Tuesday, December 28, 2010

The Keynesian Economic Theory Is Out of Date With A Modern Global Society

            We all know how hard it is to admit you were wrong about something.  Right? 

Now, let’s say you spent a lot of time studying and researching a subject, perhaps for a
PhD thesis or even a book.  Here’s an example.  About 15 years ago a veterinary
graduate student wrote his PhD thesis on the premise that dogs and cats didn’t have
strokes (cerebrovascular accidents).  He believed only humans suffered from strokes,
and other animals had what he called “vestibular syndrome,” a problem with the middle
ear apparatus that created all the central nervous system signs normally attributed to a
stroke.  Now, hold that thought while I discuss John Maynard Keynes.
            The study of economics is relatively new, primarily developing in the late 19th and
20th centuries.  British economist John Maynard Keynes published his conclusions on
the subject in 1936, entitled, “The General Theory of Employment, Interest and Money.” 
It soon became one of the most controversial and variously interpreted theories of its
time, and has influenced governments’ attempts to control their economies ever since. 
In fact, the current administration is putting all its eggs in Keynes’ basket right now.  Or,
rather, our President is putting all OUR eggs into that basket.
            The Federal Reserve System was set up in 1913 to “maintain the stability of the
financial system and contain systemic risk that may arise in financial markets,” among
other things, yet is has never been able to do so.  It didn’t prevent or control the Great
Depression, and it hasn’t prevented or solved any of the subsequent recessions,
including the one we are in now.  Likewise, Mr. Keynes’ theory was used by President
Roosevelt to end the Great Depression, but it failed miserably.  The massive industrial
mobilization of World War II is what brought us out of the Depression, not any economic
            So now we have what we call a “global economy,” and a subsequent Modern
Global Society.”  I’ve argued that we have had a global economy ever since the first
wooden ship left shore with a cargo to trade; it’s just that this is done faster and on a
much bigger level today.  So why should Keynes’ economic theory work any better
today than it did before?  President Obama believes that President Roosevelt simply
didn’t spend enough money.
            Here’s Mr. Keynes’ theory in a nutshell.  First, he believed that we should spend
all the money we make, or total spending in the economy, termed “aggregate demand.” 
Now, that’s hard to take.  It reminds me of the fable about the grasshopper and the ant. 
Next, he thought that aggressive government action could stabilize the economy.  This
is based on his belief that large fluctuations in the economy significantly reduce well-
being, and that the government is wise and capable enough to improve on the free
market.  I guess that means we should trust in the knowledgeable judgment of our
elected officials, like House Financial Services Committee Chairman Barney Frank (D-
            Keynes’ solution to a recession or depression is to stimulate the economy by
reducing interest rates and having government invest in infrastructure.  This is
supposed to have a “domino effect” by funding income, which leads to more spending in
the general economy, thereby stimulating more production and investment.  This is
supposed to repeat over and over, so that the end result is a multiple of the initial
government investment.  Times have changed significantly, however, from the 1930s.
            I’ve had this copy of Fortune¹ in my office for many years.  I think I bought it
because it is from the war years, and I’m very interested in World War II.  Inside this
December 1942 issue was the third in a series of reports “on potential courses for
democratic action” after the war was over.  They were assuming at the time that it would
be over in another year or two.  Part III is “The Domestic Economy.”  Now, here are two
paragraphs from page 6 that I want to read to you.  It’s headed, “Fallacies of debt.”
            “The commonest objection to a policy of government spending arises from the
fear of public debt.  To some extent this fear is grounded in a theoretical
misapprehension: that public debt is like private debt, and that if the government
continually spends more than its income it will go broke or cause inflation.
            “This analogy is false so long as the productive capacity of the nation is
maintained, the debt is internally held, and the government retains its taxing power.  For
with production flowing, since the interest on the debt is paid to residents of the country,
the government can always recover an equivalent sum in taxes, no matter how huge.”
            Has the productive capacity of our nation been maintained?  No, it has mostly
gone to China.  Is our debt internally held?  No, thirty percent of our national debt is
foreign-held, with nearly half of that (48%) held by China, Hong Kong, and Japan.  Has
our government retained its taxing power?  Yes, but one out of three isn’t good enough.
            This report goes on to state on page 8 that some economists urged “a fairly
drastic redistribution of income from the saving to the consuming class.  The ‘propensity
to consume’ is highest in the lowest income groups; therefore, for the sake of stability,
let us tax the rich and subsidize the poor.”  Sound familiar?
            We see all around the country signs of our President’s stimulus plan at work. 
(Show photo of “Project Funded by the American Recovery and Reinvestment Act sign
by highway)  Each of these signs, by the way, costs us $900 to make and erect.  He
believes that Roosevelt’s application of Keynes’ theory didn’t work because he didn’t
spend enough money.  Obviously, he’s taken care of that.  Roosevelt thought in millions
and billions.  Mr. Obama is calling on trillions to do the job.  Do you think it will work
            The assumption of a static economy seems to underlie Keynes’ entire work.  I
don’t believe he ever ran a business himself, and had no experience with the “human
factor” of the economy.  He really didn’t take into account an important ingredient: public
trust and confidence.  The only people who truly believe that government  has all the
answers and should run everything are the liberal-socialists.  The rest of society, if they
know any history at all (by the way, for several decades our children have become
ignorant of the lessons of history), realize that socialism is horrible.  As Winston
Churchill said, “The vice of capitalism is that it stands for the unequal sharing of
blessings; whereas the virtue of socialism is that it stands for the equal sharing of
            So, yes, I believe that the Keynesian economic theory is out of date with a
modern global society.  It is out of date with any society outside the halls of academia,
and has proven so whenever it was used to solve a recession or depression.  Why do
some think it will work now?
            Remember the theory of “vestibular syndrome?”  Well, about ten years ago a
group of pathologists, after studying over a thousand post-mortem examinations of dog
and cat brains, discovered that animals other than man do, in fact, have strokes. 
Nevertheless, a whole generation of veterinarians is still telling pet owners that their pet
did not suffer a stroke, but instead has vestibular syndrome.  Many veterinary colleges
continue to promote the theory to this day.  And a funny thing – the treatment we’ve
always used for a stroke, anti-inflammatories, antihistamine, and time to heal, seems to
cure the problem no matter what you call it.
            Even though you’ve proven a theory to be wrong or ineffective, it inevitably
persists.  Nobody likes to admit they were wrong.


