LokiAs always we agree on a lot. Fiscal stimulus as championed...

Loki

As always we agree on a lot. Fiscal stimulus as championed by Keynes is very different to the stimulus we've seen since 2008. What concerns me more than the pink bats and 800k school toilets is the likelihood that the same mob will still be in power when the next crash comes in the next 12 months. What else might they dream up in a crisis to throw money at?

yes its exactly what the Japanese did ,property prices have fallen for two decades and debt has spiraled out of control, the Japanese are proof that fiscal and monetary stimulus cant cure asset deflation, its also proof that you cant inflate away debt, bond holder wont lend you money if you inflate it away. Its sounds like a great trick on paper but they markets not that stupid. The US government is fine at the moment because its borrowing at nearly zero interest, lets see how it goes with nearly 7% like Italy

A pure Keynesian approach is similar to the save for a rainy day idea. That is government saved and balanced their budgets in good times , so as to ease the pain of the business cycle downturn. Steep depressions with government austerity usually kill off a lot more of the economy than is actually needed to properly cleanse it of malinvestment. The idea is that government strategically stimulate to protect those sectors to enable a stronger and quicker recovery than a austerity solution would allow.

The problem here of course is that no one can afford fiscal stimulus except a few countries like Australia and China. The trouble with China is that provincial debt (state debt) is growing at 30%-50% annualized of GDP. So while the Chinese have reserves they have lent them out twice over, so the reserves simply reflect balance sheet collateral not true reserves.

People keep mentioning that the Chinese government will significantly increase their purchases of gold. Its impossible to buy gold if your revenues are being sucked out the door on loan servicing. This myth that China is way of the future and the western economies are collapsing is without factual support, the Chinese are in more trouble than Europe and the Japanese are worse than the Chinese.

Derugalation needs to be wound back, the crisis will cause this anyway, it does no economy any good to have exchange rates rolling around the decks like loose cannons. So called free trade will leave us naked when the tide of the commodity boom rolls back. We have destroyed all our industries and placed all our bets on an endless commodity boom. The economic and political collapse of China will show that idea to be idiotic.

Japan and China are our major trading partners, Japan will collapse before end 2012, as this is likely to happen in tandem to a Chinese collapse, people are likely to end 2012 very shell shocked. 2013 will be worse.