Gary North on Keynesian Economics

Gary North on Keynesian Economics

There is a make-believe monster in the closet called a liquidity trap. Keynesian economists fear the liquidity trap almost as much as they fear not getting tenure. The liquidity trap takes place when prices fall. Yes, fall! You know, like the price of computer disk storage falls, which will destroy civilization if lots of other things are mass-produced and get cheaper. The horror!

Keynesianism's logic is that falling prices will reduce investment opportunities. You know, the way Henry Ford lowered the price of Fords, and then nobody wanted to buy Ford Motor Company shares, which is why he paid fortunes to his former investors to buy their shares back, i.e., to help them out in a terrifying situation for them. He was a generous man, as you have no doubt read.

[...]

Interest rates are low because of reduced demand by the private sector. People are afraid to increase their debt. But Uncle Sam isn't. He is on a spending binge like nothing we have seen since World War II.

If Keynesian policies work to restore prosperity – increased Federal debt and low interest rates – then this economy should be booming. Productivity should be rising fast. Unemployment should be coming down.