Debt Ceilings, John Maynard Keynes and the Free Markets

How does the Debt Ceiling debate affect your personal invested savings?

The Debate:

Setting aside all the politics and character assassinations over the current debt ceiling debate, at the core of the debate is this question, “what is the best way to spur the slow economy back to robust health?” John Maynard Keynes, after World War 1, provided an economic model that emphasizes government deficit spending as the quickest way to jump start economies. This is considered a credible and compassionate approach to correcting problems created by a bad economy. It has always been controversial but Keynesian economic principles are deeply entrenched in Economics Departments of most Colleges and Universities. The model emphasizes spending. Spending gets people back to work quickly and their individual production creates more spending and lifts the struggling economy out of recession. If the recession persists, Keynesians would insist that we need to spend even more money.

This idea clashes with Free Market thinking in a number of areas. First, who gets to determine when government intervenes? Keynesians want to anticipate recessions and spend to avoid them. There is a constant pressure for government to spend. It never ends. Second, where does the spending money come from? Keynesians are not opposed to deficit spending but they admit that paying back the money has to come from those that benefitted from the economic rescue. In the end, government takes back what the recovering economy produced. Third, who decides where the money is spent? Keynesians say that ultimately that does not matter even if there is waste and fraud, just get the money out there. Free Market believers know that this allows government agencies to create “bubbles” in the market by artificially propping up their favorite market sectors. Bubbles burst and then Keynesians would justify more spending to clean up a different mess. This creates a never ending spending cycle that involves more and more government participation.

Conversely, Free Markets reward productivity and utility more than simply spending. The Free Market is not perfect but it is the best mechanism to coordinate millions of self interested and productive individuals. It can factor in an infinite number of variables in determining how an economy will best function and use resources over the long term. The Free Market appears messy. It can be harsh and unforgiving. However it is also able to push the greatest number of people to reach their greatest potential. This has already been proven for over 250yrs in the great American Free Market experience we are all benefitting from every day.

Sincere, intelligent, compassionate individuals believe that we can spend our way out of this recession using Keynesian economic models. We need to respectfully but firmly insist that they are wrong.

Your Invested Savings:

The good news is that you can invest your savings using the Free Market principles and largely avoid the harmful effects of this debate. In fact, there are rewards to the informed and disciplined investor during these uncertain economic times.

First, you need to understand risk in your invested savings and determine the amount of risk you are able to tolerate. Second, you need to diversify your equities(stocks) properly to lower risk and maximize returns. Third, rebalance regularly to maintain your risk/return target portfolio. Repeat.

The Free Markets reward volatility (risk) with higher returns over time. The current spending debate creates volatility in the markets. The Free Markets will demand higher returns over the long term for the increased volatility. There is no reason to panic. This debate has existed for as long as the US Stock market has existed. In the end Free Market always trumps Keynesian economic models.

My Question for you is, “Are you using Free Market investing strategies or are you a Keynesian investor?

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One Response to Debt Ceilings, John Maynard Keynes and the Free Markets

  1. Ehlvira says:

    Not sure if liberals rellay believe in Keynes as much as we just think it’s a great idea when the jobs’ creators fail!!I’m pretty liberal, and I believe in full-employment, and if the private sector isn’t getting it done, then I say tax the rich, and create the jobs doing good in society, building roads, and bridges, putting up solar and win arrays, and grids. And don’t do it by handing some crony big money, where he pockets most of it. Hire the people, engineers, middle-men, suppliers, and workers directly from the government, at a full-living-wage. I’d say in Alabama, that would be about $15 an hour.We believe in education, and single-payer health care. Insurance is kind of an anathema to any good, and real system. When you are in it for profit, denying people health care is good, it makes you more money. When pharm is in it for profit, they don’t try to cure things, but manage them, and they might not be interested at all if you have an obscure disease.If you are interested in doing actual, good things, rather than just making money, then Capitalism FAILS. Look at Nikoli Tesla’s life if you want an example of Capitalism wasting the potential of a brilliant man, though he did manage to get a few things done.

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