Western Media Continues to Be Addicted to Keynes
By Staff News & Analysis - July 01, 2011

Americans cannot have a European-style welfare state, a modern infrastructure, and a defence budget equating to 4.5pc of GDP unless they are prepared to pay for it. I know I'll offend our Republican friends by raising the matter, but the IMF's suggestion of a federal sales tax is not a bad one. America could cure the deficit overnight with a sales tax set at even a fraction of European levels. But hell will freeze over before we see one. – UK Telegraph

Dominant Social Theme: The world's economic problems are not so bad and can be solved by a little more government spending.

Free-Market Analysis: UK Telegraph columnist Jeremy Warner has posted an article entitled "The IMF has turned into Obama's poodle." It is noteworthy in our view because it provides further evidence of how ingrained Keynesian economics are within various segments of the journalistic community.

For Warner, government imbalances are the result of failed fiscal policies: Western governments – America's at least – simply tax too little. We can see from the above excerpt that a simple "federal sales tax" would cure the US's budget deficit "overnight" according to Warner. He apparently fails to grasp that the larger issue is overspending generally.

The US has some "US$200 TRILLION" in stated obligations upcoming (thanks to aging Baby Boomers social welfare expectations) and this is actually an insurmountable amount. The US is broke. But generally, for the chattering classes, higher taxes are always a convenient answer.

Warner also seems to have an affinity for additional government stimulus – a Keynesian nostrum calling for the government to spend money into the economy to "boost" the private sector. He reports cheerily, "President Barack Obama seems this week to have chucked the prospect of a third fiscal stimulus into the mix."

Warner is not sure Obama will get the opportunity, however. Having focused on health care and other issues rather than the economy at the beginning of his term, Obama may simply have to live with the priorities he initially supported. He is "not going to be allowed to borrow and spend his way to a second term," according to Warner.

The main focus of Warner in this article is his concern that the International Monetary Fund itself has become politicized as a result of pressure from the Obama administration. The IMF recently reported on the state of the US economy and stated, "Excessively large upfront fiscal adjustment could significantly weaken domestic demand," he writes.

Warner calls this "fiscal consolidation." What it means is that too much government debt-trimming may further damage the US economy. He sees this in the context of the larger argument that the Obama administration is having with Republicans.

The Republicans want trillions in cuts. Obama and the Democrats are resisting the most Draconian adjustments and want offsetting taxes besides. Warner believes the IMF has come down on the side of the Obama administration, not for sound economic reasons but because it has been pressured to do so. Here's how he puts it:

Well, blow me down. Isn't that what President Obama and supporters in economic academia such as the lugubrious Larry Summers have been saying all along? And now the IMF agrees … As ever, the IMF is the incumbent administration's poodle. It largely says what it is told to.

This last statement, while a startling one, is in line with what we regularly point out. The Anglo-American power elite basically controls the IMF, World bank, etc. To see the IMF as a true globalist entity is to misconstrue its history and purpose.

Warner believes that the economic malaise of the US is overblown, as is the "UK's." In both economies, we are seeing the beginnings of this switch, he writes. If one removes the effects of high oil prices and the supply chain disruptions of the Japanese earthquake, "things don't look so bad."

He is also sanguine about China, taking Chinese Premier Wen Jiabao, at his word. "The Chinese premier, said he was confident China had got on top of the inflation problem," Warner writes.

Of course, Chinese have been claiming that price inflation is finally under control for close to a year now. Every month they seemingly claim so, and then next month announce a new, failed program to control it once again. But for Warner, Jiabao's statement is evidence that Chinese policymakers may have succeeded "in engineering a soft landing for what had become a seriously overheated economy."

He is similarly sanguine about America's prospects, stating that America's fiscal difficulties can be solved "easily" with a little political will and leadership. "As is the case in many advanced economies, the US spends too much and taxes too little."

This is classical Keynesian analysis to us and it is representative of the way that financial journalists on both sides of the "pond" treat the current, unrolling economic disaster. Western financial journos in aggregate still don't seem to understand the gravity of the world's unraveling financial system. They are so used to regarding government as the fulcrum of the economy that they cannot see it any other way.

Yesterday's Keynesian solutions no longer apply. The 2008 economic crisis virtually killed the US dollar reserve system and hammered, or should have, the final nails in the coffin of one John Maynard Keyne's misguided economic nostroms. Anyway, growth throughout the West continues to be nonexistent or actually shrinking. China's neo-Keynesian economic system is grappling with ever-growing price inflation and the "stimulations" of the past don't work anymore.

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After Thoughts

Something new is in the air; a new economic system that will grow out of government realignments or private market responses. (We hope the latter.) But you will never find out about it by reading mainstream fiscal and monetary analyses. That would be too much to ask …

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