[trevelyan]

The Great Depression was a case of deflation transmitted internationally via the gold standard. Friedman followed Keynes here although this was not demonstrated statistically until Barry Eichengreen showed up with country-by-country evidence that recovery followed quickly once countries were forced off the standard (Golden Fetters). See also:

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211...

China took a Keynesian approach in 2008 and rode out the international economic crisis fairly well. There is a massive real estate bubble in major cities, but this dates back to the late 1990s and is being fueled by China's lack of property taxes (making real estate free to own) and the lack of alternate investment opportunities (Chinese citizens cannot invest abroad). So China is seeing local bubbles and general inflation. The fact that local governments are financed by land sales creates a further incentive to jack up land prices and puts the central government in a bind. If you're interested in this stuff, you might find this podcast worth listening to:

http://popupchinese.com/lessons/sinica/attack-of-the-china-b...

It's a good question what will happen to the Chinese economy when the bubble bursts. But whatever precedes that doesn't have anything to do with Keynes or liquidity traps or deflation. And if you still have trouble with this think back to the basics and explain where Keynes' analogy is wrong. Why -- in the situation he describes of general deflation (a decrease in the money supply) -- would you ever want to increase the money supply by forcing people to dig rocks out of the ground? Why not just print more money and build an airport?

[stretchwithme]

Because printing more money is just another form of stealing.

And more government spending is just running up debt that must eventually be stolen from future taxpayers for some piece of infrastructure that people are, apparently, unwilling to pay for. If we need another airport (in a free market anyway), prices for using an airport would increase until its clear a new airport would be profitable.

Government destroys that ability to know if things make sense. Instead, its completely politically driven and waste and unnecessary debt is the result.

The gold standard makes inflation impossible in the long run. The deflation back then was simply a correction of the inflation created by the Fed with its low rates since 1913. A situation made worse by creating industry cartels that prevented any recovery until they were dismantled and many other bad policies.

Now there is no mechanism preventing government from stealing your money. That is not a good thing. And the final removal of the gold standard by Nixon allowed inflation to destroy a great deal of wealth.

The deferral of consequences Keynesian enables, coupled with a corruptible currency, only allows those consequences to build and build. You can respond to each bubble collapse with a bigger bubble, but eventually you can't.

All of these things are just tools for making government's destructive impact larger, and for deferring and confusing the causal relationships. Its all just a sophisticated way of doing what the Seven Samarai were hired to put a stop to. And a whole bandit class has evolved as a result.

Its this requirement for confusion that makes it hard to apply Keynesian to a simple small group situation. It always requires a large economy with decision removed to a special class and bodies that operate in secret so that people can't discern whats happening.

A group of 20 people could readily detect inherently dumb things, such as borrowing large amounts of money from the neighbors to build things that the people aren't willing to spend money on so cronies of the decision maker can have more money at everyone's future expense.

I wonder at what population Keynesianism magically starts to work in his theory. I suspect it is simply whatever size enables obfuscation.

It most definitely cannot operate without some group of industrious people that prepare for the future and who are also dumb enough to lend to people who don't prepare.

[trevelyan]

"Because printing more money is just another form of stealing."

When the amount of gold in circulation falls, its value rises and people go dig up more. And yet your logic would make this a criminal act, because "digging up gold is just another form of stealing". You make the gold standard criminal by definition.

So I doubt you really mean what you are saying, and I have serious doubts you understand these issues since your rhetoric as well as your misunderstanding of what Keynes wrote basically echos the rhetoric of the Republican Party under Reagan and Bush, the two administrations which have done the most long-term damage to the US national budget, and whose anti-debt crusade (once out of power) has been largely responsible for keeping unemployment so high this long after the crisis.

What would Keynes have advocated in 2008? Unquestionably a more aggressive fiscal stimulus in 2008 once it became clear monetary policy had failed to prevent deflation and soaring unemployment. Your concerns about debt would be irrelevant because the cost of capital to the US government was zero: the world was (rightly or wrongly) clamoring to buy Treasury Bonds at non-existent rates of interest.

This approach becomes untenable once there is inflation or when competition for capital raises interest rates. But if the former happens then you've eliminated deflation and solved the unemployment problem. And if interest rates rise without triggering inflation? Then you use monetary policy to lower them and increase the money supply again through market mechanisms until deflation stops. Rinse and repeat until unemployment is close to its natural rate again and/or you get inflation, at which point you declare victory and go home. Radical? Considering that the total cost of the 2008 Economic Stimulus act was about 1/4 of the annual US military budget, it is hard to see pursuing full employment as an unreasonable policy, especially when the cost of doing so was effectively zero.

[stretchwithme]

Gold is the most stable commodity in the world, which is one reason its ideal for this purpose. Most of the gold that has been mined throughout history is still part of the supply.

And the one getting that portion of the gold supply is doing the work of getting it out of the ground. So I really don't see how that's stealing.

Fiat money is another matter entirely. As most fictional things are quite different than real things.

Jude Wanniski makes an excellent case for gold in The Way the World Works. He also explains why inflation is so dangerous. I encourage you to check it out.

[trevelyan]

No-one is advocating inflation: we are talking about the best policy response to a deflationary shock and liquidity trap.

First you claimed that increasing the money supply to prevent deflation is wrong because it is theft. Now you retreat to the claim that theft is OK as long as it requires "getting [gold] out of the ground". So you're claiming that there are certain arbitrary activities (moving dirt) which should be government-protected as legitimate ways of debasing a currency and stealing from other citizens.

Leaving aside the fact that your proposal encourages political corruption in natural resource extraction, I fail to see why someone with a pick-ax should be entitled to inflate away my savings. But if you insist on the matter please tell me again how your proposal is different from Keynes' example of burying money in mineshafts.