WEBVTT NOTE Economics Keynesianized 1 00:00:00.000 --> 00:00:05.200 The wellspring of all Keynesianized economies is hatred of the free market. 2 00:00:05.200 --> 00:00:12.000 As summed up by Lord Keynes himself in 1933, when he declared that, 3 00:00:12.000 --> 00:00:17.500 The decadent international, but individualistic capitalism is not a success. 4 00:00:17.500 --> 00:00:25.500 It is not intelligent, it is not beautiful, it is not just, it is not virtuous, and it does not deliver the goods. 5 00:00:25.500 --> 00:00:30.900 In short, we dislike it and we are beginning to despise it." 6 00:00:30.900 --> 00:00:34.400 He went on to counsel politico-economic experiments 7 00:00:34.400 --> 00:00:38.600 so that each country can find a replacement for laissez-faire to 8 00:00:38.600 --> 00:00:44.000 make our own favorite experiment toward the ideal social republic of the future. 9 00:00:44.000 --> 00:00:47.700 In Keynes's own ideal social republic of the future, 10 00:00:47.700 --> 00:00:50.800 all economic scarcity would be eliminated. 11 00:00:50.800 --> 00:00:55.200 All of our reasonable economic needs, as he put it, would be satisfied. 12 00:00:55.200 --> 00:01:04.000 Freeing us from odious labor and provision of the future to pursue the immediate higher ends of contemplation of beauty and friendship. 13 00:01:04.000 --> 00:01:07.100 In 1931, Keynes said, quote, 14 00:01:07.100 --> 00:01:12.000 A point may soon be reached, much sooner than all of us are aware, 15 00:01:12.000 --> 00:01:19.200 when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes. 16 00:01:19.200 --> 00:01:23.500 In this utopia, the real and permanent problem facing man is, quote, 17 00:01:23.500 --> 00:01:26.900 How to Use His Freedom from Pressing Economic Cares 18 00:01:26.900 --> 00:01:32.100 How to Occupy the Leisure, which Science and Compound Interest will have Won for Him, 19 00:01:32.100 --> 00:01:35.200 to Live Wisely, Agreeably and Well. 20 00:01:35.200 --> 00:01:39.200 For Keynes, social progress depended upon capital accumulation. 21 00:01:39.200 --> 00:01:41.900 As he said in 1931, 22 00:01:41.900 --> 00:01:46.400 From the time of the influx of the precious metals into Spain in the 16th century until today, 23 00:01:46.400 --> 00:01:50.500 the power of accumulation of capital by compound interest, 24 00:01:50.500 --> 00:01:55.940 which seems to have been sleeping for many generations was reborn and renewed its strength. 25 00:01:55.940 --> 00:02:01.740 And the power of compound interest over 200 years as such is to stagger the imagination. 26 00:02:01.740 --> 00:02:08.580 He went on to predict that the capital stock having multiplied a hundred times since the beginning of this process 27 00:02:08.580 --> 00:02:15.060 and raising standards of living roughly four-fold would in the next hundred years 28 00:02:15.060 --> 00:02:20.560 lead to another four to eight-fold increase in standards of living. 29 00:02:20.560 --> 00:02:27.060 However, he did not believe that the free market would be the instrument of this largesse. 30 00:02:27.060 --> 00:02:32.960 The free market itself was insufficient, in Keynes's view, in accumulating capital rapidly enough 31 00:02:32.960 --> 00:02:37.260 to push the economy into his post-scarcity utopia. 32 00:02:37.260 --> 00:02:44.360 That required what he called central controls, or as he put it in a paper in 1925, 33 00:02:44.360 --> 00:02:53.360 It necessitates, quote, the transition from economic anarchy to a regime that deliberately aims at controlling and directing economic forces 34 00:02:53.360 --> 00:02:57.360 in the interest of social justice and social stability. 35 00:02:57.360 --> 00:03:02.360 A year later, he was more specific in a paper entitled The End of Laissez-Faire, 36 00:03:02.360 --> 00:03:11.360 when he called for an agenda of state to bring about, quote, improvements in the technique of modern capitalism by the agency of collective action. 37 00:03:11.360 --> 00:03:17.360 In this paper he elaborated on three policies, the three agendas of state. 38 00:03:17.360 --> 00:03:23.360 The first was, quote, deliberate control of the currency and of credit by a central institution, 39 00:03:23.360 --> 00:03:30.360 coupled with the collection and dissemination on a great scale of data relating to the business situation. 40 00:03:30.360 --> 00:03:37.360 The second policy of state was that the state must render, quote, a coordinated act of intelligent judgment 41 00:03:37.360 --> 00:03:43.060 about how much society should save and how its savings should be allocated to capital projects. 