John Maynard who? (part 2)

By Randell Tiongson on January 4th, 2010

… con’t.

The Philippine government tried to copy the same cheap money scenario but the local game was played very differently. The government pegged the interest rate very low, yet the bank’s borrowing rates were still stiff and did not really trickle to benefit the economy the way the government wanted it to. As a result, while there was some modest economic growth , it was a laggard by other country’s standards. When global financial institutions came crashing, the local financial companies stood their ground with nary a scratch. I got to give it to our Central Bank and sound local management to some point… but to a large degree, our local financial companies breezed through the storm unscathed because of the huge margins they enjoy. Imagine borrowing money at very cheap rates (thanks to the government) and lending them at high rates – how can you go wrong?

The first world economies and the Philippines applied what John Maynard Keynes advocates with different results. First world experienced unprecedented growth but their economy later succumbed into what appears to be a vacuum. The Philippines were spared from the financial mess but continues to await some economic epiphany that seems to be a dream. In my view, both results are failures.

Now, was John Maynard Keynes right? Should the government continue to craft policies to influence the economy? It seems that now more than ever, the Keynesian theory is alive – dole outs, stimulus packages & low interest rates; and we still claim that we subscribe to a free market? Hmmm, perplexing. Why don’t we just let the economy take its proper course; allow recession so we can learn from it; fix our houses, weed out inefficiencies and review our priorities? Allowing to do so will definitely be a painful and a hugely unpopular move. Or, we can continue applying band aid solutions to a necrotic wound.

There’s only one economy that can experience consistent growth with no recessions: God’s economy. Maybe it’s time we start focusing our time and effort in participating in His economy.

“So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?” – Luke 16:11, NIV.

A blessed New Year to everyone!

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3 thoughts on “John Maynard who? (part 2)”

  • Keynesianism also advocates the so-called “paradox of thrift,” i.e. the more people save, the worse the economy becomes. This is reflected in the view of this CNBC article “Higher Savings Rate Is Great, But What About the Economy?”
    http://www.cnbc.com/id/31567708

    The recession, according to Keynes, is caused by a “savings glut,” i.e. excessive savings: this is where the government is supposed to intervene. Gov’t interventionism is supposed to prop up consumption. Prosperity in the Keynesian framework depends on more consumption. But this is absurd, right? Adam Smith was right when he told to the effect that if prudence is good for the individual, it is also good for society.

  • There’s a big debate on how much the government should involve itself in the economy. Should it be a total government or no government? Or something in between. Political science and economics are two good areas to study for a serious investor. They are intertwined. There’s a third area, of course.

    The YouTube presentation might be an interesting one to view. http://www.youtube.com/watch?v=KFXuGIpsdE0

    Bon-Gonna Li

  • The hazards of central economic planning, which is basically what’s being done to implement Keynesian ideas, has not been successful. The good intention of smoothing out the economic cycles through periodic monetary expansion and spending leads to abuse, as we have seen.

    A free-market economy is better. But the government should be there for some minimum intervention to ensure order, peace and fair play.

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John Maynard who? (part 2)