Eric Sprott: "We Are Now Paying For The Funeral Of Keynesian Theory"

Tyler Durden's picture

Fooled by Stimulus, by Eric Sprott and David Franklin

Despite our firm’s history of investing primarily in equities, we’ve spent much of this past year writing about the government debt market. We’ve chosen to focus on government debt because we fear its impact on the equity markets as a whole. Government debt is an intrinsically important part of the financial landscape. It is the bellwether by which we measure risk, and we believe we have entered a new era where traditional "risk-free" assets are undergoing a tremendous shift in quality.

In studying the government debt market, we have inadvertently been led to question the economic theory that most fervently justified recent government spending programs: that of Keynesian economics. The so called "beautiful theory" of Keynesian economics is arguably the most influential economic theory of the 20th Century, shaping the way Western democracies approached the balance between free market capitalism and government initiatives. Like many beautiful theories, however, Keynesianism has ultimately succumbed to the ugly facts. We firmly believe the Keynesian miracle is dead. The stimulus programs are simply not producing their desired results, and the future debt costs associated with funding these programs may cause far greater strife in the future than the problems the stimulus was originally designed to address.

Keynesian economics was born with the publishing of John Maynard Keynes’ "The General Theory of Employment, Interest and Money" in February 1936. Keynesian theory advocates a mixed economy, predominantly driven by the private sector, but with significant intervention by government and the public sector. Keynes argued that private sector decisions often lead to inefficient macroeconomic outcomes, and advocated active public sector policy responses to stabilize output according to the business cycle. Keynesian economics served as the primary economic model from its birth to 1973. Although it did lose some influence following the stagflation of the 1970s, the advent of the global financial crisis in 2007 ignited a resurgence in Keynesian thought that resulted in the American Recovery and Reinvestment Act, TARP, TALF, Cash for Clunkers, Quantitative Easing, etc., all of which have been proven ineffective, ill-advised and whose benefits were surprisingly short-lived.

The economic historian, Niall Ferguson, recently described a 1981 paper by economist Thomas Sargent as the "epitaph for the Keynesian era".1 It may have been the epitaph in academic circles, but the politicians clearly never read it. Almost thirty years later, we now get to experience the fallout from the latest Keynesian stimulus binge, and the results are looking pretty dismal to say the least.

There are a number of studies we have come across that suggest stimulus is the wrong approach. The first is a 2005 Harvard study by Andrew Mountford and Harald Uhlig that discusses the effects of fiscal policy shocks on the underlying economy. Mountford and Uhlig explain that from the mid-1950’s to year 2000, the maximum economic impact of a two percent increase in government spending was an ensuing GDP growth of approximately three percent. A two percent spending increase inevitably requires an increase in taxes. Due to the nature of interest costs, however, the government would have to raise taxes by MORE than two percent in order to pay back the initial borrowing. According to their data, this increase in taxes would generally lead to a seven percent drop in GDP. As they state in their study: "This shows that when government spending is financed contemporaneously that the contractionary effects of the tax increases outweigh the expansionary effects of the increased expenditure after a very short time."2 Stated simply, ‘borrowing to stimulate’ has never worked as planned because the cost of paying back the borrowed funds surpassed the immediate benefits of the stimulus.

In a follow-on study, Harald Uhlig estimated that an approximate $3.40 of output is lost for every dollar spent on stimulus.3 Another study on the same subject by C’ordoba and Kehoe (2009) went so far as to say that, "massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression."4

If the conclusions of these studies are even close to being correct, we are now in quite a predicament – not just in the US, but across the Western world. Remember that the 2007-08 meltdown was only two years ago, and as we highlighted in April 2009 in "The Elephant in the Room", the US government has spent more on stimulus and bailouts, in percentage of GDP terms, than it did in the Gulf War, Operation Iraqi Freedom, the Vietnam War, the Korean War and World War I combined.5 All that spending was justified by the understanding that it would generate sustainable underlying growth. If it turns out that that assumption was wrong, have the governments made a fatal mistake?

