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The collapse of European Keneysian economics

What we are seeing in the world today is, I believe, the slow collapse of Keynesian economics, an economic ideology that assumes that the State is capable of managing the economic affair of the Nation through the stimulation of Aggregate Demand using monetary policies (Interest rates) and fiscal policies (public deficit spending). Since the end of WW2, every past economic crisis was (temporarily) solved in this way but the stock of debt grew as well. Borrowing endlessly with no intention of paying anything back has become the main policy of the Governments. We live in a debt-driven Society where the currency itself is Debt.

However, the Boom-Bust business Cycle of capitalistic societies is far more directly impacted by the Credit Cycle (governed by Commercial banks) than by the money supply cycle (Central Banks). You can create all the money you want, but if the banks do not lend and consumers do not borrow and prefer to hoard rather than invest because they do not trust the future, you will have a deflationary cycle.

In fact, after the 2008 financial crash standard monetary policy became ineffective with interest rates at 0 levels. To reflate the Economy States embarked in Quantitative easing (QE), printing money to buy financial assets. The outcome was that Governments continued funding their public deficits and debt (at 0 interest rates) while Central banks avoided the crash of the Banking /financial system but this destroyed the foundation of the market Society and made the pension system insolvent.

The increase in money supply created only asset inflation and the rise of Financial capitalism but failed to stimulate the Real Economy because there was a corresponding decline in Demand due to increased taxation. People fearing for their economic future reduced spending and saved instead. These deflationary policies in Europe (low growth, low-interest rates, and low inflation)) failed, and the debt burden actually rose faster than nominal GDP hitting the private sector and reducing the ability of European industry to compete and pay their previous debts.

The Covid 19 pandemic of 2020 and the war in Ukraine of 2022 were the Events that ended the deflationary policies of the past decade. Supply chain disruptions worldwide caused the emergence of supply-driven inflation which is a sudden shortage of some commodities.

EU is particularly vulnerable because of its high public Debt. To avoid a Sovereign debt crisis it will try now to reduce the burden of Debt by creating a stagflationary environment where the real value of money, pension, and public debt is reduced in the process. It is the “modern” way of defaulting on its debt. The task given to central bankers is to keep inflation high and bond yields low, without causing panic in the bond market. Their policy aim of rescuing governments from impossible debt loads

While during a Debt-Deflation environment the actual burden of the debt rises in real international terms (but people still have faith in the purchasing power of money and hoard )the opposite happens in the Debt- Inflation environment. In that environment, which results from the Government printing money and giving it away to people you lose purchasing power as you hoard money instead of spending.

Today high inflation and low-interest rates are the equivalents of financial repression because they transfer purchasing power from the government bonds in your pension fund to the government’s balance sheet. Inflation is a tax that punishes savers and favors the borrowers (Gov. is the biggest borrower). When Central banks keep interest rates below inflation, it’s a tax twice over. This is the way to create Stagflation which is the combination of low economic growth and high inflation. The worst nightmare

What will authorities do in the coming months? if they raise interest rates to combat inflation, the risk is a 2010-style European sovereign debt crisis, because the debt in the system is too high. But if they let inflation run unchecked, inflation will destroy the purchasing power of people and turned in hyperinflation which destroys currencies.

I think we are first going to have stagflation and then Currency inflation (when the currency declines so the assets rise in proportion). This is not actually a gain in real terms; rather it is how tangible assets (they retain an international value) act as a hedge against Government. The currency declines and we have asset inflation The stock market rises in proportion to the decline in value of the currency.

If the central banks honestly want to “stimulate,” they should eliminate paying interest on excess reserves. Then the banks will take that money and have to earn something by lending it out. That is the only way you can see “demand” inflation. Otherwise, we are looking at asset inflation to protect money value instead of inflation spiralling out of consumer demand.

Hyperinflation takes place not because of printing money but because a collapse in confidence and people then hoard their wealth which reduces the economic output and that compels a government to print more to cover expenses.

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