Please give Feedback

u1am posted on Fri, Aug 24 2012 7:43 AM

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I wrote this short critique of Keynes' policy to a friend in an email exchange.

I'd like some feedback from fellow Mises-proponents on any errors I've got in my understanding.

Thanks alot, and please don't be too harsh. Here goes:

Keynes' basic policy for governments was counter-cyclical spending. By counter-cyclical they mean stimulation during the recession ( i.e. bust ) and taxation during the expansion(i.e. boom).

To be more explicit loose monetary policy by central banks (either by lowering interest rates, and if that is not enough money-printing) together with aggressive fiscal policy (building roads and bridges etc. euphemistically known as infrastructure projects ) by executive/legislative branch during the bust phase; followed by taxation during the (assumed) eventual boom phase.

The taxation was to payback any debt accrued from money printing otherwise nature penalises the economy via inflation.

This policy together with fractional reserve banking (the thing I told you about the last time you were here), allows bankers to arbitrarily lend money to anyone without fear of default (they either have collateral put-up by the defaulting party or the central bank prints money for them).

So the decision to expand a company, or change it structure all depend on bankers discretion, since it would be silly for company owners to finance their projects with equity-cash: nobody wants to hold lots of cash in an economy with continual monetary inflation.

Bankers are NOT the best people to run bakeries or architectural firms or furniture companies or drug companies, or any other entity that provides real products and services. They have completely different skill sets - mostly pitching takeovers, M&E, PowerPoint presentations etc. You probably know better than I.

The point I am trying to make to you is that bankers act very frivolously (at best) when they finance projects, mortgages etc. This raises prices higher that the economy actually has in cash, sometimes 10 times as much: because the investment and high-street banks know that the central banks will bail them out. This is NOT illegal in and of itself.

But when the central bank bails out investment or high-street banks by print money, they are literally stealing money out of your pocket by diluting your purchasing power. This is not as dramatic as the government breaking down your door and stealing money from you, but it is nevertheless identical.