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The real reason why establishment economists scream for deficit spending during a downturn

We all know that Paul Krugman’s ‘solutions’ to solve the so-called ‘liquidity trap’ problem don’t work.

We all know that piling on more government debt on top of personal debt to solve problems of debt is insanity.  We all know that there’s much more debt than money to pay off the debt.  We all know it’s impossible, it’s unsustainable, it’s doomed.  We all know this thing is designed to implode.  We all know deficit spending distorts the market and creates huge economic problems.

So why does the mainstream economic community support it?  Why do governments support it?  Why do banks support it?

In a crisis, the banks need government debt to stay solvent.  Because of the madness of fractional reserve banking, the only debts that are almost impossible to default on are government debts, because the government has the power to print the nominal fiat currency.  So when there’s a rush for liquidity in a banking collapse, demand for ‘secure’ govt bonds soars.  Witness the GFC and witness the new Basel III rules.

Ironically Australia has too little govt debt to keep the Australian banks ‘solvent’ in a liquidity crisis.  Ironically, the Australian banks are calling for the Federal government to go deeper into unrepayable debt in order for them to satisfy the Basel III rules on capital adequacy.

The madness of this system is lost on everyone but the Austrian economists.

Leaving aside the inherent madness of the system, the point is this:  In order to keep the banks alive, the government must go deeper into debt.

When you next hear Paul Krugman screaming for deficit spending remember why he is screaming for deficit spending.  He is really screaming for more govt bonds to keep the banks solvent.

It destroys the real economy.  It’s madness.   It’s completely unsustainable.  But it keeps the vampire banks alive.

Simple.

So, when faced with a recession, sell shares and buy government bonds.  The established bankers do exactly the same thing.  Why try to fight the receding tide and the corrupt banking system.

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