What Keynes Has Done To Us

Nelson Hultberg

The essential economic problem we confront today is that our dominant Keynesian intellectuals have abandoned reality. They do not grasp what they have wrought with the mountainous loads of debt and malinvestment that are overwhelming us. Much of this burden must be liquidated before genuine demand and growth can be restored, which will require radical reform if we are to evoke a genuine cure.

To try and solve today's debt created crisis with more debt (as the Keynesians are presently doing) can only bring on a bigger bust the next time around, which will require still larger "debt injections" to stave off a still larger crisis. Eventually the economic implosion will be so monstrous that it can no longer be rectified with "corrective debt injections." Consumers and businesses will have reached their limit. The Keynesian system will have met its Waterloo. Perhaps this denouement has already arrived.

This dilemma began because we altered the creation of money in a profoundly dangerous way with the inception of the Federal Reserve in 1913. Government expansion of the money supply today does not have to be redeemed in gold as the banks' fractional reserve loans were in the nineteenth century. What the Fed does now is pyramid excessive levels of credit upon totally irredeemable currency. It can print as much money as it wishes, and banks can loan out nine dollars in credit for every printed dollar. The Fed has been creating, over the past 100 years, far more excessive debt than the worst banking systems of the 19th century. This must end in an eventual collapse.

Keynesian rationale, however, maintains that the "total catastrophe" scenario can be averted by use of this credit pyramiding process. The Fed can continue injecting fiat money into the economy indefinitely and thus bring about an expansion of purchasing power for consumers and businesses. Why? Because somebody is always willing to sell bonds to the Fed, and that's all it takes. The Fed prints billions in new money to make the purchases. Liquidity is thus injected into the system, which will eventually recharge all producers and consumers to begin anew the boom cycle. Keynesianism has solved the "total catastrophe" dilemma.

But what Keynesians conveniently ignore is that the fiat money from those bond sales does not become credit until a banker offers it for a loan, and a borrower desires to borrow it. If consumers and businesses become overloaded with debt, and if bankers become worried about prospective borrowers' credit worthiness, then much of that fiat money remains just fiat money. It sits in the banks and does not find its way into the 9-1 fractional reserve lending process whereby $9 in credit is generated for every $1 of fiat money printed by the Fed for its periodic "liquidity / debt injections." In other words, the newly printed money does not so easily expand into mega-purchasing power via Fed credit pyramiding, which is what is needed to bring recovery from a recession.  

Therefore the Fed becomes basically ineffective in its efforts to restore real growth after a deflationary credit contraction that results from consumer and business debt saturation. This is because the Fed's only effective policy tool is the offering of more debt, which is the very poison that is destroying the system. Sure, the Fed can stop the deflation with massive "debt injections," but at what cost? The cost will be either runaway price inflation because of the size and repetition of the debt injections needed, or a pseudo-growth economy where relentless stagflation prevails and the stock market registers nominal gains rather than real gains.

The Wildest Credit Binge In History

Our economy today is so top-heavy with credit and debt that it is unlike all other economies in the past. Keynesians somehow believe that consumers and businesses will continue to borrow still more in face of this. Reason tells us they will not. There has to come a saturation point, and it appears we have reached it with the credit crisis and Dow collapse of September 2008. We have experienced, over the past 43 years, the wildest credit binge in our history. This time the inevitable hangover will be more than a regular hangover.
  
Because the Fed must fight the economic crisis with massive monetary inflation, the dollar must depreciate disastrously in the upcoming decades. Eventually holders of U.S. dollars, stocks, and Treasury bonds will sell their dollar related investments, which will bring severe deterioration to our economy and to the standard of living that Americans enjoy as either heavy price inflation or prolonged stagflation invade our lives.

In response to all this, our government leaders will continue to put forth an array of market manipulations, financial gimmickry, and bailouts for Wall Street such as what we saw with Hank Paulson's Troubled Assets Relief Program (TARP) in 2008. Our leaders will grasp at straws. They will jawbone and delude themselves. They will stonewall and try to dump the more insurmountable problems into the next administration's lap. And, of course, they will continue to relentlessly inject massive debt into the system in hopes of not having to descend into the nastiness of a full blown depression.

What has worked for the Keynesians for 78 years is now in its death throes. The policies of interest rate rigging and debt injections mixed with confiscatory taxes, which they have used since 1936 to manage their booms and busts, could conceivably have one more stimulatory credit bubble left, but it's doubtful.

Will Credit Reflation Work?

