Posts Tagged ‘keynes’

“We are all Keynesians now,” or so said Milton Friedman in 1965. Later, President Nixon said: “I am now a Keynesian in economics”, and popular misconception has thrown up the view that it was Nixon who made the comment about us all being Keynesian.

Political leaders in South America could say it now, too. Leaders across the continent would sound eminently consistent if they too said: “We are all Keynesians now.” It is just that they aren’t and neither was Nixon, and neither was Friedman. Keynes advocated a certain set of policies under certain conditions: namely when monetary policy no longer worked no matter how low interest rates were, and when people still weren’t spending. He called the use of monetary policy in such times pushing on string.

Others call it liquidity trap conditions.

Right now in South America, monetary policy is not pushing on string, and there is no liquidity trap. Ditto the US economy in the 1960s. The policies that were adopted in the 1960s and to a lesser extent in South America today may be called Keynesian by some, but it is doubtful that Keynes would have called them that.

Keynes would have called for the remedies he famously advocated only when interest rates had fallen so low, that they cannot fall any lower. That is to say, about now in the US, the UK, Europe and Japan, but not in South America.

If you are running late and stuck in traffic, hitting the gas won’t help. But if you are running late, and the motorway is empty, and devoid of speed cameras, then upping your speed will help you to complete the journey quicker. Critics of Keynes who said his ideas didn’t work in the 1960s and thus won’t work now, are like someone who concludes, after a day spent in heavy traffic, that there is never any advantage in driving over 30 miles per hour.

© Investment & Business News 2013

Bear in mind that while the disadvantages of single currencies are clear, they do offer massive and pretty obvious advantages too.

Back in the 1930s, the problem of protectionism was rife. Mercantile policies in which each and every country tried to outdo everyone else by exporting more and importing less created the conditions for a world war. In 1944, Keynes and most of the great and the good in the economic world congregated at Bretton Woods in the US. Keynes was the star of the show. He was after all a very clever man, and he proposed a system of international exchange, in which surplus countries were pretty much forced to buy more from deficit countries. His plan was rejected largely because the US contingent felt that this too clever by half Brit, who no one else really understood, had come up with wheeze designed to help one of the world’s largest deficit countries – the UK – and punish the world’s biggest surplus country – the US.

We got the IMF, World Bank and the Bretton Woods system of monetary exchange as compromises. It is a shame, because if Keynes’ plan had been accepted, the global crisis of 2008 may never have happened, and actually the US – which today is the biggest deficit country in history – would have eventually done very  well out of it.

Keynes’ rather selfish next move was to die. In death he attained a kind of demigod status, but by then it was too late. The course of history was set.

But within the euro area itself, Keynes’ ideas could be adopted. If they were, it is possible that the problems of imbalances could be solved, and the euro could survive.

In sport, no one wants to see every competition end in a draw, but for the game of international trade, a high score draw for exports and imports for each and every country may well prove to be the result we all need.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

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