Monday, November 15, 2010

Keynes: Dead, But Not Forgotten

At least not forgotten by Alan Blinder.  Never mind that Keynesian ideas have pretty much been debunked in theory and utterly refuted empirically over and over again.

Here, professor Blinder, a well known economists and a former Vice-Chairman of the Federal Reserve, takes Sarah Palin to task, of all people.  I guess professor Blinder didn't see this open letter to Ben Bernanke signed by several prominent economists who know a bit more about macroeconomics than Sarah.

Beating up in the WSJ on Sarah Palin and German Finance Minister Wolfgang Schauble is just a bit juvenile, don't you think, professor Blinder?  Why not take on the genuine economic arguments of your peers instead?

Professor Blinder wants to keep reminding us of what he learned in ECON 101.  I want to remind Blinder of what he evidently has forgotten that he should have learned in ECON 101.  Lesson #1:  You Can't Borrow What Hasn't Already Been Produced.

Creating a bunch of new money, which provides for a bunch of new credit-financed spending by the U.S. Treasury is an ill-fated attempt to borrow what hasn't yet been produced.  For readers who have forgotten why NO ONE, including the U.S. Treasury can borrow what hasn't yet been produced, here's a refresher.

Blinder seems to think the only problem with QE2 is the potential for inflation, which pumping $600 billion of new money into the economy definitely creates --- a fact that Blinder acknowledges.  But increased inflation isn't the worst part of the problem.  Much worse is giving the U.S. Treasury $600 billion to spend without taxing American citizens.

Why in the world would we want the U.S. Treasury to spend $600 billion under the direction of Congress instead of American citizens and businesses doing the spending?  Just in case you haven't been paying attention, Congress doesn't spend your money the same way you would.  Congress thinks it's Robin Hood.  You probably don't think you're Robin Hood.

By the way, Blinder thinks that 2 or 3 percent inflation is "normal."  I guess if history is the only guide, then yes, a steady diet of inflation from the Fed is quite "normal," based on the 98-year history of the Fed's bungling.  But what Blinder doesn't mention is that with just 2 percent inflation per year, after 10 years every dollar in existence will have lost almost 20 percent of its purchasing power.

Where does the lost purchasing power go?  It goes straight to the U.S. Treasury.  The federal government loves inflation.  Does it surprise you that its right arm, the Federal Reserve, loves inflation, too?

Professor Blinder, your bias and political stripes are definitely showing.  Please go back to real ECON 101 basics and tell it like it really is, instead of the way the Fed and BHO want it told.

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