LESSONS LEARNED #87: “In a democracy you hold the keys to the treasury. So be careful of what you ask for.” -Old Pithy

Posted by PITHOCRATES - October 13th, 2011

Keynesian Spending gave us Double Digit Interests Rates, Double Digit Inflation Rates and Stagflation

LBJ was going to end poverty.  He declared war on it.  His soldiers?  Dollars.  Lots of them.  His battle plan?  The Great Society.  Tactics?  Just throw lots of money at a problem.  Hope that some of it actually hit its target.  And further hope that some of the money that did hit its target actually did something beneficial.  Just hope for the best.

And thus grew the welfare state.  The recipients liked it.  Because they were the recipients.  Government liked it.  Because the recipients liked it.  Who voted for them out of gratitude.  And dependency.  And the Keynesian economists liked it.  Because government spending was stimulus.  And they love stimulus.  These Keynesian economists.  So everybody kept asking for more.  As no one saw the harm in printing money to make people feel good.

The Keynesian said this was proof that a manageable amount of continuous inflation (printing money) would do away with the business cycle.  The boom and bust that had recurring good times.  And recurring recessions.  They said let’s just have a continuous boom.  When real demand fell just create artificial demand by having the government step in.  Let the government stimulate demand by printing money to spend.  And they did.  GDP went up.  Thus proving their theory.  Or so they thought.  Until they realized printing all that money had so weakened the dollar that interests rates soared.  To double digits.  As did prices.  Giving us double digit inflation rates.  And stagflation.  That’s why the economy sucked in the Seventies.  And why Jimmy Carter was a one term president.

Bad Monetary Policy gave us Cheap Money, the Housing Bubble and the Subprime Mortgage Crisis

After the dot-com bubble burst the economy went into recession.  So the government went to their patented recession cure-all.  Monetary policy.  Playing with interest rates.  I.e., printing money.  Because housing sales have always been the key to a growing economy.  Because building a house generates a lot of economic activity.  And furnishing a house generates even more economic activity.  So the best way to kick-start the economy was to get more people into houses.  The more the better.  Whether they could afford to or not.  Because no matter what happens, people always pay their mortgage.

So the government kept interest rates low.  Artificially low.  To encourage people to borrow money.  To buy housees.  And they did.  But not enough of them did.  Poor people weren’t buying.  Mortgage bankers were turning them down.  Because they couldn’t qualify for a mortgage.  So the government pressured them to approve people even if they didn’t qualify.  Fannie Mae and Freddie Mac guaranteed these risky mortgages.  Then bought them.  It worked.  Thanks to ARMs and no-doc mortgages, anyone could walk in off the street and get a cheap mortgage with little down.  The people liked it.  And asked for more.  Thus began the housing boom.

People were buying and selling houses like there was no tomorrow.  Investors were flipping homes.  People were moving up into McMansions.  Bidding the price of houses into the stratosphere.  Paying whatever the price was.  Because the money was so cheap to borrow.  Artificially low.  Which really inflated the price of these houses.  To unsustainable levels.  Until the bubble burst.  And these prices began to correct to reflect reality.  The Fed, waking up the next morning in a stupor, saw what they had done.  And desperately tried to fix things.  To limit the damage.  They raised interest rates.  ARMs reset.  And the great Subprime Mortgage Crisis began.  And thanks to Fannie and Freddie buying those risky mortgages, the contagion spread around the world.  To everyone who bought what they thought were safe investments backed by safe mortgages.  Because people always paid their mortgages.   But were, in fact, backed by the riskiest of all investments.  Defaulting subprime mortgages.

The Social Democracies’ Spending gave European Countries Staggering Debt and a Sovereign Debt Crisis

Karl Marx was a German.  But his theories quickly swept across the Rhine.  Soon there were communists everywhere in the West.    After World II, when communism became the new enemy, Western Europe favored something called social democracies.  Communism-light.  The social welfare state.  Cradle to the grave nanny state.  With generous state benefits.  National health care.  Pensions.  You name it.  And the state gave it.

People liked it.  Asked for more.  And their governments were glad to oblige.  They spent more and more money.  Rather, they spent more and more of the taxpayers’ money.  These social democracies had some of the highest tax rates.  Which was fine with the poor receiving these generous state benefits.  But it explains why anti-capitalists like John Lennon and Bono moved out of the UK.  To escape the high taxes on the wealth they created with free market capitalism.  So there was a capital flight out of these social democracies.  While at the same time their public sectors grew.  More and more people worked for the government.  Received government pay and benefits.  And generous pensions.  The people liked this.  And asked for more.  Except Lennon and Bono, of course.  And the other superrich who fled these social democracies.

As tax rates climb and capital flees, though, economic activity stagnates.  Which forces these countries to borrow.  And borrow some of them did.  Some of the smaller countries in the Eurozone (Greece) are so in debt that they can’t even roll over their existing debt.  They are in such a mess that no one wants to take a chance loaning them money.  Because no one thinks Greece will ever be able to repay whatever they borrow.  Of course, with the common currency (Euro), Greece’s problems are everyone’s problems.  So the richer countries in the Eurozone (Germany) are pouring money into the ECB to try and rescue Greece.  And save the Euro.  What we call the European sovereign debt crisis.  While the world waits with bated breath.  Because if they fail it could very well plunge the world into another severe recession.  Or worse.  Because the world needs the Eurozone.  To buy their exports.  So they can prop up their own sick economies.

Class Warfare pits the Rich against the Poor and Middle Class, the Taxpayers against the Public Sector

Many, if not all, of the great crises countries have…are…going through is because of bad monetary policy.  Using the power of the purse to make happy voters.  Whatever the cost.  For they were always sure they could avoid paying this cost.  That they could always keep pushing this cost off onto a future generation.  But the spending grew too great.  The debt grew too high.  And, before they knew it, that future generation was here.  And it’s us.

The people grew fat and lazy on these generous benefits.  And they never worried about the cost.  Because the cost was always someone else’s problem.  Until now.  Not only are they losing some of these generous benefits.  But they now have to pay for some of them.  The cost being so great that everyone has to pay their ‘fair’ share.  Which was fair when ‘everyone’ didn’t include them.  But it now includes them.  And they don’t like it one bit.  So they’ve taken to the streets throughout Europe.  Rioting here.  Protesting there.  And demanding that the rich (anyone who is not them) pay more in taxes so they can continue to live the good life.  All funded courtesy of the taxpayers.  Who aren’t.  Living the good life.

So class warfare escalates.  Pitting the rich against the poor and middle class.  And the taxpayers against the public sector.  Placing these countries on the brink of anarchy.  All because the people learned that they could vote themselves money.  And did.  They got everything they asked for.  Including something they didn’t bargain for.  The destruction of their countries.

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