¹  “The United States In A New World – A series of reports on potential courses for democratic action.  Prepared under the auspices of the Editors of Fortune.  III: The Domestic Economy.”  Fortune 26, no. 6, December 1942

Wednesday, December 22, 2010

Be Prepared: The Motto of the Boy Scouts of America

Our long-time friend, who is a CPA in Columbus, just sent me an e-mail (Dec. 2010), and this was his last paragraph.  I followed with my reply.

"On another note, I would like to compare notes/ pick your brain a little - Ruta and I are beginning work on a comprehensive contingency plan for what we think is going to be best case long drawn out " ground war" in our economy to worst case another depression /melt down that would involve riots/violence etc.  I think the next event is going to be currency bubble or a massive default in the muni-bond market.  We are thinking about putting together a comprehensive plan that involves 1) preparedness 2) protection 3) financial 4) education.  I think it is just prudent given how things are so fragile right now and like I said best case we will be in this ground war for a while.  Let me know when you have few minutes, I would be interested in your thoughts."


I have a Mormon friend who told me that his church recommends keeping a one-year supply of food on hand at all times.  He keeps a three-month supply, which is a lot for anyone.  There are places on the internet that specialize in disaster preparedness, and will sell you a year’s supply of food to store away.  This spring I checked prices at Sam’s Club on basics, like rice, flour, sugar, salt, beans, etc.  I checked again in November.  Rice is up 12%, sugar is up 29%, and wheat flour is up 21.5%, and our government is telling us that inflation is at normal levels.  You can’t put a trillion into a 7 trillion economy and not have inflation.  It will get worse.

