                   leading banks of the world were to lower their rate of interest, say 1 per cent. below its ordinary level, and keep it so for some years, then the prices of all commodities would rise and rise and rise without any limit whatever; on the contrary, if the leading banks were toraise their rate of interest, say 1 per cent. above its normal level, and keep it so for some years, then all prices would fall and fall and fall without any limit except Zero."

Point being the economic retracement to equilibrium in interest vs prices takes longer in the free market economy than through a central bank in establishing market rates. Based soley on the natural rate of interests yield to maturity curve, the angles of elevation in depression visa vie short and long term holdings would present much steeper inclines and declines and shorter periods of inelasticity....Thoughts so far? 

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