Keynesian economics doesn't work? Or does it?

Sequestration Is “Terrible Policy” But Better Than No Spending Cuts At All: Ayn Rand’s Brook

Not surprisingly, the Ayn Rand Institute claims that Keynesian Economics "doesn't work."  Look around and we see high unemployment despite trillions in stimulus spending.  Look at Japan.  The problem is that we can't see what would have happened without all that spending.  Look at what happened in the Great Depression.  I think most people would agree that our economy appears to be better off than it was back then.  It's probably better off right now than it would have been without stimulus spending.

That said, government does need to come up with some way to reduce spending in a meaningful way.  This idea that the economy will grow enough to eventually pay our debts doesn't work, and isn't going to work this time either.  We do need cuts; I just don't think we need cuts now, and I think it's wrong to say that any cuts are better than no cuts.

One of the comments made in the video was that there was no way that World War II did anything to help our economy.  Yes, it raised GDP, but standards of living fell.  Another, toward the end, was that you can't raise standards of living by breaking stuff, or something to that effect.  Only, the way I see it, that's exactly what eventually did raise standards of living immediately after the war.  Standards of living were low because people weren't allowed to buy a lot of things.  Those things were rationed.  The government forced the diversion of resources toward supporting the war effort.  And demand for some things was, well, "pent-up."  So, when the war ended, U.S. industry had developed into an extremely efficient manufacturing machine, and people spent.  It turns out, you can increase standards of living by breaking stuff, just not immediately.

Housing bubble? Define bubble...

Is Rebound in Housing Creating Another Bubble?

I have to admit, I've been thinking there's a bit of a bubble in housing.  After watching this video, I guess it really boils down to your definition of a bubble.  Home prices are up, which is good, but they never really got back down to the long-term trend.  And I've actually seen people complaining that 6% or 8% rise in home prices in a year isn't good enough. The truth is that the real estate market is being manipulated.  It is artificially high.  But, it could be okay this time because there's not the same air of speculation going on that there was a few years ago.  Still, home prices have been propped up by the Fed, as well as the federal government, and given that the federal government is trying to find places to cut spending, I might be a bit leery of their continued support of the housing market.  And what would happen if there were no deduction for mortgage interest?  With that deduction, the rent vs. buy decision may favor buying, but take that deduction away and does it still?  I don't know.  I don't expect anything bad in housing soon, but it wouldn't really surprise me to see a substantial drop in a couple of years, and maybe sooner depending on how the spending debate goes in Washington.

Market news today

Wall Street trips and falls on cloudy Italian election

Well, I'm not so sure this drop was all about Italy, although it may have been the catalyst.  Instead, I think it's more about what's happening right here in the U.S.  Only a few days left before we start seeing spending cuts.  And, of course, the market is still up quite a bit this year, so it needs a rest.

At any rate, based on what I've read about the upcoming cuts, I think we're heading for a recession.  And given that nobody really seems to expect it, or at least they don't seem to think it will be that bad, I think it may very well be really bad.  I don't think the government will be able to do much, and the Fed has already pretty much exhausted its bag of tricks.  The only thing that seems to be holding our economy together right now is people's apparent confidence in the economy.  But that confidence seems to be misplaced, at least in my opinion.

So, not surprisingly, stocks are down, bond yields are down, and gold is up.  Looks pretty much like a flight to safety, of sorts.  I wouldn't really call bonds safe, though.

Sequester

Just Explain It: How Will The Sequester Impact The Economy?

So, this sounds exactly like what we don't want to do.  Oh yeah, that's exactly what it was supposed to sound like so that no rational government would allow it to happen.  Guess what?  We don't have a rational government.