One of the main purposes of this blog is to provide readers with the perspective of all three primary schools of economic thought in the United States. The first is the Austrian school, which argues a "tough love" approach to budgets, which must be balanced every year. The second is the Keynesian school, which argues that deficit budgets are fine when the economy is weak, as long as surplus budgets are maintained when the economy is strong, in order to balance the national debt. The third is the Supply Side school, which argues that taxes weaken an economy and that the best way to stimulate the economy is to reduce taxes.
Supply Side economics is almost unique to the United States. The rest of the world has a more binary view between Austrian and Keynesian economics. Most European nations have adopted more Austrian budgets, with lots of austerity measures. With approval of the U.S. debt deal, it is clear that austerity is coming to the largest consuming nation in the world. Austerity reduces demand. To Keynesians, reduced demand leads to reduced prices, which leads to reduced supply of products by manufacturers, which leads to high unemployment, which leads to even more reduced demand.
With China trying to reduce growth or demand in that nation to control inflation, where will growth come from? If not Asia, Europe, or the U.S, where? Since nobody has a good answer to that question, all those portfolio managers and investors of the Keynesian school have no reason to risk capital by leaving it invested.
With Friday's weak report on the GDP, with yesterday's surprisingly weak ISM report, and today's report that consumers are saving more and spending less, Keynesians could see no hope for demand growth. As they continued to leave the market, the Dow dropped 265 points today.
