Keynesian bomb is ticking

By Chan Akya
Asia Times

Keynesian spending that is being unleashed upon an unsuspecting world takes the role of a stereotypical Hitchcock moment: after first beguiling audiences into believing that danger lurks around the corner, the master movie maker usually displays an anticlimactic result such as a harmless mewing cat; but before the comic relief can fully set in he reveals a nasty turn as the real villain enters from the other side of the screen.

For all the sounds and fury associated with the current meltdown in the global economy, the outburst of Keynesian spending will likely create a far worse result, namely hyperinflation that could well take hold before the year is over. There are a number of factors leading up to this, on both the supply and demand sides of the equation.

To the cynically minded few, there is a simple enough reason for this, namely that inflation is usually the best cure for all debt overhang situations. To explain that further using the example of the US economy, the overall "stock" of private, government and corporate debt at the end of 2007 was around US$25 trillion, about double the country's annual gross domestic product. Against this, there have been some $25 trillion of asset value reduction from $50 trillion in the value of stocks, homes and future pension values to around $25 trillion by the end of 2008.

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