"John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood."
This still isn't understood. His insight really isn't that governments need to spend. Its that governments need to borrow when the private sector isn't borrowing. The interest bearing debt based economy needs to "grow" constantly. If someone isn't willing to create a larger layer of interest bearing debt to support the previous layer of interest bearing debt then the pyramid will begin to collapse. Today the private sector refuses to go into debt to create this larger layer so governments have to. But now it seems that governments too are refusing to go into debt to create the larger base layer of debt. If no one steps up then the previous layers of the pyramid will collapse - i.e. previous loans will start to default and what will ensue is joblessness, foreclosures and shrinking corporate profits - all of which depend on a constantly growing pyramid of interest bearing debt.
BTW, the reason I keep mentioning interest is because it is the satisfaction of the desire for interest that necessitates a "growing pyramid" - without interest we would have a flatter debt structure and it would debt would be much more sustainable.
The tragedy of monopoly financial capitalism is that it grabs most surplus of the real economy and contributes almost no economic surplus to society. Its high non-productiveness monopolizes the societal economic activity and renders the low productiveness of the real economy even lower everyday. Enormous over-production hence over-capacity in the real economy make accumulation of profits emaciated whereas monopoly financial capital accumulation outshines its real economy junior partner.
To solve these tragic internal contradictions, the most basic approach is to reduce the over-production and capacity that resulted from competitions on the global market. In good times, the well-employed and –expending middle class of the world would have briskly made the over-produced economy well in hand. Now the heavily indebted and demoralized middle class as a result of the financial crisis wants to buy but finds themselves shy of funds. Are there other ways to break up the siege? Well, war is the most notoriously wasteful and cruel way to do the job of massive consumption of the over-produced goods and then to lift employment by expansion in production. The other way to waste off surplus goods is to buy them from the market and physically destroy or burn them. Both had been adopted during the Hoover Great Depression. The Second World War did indeed solve the problem of severe unemployment due to deflation.
Would a short-term deficit spending and stimulating program extricate the over-production-deflation debacle from the Bush Great Recession and now Obama Depression? Yes, for a short time of period when government spending replaces an anemic private spending but no, for long term. It is not a cure-all strategy but only a temporary relief tactics.
In connection with the deficit-reduction and austerity program, on the other hand, there is the tendency to aggravate bankruptcies and foreclosures, both to so much higher levels, that would serve the purpose of destroying not only surplus goods on the market but also, more importantly, means of production of the capitalists. As a consequence, drastically reduced inventories as well as destroyed capital surplus eventually would emerge over the world, renewed investment and production would start in earnest. The economy would reach its recovery stage, if every unfavorable condition would be made harmless and all conditions propitious to accumulation of capital. The petite and less profitable capital assets, however, would be auctioned off to the big and monopolistic capital, making the capitalist system further monopolized and away from democracy. Thus this deflationary approach would break out the debacle at great social costs of declining working class dignity and status, unemployment, bankruptcy, misery, destitution, and fierce class warfare. A protracted struggle between the two dominant classes would almost certainly engender the Second World Revolution after the first one that broke out in early 20th century. The First World Revolution retreated from the world’s political arena after holding power for almost half a century in the periphery of the capitalist world system. It was incomplete and not without mistakes due to its confinement to only the less developed areas. The Second one will occur most likely in the center because the crisis-prone area is now concentrated in the advanced capitalist countries rather than the peripheral areas as before.
In summary, both the inflationary and deflationary tactics are subpar. They may relieve severity to some extent and temporarily but can never eradicate the poisons of private profits and expropriations of the society-oriented means of production.
Its solutions will have to be sought elsewhere in the radical political economies.
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