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The Keynesian Fallacy

February 23, 2015

Here’s a quote from PayPal founder Peter Thiel’s excellent book Zero to One: “If you can identify a delusional popular belief, you can find what lies behind it: the contrarian truth.” We are confronted daily with the greatest economic and financial delusion of all time: Keynesian economics. The contrarian truth behind Keynesianism is that it must fail. Government is the greatest advocate of Keynesian economics because it finances government spending. The socialism that’s financed and paid for by Keynesian money creation has never worked in history, but has engineered economic and social suffering on a scale so enormous we can’t comprehend it.

Besides socialism, the other great beneficiary of Keynesian policies is Wall Street and its minions who see no harm as long stocks finish up. They care not about the loss to the public’s savings or the income disparity that inflation creates. These shallowest of thinkers ignore the speculative excess and the inevitable boom and bust to worship at the altar of the Fed. They fail to understand that the money printing they swoon over is the favored method of financing the welfare state and socialism.

The essence of Keynesianism in America is inflation. In his book The Ethics of Money Production, the Austrian economist Jorg Hulsmann described inflation’s cultural and spiritual legacy: “The notion that inflation is harmful is a staple of economic science. To appreciate the disruptive nature of inflation in its full extent we must keep in mind that it springs from a violation of the fundamental rules of society. Inflation is what happens when people increase the money supply by fraud, imposition, and breach of contract. Invariably it produces three characteristic consequences: (1) it benefits the perpetrators at the expense of all other money users; (2) it allows the accumulation of debt beyond the level debts could reach on the free market; and (3) it reduces the purchasing power of money below the level it would have reached on the free market.

“While these three consequences are bad enough, things get much worse once inflation is encouraged and promoted by the state. The government’s fiat makes inflation perennial, and as a result we observe the formation of inflation-specific institutions and habits. Thus fiat inflation leaves a characteristic cultural and spiritual stain on human society.”

More important for the short term are the economic consequences which include the coming destruction of the dollar through hyperinflation. This inevitable outcome is brought on by our ongoing monetization of the debt. You cannot pay a nation’s bills forever by printing or creating new money. The markets will eventually enforce repercussions. No money in history has withstood permanent inflating. In fact, all paper, fiat currencies have become worthless for the same reason.

The famous classical economist Ludwig von Mises warned, “Inflationism cannot last; if not radically stopped in time, it must lead inexorably to a complete breakdown. It is an expedient of people who do not care a whit for the future of their nation and its civilization.” He also pointed out who’s to blame: “It is government interference that has destroyed money in the past and it is government interference that is destroying money again.” Years ago he warned, “The monetary and credit policies of all nations are headed for a new catastrophe.”

Another economist of similar persuasion, Professor Hans Sennholz explained, “The ultimate destination of the present road of political fiat is hyperinflation with all its ominous economic, social, and political consequences.” The economist John Williams predicts that hyperinflation will strike in 2015. His Shadowstats newsletter has debunked the widely hyped economic recoveries of the past five years starting with Mr. Bernanke’s “green shoots.” In other words he’s been the most accurate macroeconomic thinker in the world. For him, the current phoney recovery will cause the dollar to tank and inflation to rage.

Central banks have trapped themselves. If they stop inflating, their economies crumble. They must forever apply greater doses of money and credit or face a depression. They cannot stop and they will not stop. That’s why the public is seduced into believing that inflation is a good thing. Although it’s a hidden tax that robs the citizenry of purchasing power, they’ve been taught to love it by the scoundrels in Washington and Wall Street.

The fact that virtually everyone in America buys into the Keynesian argument that 2% inflation is good should make you a contrarian. Inflation has always been something to be avoided. Economic history proves that encouraging inflation is insanity. However, if you become a Keynesian contrarian, this can be a great environment for making money. Unfortunately, for most it will be a time of great losses. Those who buy the Keynesian argument will see their wealth destroyed as markets collapse and the currency is ruined. Prepare to see your institutions fail, your neighbors impoverished and your nation go bankrupt.


James R. Cook is President of INVESTMENT RARITIES

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