Keynesians Going All In

Mainstream economists are celebrating Joe Biden’s election as US President. For Keynesians, the outlook is for a reaffirmation of economic management by the state, and of reflationary monetary policies to restore economic growth, following the damage caused by covid lockdowns.

This article points out the fallacies in the Keynesian argument. It shows how key economic statistics have been manipulated and misrepresented to conceal the delusions behind state interventions. And based on inflationary programs only announced so far, we can expect the US budget deficit in fiscal 2021 to rise to over $5 trillion. Furthermore, the twin deficit hypothesis suggests that when the temporary increase in the savings ratio unwinds, the US trade deficit will also increase accordingly.

This assumes no disruption from the known unknowns, such as an inevitable banking crisis and foreigners’ liquidation of their $27 trillion pile of financial assets and bank deposits, causing a sharp rise in interest rates.

As with every cycle of bank credit, Keynesian monetary policies will be disproved again. But this time and without a major shift in economic and monetary policies, fiat currencies are almost certain to collapse, necessitating their urgent replacement with sound money.


The Keynesians, who overwhelmingly outnumber monetarists and sound money men, are firmly in charge. Yesterday (20 January), Joe Biden officially became US President with a “new deal” agenda which will exceed in ambition any stimulus in American history; to put the coronavirus to bed, promote economic growth, and restore America to the green agenda. There is little doubt in Keynesian minds that for changes in economic policy, Donald Trump was Herbert Hoover to Joe Biden’s Franklin Roosevelt. Keynesians are heaving a sigh of relief that state control over the macro economy is back in safe hands.

Now that Biden can reflate, they say the US economy will recover and grow. Investment will come flooding into America from around the world, driving the dollar higher against the currencies that persist with austerity measures (in other words, every currency of every nation that refuses to reflate as much). Even the IMF is exhorting all governments to spend as much as possible. For Keynesian Americans, the economic outlook has improved immeasurably with Trump gone.

The investment and banking establishment undoubtedly believes in this improved outlook, because of their Keynesian credentials and their commercial interests. They are citing three things. Inflation is at bay with the CPI growing at less than two percent, giving ample room for monetary expansion within the Fed’s dual mandate. Industry can begin to invest again with increasing confidence when the pandemic is over. And with the savings rate having been boosted during lockdowns, there is ample consumer spending to be unleashed, which could even result in a latter-day roaring-twenties economy.

For now, Keynesian investment strategists and managers can with renewed enthusiasm dismiss gold as a pet rock. They see gently rising interest rates returning markets to normality in the future, and as economic recovery morphs into sustained growth, national finances will return to a balance and then surplus when tax revenues fully recover. It is the Keynesian argument of the 1960s resuscitated and repackaged for the 2020s.

How many times have we seen this? Every turn of the credit cycle, the Keynesian argument fails only to return as the establishment’s beacon of hope.

There are two stand-out statistical falsehoods behind Keynesian assumptions. The first concerns the relationship between monetary inflation and prices, and the second is the representation of GDP as a measure of economic activity. While much of this is trolling over ground already covered in earlier articles for Godmoney, it is essential to fully comprehend the fallacies over these two macroeconomic measures before we can proceed to assess the seriousness of any disinformation they provide, and how these misrepresentations will affect economic outcomes.

Changes in the general level of prices

The general level of prices is an economic concept that is just that: it simply cannot be measured. The fact that it is only a concept gives anyone who tries to establish a proxy considerable latitude in their method. Government statisticians have taken full advantage of this fact to reduce the burden of inflation compensation written into their governments’ commitments with both their general public and investors holding index-linked government bonds.

It is an cumulative process that commenced soon after governments agreed to compensate their citizens for rising prices in the wake of the inflationary 1970s. John Williams at has reverse-engineered the changes in statistical method deployed by the US Bureau of Labour Statistics since the early 1980s to arrive at a figure for price inflation without those changes. The difference from official CPI estimates is remarkable.[i] And if we look at the publicly available Chapwood Index, which covers the prices “of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities” we see that annualized prices measured this way have risen recently by as much as 13.4% (Sacramento) and at the least by 7.1% (Albuquerque), all being several multiples of the official CPI estimate. Major cities also have high rates: New York 12.7%, Los Angeles 13.1%, and San Francisco 12.8%. But with an arithmetic average across all 50 cities at 10.1%, this is remarkably different from the CPI’s All Items rate for 2020 of 1.4%.[ii]

Furthermore, Chapwood shows an average annual inflation rate of 9.97% over all cities between 2011—20. Taking its calculations, we can derive the chart shown in Figure 1.

(Click on image to enlarge)

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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