Hopefully the reader is now beginning to grasp that our present economic problems are far more serious than just another "recessionary cycle" in need of reflation. Because many of the debt injections being utilized by the Fed are being monetized (i.e., paid for by printing new money) this must bring price inflation down the road. But Fed and Treasury bureaucrats figure they can get away with such monetization. In fact they think they can monetize any number of assets (U.S. bonds, mortgage securities, commercial paper, corporate bonds, etc.), and thus stem any deflationary spiral without incurring price inflation in the aftermath. Their reasoning is that afterwards they can then mop up all their injections of liquidity. They can sell the bonds and other assets later which will withdraw liquidity from the economy. In this way, they can avoid serious price inflation problems in the future.

But three flaws in the Keynesians' reasoning exist. First, the government is buying and / or guaranteeing all kinds of loans and debt paper that no one in the marketplace wants. They are, in essence, buying trillions of dollars of "crappy paper" as the street defines it. But who will buy this crappy paper from the Fed and Treasury when they decide to re-sell it, which they will have to do if they intend to withdraw liquidity from the system later on? The re-sell argument sounds good coming from Keynesian spinners, but it will play out very badly when the time comes to implement it. Crappy paper that has no buyers in 2009 will have the same dearth of buyers in 2015. Time cannot turn dross into gold.

Second, the Keynesian spinners are ignorant of the fact that each succeeding decade in the evolution of a fiat paper money economy requires larger amounts of debt to be floated in order to maintain the same amount of economic growth. (See Keynesianism's Ugly Secret) This means that more and more massive amounts of liquidity will have to be injected in the effort to stave off depression and then withdrawn from the system in order to bring about a cessation of the inflationary pressures building up. These amounts will be far larger than the spinners are anticipating. It sounds plausible to say that all excess monetizations will be withdrawn later on. But it will be very difficult to mop up such massive amounts of liquidity in a smooth and practical manner. And what's more, it will be very difficult to pull the trigger on such withdrawals.

Will the Fed and Congress have the courage to withdraw liquidity from Wall Street in the midst of the most severe economic crisis since the 1930s? Are we to believe that Yellen and the FOMC are going to raise interest rates to American consumers and businesses who are already ignoring record low rates? Very doubtful. Moreover who will determine what constitutes "excess liquidity?" Junkies are the world's worst judges of whether or not they are engaging in excess, and this is who we have running Washington and Wall Street today - "liquidity junkies."

When all is said and done, such a massive injecting and then mopping up of liquidity will bring about a terribly volatile economy in which business calculation is unreliable, capital expenditures measly, real growth nil, and countless decisions "politicized" by a growing herd of corporate-banking bureaucrats assuming the role of new economic Czars for the 21st century.

Third, there is the problem of "money velocity." As the massive amounts of liquidity for the bailouts begin to diffuse out into the economy and cause price escalation, consumers will begin to get nervous about the credibility of the dollar. They will perceive the currency debasement taking place and will act accordingly. In other words, they will spend their money faster (thus speeding up the velocity of money), which will create a chaotic inflationary price spiral rather than the productively growing economy anticipated by Keynesians.

The Sinister Inflation Game

This level of ignorance is embarrassing. Keynesians do not understand the sinister nature of the inflation game they are so desirous of playing. They think they can manage its explosive dangers with their sophisticated debt instruments, econometric models, and logarithmic forecasting programs. They overlook the mysterious vagaries of human nature. They are blind to the unpredictable reactions of human beings because they think only in terms of X's and O's on a graph. But society's real economy is comprised of real "human beings" and real "human actions." It is these human beings and their actions that always confound Keynesian central planners.

Here then is the major source of our problem: Keynesian statists in Washington can't grasp that a human economy, like an ecology in nature, runs on natural laws (supply and demand, profit and loss, diminishing returns, Say's Law, etc.). Its hundreds of billions of convoluted emotions, preferences, actions and reactions are self-correcting through these natural laws whenever excesses and miscalculations take place. When bureaucrats intervene into this complex ecology, they cause severe distortions, inflations, malinvestments, shortages, etc., which then require more government interventions, which then create more distortions until the entire ecology becomes stultified and collapses.