42 00:03:43.060 --> 00:03:49.860 In his great work, The General Theory in 1936, he more succinctly put these two policies into the statement, 43 00:03:49.860 --> 00:03:57.960 quote, that his utopia requires a somewhat comprehensive socialization of investment. 44 00:03:57.960 --> 00:04:03.960 His third policy of state was population control. 45 00:04:03.960 --> 00:04:28.960 After all, capital accumulation would simply be wasted if spread too thinly across too many people and eugenics was part of this policy as well since, after all, the contemplation of beauty and truth is not something that the lesser types in society can accomplish and so in utopia they must be eliminated. 46 00:04:28.960 --> 00:04:35.600 Now, in America, we've suffered through two Keynesian politico-economic experiments 47 00:04:35.600 --> 00:04:39.280 of government central controls to transcend laissez-faire 48 00:04:39.280 --> 00:04:45.360 and arrive at what Keynes called in 1930 our destination of economic bliss. 49 00:04:45.360 --> 00:04:51.280 The first of these is known in the literature as the orthodox Keynesian view. 50 00:04:51.280 --> 00:04:57.080 This is the least similar, the view least similar to Keynes's own views. 51 00:04:57.080 --> 00:05:01.080 Here the ideal was to maximize economic wealth as measured by full employment. 52 00:05:01.080 --> 00:05:06.080 The touchstone of this policy was full employment. 53 00:05:06.080 --> 00:05:13.080 To do this, traditional economic theory or classical economics had to be overthrown 54 00:05:13.080 --> 00:05:19.080 since this theory taught us that it was indeed the free market that maximizes economic wealth, 55 00:05:19.080 --> 00:05:22.080 at least as defined by consumer preference, 56 00:05:22.080 --> 00:05:25.080 and that the free market employs factors efficiently. 57 00:05:25.080 --> 00:05:45.080 The Keynesians claim to the contrary that the central defect of the free market is that total production is determined in the market system by total spending and consumers save too much and spend too little. 58 00:05:45.080 --> 00:05:53.080 And investors are also deficient in their spending and furthermore their spending tends to be volatile. 59 00:05:53.080 --> 00:05:57.080 The policy that the government should employ here is obvious. 60 00:05:57.080 --> 00:06:00.080 Demand management via fiscal policy. 61 00:06:00.080 --> 00:06:06.080 If private spending is deficient, the government should spend more, run budget deficits. 62 00:06:06.080 --> 00:06:15.080 If spending is too great, is excessive, the government should run budget surpluses. 63 00:06:15.080 --> 00:06:20.080 There is some textual justification for this view in Keynes, 64 00:06:20.080 --> 00:06:26.080 But it tends to be centered around Keynes' anti-saving bias. 65 00:06:26.080 --> 00:06:31.080 And Keynes held this view that saving was a great evil, 66 00:06:31.080 --> 00:06:37.080 both on personal grounds and on philosophical ones. 67 00:06:37.080 --> 00:06:43.080 As we mentioned, for Keynes the greatest goal, the greatest end one can pursue in life 68 00:06:43.080 --> 00:06:46.080 is these higher mental states of contemplation. 69 00:06:46.080 --> 00:06:49.080 These, quite obviously, are immediate goods. 70 00:06:49.080 --> 00:07:04.080 can only be satisfied with leisure time. In addition, Keynes' personal behavior was what we nicely call in economics subject to high time preference. 71 00:07:04.080 --> 00:07:15.080 In other words, he tended to desire instant gratification and not wish to look at future provision for him and others. 72 00:07:15.080 --> 00:07:24.400 There is then another rhetorical use by Keynes in the general theory that is taken by the 73 00:07:24.400 --> 00:07:28.680 orthodox Keynesians as being important for their view. 74 00:07:28.680 --> 00:07:33.200 And this was Keynes' use of the phrase, or the term, full employment. 75 00:07:33.200 --> 00:07:38.320 Keynes used this phrase though, in my opinion, rhetorically, simply because when he was writing 76 00:07:38.320 --> 00:07:42.760 these works, people were worried about unemployment. 77 00:07:42.760 --> 00:07:47.240 What Keynes was really after, though, was what he more accurately called full investment, 78 00:07:47.240 --> 00:07:51.760 which we'll talk about in the second Keynesian view. 79 00:07:51.760 --> 00:07:57.760 In the general theory, Keynes even went so far as to attempt to show that capital accumulation 80 00:07:57.760 --> 00:08:03.440 did not depend upon saving and future orientation, as the classical economist would argue. 