Monday, July 19, 2010
Keynsian “borrow and spend” is crazy.
When government borrows, it borrows something, i.e. money, which government itself created in the first place. It borrows something which government can create in limitless quantities any time. This is as absurd as a dairy farmer buying milk in a shop when there is a thousand gallon tank of milk a few yards from his front door. It is absurd as carrying coals to Newcastle.
As to whether printing money IS inflationary, it is not inflationary (as pointed out by David Hume over two hundred years ago) until it is spent, and spent in sufficient quantities. The latter equals stimulus (or possibly too much stimulus). Moreover “spent in exactly the right quantities” equals “stimulus of exactly the right amount”. Ergo stimulus can be achieved without any Keynsian “borrow and spend”, that is, without any borrowing.
Or in the words of Claude Hillinger, “An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.”
Conclusion: Keynsian borrow and spend is crazy.
Endnote: it is quite likely that Keynes realised that Keynsian borrow and spend is crazy, to judge by what he said about Abba Lerner. (Lerner favoured “print and spend” rather than “borrow and spend” money”.) Keynes said "Lerner's argument is impeccable but heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.”
In other words possibly Keynes realised that “print and spend” was beyond the comprehension of those surrounding him, and that he’d be better off going for the second best and daft alternative, namely borrow and spend.