Unfortunately Keynesian bureaucrats have been creating ever-increasing distortions in our economy for many decades, which has now brought us to stultification and collapse. How all this will play out over the long run cannot be known precisely. But a monstrous "government induced" crisis is now upon us, and the wisdom of history says it will not unfold benignly. The structure is too corrupted within. Our policies and perspectives are too warped, our excesses too huge. Too much damage has been done to monetary integrity and ethical propriety. Too many political humbugs and parasites, too many barnacles have accumulated on the ship's hull of our life's energy. The Rubicon was crossed in 1971. When Richard Nixon closed the gold window to the world, he opened the lid to Pandora's Box. He tore down the last prevailing bulwark of economic sanity.

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Nelson Hultberg is a freelance scholar/writer in Dallas, Texas and the Director of Americans for a Free Republic www.afr.org. His articles have appeared over the past 20 years in such publications as The Dallas Morning News, American Conservative, Insight, Liberty, The Freeman, and The Social Critic, as well as on numerous Internet sites such as Capitol Hill Outsider, Conservative Action Alerts, Daily Paul, Canada Free Press, and The Daily Bell. He is the author of The Golden Mean: Libertarian Politics, Conservative Values.

The Modern Freedom Movement, 1940-2014

Nelson Hultberg

It began in the early 1940s. FDR had launched the New Deal's collectivization of America, and a small but prescient group of libertarian and conservative intellectuals were in rebellion - such thinkers as Richard Weaver, Ludwig von Mises, Friedrich Hayek, John T. Flynn, Rose Wilder Lane, Isabel Paterson, and Ayn Rand, to be followed a decade later by the likes of Russell Kirk, Frank Meyer, and Murray Rothbard.

Out of their cerebral and activist efforts there began the movement to repeal the overweening statism that was infiltrating America from Europe via Karl Marx and John Maynard Keynes. The infamous year of 1913 was the infiltration's major manifestation. FDR's New Deal was its Rubicon. In reaction to the radical political changes taking place during the 1913-1940 era, today's freedom movement was born.

It is not well-known by the general public, but when the modern freedom movement first began in the early 1940s, it was not split between libertarians and conservatives. It was one coalition unified in rebellion against FDR's monster welfare state. By 1970, however, the movement had become tragically bifurcated. The radical economist Murray Rothbard took libertarians off into anarchy, while the traditionalist philosopher Russell Kirk drove conservatives into statism. This split has created two incomplete visions - contemporary libertarianism and conservatism - that are, in their singularity, incapable of effectively challenging the authoritarian mega-state.

Conservatives are caught up in the puritanical swamps of legislating morality and hegemonic conquest of the world, while libertarians chase the philosophical absurdities of moral subjectivism and ersatz individualism. Conservatives wish to return to the Middle Ages and mandate morality via the state, while Libertarians wish to do away with any reference to morality altogether. Conservatives revere leaders like Savonarola and John Calvin. Libertarians excite themselves with Larry Flynt and the Beatles' "Nowhere Man." Somewhere the Founding Fathers are twisting in their graves over each of these political movements and their embarrassing lack of comprehension concerning the requisites for a free and individualist society.

How do we confront this lack of comprehension? We must purge the libertarian and conservative movements of the fallacies they have adopted from Murray Rothbard and Russell Kirk. This will require a "rational theory of politics" that can bring together the two philosophical streams of John Locke and Edmund Burke so as to restore the original Republic of States that Jefferson and the Founders envisioned. More on this theory shortly.

The Tragic Bifurcation

In the aftermath of LBJ's defeat of the Goldwater forces in the 1964 election, most libertarians, under the influence of the pied piper Murray Rothbard, split off from the official path of the freedom movement and wandered into the utopian forest of some very radical political-philosophical principles - those of anarchism.

In contrast, conservatives went the other direction by abandoning principle altogether to align themselves with Irving Kristol's collectivist neo-conservatives and tolerate the very government usurpations their movement had been formed to repeal. They began their sellout when Richard Nixon declared in 1971 that, "We're all Keynesians now." They continued it with Ronald Reagan's massive expansion of the welfare state and when George W. Bush launched a tide of spending, privilege, and corruption totally unhinged from sanity and reality.

Can today's freedom movement be rescued from this tragedy of default? Can the American people be convinced to restore the Republic? Yes, but in order for such a revolution to actually take place, American libertarians and conservatives must face up to some unsettling realities and take appropriate action. 

The conservative wing of the "freedom movement" has been grievously corrupted by Machiavellian statists. The most important cause of this has been Russell Kirk's philosophical emphasis on tradition being transcendent to reason and his rejection of "equal individual rights" in favor of special privileges and a flexible Constitution. This has led conservatives into a Faustian bargain with the statist enemy and opened the door for the hijacking of their movement by neoconservatives, thus moving most of today's conservatives to the left into lockstep with statist liberals.

