India’s Keynesian Policies may cause S&P to downgrade their Credit Rating

Posted by PITHOCRATES - October 13th, 2012

Week in Review

Monetary policy can be confusing.  Especially when the Keynesians start talking about it.  Bunch of policy wonks.  Pushing a defective ideology.  For it doesn’t do anything they say it will do.  Excessive government spending, and deficit spending, rarely ends well.  It only leads to larger debts, weaker growth and price inflation.  Wherever Keynesians try their policies (see Significant chance of cutting India rating in future: S&P by Neha Dasgupta and Swati Bhat posted 10/10/2012 on Reuters).

India still faced a one-in-three chance of a over the next 24 months, Standard & Poor’s said, although a series of reform steps launched in September had slightly improved the country’s prospects…

“Weaker-than-expected tax receipts, owing to weaker economic growth, and higher-than-budgeted subsidies are the main reasons behind it,” S&P said, referring to its deficit outlook.

The high deficit is counteracting the central bank’s efforts to control demand-driven price pressures, while the government’s use of domestic savings to finance the deficit is crowding out private investment and lowering growth prospects.

Governments tend to increase their spending during good economic times.  Because they can.  The problem is that good economic times don’t always last.  And when the economy tanks so do tax receipts.  Leaving the government with spending obligations that they no longer can afford to pay.  So they borrow more.  Run larger deficits.  And expand the money supply by lowering interest rates.  Which leads to, of course, price inflation.  And, finally, that oft asked question.  Is debt really anything to worry about when we owe money to ourselves?  Yes.  For when the government sells bonds to finance deficit spending it pulls investment capital from the private sector.  Where business owners could have used it to create economic activity.  And jobs.

So never be fooled by Keynesians and their rosy projections of economic growth.  For their policies hinder economic growth.  And cause credit downgrades.  Everywhere they’re tried.

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