Another recently published Harvard study looked at stimulus at a micro-economic level and derived some surprising conclusions. Entitled "Do Powerful Politicians Cause Corporate Downsizing?", the authors compiled 232 occasions over the past 42 years when either a Senator or a Representative was voted into a controlling position over a big-budget congressional committee. Unsurprisingly, the ascendancy of the politicians resulted in extra spending in their respective districts – typically in the form of an extra US$200 million per year in federal funds. The researchers examined the economic effects of this increase in spending and found "strong and widespread evidence of corporate retrenchment in response to government spending shocks." The average firm cut back on capital investment by 15 percent and significantly reduced its R&D spending.

Companies collectively operating in the affected state reduced capital investment by $39 million a year and R&D by $34 million per year. Other consequences included increases in unemployment and declines in sales growth.6,7 Yikes!! That is not the response we’re supposed to get from government spending!

The Canadian government’s experience with Keynesian-style stimulus has been no better. The Fraser Institute reviewed the impact of the Government of Canada’s "Economic Action Plan" and found that "the contributions from government spending and government investment to the improvement in GDP growth are negligible."8 They state that, of the 1.1% increase in economic growth between the second and third quarter of 2009, government consumption and government investment contributed a mere 0.1%. Of the 1% improvement in economic growth between the third and fourth quarter of 2009, government investment and consumption contributed almost nothing. In the end, it was actually net exports that were the largest contributor to Canada’s growth. No Keynesian miracle in this country.

Our own findings compare favourably to the academic studies cited above. We looked at government spending and current dollar GDP increases in our ‘Markets at a Glance’ entitled, "A Busted Formula". Our findings, using decidedly un-econometric techniques, showed similar results, and are presented in Table A below. We looked at current dollar increases in GDP as published by the Bureau of Economic Analysis (BEA) and current dollar expenditures and receipts for the US government taken from the Treasury. One current deficit dollar resulted in an increase in current dollar GDP of a mere 10 cents. Again - no miracle Keynesian multiplier here.

If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the "Keynesian endpoint", where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???

A more timely epitaph for our Keynesian funeral comes from a recent op-ed piece by Jean-Claude Trichet, President of the European Central Bank, that was published in the Financial Times and entitled "Stimulate No More". In it Trichet states that, "…the standard economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable."11 He explains that while debt in the euro zone has increased by more than 20 percent in only four years and by 35 to 40 percent over the same time period in the US and Japan, we have very little, if anything, to show for it. We agree. New housing sales are at all time lows, consumer intentions for auto purchases are at multi year lows, the University of Michigan consumer confidence index has turned negative, new jobless claims have started to increase, and the ECRI - a composite of leading indicators - is now forecasting a recession (see Chart C).

Since Keynesian economics is no longer relevant, some are now arguing that tax cuts will save the day. Two of the academic studies we reviewed suggest that tax relief is a much stronger stimulus to the economy than government spending, and under normal circumstances this is probably true. But we are not in a normal economic environment. Even if the tax cuts implemented by George Bush in 2006 are extended by the next Congress, the US will still face the ‘Keynesian Endpoint’. A Government Accountability Office (GAO) report published in January 2010 states the following: "In our Alternative simulation, which assumes expiring tax provisions are extended through 2020 and revenue is held constant at the 40-year historical average; roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020."12 Extending tax cuts won’t solve anything.

In the end, Keynesian stimulus ultimately fooled us all. It roped in the politicians of the richest countries and set them on an unsustainable course of debt issuance. Recent Keynesian stimulus has even managed to fool the sophisticated economic models designed by central banks. The process of accounting for massive government spending ‘confuses’ the models into calculating a recovery trajectory when it doesn’t exist. The Bank of England confirmed this with its announced £3.5 million overhaul of its current model due to its inability to generate accurate inflation and recession forecasts.13

Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally.


