Ancient wisdom has handed us countless proverbs and parables about the folly of irresponsible spending. It’s a well documented law of physics that incoming energy must match outgoing energy – debits must match the credits. If too much energy leaves a system, if there’s too many debits and not enough credits then the system will be depleted. However, against the collected wisdom of the human race we have John Keynes and his 21st Century disciples Barack Obama and Justin Trudeau.
Keynes gave us an interesting solution to economic problems. During his time the economy slowed and in spite of factories having proper equipment, they lacked workers and in spite of workers wanting to return to work no one would hire them. In spite of people needing essential goods and services they couldn’t afford them due to the shortages and in spite of business owners wanting to provide them no one was demanding them. The only thing missing was cash flow; with extra money all of these problems would be solved.
Adam Smith described an elegant system where (analogously) a farmer would supply food to a grocer, who would supply a market to a blacksmith, who would supply tools for the farmer. The economy worked in a beautiful circle, which in Keynes’ time had slowed down. His solution was for the government to inject cash into the system via deficit spending. This would vivify the economy, re-energizing it and and putting people back to work.
It’s a debatable point as to whether or not Keynesian approaches ever resolved any economic woe. What’s less debatable is whether or not Keynes’ theories have the power to alleviate our current economic woes.
Justin Trudeau’s immensely popular plan to energize Canada’s economy was a massive increase in infrastructure spending; Hillary Clinton promises much the same. The consequence is that in our free trade environment is that when road workers receive their paychecks they don’t buy Canadian goods. They buy toys manufactured in China, Japanese Nintendos, Korean electronics, Florida oranges, and scotch whiskey. Free trade is a great thing for the economy, and I especially admire easier access to scotch whiskey, but our current economic climate is such that it completely dismantles any hope of Keynesian practices cancelling a recession. It will only serve to improve the economies outside of the government’s jurisdiction. What’s worse, we’re impoverishing future generations to do this.
Our parents’ generation attempted similar schemes handing us crippling debt. We’re spared the crippling effects based on the interest rates being at an all-time low. The US debt stands at $19.2 trillion, and their federal revenue last year amounted to $3.2 trillion. If interest rates were at 20%, as they were when I was born, then the US federal revenue would account for 75% of the interest payments on current debt. This is the fiscal cliff – the US isn’t a nation in this case. Is the US government even sustainable at 10% interest rates? Canada’s debt currently stands at $1.3 trillion. At those enormous interest rates Canada’s interest-only payments will account for 90% of it’s revenue.
Given these nightmare scenarios one might wonder would what cause interest rates to rise. The answer is inflation. If the governments want people to spend money to boost the economy in the short-term they lower interest rates, making it easier to borrow cash and spend it. But if too much money is being spent this causes inflation and so government raise interest rates to promote saving. Failure to raise interest rates can lead to inflation or hyperinflation. Thus deficit spending places on a trajectory toward economic disaster.
There are alternatives to this onward march off of a fiscal cliff. A liberated economy is the most effective combatant against an economic shutdown. Sound-money – money whose value isn’t
subject to the whims a select powerful few – is an effective deterrent to inflation, which is the engine of economic disaster.
Living within our means is the another element of liberation. Solomon taught us that the borrower is the lender’s slave (Proverbs 22:7). The sagacity here is just as useful now as it was in ancient times. Living within our means is plugging the leak on a sinking ship.
The third aspect to a liberated economy that solves a fiscal crises is a strong economy. Unfettered entrepreneurial spirits, individuals and corporations with finances that aren’t asphyxiated by taxation, are going to propel the economy forward restoring us to healthy debt-to-GDP ratios. A $500/month debt to pay could be problematic for someone earning $1200/month, it’s less problematic for someone earning $10,000/month. As our economy grows our debt’s significance will decrease, provided we live within our means and refuse steadfastly to allow our debt to grow.
There is a cure to Keynes but it’s not power for the central banks and politics, not more guidance, not more policies that led to inflation and insolvency. The cure to folly is wisdom. The cure to government asphyxiation is liberty for the people. The cure to spending is saving. Sound money, sound economics, and being the slave to no one is the path toward prosperity.
* Brandon Kirby is a philosopher, financial adviser, and founder of a local investment club. He teaches introductory philosophy courses and host regular symposiums in philosophy. He is also a member of Canada’s Libertarian Party.
This post was written by Brandon Kirby.
The views expressed here belong to the author and do not necessarily reflect our views and opinions.