Economy

Why The Economic Crisis Should Kill Keynesian Conventional Thinking

Op-Ed: A countervailing conservative French economist blames the West’s imploding economy on long-accepted Keynesian policies of boosting consumption via public spending.

March against the cuts in London on April 2, 2011  (gwydionwilliams)
March against the cuts in London on April 2, 2011 (gwydionwilliams)
Pascal Salin

PARIS – It would have been only logical that the recent financial crisis and the consequences we are witnessing today should have radically challenged the prevailing ideas on economics. But it is fascinating to see to what extent people can stick to erroneous beliefs. The strange and enduring success of anti-Capitalist ideas after the spectacular collapse of communist and socialist societies illustrates this tendency all too well!

The ideas inspired by Keynesian theories are dangerously dominant. Despite the fact that they give no coherent explanation of the appearance of crises, everybody defined their "policies to end the crisis' according to Keynes' ideas. The main point is simple: if there is an economic crisis, if economic growth is weak and unemployment rate high, the right thing to do is to increase the global demand, which implies in particular to increase public spending. Every government favors this method, since it enables them to justify any demagogic spending, any waste of money.

Nevertheless, in all areas of human activity, wisdom means understanding the causes of a phenomenon before implementing measures to solve it. In our case, the economic and financial crisis was absolutely not the consequence of a lack of demand, but, on the contrary, of an excess of monetary credit and an excess of spending (for example, on real estate.)

A strange incoherance

Moreover, the very idea of increasing ex nihilo the global demand is an absurd idea: if a government spends more, it must find a way to finance it. Public spending always corresponds to a transfer of demand (at the expense of the taxpayers if it is financed by taxes, at the expense of the economy if it is financed by loans) and never to a net growth of demand. We should not be surprised if such a policy doesn't bear fruits. The American example shows it: the public deficit of more than 13% of the GDP did not prevent low economic growth and a high unemployment rate, while seriously disturbing the financial markets.

Keynesian thinking habits lead to a strange incoherence. Indeed, on the one hand, we recommend re-boosting consumption – which implies reducing savings – and on the other hand, we pretend to stimulate the economic activity and the investment by policies of monetary growth and low interest rates. But it is that kind of policy that caused the financial crisis in the first place. It is the creation of the illusion of having important financing means thanks to a purely artificial monetary credit, as we strive to reduce savings. We should do exactly the opposite: cut out all obstacles, in particular taxation obstacles, that eliminate the incentive to save; and prevent any monetary growth, which can only provide illusions and instability. That's why it is dangerous to ask the European Central Bank to act to reduce inflation and to encourage growth, since it is quite unable, like any central bank, to do so with success. The best thing that we could ask would be to stop any monetary growth.

It is high time that we completely change the configuration of economic policy. It has consisted until now in creating massive public deficits and strong monetary growth. We should, on the contrary, drastically reduce public spending and tax burden in order to encourage mass production, prevent any increase in money supply and incite people to save money within the framework of a major tax reform. The first revolution that must take place is an intellectual revolution.

Read the original story in French

Photo - gwydionwilliams

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Geopolitics

Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3

-Analysis-

LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.


Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

commons.wikimedia.org

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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