Why Keynesian Economics won't end this

I've written on the ideas of why Keynesian economics does not work in the past. Simply put, an unproductive government cannot be trusted to make better decisions with people's money than they themselves. The saddest thing is that voices like this are being drowned in a sea of populist economics.

Since the time of FDR and the disastrous policies of the New Deal, governments have been trying to ease economic woe with policies fraught with unintended consequences. We've already seen the first strike from fiscal policy. The Congress and President made record time in passing legislation giving everyone in the country a tax rebate check. This reeks of political posturing in an election year. That check will do as much for the economy as attempting to put out a forest fire with a squirt-gun. But, this is the playbook for economic downturns. Encourage consumption through either government programs (WIC, Welfare, Social Security, etc.) or through direct payment (rebate checks). These programs will do nothing to consumption in the long-run, even in the short-run its effects are questionable.

It appears to me that this economy is undergoing a general deflation from an artificial inflation. Two examples lend credence to this idea. First, the housing market. Thanks to the Fed's cheap money policy and perverse economic incentives, housing prices skyrocketed far past anything that can be attributed to a rise in value. People with awful credit were allowed to take out hundreds of thousands of dollars in loans and credit. Even some with reasonable credit dove in over their heads. Now the market is shrinking, there will be a lot of casualties.

But what about the weakening dollar? Through this government's excessive and destructive spending on credit, the dollar became very strong through foreign investment. The dollar kept its status as long as our economy was strong. Now that the economy has turned, those investments aren't so great. That investment is starting to wane, and this is showing up in the flight to commodities (ahem, gold and oil). If the government sticks by its Keynesian guns and tries to spend its way out this, then you can expect even bigger problems than we have today.

An unbridled government spending spree will weaken the dollar even more. This means higher oil prices (oil price is tied to the dollar), as well as higher overall prices, since cheapness in exports will have been washed away in a high exchange rate. Remember, there are consequences to unwise spending. We found that out in the 1930s with the depression, in the 1970s with inflation and gas lines, and today with both a crumbling housing market and a freefalling dollar. Unless the government reins in spending (through perhaps a Balanced Budget Amendment), we can expect to see a lot more widespread suffering, as the State tries to "fix" this problem. Unlikely, but we can always hope though, can't we?