To:       Honorable President Barack Obama

Sub:     Keynesian strategy deepens inequality, to precipitate depression.

Date:   January 24, 2014

Dear President Obama,

The Keynesian strategy is an element of the established system (rules of governance).  By this strategy, the government borrows and spends and the Fed prints oodles of money to revive private spending by households and businesses during periods of economic depression. 

The truth about the Keynesian strategy: it is designed to cover up the established system of legalized robbery of the hard earned wealth of households and businesses.  Such systemic robbery deepens the inequality in incomes and wealth.  Inequality leads to economic depression, after some cycles of recession and Keynesian strategy. 

When the governments and embedded economists propping the established system continue to deny the truth, a deep and lasting economic depression ensues to pave the way for a fair system of equal opportunities.  Only a fair system can maintain long-run stability (economic equilibrium) and recreate wealth based on skills and perseverance, as opposed to robbing of public and private wealth. 

The government can and should preemptively avert a painful economic depression by repealing laws, rules and policies that foster inequality:[1]

  • Establish the first-best efficient system of money and finance[2] by repealing all existing rules that define the currently established second-best system.[3]
  • Disband the system of protecting parent rights.  Retain only copyrights to recognize the original authors and inventors.  Original inventors and authors have rarely become wealthy.
  • Reform the system of initial public offering of business equity, which is now designed to keep the cream with the insiders by selling off the lemons at exorbitant prices to the outsiders. 
  • Limit the CEO compensation to a fixed multiple of median wage of employees of a business or organization so as to induce the CEO to keep the median wage high.[4]
  • Amend the constitution to insert the following foremost preamble for first-best efficient governance to beget first-best status for principals (citizens):

We the people declare solemnly to (i) pass only those rules of governance which are equally applicable to all, which do not, even surreptitiously, facilitate usurpation of public wealth or any individual’s private wealth including real and financial assets and the opportunity to acquire such assets, life, liberty and pursuit for happiness, (ii) to elect our political representatives who use only funds released from the public exchequer by a transparent formula set by the election commission and not deploy (directly or indirectly through allies) any private funds for anything related to their elections, and (iii) to ensure that no other preamble or article of constitution or law passed by Parliament/Congress or government executives will ever transgress this foremost preamble.[5]

Would you, as a constitutional professor, accept that the above foremost constitutional preamble is commonly acceptable?  Such a preamble is not slated in any constitution in the world now.  Given this constitutional preamble, however, one can easily discern unconstitutionality of any part of the established system (rules) of governance, repeal them and pave the way for the first-best system to bestow equal opportunities (sans privileges) based on skills and perseverance. 

An example of laws enacted to surreptitiously evade the above constitutional preamble is the Volker Rule.  The Volker Rule bans proprietary trading by banks.  The Volker Rule, thus, disallows banks to have their hedge funds.   This rule ostensibly appears to be designed to beget first-best status for principals.  But the truth is very opposite. 

The Volker Rule does not disallow bank executives and their political patrons to lend federally insured bank deposits to private hedge funds in which they have significant stakes.  This Volker Rule will only weaken the publicly guaranteed banks, as the bank executives with restricted trading-based bonuses and salaries escalate transfer of wealth from federally insured banks under their control to their private hedge funds and trusts. I believe they already are doing this.    

The Volker Rule will eventually make (a) the federally guaranteed private banks the wards of the government (taxpayers) and (b) many private hedge funds with massive credits amassed due to transfer of public wealth emerge soon as unregulated private banks with large capital-to-assets ratios.  These well-capitalized, unregulated-uninsured private banks will be credible and trust-worthy for deposits without federal insurance.   

Such well-capitalized and unregulated-uninsured private banks are an integral part of the safe central banking policy which attains in my general equilibrium model, first mimeographed at the Fed in 1991.[6]  I submitted my safe central banking policy proposal to the US Congress in 2003[7] to avert a looming financial crisis due to instability of the established system found within my model.  Neither you nor the Congress has so far accepted this part of my safe central banking policy as law.  Nevertheless, this part of my safe central banking policy is bound to prevail (as the undercurrents lead me to infer), but only after huge losses to public exchequer due to the federally guaranteed private banks turning insolvent and wards of the government, thanks to the Volker Rule.  

