Keynes vs Mises: When the Golden Moose come Home to Roost

A few posts ago I believe I mentioned the size, numerically, of the Keynesian bubble the world is currently in. The gross domestic product of the entire planet is something like $65 trillion. That’s enough for a nice-sized moose farm, assuming all said moose on farm are solid gold and there are a lot of them.

I kid, but the value of the world-wide derivatives market, which means money that people assume they are owed and that is coming to them, is something around $1 quadrillion. A quadrillion is a thousand trillion. Let’s look at it numerically:


The problem is the discrepancy. That is, say some bank owns a Greek bond, and Greece owes that bank $1,000. Bank gets to write on sheet that bank has $1,000. But really bank does not, because Greece cannot pay bank. So bank loses $1,000. Those dollars never, in fact, existed. They were just assumed to exist.

The same is the case with every dollar over $65 trillion that exists in the worldwide derivatives market, because there’s no mathematical way that a quadrillion dollars in value exists on the planet when planetary GDP is only $65 trillion.

So the difference between those numbers is the size of the bubble in real numeric terms. And when that bubble bursts, everything goes back to zero. Like a planetary jubilee, debt slaves released.

The cause of this bubble is governmental bailouts and handouts and payouts in virtually every western country that can never be repaid. It started at the level of individuals, and went up the money chain from there. The progression is like so:

  1. Federal Reserve prints money and loans it to bank
  2. Bank loans it to Bob, an individual, bank being coerced by some government initiative to give Bob stuff he can’t afford
  3. Bob can’t pay back bank, Bob loses house
  4. Bank can’t sell house, loses loan
  5. Bank asks government to bail it out, so debt goes up the money chain from individual (Bob) to bank.
  6. Federal Reserve prints money and loans it to government
  7. Government bails out bank
  8. Bob loses home and the value of whatever dollars he does have goes way way down.
  9. Bob can’t spend money because he’s broke
  10. GDP, which is 70% consumer spending, goes down
  11. In a panic, Federal Reserve prints up more money so government can give it to Bob so he can spend it.
  12. Government goes into debt, the final level in the money chain.
  13. No one can bail out government, so bubble bursts.

It’s a dollar bubble. It keeps getting printed and printed at every step of the way. And it’s going to burst.

Keynes maintained that by intervening in the economic cycle, i.e. giving Bob money he couldn’t pay back, the government could paper over recessions and only have growth. Where Keynes went wrong was that he didn’t understand that once government has the power to create money out of nothing, that power, like any absolute power, gets abused. Soon, the government isn’t papering over mild recessions by handing out money. They’re furiously handing out money to keep the entire global economy from collapsing.

Think trillion dollar stimulus bills, $700 billion bailouts, $2 tillion European bailout funds, and God knows how many dollars the Fed is printing. Really, only God knows because they don’t have to tell anyone. And Herman Cain thinks this is fine.

But the more they hand out, the bigger the quadrillion dollar bubble grows. And the time until it finally bursts gets closer and closer.

In the end its all about Hubris. Keynes thought he could outsmart human nature by giving the government the right to print money backed by nothing. He thought he could stabilize the world through a simple tactic.

Mises knew better when he said that you can’t have your cake and eat it too. You can’t have growth without recessions, and if you try to, then all you’ll get is one big recession (read: crash) when the golden moose finally come home to roost, or whatever sound they make.


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