John Maynard Keynes was famous for the idea that in a liquidity trap where individuals and companies refused to spend or invest and hoarded cash, it was the responsibility of government to stimulate the economy by deficit spending. Keynes’ ideas have some merit in a situation where the government is not heavily indebted to begin with and where the economy is in a severe recession or the early stages of a recovery.
Keynes died in 1946, but his ideas lived on. The problem was that “deficit spending” became an all-purpose excuse for more government entitlements rather than the limited recession remedy Keynes envisioned. The U.S. has only had three modest surplus years in the past 50 years; the other 47 years were all deficits.
The U.S. national debt now stands at $21 trillion (not including guarantees and entitlement liabilities) and the debt-to-GDP ratio now stands at 106% (the highest since 1945). Worse yet, the U.S. is past the point where debt creates any growth at all. The U.S. is in a zone where more debt actually hurts growth and slows the economy, while the debt remains.
This article reports on the return of $1 trillion annual deficits under Donald Trump for the first time since the early years of the Obama administration. Both Republicans and Democrats embrace crude versions of Keynes’ original ideas without regard to the fact that there is no stimulus in current conditions and additional debt risks a complete loss of confidence in the U.S. government’s finances and the role of the dollar.
If Keynes were alive today, he’d be the first one to object to such out-of-control spending and profligate debt levels. You can lodge your own objection by getting out of risky assets and into a combination of liquid assets and safe havens such as gold.
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