Are We In A Keynesian Outlier Event? Kick-Started US Recoveries No Longer Justify Their Price In Debt

Tyler Durden's picture

For all those who need confirmation that i) Keynesianism does not always work and that ii) we are living through an economic outlier, take a look at the below chart. While it is obvious that all previous recoveries used to "bloom" on their own after a modest debt/GDP increase, in essence validating the musing of John M Keynes, this time sure is different: the change in the ISM manufacturing, widely seen as a precursor to economic growth, will just barely surpass the increase in the debt/GDP, confirming that no more marginal debt will stimulate the economy. Extending this chart also shows that shortly the marginal change in the debt will surpass that of the ISM. This begs the question: why keep drowning the country with new and more debt when it is now obvious that incremental debt is no longer creating a virtuous growth loop?

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Ethics Gradient's picture

Before it's News is even more biased than this place!

Mercury's picture

Yeah ZH should spend more time addressing both sides of these issues: unicorns and rainbows.

The fringe is getting too big to be considered fringe anymore. Trouble may be brewing in paradise too now:

WaterWings's picture

The Circus is in town:

From a Bayesian standpoint, if you always observe a certain combination of information when X occurs, and never observe that same data when X is not present, then even if X is hidden under a hat, you would conclude that X is most likely there. If I see clowns walking around the grocery store buying peanuts, and there's a big top tent with two unicycles in front of it in the middle of what is usually an open field, I'm sorry, I'm going to conclude that the circus is in town...


A 3-minute course in Keynesian Theory


OK, a few quick equations. Stick with me - there's a lot of insight for the effort. Let's start with the standard definition for GDP (ignore imports and exports for simplicity)


Output (Y) = Consumption (C) + Investment (I) + Government (G)

Move a few things around, and you'll notice that by definition, I = Y - C - G, which basically says that total real investment (factories, equipment, inventories, etc) can only be created by whatever output is not absorbed by consumers or government (i.e. savings). So real savings and real investment are always equal, even if the investment represents unwanted "inventory investment." This isn't a theory, it's an accounting identity.


Next, we introduce basic Keynesian theory in two lines:


C = cY : consumption is proportional to income

I = I_fixed : real investment is fixed


That gives you


Y = cY + I_fixed + G




Y = ( I_fixed + G ) / (1 - c)

Example: G = 100, I = 20, c = .75, so (1-c) = .25, and Y = (20 + 100) / .25 = 480. Every dollar of G or I conveniently has a "multiplier" effect of 1/.25 = 4.

Since Keynes assumes real investment I to be fixed during a recession, the best way for the Keynesian economy to produce more output is to increase government spending. It doesn't matter how. Go ahead and fill old bottles with banknotes and bury them at suitable depths. Worse, notice that if people try to reduce the proportion of income "c" they consume, that is, as they try to save more, (1-c) gets larger, and cruel Keynesian algebra says that output (Y) will fall. Again, the solution is to increase G.

Mercury's picture difficulty with last year's policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy.

Especally when the vast majority of the "stimulus" went not to building roads and bridges but toward advancing every liberal/socialist pet project on the drawing board since 1972.

New_Meat's picture

Stealing this: "so let's have $1TT/hour of G, with a multiplier like that."  To the Moon! - Ned

Mark Beck's picture

It seems to me Keynes made some erroneous assumptions in the oversight of our money system, specifically the effects of debt, both fiscally and through FED redistribution of wealth.

The choice to borrow must produce lasting benefits to growth, or the debt should not be incurred. A point is reached where non-performing debt will turn G negative.


If you step back, one could say that our system is broken. Perhaps what can be said, is that without sound money, our political system is fiscally corrupt.

What is amazing to me, is how can you separate fiscal and monetary policy into two opposing ideologies and hope to maximize return on investment. Fundamentally, there is no cooperation, no synergy, it is un-united.

Mark Beck

overmedicatedundersexed's picture

 Ethics, you confuse Bias with counter balance..

try CNBC, now there's an uncorrupted source for those of your bent- bias - type.

Happy tails to you.

papaswamp's picture

This is merely a counterpoint to MSM 'all is well, pay no attention to the bad data' mantra. Don't think it's viable info, stick with CNBC...I'm sure they will give you the info you want to see.

FrankIvy's picture

Ethics Gradient said - Before it's News is even more biased than this place!

