Well, dear readers, our humble blog has moved up in life. We were graced with a visit from Lord Keynes himself. Not of course the one who wrote a book in 1936, but a blogger whom we have been mistakenly calling Cynicus Economicus, when in actuality he styles himself Lord Keynes.
Following the precedent set by Pravda, we are going to edit all our earlier blogs, eliminating all mention of Cynicus, who was there by mistake, and replacing him with “LK”.
1. He begins by pointing out that although fiat money might not have existed in Say’s days, fractional reserve banking did.
Short answer: The rebuttal I wrote to fiat money, and showed that Say wrote it, too, applies to money created by fractional reserve banking as well. It is not money earned by the bankers in exchange for a good or service they provided.
2. I attributed to Keynes the cause of recessions as animal spirits, which I paraphrased as “darned if I know”.
To which he stated, I think, do not be fooled by the whimsical phraseology. There is a deep insight behind the words animal spirits, mainly, that nobody can know what causes recessions. [Which contradicts posts he has on his blog saying recessions happen because of deflation]. He mentioned Lachmann, who apparently agreed with Keynes and yet is considered an Austrian.
Here’s what he wrote:
Animal spirits is essentially an irrelevant term used by Keynes’ describe why we act. You can dispense with it TOTALLY and still have his fundamental insight: that because of uncertainty (thatis non-calculable) we have subjective expectations. This idea is also held by the Austrian radical sujectivists who follow Ludwig Lachmann. That is why the investment is subject to instability and fluctuation, why investment will not necessasrily equal loanable funds supply.
Short answer: So we agree that Keynes animal spirits means “darned if I know”. You are just adding that “darned if I know” is the right answer. I am sure you are familiar with Austrian writings that have a different answer.
3. I wrote that printing new money causes inflation. LK replied with two points. First that “(1) large deficits matched $for$ by bond issues are not creating new money.“
Short answer. Depends on where the money came form to buy those bonds, and how those bonds are going to be repaid, right? Take QE2. It is a case of printing money to buy bonds to finance the US govts deficit spending. As for how the bonds are going to be repaid, we know the answer to that one, too. The govt wants to increase the debt ceiling lest we go into default. Translated, they want to borrow more money to repay the old bonds. Since for the last 6 months all US govt bond issues have been bought by newly printed digital money, that means the old bonds are going to be repaid with printed money.
In any case, there are plenty more ways of printing new money, be it paper or digital. You mentioned a few in your original post, which I quoted.
4. He also replied to my assertion that printing new money causes inflation with the following longish statement:
(2) in an economy in a recession or depression, it is PRECISELY when there are significant idle resources, unused capacity at plants and factories, idle labour and available resources.
Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour), just as private investment, private bank credit, and private payment of wages to workers by businesses would do the same thing if there was a recession.
You make the same mistake as Anderson:
I call this a non sequitor. What relevance does this have to the fact that printing money causes inflation?
The only thing I can think of is that LK means that the benefits of printing money, in the proper context, outweigh the inflation it causes, in his and Keynes’ opinion.
As a student of Austrian Economics, I am sure LK knows that AE’s reply to his comment is that Keynes did not understand nor correctly describe the problem, and that his proposed solution solves nothing, but rather makes things worse.
If you are reading this LK, I suggest we continue by your summarizing what AE has to say about Keynes [why his diagnosis as well as his prescription are totally wrong], to make sure we are all on the same page, and then rebut if you can.