1 Ferguson, Niall (July 19th, 2010) "Today’s Keynesians have learnt nothing". Financial Times. Retrieved on August 10, 2010 from:
For those interested readers "The Ends of Four Big Inflations" by Thomas Sargent can be found at:
2 Mountford, Andrew and Uhlig, Harald (July 2005) "What are the Effects of Fiscal Policy Shocks" SFB 649 Discussion Paper Humboldt-Universität zu Berlin. Retrieved on August 10, 2010 from:, pg. 20
3 Boskin, Michael. (July 21, 2010) "Obama’s Economic Fish Stories" The Wall Street Journal. Retrieved on August 10, 2010 from:
4 Uhlig, Harald (May 15, 2009) "Some Fiscal Calculus" Unpublished. Pg 13. Retrieved on August 10, 2010 from:
5 Sprott Asset Management, Markets at a Glance April 2009. The Elephant in the Room.
6 Reynolds, Neil. (June 9, 2010) "The Hidden cost of Stimulus programs" The Globe and Mail. Retrieved on August 10, 2010 from:
7 Cohen, Lauren; Coval, Joshua; Malloy, Christopher. (March 16, 2010) "Do Powerful Politicians Cause Corporate Downsizing?" Unpublished. Retrieved on August 10, 2010 from:
8 Amela Karabegovic, Charles Lammam, Niels Veldhuis (March 23, 2010) "Did Government Stimulus Fuel Economic Growth in Canada? An analysis of Statistics Canada Data" Fraser Institute. Retrieved on August 10, 2010 from:
9 We used current-dollar GDP numbers provided by the BEA to determine the marginal impact of deficit spending on GDP. There is no separate data set generated by the BEA, however the number is published in their news releases. It is also worth noting the divergence between reported numbers from the BEA. While the current dollar measurement of GDP decreased by $185.1 billion or 1.3% on 2009, real GDP was widely reported as increasing by 0.1%. This divergence is due to seasonality adjustments in real GDP and the percentage change reported is a blended increase over the 4 quarters in 2009.
10 Goodman, Wes and Reynolds, Garfield (June 8, 2010) "Pimco’s Crescenzi Sees ‘Endpoint’ in Devaluations (Update2)" Bloomberg. Retrieved on August 10, 2010 from:
11 Trichet, Jean-Claude. (July 22, 2010) "Stimulate no more – it is now time for all to tighten" Financial Times. Retrieved on August 10, 2010 from:
12 United States Government Accountability Office. The Federal Government’s Long-Term Fiscal Outlook January 2010 Update (GAO-10-468SP). Retrieved on August 10, 2010 from:
13 Aldrick, Philip (August 10, 2010) "Bank of England overhauls forecast model after errors" Telegraph. Retrieved on August 11, 2010 from:


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
robobbob's picture

Nice start, but you over emphasize the Bush boogeyman. Bush was a front man for Thyssen. Germany had TIGHT FX rules, and after hostilites, so did America, and had to launder $$ through Union Bank to Dutch Bank voor Handel, and then back to Germany. Bush and Harrimans were only minority shareholder, but collected nice processing fees.

Left out was British interests including the Cliveden Set, under direction of Colonel Milner, Cecil Rhodes protege, Lady Astor used her ownership position of UK newspapers (Daily Mail?, Observer?) to downplay Nazi atrocities, and push sympathetic Nazi stories. (Claud Cockburn "The Week"-commie outfit)

On the rumor lines included Dutch Royal Shell who intervened at critical moments with cash infusions.

And lastly, it was the Germans themselves who carried the Nazis over the finish line with a last moment deal worked out under German/American financial wunderkind Hjalmar Horace Greeley Schacht to bring in money from Thessyn, Krupp (Rise Fall Third Reich, Shirer 1959)

After the preceding turmoil, the Nazis brought the appearance of stability and growth to Germany. Money looks for those things.

To summarize: People who want to make money will lend it to anyone. They either have no morality to start with, let themselves be blinded by what they want to see, or are foolish enough to believe that they will succeed where Dr Frankenstein failed. Like the Soviet Union, the Nazis were an international experiment. Want to know who's responsible, look towards the money changers.

DavidPierre's picture


I read Shirer in high school in the early 60's and much too much in the next 45 years.  So yes... I did leave out a 'few' details in my comment. 

Shirer left out a "few" details also.

But... hey... cannot put it all in one short comment or even an entire book or two.

robobbob's picture

Damn, you were lucky. Now days its "See Dick and Jane use Recyclables to make protest signs", "How America is always wrong, parts 1, 2 and 3", or "How I stopped worrying and learned to love the charge card""

Do you have any pull it together resources? actual accounting records that show who put up how much.  Is there a way to know who was just hedging bets and who were true believers?

