This link to a recent Telegraph (of London) Ambrose Evans-Pritchard (AEP) report is typical of the trap that Keynesians have built for themselves. AEP well articulates their dilemma, stating:
“…the developed world has yet to shake off the legacy of the Lehman crisis, is struggling with record debt ratios and has already used up most of its fiscal and monetary ammunition.”
The Keynesian tools of choice for escaping a recession are increased government spending and monetary stimulus. It must work, they believe, because their models tell them so. But when governments spend themselves to unsustainable debt levels and central banks expand base money and drive down the interest rate and STILL the economy refuses to budge, these Keynesians are trapped. And like all trapped animals, they are dangerous. But their conundrum is a mental trap only and one that is easily conquered, if only they have the courage to admit it and take appropriate action. The cure is simplicity itself. They must give the free market a chance. Governments must CUT spending, and central banks must STOP EXPANDING base money. This means that governments must tell their citizens that the welfare/warfare state is ending. And central banks must tell their governments that they will no longer monetize debt or intervene in any way to influence the interest rate. The resulting recession, perhaps even depression, is the necessary and inevitable workings of the free market to shed itself of what must now be massive malinvestment. It is the market working to realign the structure of production to economic reality. This will take time, but there is no other way.