Glenn Beck has an article on food storage (I think he’s a Mormon, too) that is a good start. http://www.glennbeck.com/content/articles/article/198/48306/   It’s good to know how to make bread from scratch and how to boil beans.  Those are basics.  I live near a small lake and can get water from there (I have several filter systems), but I also have a Water BOB (www.waterbob.com) that stores water in your bathtub.  Providing you have warning that water will be shut off, that’s fine.  Emergency water is also available in your water heater tank and in the toilet tanks.

I went to Lowe’s and bought a dozen of their gray 5-gal plastic buckets with sealable lids.  Then got oxygen absorber packets from USA Emergency Supply to put in them. https://www.usaemergencysupply.com/emergency_supplies/oxygen_absorbers.htm   Next I went to Sam’s for the flour, salt, rice, beans, baking soda, freeze-dried coffee, etc.  One bucket will hold a 50-lb bag or two 25-pounders.  Label the lid, date, drop in the oxygen packs and seal.  I have them on two roll-around dollies in my basement.  You might also get one of the cooking with home storage cookbooks from this site.  The easy way is to just by the 1-, 6-, or 12-month supply of food from them.

I’ve also put together two “bug-out bags” that are filled with basic survival gear.  If we have to evacuate or run for our lives, these are two backpacks that I will grab first, then the guns and ammo, then food.  We have a couple cases of military MREs, too.  Google “bug-out bag” for a list of essentials.  Remember, if the electric grid goes down, you won’t be able to go to the gas station for gas (no power for the pumps).  I bought a Honda generator two years ago to power a freezer or refrigerator.  I have a 55-gal drum of gasoline in the shed and maybe 15 gallons of kerosene.  Get yourself a Petromax kerosene lantern.  They are essential http://www.britelyt.com/.  I have two Swiss military 250s and a 500 that we use when we go to Cook Forest.  You can also cook on them.  Know how to start a fire without matches; there are many ways.


Find a reputable gun shop near you.  Preferably one recommended by friends.  Ask about a concealed carry permit instruction course and sign both of you up for it ASAP.  They will usually provide a gun if you don’t have one.  This is the store where you will go to for advice, ammunition, holsters, etc.  I have two in the area that I use, and both know me well.

I bought most of my guns from gun shops, however, I buy most of my ammunition online.  Cheaperthandirt.com now offers ANY gun you might want for sale.  You just have to have it delivered to a licensed gun dealer near you to pick it up.  Some stores charge you a fee for this, and you should first ask if they will match the online price(s).  Often they will, except for ammo.  I would recommend a .45-caliber pistol, semi-automatic, because .45 ammo will always be available, as it has been around for over a century.  You can still buy WWII ammo in a sealed can!  I’ve also bought ammo from Sportsman’s Guide (www.sportsmansguide.com) and found they have the best price on bulk ammunition.

How much is enough?  I told a friend of mine who has full-auto rifles and even a Thompson submachine gun (special BATF license required) that I had 3,000 rounds of ammunition.  He chuckled and said he wouldn’t feel safe with that.  I now have 16,000, most in .22 (.22 rifles will be gold, and so will the ammo to hunt small game), but 4,500 in .223 (for a Colt AR-15), and 3,600 in 5.7mm (I bought a FN Five-Seven pistol and FN PS-90 rifle this year.  Pistol holds 30 rounds, rifle 50.)  Buy a lot, usually in 500-round or 1,000-round batches for best prices.  Join Sportsman’s Guide Membership for further discount.

It’s best to stay with one or two calibers to simplify your ammunition purchasing and confusion.  I have .22, .223 (5.56mm), 5.7mm, .32 H&R, .380, .38, .44 Mag., .45 ACP, and .45 Colt.  It can get confusing if you are not fully aware of what they are and in which gun they go.  I will soon add 12-gauge shotgun to the list.

