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Since we only have one set of real world observations, and economic models are far from perfect (as witnessed with today's shocking GDP drop), we will never be able to disprove this idea.
The prediction from conservatives was that huge increases in the monetary base would cause devaluation, inflation and that big government deficits would cause big increases in interest rates. These predictions have been wrong for five years. That makes that model complete wrong.
In view of this failure, has there been any rethinking on the Austrian/Austerian side? Not at all. All I read are excuses, like, 'we would have had inflation except for the Europeans, or something' or 'it will happen some day.'
Conversely, the prediction that increasing the money base and big government deficits will be neither inflationary nor cause high interest rates, if the economy is in a liquidity trap, is a fundamental reaffirmation of Keynesian models -- and that's what actually happened.
The fact that the economy sank when government stopped spending is exactly what Keynesians said would happen and contrary to those who said that slashing spending would boost the economy.
One couldn't have a better test of competing models.
Economists polled by Reuters had expected output to increase at a 1.1 percent rate. None of the economists surveyed had predicted a contraction.
Where's the word "unexpected"?
Oh wait, here it is.....
Quote:
WASHINGTON - The economy unexpectedly contracted in the fourth quarter, suffering its first decline since the recession ended more than three years ago as businesses scaled back on restocking and government spending plunged.
What spin? We cut spending and it slowed growth. Is that hard to understand?
Growth of what ..the defense industry ?
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