81 00:08:03.440 --> 00:08:08.480 But that saving actually limited capital accumulation. 82 00:08:08.480 --> 00:08:14.480 This is his famous paradox of saving argument and the argument goes this way that when people 83 00:08:14.480 --> 00:08:20.960 wish to save a greater percentage of their income, this causes their spending to go down. 84 00:08:20.960 --> 00:08:27.280 Their reduced spending then reduces production since production simply follows spending and 85 00:08:27.280 --> 00:08:32.400 this lowers their income so even though they're saving a greater percentage of their income, 86 00:08:32.400 --> 00:08:36.200 their total saving is actually reduced. 87 00:08:36.200 --> 00:08:41.200 Banking also retards capital accumulation because reducing consumption reduces demand 88 00:08:41.200 --> 00:08:45.360 for capital and therefore has this effect as well. 89 00:08:45.360 --> 00:08:48.900 In fact, Keynes went on to argue that capital accumulation and the accumulation of wealth 90 00:08:48.900 --> 00:08:54.720 depends only on investment, not on saving it whatsoever, that investment can proceed 91 00:08:54.720 --> 00:09:01.020 without prior saving because any increase in investment will increase spending, production 92 00:09:01.020 --> 00:09:05.320 then will increase, the greater income from this greater production then will provide 93 00:09:05.320 --> 00:09:11.320 In an article in January 1931, Keynes said, 94 00:09:29.320 --> 00:09:34.320 This seems to be based on the mistaken analogy that because the decline in demand for one consumer good 95 00:09:34.320 --> 00:09:45.320 lowers its price and profitability and thus the production of that good, that a decreased demand for all consumer goods would decrease prices and profitability for all goods across the economy. 96 00:09:45.320 --> 00:09:55.320 But as classical economics has taught us, saving is invested. When people don't spend on consumer goods, those funds are provided for spending on capital goods. 97 00:09:55.320 --> 00:10:02.320 And even if this is not the case and these funds are simply held in cash balances, what Keynes called hoarding, 98 00:10:02.320 --> 00:10:08.640 Saving. This act would simply lower prices all around. Factor prices and prices of goods 99 00:10:08.640 --> 00:10:14.120 would be lowered and profitability of production would be maintained as all prices dropped 100 00:10:14.120 --> 00:10:19.720 roughly in proportion. This would then allow the same dollar amount of spending to buy 101 00:10:19.720 --> 00:10:24.740 all goods since the prices of these goods would be lower. Orthodox Keynesians of course 102 00:10:24.740 --> 00:10:30.680 dispute all this and claim that consumer saving will not be invested but hoarded and even 103 00:10:30.680 --> 00:10:36.000 Even that portion that is invested, that is set aside for investment, will not be picked 104 00:10:36.000 --> 00:10:41.680 up by entrepreneurs because their investment expenditure does not correlate to the amount 105 00:10:41.680 --> 00:10:44.440 of saving. 106 00:10:44.440 --> 00:10:49.480 And even if it does, that doesn't work in the long run or in the longer run because 107 00:10:49.480 --> 00:10:51.280 it's volatile. 108 00:10:51.280 --> 00:10:56.280 Moreover, they argue that prices are sticky downward, that they do not adjust downward 109 00:10:56.280 --> 00:11:05.240 However, it was not losing the somewhat arcane debate about these propositions that ended 110 00:11:05.240 --> 00:11:11.200 the orthodox Keynesian experiment, but the policy implications of their theory. Economic 111 00:11:11.200 --> 00:11:15.360 activity and employment are determined by effective demand or spending, according to 112 00:11:15.360 --> 00:11:19.680 this view. When private spending is deficient, as Keynes claimed was the normal condition 113 00:11:19.680 --> 00:11:23.760 in the market, government should increase its spending and run a budget deficit to prevent 114 00:11:23.760 --> 00:11:29.160 Stagflation and Unemployment. When private spending is excessive, if ever, government 115 00:11:29.160 --> 00:11:34.600 should decrease spending and run a budget surplus to prevent price inflation. But clearly 116 00:11:34.600 --> 00:11:40.440 effective demand cannot be both insufficient causing unemployment and excessive causing 117 00:11:40.440 --> 00:11:46.800 price inflation at the same time. Unfortunately for the orthodox Keynesians, this is a rather 118 00:11:46.800 --> 00:11:51.800 and their normal condition of a Keynesianized economy. 