I've been reading here for many months now.  The only bias I smell here is the regular bemoaning of expressed truthful sentiment that reflects poorly on America, said bemoaning coming from the mouths of apple-pie-up-the-ass faux-patriots who can't imagine that their government is not the good guy 100% of the time.

moneymutt's picture

Steven Keen has addressed this...debt has diminishing effect overtime...hence the eventually collapse of debt.

peripatetic86's picture

Why?  Because it is the path of least resistance.   Austerity, while certainly proper when debt is no longer fueling growth and is in fact restraining growth, is very painful and politicians worry that it will cost them their precious sinecures as the people's alleged representatives.

MachoMan's picture

Simple, so that the powers that be can continue their disparity with and theft from the rest of us...

Patrick Bateman's picture

I can't wait to see what the 2010-2012 chart will reveal. Ooops, that's right, there will be no chart because the money mountain of debt will have collapsed by then.

JasonTX1's picture

Because this time it's different.

Right, fellas?...Fellas?

Scooby Dooby Doo's picture

We won't know until it's too late. Time will become distorted.

economicmorphine's picture

From your link:  " In a college letter to his friend and lover Lytton Strachey, Keynes wrote, "I find economics increasingly satisfactory, and I think I am rather good at it. I want to manage a railway or organize a Trust, or at least swindle the investing public." 


Paper CRUSHer's picture

Interesting.It took four heart-attacks to take this dude out.

In 1946 he left this earthly plane and merged with is master (Greek God Pluto)to whom he will continue preaching his KEYNESIAN RELIGION for all eternity.

Headbanger's picture

Here's a chart we've seen before showing the diminishing GDP returns of increased debt over the years:

centerline's picture

Debt saturation.  Doesn't take a PhD economist to understand this one.  Recent bubbology only served to "cram down" even more debt into the system than would have been possible otherwise on our trajectory.  A perfect storm.  It is also why it was necessary for leverage to be increased and risk shifted over the last couple of decades.  Infinte leverage and infinite risk = parabolic fireworks show.  And we have front row seats (in the burning fallout zone - sort of like Sea Worlds "Splash Zone", but not so fun).

zhandax's picture

The question becomes, do we learn from Edison's premise that insanity is the repetition of the same actions expecting a different outcome or do we try something different?

economicmorphine's picture

I think the point of the article was that we have gotten a different outcome this time.

twinturbo's picture

Einstein not Edison I think

Sudden Debt's picture

As long as the cube is only a dotted line, there shouldn't be any problem.

See ya in December bitches!

Wynn's picture

Not to worry ... Obama has his best people on it .. some of them even have Phd's

As you know, economics is very hard .. best leave it to the professionals


Gully Foyle's picture

I'm confused so help me understand.

If I make a Pet Rock and sell it to you for a physical dollar I own that dollar and you own that rock.

If I pay that dollar to the Government they then inturn can ship a pallet of bills to Afghanistan which then will be smuggled to Dubai to buy elite homes. Still physical dollars like the original.

But government debt is just numbers sitting on a computer, a digital mock up. It isn't like the Chinese or Japanese will come to the states and demand the Empire State building or White House.

That debt is the illusion of money, correct?

Since we are dealing with fiction, what stops the fiction from increasing forever? Nothing physical is involved. It's less real than trading Monopoly money.

How and when did we start confusing the real physical world with the artificial world of promise and illusion? I'm not even refering to currency because that is something one can hold and touch.

Aren't we really discussing Magical thinking?



WaterWings's picture

It's all just an elaborate method, very simple in concept, to get ordinary and otherwise clueless people in society to pay bills for the elite.

AKA, Fractional Reserve Banking.

Paper CRUSHer's picture

or.....Perpetual Enslavement

centerline's picture

You are on the right track.  The system is built to enslave people via debt, and to swap "magical thinking" for actual, physical assets like property, gold, resources, etc.  Trading something for nothing and enslaving in the process.  Quite a racket actually.  That, in a nutshell, is a debt-based system.  The pitfalls if ursury, and laws bent for the benefit of the powerful instead of protection for the productive.  Modern day vampirism of sorts.

Diogenes's picture

Absolutely. The magic continues to work as long as everyone believes in it. When people stop believing, the magic ends.

Just like you could live forever on borrowed money and never work as long as people continue to lend you money.

Carlo Ponzi never did understand what he did wrong. As far as he was concerned, all his investors would have got back every penny plus interest, if the government hadn't shut him down.

