WASHINGTON, Aug. 22, 2015 — Friday’s Dow plunge of 531 points was impressive. The tumble was presaged more than a week ago by China’s currency devaluation, designed to boost exports as its economy and markets tank.
The Asian giant that traded dictatorial communism for totalitarian Keynesianism is watching its position as the globe’s economic engine evaporate.
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China’s central bank is also gripped by deflationary fears as it failed to meet its inflation target of 4 percent. China’s inflation stands at 1.6 percent.
The global economy is shrinking, and its central banks are running out of Keynesian stimulus tricks.
For its part, our Federal Reserve, it is believed, will postpone expected interest-rate hikes as markets descend into panic mode.
“I find economics increasingly satisfactory,” wrote economist John Maynard Keynes to a friend. “I want to manage a railroad or organize a trust or at least swindle the investing public.”
The Keynesian economic model has ruled the world since the defeat of Nazi Germany and imperial Japan in 1945. Since the crisis of 2008, governments the world over have increased spending, printed currency in the trillions and kept interest rates at near zero.
Was it not Keynes who said such moves would “create demand”?
But all we see is falling demand, and with it, falling commodity prices. Only gold has risen in a knee-jerk reaction to falling markets. But there is little inflation to speak of, so why the flight to gold?
I have stayed in cash, much to the amusement of some of my friends. I keep telling them that in a deflationary situation – economic depression – the value of money increases exponentially. In an economy with fewer and fewer jobs, fewer and fewer dollars circulate. That scarcity tends to increase the value of those dollars.
The financial media have recently reported that home prices have rebounded almost to pre-2008 levels. That may be the next bubble to pop – again.
At CNBC, the financial news network, host Jim Cramer came in on his day off to make a plea. If Fed Chair Janet Yellen “came out today and said everything is on hold [interest rate hikes] until we get this China situation [under control], you would see a rally.”
Anti-Keynesian economist and free-marketeer Friedrich Hayek predicted the Keynesian mess in which we find ourselves:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
If the feeble attempts by central banks is all that moves the markets, not corporate profits, hold on to your hats.
It’s going to be a very bumpy ride to a market bottom.