The truth (discovered in my research) that completely deregulated-uninsured private banks attain in economic equilibrium will ultimately prevail in future, but only after huge irreparable losses to the vast majority and public exchequer.  The Federal Reserve in this looming scenario will be forced to provide safe custody of the part of savings that households and businesses would need to preserve absolutely safely, perhaps at the federally insured private banks after they become the wards of the government/Fed. 

Government/Fed’s direct custody of deposits of households and businesses is the other part of the safe central banking policy which obtains in my model of general economic equilibrium, which I had conveyed to Congress in 2003.  The Congress adopted this policy (not in 2003 when I submitted it to them) but in 2008, only after the vast majority and public exchequer lost trillions of dollars of hard-earned wealth,  and millions of jobs were erased and tax revenues slumped due to the 2008 financial crisis. The Congress was indeed forced to adopt this part of my safe central banking policy through government/Fed guarantee of previously uninsured money market funds ($3.5 trillion) and previously uninsured private bank debts ($7.8 trillion) to stem the domino of crashing markets in 2008.  

The public servants chosen by government for economic policy are obviously very smart academic experts who never fail (irrespective of their party affiliation) to enrich legally their private patrons by burdening the crucial vast majority and the public exchequer.  Their policies have given rise to the ballooning public debt, the top eighty five richest individuals holding as much wealth as the bottom fifty percent, the degree of inequality surpassing the pre-Great Depression era levels, etc.  There is no need to reiterate why these smart academic experts on economic policy have serious vested interests in suppressing research on first-best efficient governance designed to beget first-best status for principals (citizens) and in destroying the career of this researcher.   The question now is whether the established second-best system (the paradigm advocated by the smart academic experts in government) has revived from its 2008 crash to maintain status quo.  My equilibrium model of the economy tells no

The first-best efficient equilibrium policies discovered in my model must be the indubitable epistemic truths because they have consistently prevailed, despite efforts of the reigning smart academic experts to suppress them: elected representatives of people have ultimately adopted these policies, though after massive losses to the vast majority and public exchequer and blamed these experts for causing the 2008 financial crisis by rejecting the gospel/expertise that the crisis was an act of invisible hands. 

The foremost constitutional preamble is likewise the epistemic truth, which will ultimately prevail, at least after further catastrophic losses to the crucial vast majority and public exchequer.      

With profound regards,     
SankarshanAcharya  
Founder, Citizens for Development & Pro-Prosperity.Com

[1] This is discoursed detail in my book, “Prosperity: Optimal Governance,” Citizens Publishing, 2005.
[2] Acharya, S. (2013), “Constitutional System of Money and Finance,” Journal of Financial Intermediation, http://pro-prosperity.com/Research/Constitutional-Monetary-Finance-System.pdf.
[3] Acharya, S. (2013), “First-best Management Academy: Proposal for Consideration by Global Leaders,” http://pro-prosperity.com/Research/First-best%20Management%20Academy.pdf .
[4] Acharya, S. (2008), “Optimal CEO Compensation in Best National Interest,” http://pro-prosperity.com/Research/OptimalCEOCompensation.pdf
[5] Acharya, S. (December 8, 2013), “We the People Want Constitutional Raj Dharma: First-Best Efficient Governance,” http://pro-prosperity.com/India/We%20the%20People%20Want%20Constitutional%20Raj%20Dharma.html
[6]Acharya, S. (2013), “Arbitrage Pricing of Total Risk of Assets and First-best Governance of Financial Institutions,” http://pro-prosperity.com/Research/moralhazardliberty.pdf
[7]Acharya, S. (2003), “Warning to the US Congress on the Current Mortgage Debt Debacle,” http://pro-prosperity.com/Global%20Economy%20Chatterbox/Warning-USCongress-In-2003-On-Home-Mortgage-Debacle.html and Acharya, S. (2008), “Safe Banking to Avoid Moral Hazard,” Journal of Risk Management in Financial Institutions, http://pro-prosperity.com/Research/moralhazard-safebanking.pdf  

 


Fallacy of Keynesian Economic Philosophy

November 15, 2008

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

The global economy is in a deep rut.  It is due to a prolonged adherence to a twin philosophy of governance: the Keynesian economic wisdom and lopsided rules of law. The economic wisdom advocates infusion of newly created fiat money and cutting taxes to reinvigorate a deflating economy. The lopsided rules of law, designed by a few and imposed on the vast majority, create credits usuriously for the few while piling the credits as debt on the vast majority. 