In evidence of this, when he was busted Ponzi owned a mansion in Brookline, 2 Pierce Arrow automobiles, furniture, and much more non portable property, while he had made no preparation at all to skip the country or hide away any money. He died penniless in South America, still believing he had done nothing wrong.

Keynes put it more succinctly. When someone pointed out that in the long run his theory must end in ruin, he said "in the long run we are all dead".

Guess what, he was right. He and everyone in the room with him are now dead. And Keynesianism didn't cost them a cent.

Fiscal Smegma's picture

It's called:

"The Law Of Diminishing Return"


primefool's picture


If you want your sports team to do well - consider not making them run 10 miles and take cold showers the night before the big game. Hey - let them go out for a nice dinner, have a glass of WINE and frolic with their girlfriends. They will be more relaxed and have a better chance of winning.

NEO- Keynsians:

Keynes said to drink WINE. Says so right here. So everybody drink WINE. Hell , since the active ingredient in WINE is ethyl alcohol - lets go the old man one better. Everybody gets a bottle of jack Daniels.

primefool's picture

Heli-Ben :

The neo-Keynsians were on the right track - but sooo wimpy. Look keynes said to drink - right? So lets forget about training altogether - just have the players drink - jack is good, Johnny OK too. Skip the milk. Cornflakes and Jack for breakfast - keynes said drinking is the way to success.

MarketFox's picture

Another important issue is the distribution of wealth....


Where are the wealthy going to pick their fruit ?

Now that the orchard trees have been cut down for firewood ?


The key to having plenty of fruit to pick can only happen after an orchard has been put into production...


Thus the last tool in the toolbox tax structure change...the type of change that improves the private side valuation and numbers thereof....


The current government formula is one that only cuts down more trees while demanding more fruit....


Solution ?

15% consumption tax only....eliminates the individual and corporate income tax...


What is not understood ?

That the tax take from a sole 15% consumption tax....will dwarf the current and future take of the current system...


What is stupidity ?

Cutting down more trees while demanding more fruit.....


This is a black/white question....

Are more trees being planted ?

New_Meat's picture

More trees being planted?  No.

Prune the population with the "remaining value in the individual's whole life?"  Coming our way.

Do the math above as a difference equation by year.  All of the incremental skimming in all reaches of life in U.S. starting 1/1/2010.  Then the incremental VAT will kick in (time step might need to be quarterly vs. yearly to get sufficient fidelity).

But please do not confuse this with stupidity.  Very smart people indeedy.  All idealogically coordinated.

as a start.

- Ned

bada boom's picture

Yes, kick-start is no longer so easy if at possible when the engine gets to big.

Options, get a smaller engine or use an electric start like the Weimar Republic.

Astute Investor's picture

The "power" of leverage, unintended consequences ignored.

proLiberty's picture

This begs the question: why keep drowning the country with new and more debt when it is now obvious that incremental debt is no longer creating a virtuous growth loop?

Most important question is to what extent does perpetual debt play in growth at all. I contend that our economy has grown despite the debt burden.

From 1932 until the present, the dollar as measured in gold has changed in value by the ration 1200/20 = 60x. However, the per capita income in constant (inflation adjusted) dollars has increased by a ratio of approximately 5x. I can only conclude that people have been able to grow and adapt their personal financial situations to sidestep the perpetual decline in the value of the currency. I would further speculate that this is due in part to the percent of families that kept their wealth in the form of real estate.

Perpetual debt yields a one time benefit but carries an endless cost. If an economy, through continual improvement, innovation and refinement can increase value and productivity faster than interest costs, it can afford the carrying costs. However, the instant that some event, like war, disaster, famine, epidemic, government run amockness, or wacky ideology like cap'n tax prevents people from working and innovating, then we can be overwhelmed by the carrying costs of our debts.

I fear that is where we are today, and it appears that the current regime is hell-bent on borrowing even more in a vain attempt to recapture past glories of big spending government.

The present Thelma and Louise strategery of borrow, pretend and extend is not a real solution at all. Caution, the boulders in the windshield may be closer than they appear.

mudduck's picture

Of course non PHDs would see things this way, what with not having the training to factor in the POOP #s or the FU adjustment factor. Even when amatuers do try to use these various very important economic fudge compacting technics they usually dont adjust for KY or they just bend these things over the wrong way making a mild recession into a full blown  (self loathing) depression. No PHD, no listen, no ticky, no laundry.

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