Keynesianism doesn't work in the real world.

This is from the Market Wizards book (Jack Schwager,1988). The author interviews Richard Dennis, one of the most succsessful traders ever. He was one of the few relevant democrats in the investment sector, a world that was dominated by republicans, and he was heavily intellectually invested in politics. This was written more than 30 years ago and it feels more relevant than ever.

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As a long-time market observer, what major trends do you see shaping up over the coming years?

I bet we will be at record levels of inflation by the end of 1990. It is going to be driven by trying to avoid a deep recession. The recession is going to be caused by the federal budget deficit as investors require higher and higher levels of real interest rates to buy the debt. The' government will try to avoid the recession by stimulating the economy, a tactic which essentially doesn't work.

It is, unfortunately, a very Republican idea, but I think it is right. Whether you like it or not, the financial markets are in conservative hands. People who lend money to the government and business will not buy monetary easing as a solution to a recession.

Are you implying that the deficit problem is just a time bomb, which will eventually shatter the economy?

Sure. We tend to think that since it is not a problem now, that means it won't be. We expect continuity in our lives, but the economy, and certainly the markets, are more discontinuous than continuous.

It is like having termites in the foundation of your house. You may not notice them until one day they gnaw away a big chunk and the house collapses. I don't think anybody should take a large amount of comfort in the fact that things appear to be holding together.

Hypothetically, if you were President and could influence change, would the deficit be the first thing you would change?

Sure. I think it is especially important for Democrats, since they were the first ones to pick up the banner of Keynesianism [the advocacy of government programs to increase employment], to admit that while it may be a great theory, it doesn't work in the real world.

I don't think Keynes ever proposed using deficit spending in strong economic times.

No, that's true. He proposed surpluses that were supposed to be countercyclical to deficits. Surpluses in good times; deficits in bad times. The trouble is that we have only one side of that equation because of the lack of political will to create the surpluses when times are good. So what we really ought to do is admit that Keynesian economics is just an excuse for easy money, overspending, and overconsuming. We ought to just admit that the government is a debt junkie and the whole concept of deficit spending is flawed in practice.

You mean Keynesianism as it is being applied, not Keynesian economics as he himself purported it?

The theory is fine, it just doesn't work in the real world. Therefore, we shouldn't use it. Besides, Keynesian economics was a solution to the problem of oversaving and underconsumption, which was a fair enough attempt to pull us out of the Great Depression. The problem now is the exact opposite: undersaving and overconsumption. Even if Keynesianism were politically tenable, you still need a different solution because you have the exact opposite problem.

Is there an economic theory that you feel fits the times and makes sense?

We have to get rid of deficit spending. We need to retire the deficit in some orderly way, and the federal government should have to balance its budget just as the states do. At that point, Milton Friedman's proposal for a constant money supply adjusted by a growth factor would probably be a good idea.