John Maynard Keynes laid the foundation for modern economic theory, a theory born out of the experiences of the Great Depression. Time Magazine featured the famed economist on the cover of their December 1965 issue. And President Richard Nixon, upon taking the world off the gold standard on August 15, 1971, proclaimed “We’re all Keynesian’s Now”, a quote attributed to Keynes rival economist Milton Friedman.
The Keynesian economic experiment is crashing to an end! The current economic crisis we find ourselves in, triggered by the coronavirus pandemic, will end it as the debt house of cards implodes in dramatic fashion. And as with all economic transitions, which occur about every 30 to 50 years, there will be winners and losers, triumph and pain.
The Keynesian economic bubbles of the past 50 years or so have been devastating on American families, as economically unaware workers scrimp and save for retirement over 30 years, only to see their nest egg fortunes wiped away in mere weeks as another financial bubble pops. Or, as American’s see prices continually rise faster than their paychecks, so that one working spouse can no longer support a household, or worse where entire families can no longer afford a home and are forced to live full time in RVs or tents. Meanwhile, the nation’s wealth is transferred to a ever richer and fewer wealth class, leaving the remainder of the population in debt. These are the results of the Keynesian experiment!
Keynesian economics has fundamental flaws.
First, there is a core belief among Keynesian apostles that “currency” is “money”.
Currency is NOT money! A key characteristic of money is that it is a store of value. If I sell something, accept money for that item, and hold the money for 100 years, that money will still have the same economic value 100 years later as it did when the item was sold. Our dollar currency does not behave this way, as it is NOT a store of value.
Since Richard Nixon adopted the purely Keynesian model, the dollar has lost over 85% of its value. The dollar is currency, not money. The dramatic effect of this change when the dollar ceased to be money can be seen in the chart below. The higher the line goes, the lower the dollar moved in value.
Prior to 1971, in 1775 a person could have started saving for a consumer item, and the dollars would have held their same value for 125 years. In 1900, that person (or their descendants) could purchase that item for the same price as it was 125 years earlier! The only exceptions being brief periods of war, where scarcity of supplies existed and prices temporarily rose.
The dollar, being currency, is NOT money. The flaw is that we have all been deceived into thinking it is! We save dollars in savings accounts, retirement accounts, or insurance policies, with the believe that we are saving value, only to learn years later we don’t have the value we thought we should, even when the dollars are still there!
The real wealth in the meantime was transferred to Wall Street bankers selling these “savings” products, and understanding the difference between currency and money.
The second flaw of Keynesian thought is the belief that adding currency to the economic system creates wealth. Currency is nothing but a piece of paper, or a digital computer entry! It is NOT wealth, and by adding more of it to the system, wealth is NOT created. Wealth, stored in currency, is actually destroyed.
Real wealth is your time, effort, ingenuity, and product. More currency does not cause these things. Therefore, currency does not create wealth! If anything, it destroys wealth, particularly for those trying to save their wealth in the form of currency.
As more and more currency is added to the economic system, it diminishes the value of all other currency already in the system. As the supply of currency becomes “inflated”, the value of each currency unit goes down. It therefore takes more of those same currency units (dollars) to buy the same item.
In the current economic crisis, unprecedented TRILLIONS of new dollars are being introduced to the economic system, worldwide. As these dollars begin to circulate, the value of all other dollars will be diminished, and prices will rise. Incomes however will not keep up. As incomes fail to rise as fast as prices, even more people will be living in tent cities throughout our nation.
Continuous and persistent inflation is an effect of Keynesian economics. Inflation robs savers doing the right thing, and transfers their wealth to borrowers.
Wall Street bankers and hedge funds, understanding inflation and currency creation, borrow vast sums of currency. They gamble with derivatives, or convert currency (fake money) to real items that represent the means of production. They keep the profits of the product, and later return the lower valued currency back to the lender. As with any compulsive gambler, this “borrowing your way to wealth” mentality often gets out of hand, and is the root of every financial bubble over the past 50 years. Every year, the bankers dream up new ways and new derivatives to borrow more money, for even riskier bets.
The third flaw with Keynesian thought is not just a flaw, but downright fraud! The fraud is that all currency is borrowed into circulation, and by law, that is the only currency we are allowed to use.
Suppose for a moment that I am the central bank creating currency, and I only lend it into circulation (not spend or issue it). Let’s suppose too you are the borrower of that currency, perhaps being the first to borrow a unit into the system. If you borrow a dollar from me into circulation, perhaps at 5% interest, then at the end of one year you owe me $1.05. Can you ever pay off this debt? NO!
All you can return to me is the $1 you borrowed, as I only accept the currency I create. I didn’t create the 5 cents, and you are not legally allowed to create it yourself, as that would be a counterfeit! The only place of course you can get 5 cents is to come back to me and borrow even more into circulation so that you can pay the interest. But now you will owe interest on the interest!
While the core national debt will grow as currency is needed in circulation, the interest on that currency will compound exponentially at a faster rate forever. Eventually, the lender being the central bank and commercial banks in our case, could foreclose on every asset in the nation! The banks create currency from nothing, lend it into circulation, and foreclose on REAL assets, or real wealth. In this way, wealth is stolen systemically and transferred to Wall Street bankers!
AUSTRIAN SCHOOL OF ECONOMICS:
Real stores of wealth are never “printed” or “created”. They are earned. This concept is promoted by those from the Austrian school of economic thought. It doesn’t take a omnipotent central bank to determine the value of real money. Instead, the natural work required to mine it determines the value relative to all other goods.
Gold, by its very nature, cannot be printed or created from thin air. It is always earned through a unit of work required to dig it out of the ground, refine it, and produce a coin or bar. That work has value in that it is the product the miner creates. In this way, a gold coin always represents a certain nearly fixed value.
As money, gold never loses value. In 1880, the average wage in America was $2/day, or $10/week. A 1/2 oz gold coin was stamped $10, so one week’s wages was about 1/2oz of gold for the typical American in 1880. Today, a 1/2oz gold coin is valued at about $800, which is about $41,000/yr if we were paid 1/2oz of gold weekly. The median individual income for Americans in 2019 was $41,100. Gold has perfectly retained its value for over 140 years!
Similarly, in the Roman empire, a very nice man’s suit (or toga) was valued at about 1oz of gold. Today, an ounce of gold is between $1500 and $1600, or the same price of a very nice man’s suit! So for 2000 years, gold has retained its value. The dollar on the other hand has lost almost all its value in just 50 years, and 98% of its value since the Federal Reserve was created in 1914.
Austrian economics does not pretend that currency is money or wealth. Only your ideas and effort are wealth, and money needs to accurately account for that value, and be able to store the value. This is why gold has been the only true store of value, and can be the only true money. As famed banker JP Morgan once said, “Gold is Money. All else is credit.”
The Keynesians have debauched the dollar, destroyed its value, and stolen America’s wealth. They have perpetrated the greatest monetary fraud in history, and as this current financial bubble implodes causing the appearance of wealth in retirement 401ks to disappear, their schemes will be revealed.
The Federal Reserve board, and every nearly bank leadership team member, is comprised of Keynesians today. As a nation, we are about to see through the fraud, and will soon all be schooled as Austrians, respecting gold for what it is, real money! Soon, we’ll be saying, “We’re all Austrians Now”.