Did “Keynesian Economic Theory” fail in the post-crisis years of 2008?
The ‘Great Recession’ of 2008 was brought about by reckless lending. The aftermath left the credit market in an extreme tight squeeze whereby corporations were frightened and hesitant to spend. Cost cutting led to massive layoffs leaving people with no money, therefore, ‘aggregate demand’ dropped! Economists, led by the then FED Chairman Ben Bernanke, believed that the solution to this problem lay in generating demand by using the ‘easy monetary policy’ as propagated by the ‘Keynesian Theory’.
This famous economic theory is named after the British economist, John Maynard Keynes, who published this theory in his book, “The General Theory of Employment, Interest and Money” in 1936. The basic principle of his theory is to generate aggregate demand with a combination of both fiscal and monetary policy.
The Central Banks, led by the FED, embarked on a journey in order to stimulate demand by using the monetary policy route.
The FED and developed nations dropped interest rates to zero which failed to kick-start demand. They followed this up by huge ‘Quantitative Easing’ programs, in other words, by printing money out of thin air. Even this failed to accelerate the ‘cumulative demand’.
After six years of failure, attempting to generate demand, the Central Banks are experimenting with ‘negative interest rates policy’ (NIRP). Although NIRP has been in force in the Eurozone since 2014, it has not produced any noticeable positive results. Yet, the ECB President Mario Draghi continues to inflict negative rates into negative territory, in hopes of generating demand. Japan is another large global economy using the NIRP policy, however, the policy is resulting in the opposite effect. Japanese citizens are hoarding their cash and investing in gold, as a result of NIRP.
Why did all of this QE, ZIRP and NIRP fail to generate demand? The main reason, in regards to this question, is that the effects of the ‘easy monetary policy’ never trickled down to meet the needs of the working class people. I feel certain that you are most likely no better off in terms of obtaining credit as compared to that of a decade earlier. The banks are no longer willing to lend.
According to the World Economic Situation and Prospects 2016: In a United Nations report, the banks preferred to park their money with the FED and earn a risk-free interest rate return rather than lending it to the public. The Banks parked $1.6 trillion during the period from 2009 to 2015 as compared to an average of $200 billion during the preceding eight-year period of 2000 to 2008.
With the FED trying to raise interest rates, the banks will earn higher interest rates and are most certainly unlikely to begin lending, anytime soon.
According to the UN report, although the developed economies have maintained an ultra-low interest rate policy, the private investments in 5 of the 20 global economies have declined within the 2010 to 2015 period to lend as compared to the ‘pre-crisis era’ of 2007. The rate of growth, in those 17 economies, post the financial crisis was lower as compared to the ‘pre-crisis years’.
The U.N. report also points out that the growth rate in the developed economies has been halved, since the crisis. Even the employment numbers are discouraging; there are 12 million more unemployed people as compared to what existed in 2007.
Inflation throughout the developed nations is languishing well below the comfort zone of the Central Bankers. Excess money in the economy, throughout the developed nations has been used by corporations and the wealthy in order to inflate ‘asset prices’.
Since the failure of the current ‘monetary easing programs’, a few experts have reverted back to the philosophy of the American economist Milton Friedman and his idea of ‘Helicopter money’, which is published in his paper, “The Optimum Quantity of Money” which was written in 1969.
Mr. Friedman wrote: “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
Interpreted, the basic idea is to directly provide the people with money which will, in turn, encourage them to spend rather than the current indirect method which has failed to reach the working class people.
This idea has found many supporters, including the former Federal Reserve Chairman Ben Bernanke as well as the Financial Times' Chief Commentator Martin Wolf.
However, once people start receiving ‘free money’, the problem is that they become dependent on it and this makes it virtually impossible to cease the drops. This becomes detrimental to the entire society.
So, what options are left?
The unsung genius, Kondratiev, and his economic business cycles will ‘play out’. We will witness a debilitating period of ‘contraction and crisis’. This period is most likely to begin very soon and persist for another 3-5 years! I am labelling it as the ‘Great Reset’. During this period of time, a few nations will default and the Eurozone will likely break apart. I forecast fiat money will be under a serious and severe threat.
The world will see gold and silver as a true store of wealth and security and eventually the entire global economy will stabilize and grow, yet once again!