119 00:11:51.800 --> 00:12:01.800 Paul Samuelson was the first to recognize this after the somewhat optimistic orthodox Keynesian views of the 30s and the 40s, 120 00:12:01.800 --> 00:12:08.800 typified by Alvin Hansen who seemed to think that the government could simply run deficits right out to the point of full employment 121 00:12:08.800 --> 00:12:14.800 with no price inflation and reach this utopian point. 122 00:12:14.800 --> 00:12:24.800 As mild as they were, Samuelson was forced by these post-war inflationary recessions to embrace the Phillips curve trade-off in an attempt to salvage the orthodox Keynesian paradigm. 123 00:12:24.800 --> 00:12:37.800 This is a rather puzzling thing for Samuelson to do, and I might even assert that if Samuelson had not picked up on the Phillips curve as a trade-off between inflation and unemployment, 124 00:12:37.800 --> 00:12:40.800 that this theory would have sunk into oblivion. 125 00:12:40.800 --> 00:12:44.800 It wasn't a widely held theory when Samuelson began to advance it, 126 00:12:44.800 --> 00:12:48.800 and it was not very well empirically verified. 127 00:12:48.800 --> 00:12:53.800 Samuelson did this, of course, because of the evidence facing him 128 00:12:53.800 --> 00:12:56.800 that price inflation and unemployment can rise at the same time. 129 00:12:56.800 --> 00:12:59.800 He recognized that this was a contradiction to his view, 130 00:12:59.800 --> 00:13:03.800 and so he needed to give some sort of an explanation. 131 00:13:03.800 --> 00:13:07.800 His explanation was that capitalism was actually even more wicked than Keynes thought. 132 00:13:07.800 --> 00:13:11.800 Because his fiscal policy pushes the economy towards full employment, 133 00:13:11.800 --> 00:13:15.800 something deep within the capitalist system causes prices to rise. 134 00:13:15.800 --> 00:13:20.800 Sometimes it's labor unions, or sometimes it's monopolists, 135 00:13:20.800 --> 00:13:24.800 or these other ad hoc types of explanations. 136 00:13:24.800 --> 00:13:30.800 So, in post-Samuelson, the Orthodox Keynesians accepted this trade-off, 137 00:13:30.800 --> 00:13:34.800 This limitation to their fiscal policy. 138 00:13:34.800 --> 00:13:40.320 The heyday of the orthodox Keynesian vision and experiment, of course, was the 1960s, 139 00:13:40.320 --> 00:13:45.440 an era of fiscal fine-tuning, with Walter Heller and his associates deftly pulling the 140 00:13:45.440 --> 00:13:50.320 spending taxing levers, moving the economy artfully along the Phillips Curve trade-off 141 00:13:50.320 --> 00:13:56.720 to the socially optimal point, near full employment with a minimum amount of price inflation. 142 00:13:56.720 --> 00:14:00.680 Orthodox Keynesianism died with the advent of the severe inflationary recession of the 143 00:14:00.680 --> 00:14:06.000 mid-1970s. It was no longer possible to deny the contradiction in the theory that rising 144 00:14:06.000 --> 00:14:12.560 rates of inflation and unemployment simultaneously imply both increasing and decreasing demand 145 00:14:12.560 --> 00:14:18.000 and require government budget to be both in deficit and surplus. Even Samuelson himself 146 00:14:18.000 --> 00:14:23.280 could not save the paradigm by calling inflationary recession stagflation and blaming it on the 147 00:14:23.280 --> 00:14:26.280 and the Arabs and big oil companies. 148 00:14:26.280 --> 00:14:29.280 Orthodox Keynesianism died with its silence on the question, 149 00:14:29.280 --> 00:14:33.280 what is the proper fiscal policy during stagflation? 150 00:14:33.280 --> 00:14:36.280 When politicians ask their advisors what should be done, 151 00:14:36.280 --> 00:14:42.280 the one unacceptable answer is, I don't know. 152 00:14:42.280 --> 00:14:46.280 It's safe to say that this type of Keynesianized economy and its policy prescriptions 153 00:14:46.280 --> 00:14:49.280 are not to be found anywhere in the world today. 154 00:14:49.280 --> 00:14:52.280 Nowhere is a budget deficit seen as a powerful tool 155 00:14:52.280 --> 00:14:57.280 government wields to control the dark forces of the market to balance unemployment with inflation. 