The current Ponzi model need not apply
The reality however is that these top down policies were not intended to finance military blunders, tax cuts, trade deficits and other chicanery, they were originally intended to be counter-cyclical i.e. used sparingly during contractions and reversed during expansions. As a means of buffering the economy and lessening poverty.
We are witnessing in real-time the horrifically mis-applied implosion of modern economic theory...
We are witnessing in real-time the horrifically mis-applied implosion of modern economic theory...
Keynesian fiscal stabilization is the case in point of a counter-cyclical policy that has been used on a pro-secular (all the time) basis since the day Reagan took office. However, on the monetary side we've witnessed even far greater bastardization in the past three decades. Prior to Reaganomics, Keynesian (fiscal/government spending) policy vied with Monetary (money supply control) as the two primary competing models for controlling the economy. Fast forward to the current paradigm of amplifying every policy to asinine levels previously unforeseen by far more sane generations - and these competing policies have now become a conjoined model by which Monetary Policy complements Fiscal policy by financing totally unsustainable government deficits. It's now a two-headed monster in the hands of Boy Men who's idea of an economic Depression is having to fly business class instead of first class for a few months.
The Austrian Model is 'Best'
The third competing model, the 'Austrian School' economic model, prescribes a laissez-faire government approach with minimal intervention and 'sound' money in the form of a gold standard. Intuitively, this model sounds the best and in today's age of economic lunacy seems like the only alternative. This model clearly would work the best during expansions, however, during the inevitable economic downturns that have attended humanity since the beginning of time, this model has no mechanisms by which to prevent bloody revolution. Hence it's not politically stable through all scenarios, for example the Great Depression.
The Forty Year Asian Lesson: The economy is the real gold standard
I highly doubt that any country will ever be on a gold standard again. Now that I've pissed off all of the Libertarians and gold hoarders, allow me to elucidate why I think this. Currently not one country in the entire world is on a gold standard. My primary assertion, and one that we've learned over the past three decades, is that no country can unilaterally adopt a gold standard while most other countries are still using fiat currency. And the reason of course is due to trade Mercantilism and competitive debasement. We live in an age of competitive debasement unseen for decades if not centuries. And it's clear why economic purists would see this as the strongest rationale for returning immediately to the discipline of the gold standard. However, Mercantilism isn't about gold it's about productive capacity. It's about employment and the economy, not the store of wealth, therefore the country that is willing to debase its currency the most will do so. This is the lesson that Asia has taught us for almost 40 years. Clearly, as we see in real-time with Japan, there are massive limitations to this policy in terms of destroying wealth. However, rudimentary game theory would suggest that in a world where even the majority of countries are on a gold standard, any one country can derive incremental trade competitiveness by moving off of the gold standard. Pre-emptive debasement. And needless to say that any country that unilaterally adopts a gold standard will quickly see its gold reserves depleted by imbalanced trade. This was the lesson of Spain during the 16th Century. And in many respects, this same Mercantilist principle is why Greece is under pressure to leave the Euro, to be able to re-instate the Drachma, debase, and hence become competitive without forcing everyone to take a wage cut, which will never happen. They are not competitive under the Euro.
But the reason why the U.S. went off of the gold standard had far less to do with trade and more to do with monetary (credit) expansion. The ability to lower the cost of credit during periods when no one is willing to lend at any price and the money supply is constrained by the supply of gold. Again, it seems like a bad idea now, but I personally won't judge decisions taken during 1933 at the worst point of a depression. Did FDR forestall bloody revolution? Many think so, and I happen to be one of them.
