The Keynesian Abyss..

The Keynesian Abyss

RON HERA SVOL. 30, NO. 8, August 2012  THE MONTHLY PUBLICATION OF THE LUDWIG VON MISES INSTITUTERon Hera is founder of Hera Research, LLC, and the principal author of the Hera Research Monthlynewsletter. Ron’s articles have appeared on,, King World News, Seeking Alpha and in other professional economics and investment publication venues. (Email: the greatest modern champion of central economic planning was the twentieth-century English economist John Maynard Keynes. Keynes advocated the idea that the government should play a large, active role in the economy. Among the consequences of Keynes’ economic theories, whether intended or unintended, is the fact that Western economies today are characterized by large, central governments, central banks, and massive debts.Government policies based on Keynesian theories and the institution of central banking form a nexus of central economic planning. Control of the central planning process is a winner-take-all proposition for businesses. In the U.S., the result is an unholy alliance of the U.S. federal government, the Federal Reserve (along with the largest U.S. banks), and the largest U.S. corporations. The logical chain beginning with Keynes’ fundamental idea that government, supported by a central bank, should play a large and active role in the economy sets the stage for a centrally planned economy and ultimately produces a corporate state.The U.S. economy is locked in a downward spiral of economic decline. By growing in size, and by engaging in ever-larger economic interventions, the U.S. federal government became itself a material cause of the recession that began in 2007. By attempting to grow the economy through monetary expansion, the Federal Reserve destroyed savings and fueled a series of disastrous economic bubbles, culminating in the housing bubble. Following Keynesian economic theories, the policy response of the U.S. federal government to the recession that began in 2007 and of the financial crisis that began in 2008 was to expand the government further and at a more rapid pace. In other words, some of the root causes of the economic imbalances that led to the recession and financial crisis (the relative size of the government and the resulting economic distortions) were compounded. As a consequence, the so-called “double dip recession” in the U.S. that began in the second half of 2011 will be longer and ultimately more severe than the economic downturn of 2007–2009. Leviathan: The Size of the StateGovernment encroachment on the private sector, like a self-fulfilling prophecy, often magnifies the reasons why government intervention was originally believed to be necessary. For example, when the U.S. federal government became involved in education through federally guaranteed student loans, the result was Inside:“The Keynesian Abyss”by Ron HeraLudwig von Mises Institute518 West Magnolia AvenueAuburn, Alabama 36832-4501FREEMARKETTHETHE MONTHLYPUBLICATION OF THE LUDWIG VON MISES INSTITUTEADDRESS SERVICE REQUESTEDNonprofit Org.Postage U.S.PAIDMises Institute Ludwig vonspending,and central economic planning, but, considering political campaign funding practices, have become the de facto oligarchs of America.Sliding Into the Keynesian AbyssThe decline of the U.S. economy is the logical outcome of Keynesian economics, which enshrines central economic planning and embraces central banking. The unholy alliance of the federal government, the Federal Reserve, and Wall Street has all but eliminated capitalism and has transformed the United States from a burgeoning free-market economy into a failing corporate state.The U.S. federal government, the Federal Reserve, and Wall Street each played a role in the progression from central economic planning and central banking to a corporate state. Politicians used Keynesian economics to justify big government, a welfare state, and budget deficits. The Federal Reserve sought to grow the economy through monetary expansion, thereby crippling it. At the same time, Wall Street sought higher profits through influence over the government. The resulting corporate state undermined capitalism and the free market in the United States and produced a downward spiral of economic decline from which there is no escape without fundamental reforms. ¾

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