156 00:14:57.280 --> 00:15:08.280 Instead, it's a social problem to be solved, or it's a criterion to be met to join an economic trading block like EMU, or to receive international subsidies from the IMF. 157 00:15:08.280 --> 00:15:17.280 No government today claims to use the deficit as a policy tool, and no one is predicting massive recession in the face of our current decline in the deficit. 158 00:15:17.280 --> 00:15:28.280 Surplus is a word that's never even mentioned today, unless politicians utter it to refer to a small deficit or to some future event that they don't actually think will ever occur. 159 00:15:28.280 --> 00:15:39.280 Far from ushering in the full employment utopia, the orthodox Keynesian experiment has left us with a specter of an out of control national debt and the possibility of default or hyperinflation. 160 00:15:39.280 --> 00:15:47.280 Now, after a brief interlude in the late 1970s and early 1980s, the second Keynesian experiment began. 161 00:15:47.280 --> 00:15:56.280 And not coincidentally, it coincided roughly with Alan Greenspan's ascendancy to the Chairman of the Board of Governors of the Federal Reserve. 162 00:15:56.280 --> 00:16:02.280 So we might call this Greenspan Keynesianism, or more generally, Central Bank Keynesianism. 163 00:16:02.280 --> 00:16:07.280 I'm even somewhat inclined to call this Wall Street Keynesianism. 164 00:16:07.280 --> 00:16:13.280 This experiment is much more in tune with Keynes's own views. 165 00:16:13.280 --> 00:16:17.640 Here the idea is to maximize economic wealth by capital accumulation. 166 00:16:17.640 --> 00:16:24.760 The classical view in economics, the correct view picked up by the Austrians, is that the 167 00:16:24.760 --> 00:16:31.280 free market gives the optimal amount of capital accumulation as given by consumers' preferences 168 00:16:31.280 --> 00:16:33.340 to save and invest. 169 00:16:33.340 --> 00:16:38.900 The credit markets and stock markets are efficient mechanisms by which these savings are channeled 170 00:16:38.900 --> 00:16:46.700 into various capital projects. To the contrary, Keynes argued that because of precaution and 171 00:16:46.700 --> 00:16:53.860 avarice, precaution is his term for saving, avarice for holding money, consumers hoard 172 00:16:53.860 --> 00:16:57.980 funds instead of providing them for investment. It takes interest to bribe them to part with 173 00:16:57.980 --> 00:17:03.300 without their liquidity, but interest retards investment, keeping capital artificially scarce 174 00:17:03.300 --> 00:17:07.940 because the rate of interest is artificially high because it isn't determined by rational 175 00:17:07.940 --> 00:17:12.180 calculation but by convention and speculation. 176 00:17:12.180 --> 00:17:17.920 The policy of this view is to have the Federal Reserve engage in monetary inflation to expand 177 00:17:17.920 --> 00:17:21.500 credit and lower interest rates. 178 00:17:21.500 --> 00:17:26.260 So in this view, as Keynes put it, society's progress depends on a progressive policy of 179 00:17:26.260 --> 00:17:31.260 Reducing the Rate of Interest by Central Bank Money and Credit Expansion 180 00:17:31.260 --> 00:17:38.760 As I mentioned in his paper in 1926, the end of laissez-faire, this was one of Keynes's policy prescriptions, 181 00:17:38.760 --> 00:17:42.760 deliberate control of the currency and credit by a central institution. 182 00:17:42.760 --> 00:17:49.760 By 1933, Keynes had, quote, become convinced that the retention of the structure of private enterprise 183 00:17:49.760 --> 00:17:55.760 is incompatible with that degree of material well-being to which our technical advancement entitles us. 184 00:17:55.760 --> 00:18:02.760 Unless the rate of interest falls to a much lower figure than is likely to come about by natural forces operating on the old lines, 185 00:18:02.760 --> 00:18:13.760 indeed the transformation of society, which I preferrably envision, may require a reduction in the rate of interest towards vanishing point within the next 30 years." 186 00:18:13.760 --> 00:18:20.760 Such a policy, if possible, pushing the rate of interest to zero, would increase capital values towards infinity 187 00:18:20.760 --> 00:18:24.760 and usher in the post-scarcity utopia that Keynes longed to see, 188 00:18:24.760 --> 00:18:27.760 where everyone's reasonable economic needs were met 189 00:18:27.760 --> 00:18:33.760 and their days were filled with leisure to pursue the higher mental states of contemplation, of beauty and friendship. 