Have you ever given much thought to our national debt?

Until recently, I haven’t. It’s such a huge number, and such a far off thing, that it’s hard to comprehend, really, how it impacts me.

As it stands right now, our national debt (as of November 17, 2009) is:

That’s according to our National Debt Clock, which tracks our debt by the hour. We’re adding $3.84 billion to this number every single day.

But, this number is astronomical. What does it even mean?

Here the debt in numbers you can actually understand:

There are 307,303,336 people in the United States. This means that your share of this debt is $39, 067.45.

Ouch.

Spend, Spend, Spend…

Most us probably know that our government’s reaction to the Great Recession, as they’re calling it now, has been to “spend our way out of the problem”. And we’ve got the national debt to prove it. But, have you wondered if this is really the best way?

Think about it: our country got into this mess, in part, because of debt. Does it really make sense to pile on more debt to fix the problem?

Imagine how your own life would be if that solution made sense. You’ve piled up $50,000 on your credit card. You’re about to lose your home, your job, and your car. So what do you do? You go out and spend even more money to get out of the problem.

Yep, in real life that would never work.

Welcome to Keynesian Economics 101.

The reason why I’m bringing all this up is because I just finished reading a fascinating book, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts. It’s a sobering look at the theories of John Maynard Keynes, a legendary British economist whose theories became famous during the Great Depression.

The author, Hunter Lewis, argues that Keynes’ theories are untested, and almost entirely based on hunches and educated guesses, not fact.

So, why should you care about Keynes?

Well, we all need to care about Keynes because right now most of our world governments are creating policies based entirely on his theories.

The author has written this book in order to get us laypeople familiar with the theories of John Maynard Keynes. And, he sets out to prove that Keynes is dead wrong.

Keynes’ Convoluted Theories…

I was shocked by this book on a number of levels.

• First, many of Keynes theories do not make any sense. At all. Some of his theories lack so much common sense that you have to wonder if a third grader came up with them.

• Second, Keynes contradicts himself time after time. For instance, he urged everyone that saving money is bad for the economy. And yet, he notoriously hoarded his own money. He didn’t practice what he preached.

• The third reason why I was so shocked by this book is because our governments are following Keynesian theories lock step. And yet, Keynes has almost no evidence to support his theories.

All this means is that the policies and debt we, and our kids, are going to be living for the next few decades are based on theories from a man who basically guessed himself into the public eye. Scary.

So, let’s take a look at some of Keynes’ theories and get better acquainted.

Getting To Know Keynes…

Here’s a quick introduction to the foundation of what Keynes believed. Numbers in parenthesis are the page numbers where these theories and beliefs can be found in the book.

• High interest rates are very, very bad. They should be kept as close to 0% as possible. (106)
• Keynes was notoriously anti-saving. He believed that spending is the way to wealth and that we, as a people, do not need to save money as long as the government keeps printing it. (284)
• Markets cannot self correct. Ever. (71)

Keynes’ Theory #1: High Interest Rates Caused the Great Depression

So, we know Keynes is against high interest rates. And, he believed that high interest rates directly led to the Great Depression (106).

But, the author makes the case that this is false. In his opinion it was cheap loans that first produced a bubble, and then led to the Crash in 1929.

Wait, doesn’t that sound a bit familiar?

Oh, right, because we just went through this. Cheap loans were everywhere the past few years, which is why so many people could “afford” to buy a house. We got a bubble, and then it popped, which helped lead to our Great Recession.

The problem, in short, is that low interest rates help lead to bubbles. When money is basically “free” to borrow, we’re far less careful about what we do with this. This leads to bad investments (think of the free-wheeling early ’90s, when we got tons of Dot-Cot companies that lasted a few years then went under).

According to Keynes, bad investments are better than no investments at all. But, that’s just bad reasoning.

Keynes’ Theory #2: The Paradox of Thrift

This theory got bandied about quite a bit last year. Remember it? It was the theory that “savers are ruining the economy!”

Yep, personal finance bloggers had a field day with that one.

Well, this theory came straight from Keynes. He says that saving money is bad for the economy. When people save, they don’t spend, which means businesses make less money, so they lay off workers, who have to save their own money, etc.

On the surface, this makes sense. But, this is just a natural cycle of business. Keynes argued that people should never save, in good times and in bad.

But this author argues that there is no Paradox of Thrift (129). It’s prudent for people to save money for emergencies. And if someone loses their job, whether there is a bubble or a crash going on, they’re going to save money. That’s just simple common sense.

When the economy improves, the author reasons, people are going to spend some of their savings. That money is never really “gone” from the economy, like Keynes insists. It will come back slowly.

Keynes’ Theory #3: Markets Cannot Self-Correct

This is another one we’re probably all familiar with.

“If we don’t do something, the economy is going to crash and burn! We may never recover!”

Politicians touted this phrase endlessly last year. And it was enough to scare all of us, including me, into believe that yes, we had to do something drastic right now to stop this free fall.

But let me ask you this: have you ever heard of the Depression of 1921? Until I read this book I sure hadn’t. I didn’t even know our country went through a Depression in 1921. But we did.

Want to know why it’s never talked about, why the Great Depression of 1929 always takes center stage?

It’s because the 1921 Depression was so short. And yet this Depression saw the sharpest price break ever know (wholesale prices fell 38%, and hourly rates fell by 11%-both of these more severe than the Great Depression).

What’s unique about the 1921 Depression is that our government did nothing to stop it. They stepped back and let the market correct itself.

And you know what? It did correct itself. Prices and wages realigned themselves naturally within a year, and things returned to normal.

What’s really scary is that the period following the Japanese bubble of the 1980s is often cited as a testing ground for Keynesian policy (191). Keynes full arsenal of “priming the pump”, that is, driving interest rates down, bailing out banks, and borrowing to spend was put to work in Japan. Public debt levels grew to over 160% of GDP by 2007.

And you know what? The economy never really recovered (192). It’s called “The Lost Decade” for a reason. By the time the Japanese economy crashed again in 2007, the country was worse of than America, since the Japanese saving rate was even lower than our dismal 1%.

Last Word…

Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts is a really amazing book because it explains Keynesian economics in a language that we can understand. I’m no great shakes at economics, and yet I easily understood this book thanks to the author’s clear, simple language.

Every piece of information in the book is well-sourced and documented. Keynes’ views are taken from his own writings, and the author debates each theory with common-sense arguments on why he’s wrong.

If you want to learn more about why our governments are forming the policies they are, then this book will give you a clear understanding of why they’re doing what they’re doing. And if you’re anything like me, you might finish the book believing that we really might have been better off if our government had just let the economy self-correct on its own, instead of trying to spend our way out of the problem.

As the author so concisely put it, spending our way out of a recession is “just like trying to cure a hangover with more alcohol”. It’s just not a good idea.

Tagged as: saving money