Oh how true, this 5 words caused the start of almost all the monetary crisis of all the world.
What is Keynesian Economics? How does it affect us? What does it predict for the future?
Keynesian Economics is a subset of Macro-economics
Keynesian Economics:
A belief that the private sector decisions leads to inefficient macroeconomic outcomes, they advocate active policy responses by the public sector. They encourage and embrace monetary policy actions by central bank, government deficit spending and fiscal policy actions by government to stabilize output over the business cycle.
- Keynesian Multiplier & Deficit spending
- Interest rates manipulation
Lay-man Terms:
A system that believes government need to intervene and lead the economy of its nations together with the private sector. Its the governments responsibility to bring about stability in the financial world through policies.
-Lowering interest rates, printing money, stimulus package.
Most Western governments and developed countries are practicing Keynesian economics to one degree or another. But none as prevalent as USA. US economics is almost totally Keynesian.
A very interesting article i found explains quite a bit about why Keynesian rules are chipping away on the economic health of the world: http://ilene.typepad.com/ourfavorites/2010/10/niall-ferguson-explains-why-keynesian-policies-are-dooming-the-world-economy-to-round-after-round-of-asset-bubbles.html
The most Important Quote of this article is:
'Remember what Keynes wrote in the 1930s about stimulus and the way in which government could get an economic going again really applied to a post-globalization world in which trade and capital flows had largely broken down, and most economies were quite isolated units.'
Keynesian thinking might be good in the past, but now the world is facing a great monetary deficit that might not be able to be paid off, the world economy are now interlinked with each other, no longer are bankruptcies the bane of companies, but also a threat to nations. What if the USA becomes bankrupt?
How Government Actions have plunged the world to crisis. (Keynesian Style)
Remember the 2008 Housing Mortgage Crisis
The crisis was caused mainly by mortgages and loans that went bad. That trickled down into the mortgage-backed securities being sold by banks to investors to : Reduce credit risk and replenish funds to loan out more money to housing buyers amongst other things.
Why would banks lend money to people who can't qualify for loans or meet the income brackets? Simple, the US government created Freddie Mac & Fannie Mae (Govt linked entities) to assure and guarantee all these loans and debts taken. With the government assuring your loans, greed took over most people and many began taking loans far beyond their means.
Banks gained the guts to lend more loans to risky people since the governments guaranteed it. Once those loans turned bad, the domino effect of disaster happened.
Stimulus Packages
Or Quantitative easing as the officials call it. In simple terms, its flooding the economy with money that is meant to stimulate the economy only if the money is put into good use. However most of these money never reaches its intended venues. Most of it is used to rebuild government infrastructure or to create jobs that DO NOT create any value or production in the USA.
That money should be given to the private sector, entrepreneurs to revive dying sectors that can improve the real production of America and not used as bailout money.
The next Bubble i call it the Credit Bubble, thanks to Keynesian thinking and government intervention (with good intentions but poor execution), the money supply of the world is going out of hand.
'Because the liquidity just leaks out, and that's why another round of stimulus would not stimulate in the promised way. It would stimulate the wrong things. And those things, commodity markets and emerging markets, are already overstimulated to the point of being nearly bubbles.'
Why is gold still strong and set to soar? Simple, because the world is Keynesian.
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