190 00:18:33.760 --> 00:18:38.760 But as Mises taught us in 1912 and as we are about to learn again, 191 00:18:38.760 --> 00:18:43.760 credit expansion by monetary inflation contains the seeds of its own destruction 192 00:18:43.760 --> 00:18:49.760 and must end in stock market crashes, liquidations, bankruptcies, capital consumption and unemployment. 193 00:18:49.760 --> 00:18:56.760 As the Fed creates new money and uses it to purchase securities from banks, it bids the prices of bonds up and thus interest rates down. 194 00:18:56.760 --> 00:19:02.760 Banks have more funds to lend and entrepreneurs find more capital projects profitable at these lower rates. 195 00:19:02.760 --> 00:19:11.760 Production of capital and durable consumer goods increases in response to the higher profitability and factors of production are reallocated across the production structure. 196 00:19:11.760 --> 00:19:14.760 The boom that Keynes favored thus begins. 197 00:19:14.760 --> 00:19:26.080 Let's begin. In 1931, in a series of lectures, Keynes, 1931 after the Depression had begun, 198 00:19:26.080 --> 00:19:33.440 Keynes was still in support of the inflationary credit boom of the 1920s. And in speaking 199 00:19:33.440 --> 00:19:38.320 of this investment boom, as he called it, from 25 to 29, he said, quote, a very few 200 00:19:38.320 --> 00:19:44.560 more quinquennia of equal activity might indeed have brought us near to the economic El Dorado 201 00:19:44.560 --> 00:19:48.360 where all our reasonable economic needs would be satisfied. 202 00:19:48.360 --> 00:19:52.360 But instead, as Mises demonstrated, the boom must end in bust 203 00:19:52.360 --> 00:19:55.860 because the newly created money cannot be confined to the credit markets 204 00:19:55.860 --> 00:20:00.360 but will instead be spent again and again on consumer goods. 205 00:20:00.360 --> 00:20:03.260 That is, when people receive the newly created money and income payments, 206 00:20:03.260 --> 00:20:07.960 they will not put 100% of it back into the credit markets as the Fed initially did. 207 00:20:07.960 --> 00:20:11.460 The reduction in funds in the credit market, coupled with price inflation, 208 00:20:11.460 --> 00:20:13.460 push interest rates back up. 209 00:20:13.460 --> 00:20:17.900 Capital values then collapse, stock markets crash and the boom comes to an end. 210 00:20:17.900 --> 00:20:23.900 These financial reversals reveal the necessity of dismantling the buildup of the production structure during the boom. 211 00:20:23.900 --> 00:20:26.740 Liquidation, bankruptcy, unemployment. 212 00:20:26.740 --> 00:20:32.820 What can extend the boom and delay this day of reckoning is an increase in money demand. 213 00:20:32.820 --> 00:20:37.620 That is, if someone, instead of spending this newly created money, holds it. 214 00:20:37.620 --> 00:20:44.120 This would allow the interest rate-driven boom to proceed apace without consumer spending or price inflation reversing it. 215 00:20:44.120 --> 00:20:47.820 And in such a case, we would see exactly what we see in today's economy. 216 00:20:47.820 --> 00:20:54.320 We would see the overthrow, the reversal of the Phillips curve. 217 00:20:54.320 --> 00:20:59.120 We would see an economy where unemployment and price inflation fall at the same time. 218 00:20:59.120 --> 00:21:02.920 In our current boom, there are two sources of increased money demand. 219 00:21:02.920 --> 00:21:05.920 One is simply due to our position in the business cycle. 220 00:21:05.920 --> 00:21:13.320 Any time an economy comes out of a recession, inflationary expectations tend to be lowered, 221 00:21:13.320 --> 00:21:20.120 and people in the recovery period tend to then go back to their normal economic activities, 222 00:21:20.120 --> 00:21:24.120 and that includes a normal level of holding money. 223 00:21:24.120 --> 00:21:33.120 The other source of increased money demand is due to our unique status as the world's reserve currency. 224 00:21:33.120 --> 00:21:40.120 It's an increase in the foreign holdings of dollars, especially the stockpiling of dollar reserves by foreign central banks. 225 00:21:40.120 --> 00:21:48.120 According to the recent figures from the IMF, central bank dollar reserves are $423 billion now, 226 00:21:48.120 --> 00:21:54.120 which is about 60% of the total reserves of central banks of $762 billion. 