The libertarian wing of the "freedom movement" has been equally corrupted, but in the opposite direction to the far right on the spectrum. The most important cause of this has been Murray Rothbard's anarchist politics that privatizes all functions of the government, even the military, police, and courts of law. In addition his followers espouse an egoistic "do your own thing" culture that refuses to morally condemn the traditional evils of history. Whatever is peaceful is their creed. It is a sense of life that worships what the Greeks called the sin of "eleutheromania," freedom without limits.

To better understand the nature of this disastrous split between libertarians and conservatives, a brief exposition of America's concept of freedom is necessary.

Jeffersonianism Is America's Philosophy

The American concept of freedom has its ideological roots in the Founders' libertarian political ideal, combined with conservative metaphysics and culture. It is a blend of the 17th and 18th century thinkers, John Locke and Edmund Burke (one libertarian and the other conservative), which heavily influenced Americans from the start and up through World War I - the former emphasizing reason and individualism, the latter tradition and community. It manifested in what is called Jeffersonianism.

This political philosophy stands for the individual over the collective, a strictly limited constitutional government based upon federalism, equal "rights" instead of equal "results," a free-market economy, no entangling foreign alliances, and an objective code of morality for society as opposed to the moral neutrality of Rothbardians and modern liberals. This is what needs to be restored.

The famous conservative philosopher, Richard Weaver, at the University of Chicago in the 1940s and 1950s, and author of the great classic, Ideas Have Consequences, understood well this Jeffersonian concept of America and shaped his defense of freedom around it accordingly. Unlike today's neoconservatives, Weaver understood the necessity of limiting the tyrannical danger of the state. He would be horrified with today's neoconservative attacks upon the Founders' vision of laissez-faire. He grasped the philosophical common ground between libertarianism and conservatism:

"[C]onservatives and libertarians stand together," he said. "Both of them believe that there is an order of things which will largely take care of itself if you leave it alone." Weaver was a strict constitutionalist because a Constitution provided for a "settled code of freedom for the individual."

This is the crucial issue of our time - restoration of libertarian conservatism in America and its "settled code of freedom for the individual." If we, who believe in free enterprise and the Constitution, wish to reverse America's drift into an authoritarian state, our goal must not be to accommodate, but to purge the Gargantua on the Potomac that usurps our rights and freedoms with impunity. Libertarians and conservatives must be reunited to effectively challenge this monster.

My book, The Golden Mean: Libertarian Politics, Conservative Values, explains the need for this ideological unification and how to bring it about. I realize authors don't usually promote their own books in their articles, but in defense of my lack of orthodoxy, I cite the popular economist, Walter Williams.

Several years ago he was writing a review in his newspaper column for one of his own books. And in defense of his partisan effort, Professor Williams explained to his readers that his mother had always told him, "it's a poor dog who won't wag his own tail." So if the reader will indulge me, I would like to partake in a little tail wagging.

The Golden Mean is the philosophical answer to our immensely troubled times. It puts forth the "rational theory of politics" referred to earlier, and which we desperately need in order to challenge the authoritarian statism that has been destroying our republic ever since 1913.

The libertarian movement is lost in "utopian unreality." The conservative movement is lost in "statist appeasement." This is because of the disastrous libertarian-conservative split spawned by Murray Rothbard and Russell Kirk back in the 1960s. Without a correction of this split, freedom cannot be adequately defended and restored. Both libertarian and conservative activists are terribly misguided in their insistence on remaining separate movements. Conservatism needs libertarian politics in order to be just, and libertarianism needs conservative moral values in order to be workable.

The statist Gargantua controls our lives today because there is no effective ideological counterforce to overthrow its moral-philosophical-theoretical base. The Golden Mean provides that counterforce because it shows how to once again merge the two great systems of philosophical thought that brought America into being: libertarianism and conservatism. It shows how to recapture the Jeffersonian ideal.


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Nelson Hultberg is a freelance scholar/writer in Dallas, Texas and the Director of Americans for a Free Republic www.afr.org. His articles have appeared over the past 20 years in such publications as The Dallas Morning News, American Conservative, Insight, Liberty, The Freeman, and The Social Critic, as well as on numerous Internet sites such as Capitol Hill Outsider, Conservative Action Alerts, Daily Paul, Canada Free Press, and The Daily Bell. He is the author of The Golden Mean: Libertarian Politics, Conservative Values. Email him at: hultberg@afr.org