Wednesday, August 03, 2011

Judgment Day for Keynesian Economics


Judgment Day is approaching for Keynesian economics.

Named after 20th century economist John Maynard Keynes, this quote from Keynes summarizes the school of thought: "[W]hen national economies suffer a downturn, governments should borrow and spend money to boost economic activity. Part of the proceeds of the resulting economic growth should then be used to repay the debt."

And during the past few years, the federal government followed Keynes' script by trying virtually everything it could to fix our weak economy.

What did we get in return?

Well, second quarter GDP growth was below estimates at 1.3%. And first quarter GDP was revised sharply downward to 0.4%!

In June, consumer spending fell .2%. And we've become all too familiar with hearing about the persistently high unemployment rate above 9%.

The March 2010 Elliott Wave Theorist said that the government "pledged to use taxpayers’ money and borrow unlimited amounts to fund banks that it deems 'too big to fail,' while pledging that the FDIC will fund shortfalls at all other banks. At the same time, the world’s top central banks offered unlimited credit at near-zero interest rates...

"According to the exogenous-cause model, these historic pledges and bailouts should have had immediate results. Take a look at [the chart below]. Can you tell where on this graph of stock prices authorities took these actions?"


"According to the economists' beliefs, the only rational place for them to have taken place would be at the bottom of the market. The minute the authorities began flooding the market with liquidity is the minute it should have turned up.

[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened."


Here's more recent analysis from EWI's Robert Prechter:

"Within the next few years, after every authoritarian trick is exhausted, the supposed infinite powers of central banks to inflate and of their governments to spend are going to melt like ice cream in the sun. In the end, the Keynesians and monetarists, the great macro-financial engineers of the 20th century, will be discredited. We can only hope that it will be enough to relegate their theories to the ash dump of history."

Elliott Wave Theorist, July 2011

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