Gun brand is personal preference.  In .45 semi-auto pistols there are HK, Glock, SIG, Colt, and many others.  Glocks are pretty durable and dependable.  I have an HK USP Compact .45 for traveling, and usually carry a SIG P238 .380.  Paula keeps a Glock 21 .45.  I used to carry a Walther PPK/S .380, but the SIG is much lighter.  I have an inside the waistband/belt holster that rides just ahead of my right hip.  A lot of people carry in the small of their back either inside or outside in a belt holster.  I just find it harder to reach back there.

Glocks have an integral safety set in the trigger, so there is no lever to look for to flip off (especially good for people who are unfamiliar).  You don’t put your finger on ANY trigger until you are ready to fire, so that is one of the first things you learn.  You’ll get yelled at in the Concealed Carry course for having your finger on that trigger.  With the Glock, when you put your finger on the trigger you first depress a lever in the trigger, then begin to pull the trigger itself, so there is no other safety lever to flick off, like on nearly all the other semi-autos.

If I have to choose a minimum defense package, I’d probably go with the two FNs (pistol and assault rifle) and a 12-gauge shotgun.  The pistol is to buy time to get to your rifle, and nothing impresses an intruder more than a shotgun.  But I’ll have a .45, too!


If you remember your history, when inflation takes off your paper money will soon be worthless.  Gold and silver will be the only true currency, other than barter.  Read “One Second After” by William R. Fortschen or “Alas, Babylon” by Pat Frank for examples of what life might be like.  Pretty lawless.  Also watch “The Road” and "Book of Eli."

I’ve just bought bouillon, no collector coins.  If you are buying things you will only get what the gold or silver is actually worth, not what someone thinks it is worth.  Juni Banico at Bowers and Merena Galleries jbanico@bowersandmerena.com lets me know when  he has Krugerrands, Maple Leafs, and other bouillon coins for sale.  I’ve bought silver coins through him, too.  Right now I’m waiting on a shipment of silver 1 oz. rounds from Northwest Territorial Mint http://bullion.nwtmint.com/silver_stagecoach.php that are pre-scribed to break or cut into quarters.  Shipment has been delayed twice and I’m looking at mid-January.  You just have to compare commissions and markup to find the best buy.  Volume brings the percentage down.  I’ve also bought from Lakota Bank http://www.freelakotabank.com/accounts.php, but paid more.   Nevertheless, the way things are going, I’m making money every day.


I’ve had a lot of basic survival education through the Air Force, but you never have enough.  I took a winter survival course at YSU in their ROTC curriculum, so you might see what’s available near you.  There is also unlimited information online.  When you find a site, look at their links for more.  Again, learn how to make fire several different ways.  Many people will die just because they can’t.  Twenty-five percent will be gone the first year, by most estimates.  Not from a bomb, but from survival of the strongest.  If you’re diabetic, make a will.  Those on dialysis will be gone in a week.

You might be referring to home schooling, too.  Again go online for information, but you might put together an “essential” library of your own; something of an investment anyway.  It might even be something to pass down to your grandkids.  You can choose the titles, and even get out of print copies through Advanced Book Exchange http://www.abebooks.com.  This is a huge co-op of book stores around the world.  It would be the best way to put together a library at minimum cost.


If the SHTF, trying to survive by yourself with just your family will be tough.  If you have good friends, a group is more likely to survive roaming bands than a single family in a house.  We live on a cul-de-sac that I am looking at for defending.  It has Mill Creek Park wrapped around it with just one road behind us and then the lake – natural obstacle.  But we need maybe a dozen adults to protect it.  I’m talking 24/7 guard duty.  It would be great to have our two Dobermans again, too.  Dogs are better than any alarm system (remember, no power, no alarm system).  You have to feed them, too, but you can also eat them if need be!  (Yes, I would have a hard time doing that.)