Our Keynesian Mess isn’t as Bad as Europe’s Keynesian mess

Posted by PITHOCRATES - November 26th, 2011

Week in Review

As the Keynesian policies fail the Keynesians circle the wagons (see Treasury potatoes posted 11/22/2011 on The Economist).

TREASURY bond yields fell today as the supercommittee failed to agree on a deficit reduction plan. Paul Krugman says this means the market can’t be worried about long-term deficits. More likely, they are worried about near-term austerity (since the supercommittee’s failure makes an extension of the payroll tax cut less likely). Ezra Klein makes a similar point here about the stock market’s drop.

I don’t really know why bond yields fell today, though I’d guess it has more to do with what’s going on in Europe than America. Still, I wouldn’t dismiss the possibility that fears of deficits and default lead to lower, not higher, bond yields. In a liquidity trap, government bonds behave increasingly like money and will reflect not just the usual drivers of expected inflation and deficits, but the demand for liquidity and safety…

The Keynesian economists are wrong.  As usual.  So why do investors keep buying American bonds even after S&P downgrades their credit rating?  And when the supercommittee punts?  Much like the full House did?  The Keynesians say it’s not the debt or the deficit that scares them.  It’s that government may stop spending recklessly.  That’s what a Keynesian thinks an investor fears most.  The goofballs that they are.

Here’s a thought.  Could Keynesian economics have failed so grandly in the Eurozone that by comparison our Keynesian failures here look less risky?

If we keep spending like we are we will end up like Greece.  Italy.  And all of the other Eurozone countries that are desperately trying to avoid bankruptcy.  Note the key is ‘will end up like’.  Meaning that we haven’t.  Yet.  Which is why American bonds are more attractive than these others.  Because our Keynesian mess isn’t as bad as their Keynesian messes.  Yet.



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