Pacific Investment Management Company (PIMCO), the world's largest manager of bonds, has just released research analysis titled: "Saying No to Keynes and Fiscal Folly." The report is a dramatic departure for PIMCO, who had fully embraced the Keynesian "pump priming" economics of stimulus spending, bailouts, and corporate interventions. But with the American public now opposed to Keynesian government spending by a stunning two to one margin, PIMCO may just be the first of a coming swarm of powerful elites to abandon Keynesianism for self-preservation.
The PIMCO has made big money on the credit crisis over the last three years. PIMCO's management stated that their firm's strategy was to "shake hands with the government" by investing money in areas that would benefit from the government's rescue efforts. With the stock market in tatters, investors rushed to place huge bets in PIMCO's bond funds. The U.S. Federal Reserve even hired the company firm to manage $500 billion in distressed mortgages. But a few months ago PIMCO made a disastrous investment decision by selling all of their U.S. Treasury Bond investments, just prior to the United States credit rating being downgraded and value of government bonds rising by up to 20%.
Now that PIMCO is losing money on that handshake with the government, they seem to be turning on their former masters. PIMCO's recent report offers three key conclusions:
• Taxpayers have been hoodwinked into believing the cost from profligate government spending is low relative to the benefits.
• The Keynesian revolution ignited a decades-long abuse of the core principle of Keynesian economics: for government to increase spending when private sector aggregate demand weakens and stymies job growth.
• The central banker is left to shoulder the burden, seeking all the while to pressure the fiscal authority to amend the abuse of Keynesian economics and decades of fiscal folly.
Most people do not realize that the American Revolution was a revolt against efforts by Great Britain to collect brutally high taxes from the colonists to pay the massive debts Great Britain accumulated in the Seven Years' War with France. Due to strong memories of endless colonial taxation to pay for past British war debts, one of the first actions by the founders of the United States of America was to pass the "Sinking Fund Act of 1795." The law required that taxes should "be levied and collected and appropriated to these objects until the whole debt should be redeemed." The law essentially prevented the young American government from engaging in deficit spending that would be passed on to their children's generation.
The system was wildly successful at preventing the buildup of debt until the advent of the Keynesian economics revolution in the 1930s. Since that time, successive American governments have increased spending every time private sector demand has weakened and job growth was stymied. PIMCO argues that Americans have been pacified "by the illusions that lead them to believe that the cost they bear from profligate government spending is low relative to the benefits. The hoodwinkers have been many, in particular politicians in Washington, who lead the American people to believe that the use of debt is without cost. This is the essence of fiscal illusion, whereby the victims are ill informed and are taken advantage of by those who have control of budgetary matters and use debt to hide the true cost of their decisions."
Italian economist Amilcare Puviani first advanced this notion in 1903 that a politician will best use his powers of the purse to promote their own political projects, rather than what is necessarily best for the public. The goal of these political entrepreneurs is to take credit for all that is perceived as good about public policy in the pursuit of their own self-promotion.
James Buchanan won the 1986 the Nobel Prize in Economics for his efforts to apply Puviani's theory to "public choice theory" to prove that politicians manipulate the gap between the public's perception about the benefits of fiscal initiatives and their costs in order to grow the size of government. Buchanan demonstrated how this is accomplished by the use of debt and by applying taxes that are less visible than those taken directly out of paychecks.
Politicians and their elitist crony pals have benefited immensely from the 1560% of inflation over the past 80 years that has resulted from the endless abuse of Keynesian philosophy to justify running up debt for self-aggrandizement. But now that the worst recession since the Great Depression is inflicting severe pain on the generally citizenry, those elites are becoming alarmed that the American public will pull back the curtain on the Keynesian Wizard of Oz happiness machine and discover they are doomed to the herculean task of paying down mountainous debts.
What the elitists fear most is the whiff of rebellion that is now in the air. The good times of relying on politicians to spend "other people's money" for their benefit is over and those other people are getting mighty angry as they realize how much pain they are going to paying for past spending. Elites are educated enough to understand that elites on the wrong side of revolutions usually get trampled into the dust pan of history. It seems to me that PIMCO is just the first of a coming swarm of elites that will abandon Keynesian economics for self-preservation.
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