Pro-prosperity.com has articulated how this twin philosophy of governance has merely postponed the impending economic disaster.

The fundamental nature of the disaster is simmering financial depression faced by households, under the veneer of government-hooted pseudo GDP growth and unemployment statistics. The household depression is due to the twin philosophy of governance practised over a prolonged period of time. This philosophy has yielded: (a) usurious accumulation of credits by a few households who do not really produce much of the globally competitive goods and services, and (b) piling up of this credit as debt on the vast majority of the effective producers of goods and services.  This process has perhaps financially bondaged (with net debt) the vast majority of effective producers by a few creditors who design and take advantage of the lopsided rules of governance to accumulate credits usuriously.

The GDP growth is pseudo because the enhanced prosperity due to the growth has primarily accrued as credits for the few controllers of the lopsided system of governance. 

The unemployment statistics do not account for the underemployment, i.e., the negative net income of the employed. 

The growth in household debt has more to do with the necessity of economic survival than the media-hooted irresponsibility of the underemployed. 

The governments’ reluctance to collect data on net assets of individual households perhaps testifies their willy-nilly desire to hide the truth - brewing individual household economic depression - through transient succors proffered by the Keynesian monetary philosophy.  

By adopting the Keynesian philosophy, governments have obviously prolonged the simmering household depression for eight decades.  The individual household depression has not appeared to be systemic so far. It may be due to the inability or unwillingness of households to communicate among themselves about their financial distress and due to the government not collecting, let alone disseminating, data on net assets of individual households.

The issue facing the world now is whether the twin philosophy of governance - Keynesian economic wisdom and the lopsided rules of law - will continue to succeed in camouflaging the true, perhaps pervasive, household depression, especially, within the developed economies.  In the absence of net asset data of individual households, pervasiveness of economic depression is obviously hard to decipher. Without such data, meaningful preemptive policy reforms are well nigh impossible.

Absence of individual households' net asset data and the remarkable accuracy of our prognosis in 2003 on the current financial market meltdown as well as of the cause for such meltdown, make us feel confident to suggest that the standard punditry that the Great Depression was caused by lack of credit is untrue. The Great Depression was caused by financially depressing the vast majority of individual households through systematic wangling of savings via lopsided rules of governance. The credit squeeze obviously exacerbated the depression. Governments have, therefore, followed the Keynesian wisdom to create new fiat money and tax cuts whenever they see signs of depression. This is how the household depression has been suppressed over eight decades.

The communique of G20 governments issued on November 15, 2008 states two important causes of the current financial meltdown: (i) financial institutions and investors seeking higher yields, and (ii) lack of proper government regulation. It does not state if the "higher yield" is unsustainable or usurious. More importantly, it does not state if the current financial system (rules of governace) that allows usurpation of usurious yeilds (that enhance credit) is (a) lopsided or causing irreperable losses to the vast majority, (b) instituted by the top creditors for self-aggrandizement by nibbling away the savings of the vast majority, and (c) allowing to share the gains with the sponsors of this system.

It is doubtful that the truth about household depression could be suppressed any longer. If the vast majority of households are truly facing financial distress with positive net debt and negative net income, the humanity will eventually witness a Great Global Depression.

Pro-prosperity.com has enumerated optimal rules of governance to redress the economic crisis facing humanity.  We have also shown how the existing lopsided rules of governance are suboptimal for the vast majority.

Humanity should Institute optimal policies and repeal lopsided rules of governance to prevent a potential Great Global Depression. It is doubtful, though, that the individuals in-charge of governments will implement optimal policies or repeal the lopsided rules by transcending the interests of self, kith, kin and cronies. 

Only after the simmering crisis deepens further will the governments be forced to implement optimal policies or repeal the lopsided rules. Only then will the governments abandon the Keynesian economic philosophy as a panacea. Only then will the humanity embrace the philosophy of prosperity amid stability as a new economic paradigm to sustain the commonly cherished democratic capitalism.

[This is being updated…]

Sankarshan Acharya