Keynes Rules!

"The importance of money flows from it being a link between the present and the future>" - John Maynard Keynes

In an article in Business Week Keynes was listed as "The Man of the Moment".  Keynes died in 1946 but his economic theories live on.  He was the first to promote the idea of fiscal and monetary policy as a solution to economic turmoil.  To summarize his ideas he said that during good economic times governments run surpluses and these surpluses should be spent during times of economic weakness to take up the slack from a weakened business environment.  Using both fiscal (tax cuts and spending on shovel ready projects) and monetary (printing money and lowering interest rates) an economy can be stimulated.  Once business picks back up the government can exit the market and recoup their investment through increased tax revenues.

It appears that the world's central bankers (German's aside) are bent on giving Keynes's theories one massive try.  The interesting thing to me is that his theories encompass ALL of the aspects of stimulus not "some" of the inputs.  Looking around the world then it is clear that while on the surface his principles are being used to "stimulate" the global economy when you dig deeper there are a number of things amiss and these missing pieces are undermining the efforts.

First let's take a look at Japan.  While the world applauded their most recent money stimulus and government spending packages they failed to mention that Japan has already raised the consumption tax and is planning to raise it again.  According to Keynes tax reductions are needed in addition to these other stimulus's and so while Japan is using two of the inputs the third is offsetting any perceived benefit.

Europe, the laggard of the group is barely using any stimulus other than monetary.  The Germans are even against that but the problem is that fiscal policies remain under the tight constraint of the Eurozone parameters.  This makes it near impossible for any of the countries that fall under the EU umbrella to stimulate beyond some monetary stimulus that they receive from the central bank and even this stimulus is becoming increasingly difficult to achieve.

The United States has definitely been the shinning star in terms of monetary policy having printed more than $4 trillion.  However on the fiscal side there has been little in the way of shovel ready projects and the tax burden being felt by individuals and businesses is massive.  Not only are the tax rates higher but with Obamacare in full force the cost of keeping full time employees is growing and is akin to an additional tax.

The final problem is that virtually none of the countries have had a budget surplus in decades (other than Germany).  They were all in a hole before they began printing money and are now in an even bigger one.  Furthermore the thought of them ever being able to balance their budgets seems impossible.  The United States as an example has not only a huge deficit to fill but with Social Security and Medicare kicking in the chances of a balanced budget are slim to none.

So while it appears that Keynes rules the day, unfortunately his ideas are really nor being followed as if they were I have to believe we would be out of this mess instead of digging a deeper hole each and every day.