Friday, January 2, 2009

Keynesian Rebuttal

The only solutions to the current economic crisis we've seen so far from Washington, and likely will see under the Obama administration, have been Keynesian ones, where we attempt to "spend our way to prosperity"—or in this case spend our way out of a recession; one that came about by overspending.

The Keynesian approach to reviving the economy is to increase credit injected in to the system. That has been the intention of nearly every bailout measure so far—to make it easier to borrow. Indeed if credit were increased, then overall money supply would increase, and then prices would rise (or stabilize).

What Keynesians seem to be disregarding is that credit supply is limited by what people can pay back, and if credit extends beyond borrower's ability to pay back loans, then eventually failures of repayment erode the capital base of the lending institutions, and then the whole Keynesian cycle of borrowing and spending grinds to a halt.

To Austrians, there is a limit by which an economic system cannot take on further credit, and worse becomes burdened by the repayment of old debt now spent, and at that point the only outcome is economic contraction regardless of how much the powers that be encourage us to borrow.

1 comment:

East.Bay.Miser said...