Keynes vs Classical

  Classical economics is outdated. Adam Smith is dead. Most of my economics education was classical economics. We were taught that money like goods and services was finite. But reality is much different. Keynes did not create boom and bust cycles. Otherwise there would have never been a boom and bust cycle prior to the Great Depression. There even would not have been a Great Depression.

   Historically growth and decline is a result of over extension. Many choose the word hubris and arrogance. There is no return unless you are willing to take risks. But if you take too much risk, it will ruin you. But there is no clear dotted line as to what constitutes too much risk. Individually, for a lot of industries, they keep taking risks so long as they are rewarded for their actions. Until finally, the coin flips the other way and all of their risk taking finally destroys them. However, this would not explain the entire economy which constitutes many many industries, and not just one. What are the chances that every industry across the economy fail simultaneously? So this alone might explain why a single industry may rise and fall, it does not explain why entire national economies rise and fall.

  Historically, boom and bust cycles are related to gold. They are determined by the money supply and its relationship to gold. Banks typically practice fractional reserve lending. So they usually lend out more bank notes and loan agreements than they have in physical gold. Not only do private banks do this, but so do central government banks. As the ratio between money creation and gold becomes even wider, the risk that the bank is unable to exchange each bank note for an ounce of gold becomes even greater. A 10 to 1 ratio is normally considered safe. Meaning there are 10 gold certificates but only 1 ounce of gold. The assumption is that normally, the 10 holders of the gold certificates do not simultaneously come in to collect their gold. If only one person comes in to collect his gold, it would be absolutely fine because that person would only redeposit the gold back into the bank in exchange for a gold certificate in some near future.  And the 10 holders of those certificates would each have a claim on the same ounce of gold just borrowing it from one another never knowing that there is only one ounce of gold between the 10 of them.

 At some critical point, the fractional reserve lending process is discovered. And all 10 come in at the same time to claim their one ounce of gold. This creates a terrible consequence to the financial sector. The banks are then forced to become more prudent and careful in how they create money, thus money creation becomes difficult. The monetary system goes through austerity because they do not want the same kind of risk blowing up again. But having less bank notes floating around in the economic system means terrible consequences for the economy. Banks are hesitant to give out loans to pay for consumer spending and factory output. Having less money being created means people have less income and thus stagnant wages and an anemic economic system.

 Governments and Banks have removed themselves from the gold standard and thus the boom and bust cycle has become obsolete. China has not had a recession for over 30 yrs. The only reason the united states suffers from recessions is because its the only tool the federal reserve has in order to calm inflation. The federal reserve is not a social worker. Their only tool in slowing inflation is to send millions of americans towards unemployment. This is because americans who dont have jobs, incomes, and spending habits, wont help drive up consumer prices. If you dont have a job, then you will just stay home every night and wouldnt be bidding on products on ebay. And by not participating in the economy, you are helping to keep inflation low.

The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well.

The Early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November 1982.^[1][2] The primary cause of the recession was a contractionary monetary policy established by the Federal Reserve System to control high inflation.^[3]

   Today, recessions do not occur because we run out of money because money is no longer tied to any finite commodity. Recessions today occur because the state is trying to stabilize the money supply. The reason China has never had a recession is because the Chinese Central Bank rarely tries to rein in the money supply in order to cause one.