Keynes' Crises

“Let me lay to rest the bugaboo of what is called devaluation… The effect of this action, in other

words, will be to stabilize the dollar.” said Nixon as he ended the dollar’s, and therefore the world’s,

monetary link to gold. Since then, we have left the gold standard, and have been on the PhD standard. 

Has the stewardship of our money by Fed chairpeople and bank governors been a success? Has

the ability of our wise and learned betters to steer the ship of the economy led us to tranquil harbours

or stormy seas? Will the next iceberg finally return us to the “barbarous relic”, or will we remain

anchored in an even older system by which our rulers control and ruin our money?

The Ducat and the Florin are familiar-sounding currency units. These are the renaissance currencies
of Venice and Florence which gained widespread acceptance all over Europe. The reason these
republican currencies became so widespread is that the local currencies in England, France and
various German duchies were being constantly devalued by their sovereigns. This “royal standard”
was the precursor to our modern PhD standard and was just as immoral, corrupt and ineffective.

Once England and the Netherlands adopted the gold standard it was the Pound and Guilder that 

became international units of account, because they were anchored to gold and were not frequently revalued. 

After nearly a century of relative stability and prosperity under the gold standard, Keynes and his

acolytes advocated a great new diet pill that would smooth out the business cycle and deliver high

constant growth and stable prices. These days, Keynes’ playbook is economic orthodoxy and the

policy response to the last crises has shown the effectiveness of his ideas, or rather the ideas of his

school of economics.

The results are clear, Keynesian stimulus doesn’t smooth out the business cycle, it lengthens it and 
makes it more extreme. The dot-com boom and bust, as well as the housing bubble were a direct
result of artificially low interest rate policies. The response each time is to take rates even lower for
even longer, from LIRP to ZIRP to NIRP. Such policy responses cause malinvestments by
desperate yield-hungry would-be savers. Also, it prevents previous malinvestments from being

reallocated creating a fertile breeding ground for unicorns and zombies. 

The ultimate proof that these policies don’t work will be the necessary conclusion of this latest round

of monetary excess: the next crisis. The US stock market, subprime auto lending, cryptocurrencies

and fine art are showing signs of volatility after a prolonged period of inflation far beyond what can be

merited by the fundamentals. This volatility, coming with rising (but still low) real and nominal interest 

rates are a sign that these bubbles are popping. 2018 could well go down as the year of the next

crisis.

The response, predictably, will be a fast return to ZIRP/NIRP as well as massive money printing
poorly disguised by the academic term Quantitative Easing. Will it work this time round? Will they
manage to avert a real recession by inflating an even bigger bubble than the even bigger bubble?
This time they might be out of road, the nominal or real value of these assets will have to return to
their fundamentals, either by a collapse in their price, or by a collapse in the currency they are

denominated in.

 

And when the dust settles will we have learned anything? The socialists and central planners who

are creating this disaster-in-the-making will swiftly blame it on the excesses of capitalism, as if this

current state of affairs can be straight-facedly described as capitalism. In capitalism you don’t fix

prices, least of all the most important price of all: interest. Also, you don’t bail anyone out. Once it is

clear that the current direction has lead us to ruin, will we double-down on socialism or truely change

direction?

Bangalore April 16th 2018

TLDR: Mainstream economics is flawed. The coming crisis will be a catalyst for change for better or worse.

Under socialism, you have 3 cows, and they eat garbage in the street