Wednesday, March 24, 2010

Theory vs. Practicality

Yes, Keynes worried about Aggregate Demand. He had to, as he onstensibly invented the concept.

I do not dispute the theory at this time, but the mechanism used (top down bail-outs of the money center banks) was disasterous to start. We must all get over this false dichotomy of KEYNES or FRIEDEMAN????? and get on with solving the problem of deflation. Both have their limitations as both theories rest on child-like views of the world. Reality is more violent.

March 23 (Bloomberg) -- The spending that politicians uncorked as the financial meltdown crippled the global economy in late 2008 and early 2009 followed a script written during the Great Depression by British economist John Maynard Keynes: Use government money to fill the void until consumer spending and business investment revive.

Now it’s the red ink created by this largest-ever application of Keynesian stimulus that’s polarizing political and economic debate, Bloomberg Markets magazine reports in its May issue. One camp argues that deficits and public debt have become the biggest threats to sustained economic growth. The other side says cutting spending too soon will destroy a still- fragile recovery.

“The fact that the world hasn’t slid into another Great Depression, which the collapse of the banking system in 2008 made possible, is because governments followed Keynes,” says Robert Skidelsky, author of a three-volume biography of Keynes and an advocate of keeping public money flowing until robust growth returns. “Governments bailed out financial institutions and allowed their budget deficits to grow -- neither of which happened between 1929 and 1931.”

Six decades after his death, Keynes’s ideas are being put to the test as never before. While the economist wrote his greatest works in the 1930s, he was largely unsuccessful in efforts to persuade U.S. and British leaders to boost government spending during the Depression. Keynes sent a copy of his 1933 treatise, “The Means to Prosperity,” to President Franklin D. Roosevelt and met him in Washington in 1934. Still, in the mid- 1930s, the U.S. cut spending -- and the Depression dragged

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