92 sats \ 9 replies \ @Storyteller 26 Jul 2023 \ on: Keynesian Disease At Work bitcoin
Here is how Keynesians often think and here is where it might go wrong.
If the government invests it might help the economy, slightly.
But indeed we should take some of these into consideration:
-
The multiplier effect. How big is it. If you invest 50 million Euros, what are its secondary effects in the rest of the economy? Normally Keynesians think construction workers and construction businesses doing these infrastructure projects, will spend the 50 million elsewhere. And this will create more economic activity. But it remains to be seen how big these secondary effects are.
-
Who will work? If the workers are outside Germany and say Polish. They will send money back home, in remittances. They will only eat in Germany. They will only rent the bare minimum. So less secondary effect for Germany.
-
What type of investments Governments tend to think they can best invest. But the best players in the economy that know where to invest are businesses. They do this for profit. They take care not to overinvest. It is difficult for a central organization like the government to plan exactly where and how much to invest. Keynsians mostly look at the general macro picture how much to invest.
The best thing the government can invest in that becomes productive is education, technology/knowledge creation and health care for its population. These tend to increase productivity.
-
Is the investment needed? There are many bridges, train rails that are idle. Will these huge investment projects turn into productivity?
-
And here is the last one for today: in most countries public investments are just a fraction of the total investments. The private sector investments is the biggest part. Governments say that their public investments will trigger private investments. But this is often difficult to prove. If you only invest 50 million while the private sector invest 5000 million your 50 million is just a drop in the ocean.
6 Bonus: who will payđ
.? If you see no payment plan and everybody clapping at the oorning of the big bridge from nowhere to nowhere it often means the one psyiny is YOU!!!!
Mostly the people will pay. More taxes in the future. A higher debt. Or more printing of money to finance these government projects. Money printing is easier. It will let you psy without you knowing. It will let you psy with higher inflation.
And like I said somewhere on Stacker.news higher debt means increased taxes or more money printing. And devaluation of the currency later on.
Basically if they finance the bridge with debt, that is money creation, out if thin air money is created to finance an unproductive bridge, it means the money supply in Germany/Europe has increased. More digits, more Euros. For something unproductive. It will lead to inflation. Especially for huge infrastructure projects. Prices of all concrete etc will go up. The money create has to buy stuff. Thatâs inflation. And it drecreases the purchasing power of the Euro.
If you are in Europe and you see big infrastructure projects out if nowhere: stack sats!!
So that is why you need to keep stacking sats!! When you hear about these huge government Keynesians projects taking place.
Attempts to quantify the multiplier effect have found it to be less than one most places and even slightly negative in a couple. Keynesian policies confirm Austrian theory, specifically the problem of economic calculation by central planners that Mises wrote about.
reply
No way that even one europ. politician heard about von Mises
reply
Well he was driven from Europe under imminent threat of death, so that tracks.
reply
Si. Fits well into europ. history. Sad...
reply
Mises barely got out alive, and all his library was lost.
reply
A lot of Vandals around... we need strong men like him again
reply
Nice one! Thank You, well explained. We should add the crowding-out effect of the private sector and the yield spread that benefits state actors compared to the private sector. Europe clearly is tumbling...
reply
Yes. Forgot the crowding-out! Especially when âfiat money is scarceâ and liquidity is tight - remember those old days when fiat money was actually tight and real interest rates were positive (eg meaning nominal interest rates are HIGHER than inflation) this crowding out effect will work.
Like in small island nations in the Caribbean for instance you see this happening.
When the government wants to invest 50 million euroâs like above, for a small island economy like say Grenada, or Barbados, it crowds out private investement.
So imagine the government going to local banks and say I got this government bond at 6% for my infrastructure project. And it is the âsafestâ investment you could get bank. Because I can eventually print money to pay you back.
What do you think the bank with a convervative investing policy would do?
Do you think that bank would invest in a 50 million all inclusive hotel? The hotel business owner gets declined. The bank lends money to the government.
Now you wonât hear me saying the 50
Million euros all inclusive hotel is not risky and more productive. And that that big infrastructure project is not productive.
But I bet you the hotel business owner has a super calculated plan about number of tourists, rate per room, how long tourists stay. Etc. The hotel business owner makes a calculated risk because he knows âsorryâ that his âballsâ are on the table. If he canât pay he is bankrupt.
While the government Minister has a 4 yearâs horizon. The public servant architect creating the huge infrastructure investment plan has a 20 years horizon. How can I make my pension.
This is crowd out. Less productive public investments prioritized before more productive but risky private investments.
What you said about the yield I donât yet understand. Could you elaborate about that? How does the yield spread benefits the government?
How do you define the yield? How does that work?
Thanks
reply
You described it indirectly. For example German 10y Bund noted nominally at 2.5%, inflation still is 6.5%, the gov pays a real yield by full backstop of the ECB of - 4%. Our business credit yields are between 6-8% nominally and credit conditions are getting worse fast.
reply