Keynesian Bubble Burst

I have lived through the real estate bubble, the dot.com technology bubble, and the stock market bubble.  I am now convinced that the Keynesian Economic Theory bubble is about to burst.  The Keynesian Economic theory says that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.  A supporter of Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation. 

Recently I wrote a blog about the individual.  Ironically, our poor economy can be traced back to the individual and a credit card crisis.  I will try to explain how this simple little plastic card has had global implications and may prove to be the downfall of the U.S. economy until we totally crash and rebuild from the ashes.

By 2010, consumer credit card debt reached new levels into the trillions of dollars.  Today, a staggering number of people don't have jobs.  Families are desperate.  So what do they do?  They turn to the credit card to help them make ends meet on a temporary basis.  But now, due to Obama's failed policies, our economy has not rebounded and many people can't even make minimum payments on their credit cards.  This has lead, in part, to a record number of personal bankruptcies.  These bankruptcies affect the entire economy. 

Here's why.

One reason the damage from the housing bubble was so widespread was that mortgage debt was securitized (transformed into a tradable asset) and sold to investors. As homeowners defaulted on their mortgages, lenders took huge losses, as did the global investors -- including some of the largest investment banks -- who had purchased these mortgage-backed securities.  The same ripple effect  is starting to occur as millions of Americans default on their credit card payments. Credit card debt has also been massively securitized. Securities backed by consumer credit card debt represent a $365 billion market [source: Huffington]. When those securities crash, expect the rest of the market to follow.

To make matters worse, some economists fear that the Fed is printing too much money to finance its generous stimulus packages and corporate bailouts. When and if that money begins to circulate through the economy, there will be a glut of dollars that will increase prices. You know this as inflation.

What does this mean to bond investors? When bonds mature, not only will their yields be close to zero, but they will be cashed in for dollars that are worth a fraction of their original value. In other words: loss, loss, and more loss.

Of course, this is an over-simplified answer to a staggering and complicated problem.  But hopefully, even the libs will start to understand that active government intervention in the marketplace and monetary policy is not the best method of ensuring economic growth and stability, but that a return to individual liberties and freedoms is.  Just as the individual can negatively affect an entire global economy through credit card abuse, so can the individual positively affect the economy with relief from the burden of excessive taxes and a return to putting individual liberties first.