227 00:21:54.120 --> 00:21:59.120 In 1990, dollar reserves were only $50 billion in this total, now they're $60, 228 00:21:59.120 --> 00:22:07.120 And for industrial countries, the percent of total reserves in dollar form rose from 44% to 91% to 56% today. 229 00:22:07.120 --> 00:22:11.120 Whereas non-industrial countries' percentage stayed about the same. 230 00:22:11.120 --> 00:22:16.120 In other words, these dollars are being held by industrial central banks. 231 00:22:16.120 --> 00:22:22.120 Why they're doing this is obvious. Why any country does this is quite apparent. 232 00:22:22.120 --> 00:22:27.120 Central banks stockpile these dollars to defend their domestic currencies in the case of devaluation. 233 00:22:27.120 --> 00:22:32.560 In the most recent currency debacle, several Asian countries had pegged their currencies 234 00:22:32.560 --> 00:22:37.220 to what was essentially the US dollar, which masked their excessive domestic inflation 235 00:22:37.220 --> 00:22:41.200 and made sudden devaluation inevitable. In response, some of these countries began to 236 00:22:41.200 --> 00:22:47.440 use their dollar reserves to buy up their domestic currencies and support their pegs. 237 00:22:47.440 --> 00:22:51.920 To prevent them from disgorging these dollars and having them come home and ignite price 238 00:22:51.920 --> 00:23:00.020 Tax Inflation here in the U.S. The U.S. as they did with Mexico in 1995 arranged bailouts. 239 00:23:00.020 --> 00:23:06.200 More are planned. The IMF revealed plans for its 181 members to increase its capital base 240 00:23:06.200 --> 00:23:14.600 by $285 billion, a 45% increase, for the express purpose of paying for these future bailouts. 241 00:23:14.600 --> 00:23:22.280 The U.S. share of this increase is $14.5 billion, a 40% increase in our contribution. 242 00:23:22.280 --> 00:23:26.980 The importance of maintaining these dollar reserves explains the recent hysterical attacks 243 00:23:26.980 --> 00:23:29.660 on foreign currency speculators. 244 00:23:29.660 --> 00:23:35.940 You may have read of the Prime Minister of Malaysia calling these speculators rogue speculators 245 00:23:35.940 --> 00:23:39.520 and accusing them of wanting to destroy weak countries. 246 00:23:39.520 --> 00:23:45.200 He even developed a conspiracy theory in which currency trading is a form of imperialism, 247 00:23:45.200 --> 00:23:49.080 whereby developed countries put underdeveloped countries in their place. 248 00:23:49.080 --> 00:23:54.840 And he concluded his tirade with, quote, I am saying that currency trading is unnecessary, 249 00:23:54.840 --> 00:23:56.900 unproductive and immoral. 250 00:23:56.900 --> 00:23:58.040 It should be stopped. 251 00:23:58.040 --> 00:24:02.120 It should be made illegal, close quote. 252 00:24:02.120 --> 00:24:06.880 Expect others to join in his chorus as the European Union tries to implement the euro, 253 00:24:06.880 --> 00:24:10.880 which necessitates fixed exchange rates between each domestic currency and the euro 254 00:24:10.880 --> 00:24:14.880 and thus fixed exchange rates among all the currencies in the EMU. 255 00:24:14.880 --> 00:24:19.880 Without extreme discipline and precise policy convergence, currency speculators 256 00:24:19.880 --> 00:24:25.880 will have a field day reaping profits while destroying the attempt to impose a single fiat paper money in Europe. 257 00:24:25.880 --> 00:24:31.880 And it's not too difficult to predict what will happen in America if the Europeans are forced 258 00:24:31.880 --> 00:24:36.880 and the support of their currency exchange rates to disgorge these dollars. 259 00:24:36.880 --> 00:24:45.880 They'll come home. Price inflation will be reignited, interest rates will skyrocket and the boom will come to an end. 260 00:24:45.880 --> 00:24:52.880 Keynes even recognized this international limitation to domestic credit expansion and since he was so wedded to this policy, 261 00:24:52.880 --> 00:25:00.880 he proposed a single worldwide fiat paper money that he called the banker as a solution to this. 262 00:25:00.880 --> 00:25:11.880 But clearly this will not bring about a more rapid and uninterrupted capital booms as Keynes desired but ever more severe crises and worldwide inflation and recession. 263 00:25:11.880 --> 00:25:15.880 This is why Keynes went on to his third experiment. 264 00:25:15.880 --> 00:25:24.880 This is what we might call a fully Keynesianized economy or the socialization of credit and equity markets. 