While the appointment of Janet Yellen as head of the US Federal Reserve appears to be a foregone conclusion and stock markets have welcomed the news, the long term outcome for the real world may well be more pain.
Yellen comes from a coterie of 'born again Keynesians' who all believe that the answer to our recent woes is to borrow and spend still more. They are believers in state intervention in every aspect of our financial lives and believe that simply making the money revolve around the system ever-faster is the way to ever-greater prosperity. More recently, they've discovered a new wheeze which is the creation of large amounts of money for injection into the economy via the mechanism of 'Quantitative Easing'; what the ultimate effects of this will be are wholly unknown.
I don't claim to be an economist of any sort, and I know a lot less than the likes of Yellen and her Keynesian colleagues (2 of whom are Nobel Prize winners) but I still think they're wrong. When the major western economies, not least the USA, are labouring under vast mountains of debt, the way to salvation cannot be to borrow more. If I, as a private citizen, get into debt, I may try to borrow my way out of trouble but I'll eventually go bankrupt; so it is with countries. The current crisis over the existing 'Debt Ceiling' in the US tells us that there are many who are already very unhappy with the state of play and Yellen is unlikely to tighten any belts for a long time yet. It's even reported that her stance may be even more lax than that of her predecessor, Ben Bernanke.
There is one difference between a private bankruptcy and a state one; the state bankruptcy takes longer to arrive but is ultimately much worse. Keynesians of the world should all take note - when you're in a hole, stop digging.
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