Home › Forums › Discuss John Maynard Keynes › Doesn't Keynesianism work when you control the world's reserve currency?
- This topic has 3 replies, 2 voices, and was last updated 7 years, 3 months ago by jmherbener.
February 29, 2016 at 2:34 am #21169kristerjMember
Forgive my ignorance – I just signed up and am just starting my way through the courses. This might be answered in one of them, but I have been looking for an answer on this long enough I am too impatient to wait the 6 months it will take me to get through them. If somebody could chime in on this it would make the cost of subscription worthwhile in itself.
Not that I think Keynesian economics are moral, sound, or sane in any way, but…
If you are king and have the keys to your neighboring kingdoms’ treasuries, and can spend whatever you want in your own kingdom, provided you can (and do) steal it from your neighbors, doesn’t Keynesian economics work? Is this analogous to the situation we face in the US where a large amount of our debt is held by foreign nations, which we can inflate away with the press of a button? As long as you steal slowly enough that nobody notices, can’t this go on until they dump your currency?
If this is the case, why do other countries like China still trust our currency and debt? Do they really have no other options?
It seems to me that, given our current situation, all “good patriots” should cheer our government’s Keynesian policies as an effective (morally bankrupt) method to transfer wealth from other nations to ours.February 29, 2016 at 8:30 pm #21170jmherbenerParticipant
It has long been realized that having the world’s reserve currency permits a country to engage in a policy of “inflation without tears.” The British did this when the pound was the world’s reserve currency before the First World War. The USA did this under Bretton-Woods and in the 1980s and 1990s.
Take a look at Murray Rothbard’s book, What Has Government Done to Our Money:
For “inflation without tears” to operate, there must be an international monetary regime of pegged exchange rates and coordinated world inflation. Under Bretton-Woods, for example, monetary inflation and credit expansion of the dollar becomes the base of monetary inflation and credit expansion of the domestic currencies in other countries. Their central banks increase their holdings of dollars as a reserve upon which they inflate their own currencies. This increase demand for the dollar prevents price inflation from choking off the boom which is induced by credit expansion. When price inflation occurs in the domestic currencies the booms their collapse and there is a rush to liquidity in which the central banks hold even more dollars further insulating the US economy from price inflation.
Take a look at Henry Hazlitt’s book on Bretton-Woods:
Keynesianism doesn’t work for the country having the world’s reserve currency, just look at the UK and the trajectory of the US economy. If the policy is pushed far enough we get world monetary inflation and credit expansion, as the title of Hazlitt’s book indicates, and as the booms and busts of the last several decades illustrate.March 2, 2016 at 10:23 am #21171kristerjMember
Thank you, I will read both.
So, if I understand you correctly, it can work as a method of wealth transfer, but obviously still at the cost of the boom/bust cycle?March 2, 2016 at 12:58 pm #21172jmherbenerParticipant
Correct, monetary inflation can make some people richer at the expense of others that it makes poorer. What monetary inflation cannot do is make society-at-large richer. In fact, it makes society-at-large poorer.
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