265 00:25:24.880 --> 00:25:28.880 And since I'm running out of time I'll briefly summarize this. 266 00:25:28.880 --> 00:25:37.080 Keynes argued that stock markets, like credit markets, were inherently irrational, 267 00:25:37.080 --> 00:25:41.680 that stock prices were based solely upon convention, 268 00:25:41.680 --> 00:25:49.080 since the average investor has no knowledge whatsoever of the underlying realities of these capital values. 269 00:25:49.080 --> 00:25:56.380 And the stock market then is a great black hole, we might say, in the economy that sucks money 270 00:25:56.380 --> 00:26:00.980 away from capital projects into the stock market. 271 00:26:00.980 --> 00:26:04.380 It also sucks the effort of professional entrepreneurs 272 00:26:04.380 --> 00:26:08.980 since they now have to deal with the volatility of the stock market 273 00:26:08.980 --> 00:26:14.380 instead of focusing their attentions and energies on their own capital projects. 274 00:26:17.180 --> 00:26:22.180 Let me give you one quote here from Keynes about the stock market. 275 00:26:22.180 --> 00:26:25.580 He's talking about average stock investor's knowledge being nil 276 00:26:25.580 --> 00:26:35.580 of Stocks, and saying then that it must be based on arbitrary convention, which in turn is a product of the state of confidence, as he called it, of the mass of ignorant investors. 277 00:26:35.580 --> 00:26:44.580 Stock markets just limit genuine capital accumulation by diverting funds and efforts into it and away from capital projects. 278 00:26:44.580 --> 00:26:53.580 And they're also the source of the trade cycle, since investors have what he called a disobedient psychology. 279 00:26:53.580 --> 00:26:59.580 and are subject to over-optimism and over-pessimism. 280 00:26:59.580 --> 00:27:02.580 And so he concluded this way, he said, I expect to see the state, 281 00:27:02.580 --> 00:27:07.580 which is in a position to calculate the rate of return on capital goods on long views 282 00:27:07.580 --> 00:27:10.580 and on the basis of a general social advantage, 283 00:27:10.580 --> 00:27:14.580 taking an ever greater responsibility for directly organizing investment 284 00:27:14.580 --> 00:27:18.580 since it seems likely that the fluctuations in the market estimation 285 00:27:18.580 --> 00:27:21.580 of the rate of return on different types of capital 286 00:27:21.580 --> 00:27:26.280 will be too great to be offset by any practical changes in the rate of interest, 287 00:27:26.280 --> 00:27:32.480 or as I mentioned before, what he called a somewhat comprehensive socialization of investment. 288 00:27:32.480 --> 00:27:39.180 Now, I might remark then in closing that there's one more theoretical problem for Keynes 289 00:27:39.180 --> 00:27:49.080 in suggesting that a fully Keynesianized economy should have a socialized stock market and bond market. 290 00:27:49.080 --> 00:28:00.080 That's this, that if one doesn't go on to socialize the rest of the economy, then capital values will still be based upon consumer preferences, as David Gordon mentioned. 291 00:28:00.080 --> 00:28:11.080 These capital projects that Keynes envisions the state engaging in will not have capital value either, since they get their capital value only by consumer demand. 292 00:28:11.080 --> 00:28:16.080 What this necessitates, of course, is going on to socialize consumer demand as well. 293 00:28:16.080 --> 00:28:46.080 And far from shrinking from this, Keynes actually advocates this in the general theory, where he says this disturbing conclusion that capitalism cannot accumulate capital sufficiently depends, of course, on the assumption that the propensity to consume and the rate of investment are not deliberately controlled in the social interest, but are left mainly to the influences of laissez-faire. He goes on then to say, the state will have to exercise a guiding influence on the propensity to consume, partly in its scheme of taxation, partly by fixing 294 00:28:46.080 --> 00:28:50.080 and increasing the rate of interest and partly perhaps in other ways. 295 00:28:50.080 --> 00:28:54.080 It's the other ways of course that scare me. 296 00:28:54.080 --> 00:28:58.080 And surely there can be only one outcome to progressive socialization. 297 00:28:58.080 --> 00:29:02.080 And this is progressive impoverishment. And just as surely it would be folly 298 00:29:02.080 --> 00:29:06.080 for us to repeat the socialist experiments of the 20th century 299 00:29:06.080 --> 00:29:10.080 under the guise of a Keynesianized economy. Thank you.