FEDbuster's picture

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
- Napoleon Bonaparte, 1815

DavidPierre's picture
1939-1940: War's Just Good Business, Shortselling Czech Stock,


Six months before World War Two begins, Joseph J. Larkin, vice-president in charge of European affairs of the Rockefellers' Chase National Bank, ...

In collusion with Winthrop Williams Aldrich, president and chairman of the board of Chase National, ... Plan with the Nazi Schroeder Bank, a partner with the Rockefellers in Schroeder, Rockefeller and Company,... secure an additional $25 million for the Nazi war machine.

Jew hater, pro-Nazi adulterer, bootlegger, stock market swindler and long-time Mafia associate cum U.S. Ambassador to Great Britain,... Joseph Kennedy cashes in... a bit of insider knowledge. With access to top secret intelligence information in his position as Ambassador, Kennedy learns that Hitler is about to invade Czechoslovakia. Kennedy short-sells Czech stock, the Germans invade, the Czech stock market collapses and Kennedy clears $500,000 to be stashed away with the rest of his criminal fortune. It's just good business....

Three weeks after the Nazi invasion of Czechoslovakia, General Motors chairman, Alfred P. Sloan, defends the fact that GM is the Nazis’ leading supplier of military vehicles as...  “sound business” “highly profitable”.

DavidPierre's picture


"...pull it together resources?..."

God damn!... you got me on that one.

I just make this shit up.



Henry Ford/Hitler

                  [That should be enough for the W/E]

robobbob's picture

Considering the importance, you would think someone would have put it together into a comprehensive list

yes, I am familiar with the google. That red light district where you pick up unvetted puzzle pieces and risk coming down with who knows what. Most of the people on this site seem well informed, but yet are constantly at odds. Gold, No Gold. Its Banksters, its Jews. If you can't get a consensus here, how can any progress be made?

you do have some good info to look into.


Read everything by Webster Tarpley.

caconhma's picture

Just 4-5 months ago, the EU Human Right Commission has equated the Soviets and Nazi crimes during the WWII.

A how come American mass media condemns crimes committed by Nazi and keeps its mouth shut regarding Soviets war crimes and atrocities?

OK, let me guess: American Jewish-controlled mass media would not like to mention that 10 out of 13 Soviet extermination concentration camps (aka GULARG) commandants were  Jewish.

NotApplicable's picture

Harriman-controlled Hamburg-Amerika line

Which I believe they got control of (read: stole) in the after-math of WWI.

caconhma's picture

<The Rockefellers’ Chase Manhattan Bank serves as a major source of finance for the Nazis and, as the Nazis send Jews, Gypsies, socialists and other “sub-humans” to the gas chambers in accordance with the eugenics agenda promulgated by the American ruling class, closes the accounts of its Jewish customers.>

This is a total rubbish coming from Soviet and Zionist sources.

  • Two weeks after Hitler came to power, in 1933, Jews/Zionists declared a war against Germany
  • The FDR administration (like Obama administration today) was overwhelmingly populated by Jews who exercised enormous influence over FDR and his domestic and foreign policies
  • Did the Nazis kill Jews, Gypsies, socialists and other “sub-humans”? The answer is "YES." Did Nazis use the gas chambers? The answer is "NO"!
    • Long before Hitler came to power, in late 1920s, the gas slaughter chambers were invented by Jewish scientist Dr. Berg and were widely used in Soviet Union to slaughter Russian peasants.
    • However, this was soon abandoned since, for the practical purposes, it could handle very few people. It could kill hundreds or even thousands and it is all.
    • To slaughter hundreds of thousands or millions of people, Soviet "successfully" used mass famines and concentration & extermination camps. Eventually, Soviet slaughtered over 35 millions of their people. (Still many less than Mao did in China. Oh well...)
    • The overwhelming majority of Jew perished during Holocaust have died in concentration camps from diseases and starvation during the last 4-6 months of the WWII since the Allied bombing totally destroyed Nazi infrastructure preventing any food supply into these camps.
  • Zionists prevented reallocation of hundreds of thousands Jews from Nazi Germany and Nazi occupied Europe to America and British colonies. This is why Zionists are so much against researching the Holocaust history.
  • Finally,
    • All without any exceptions  gas-chamber concentration camps were in the Soviet occupation zones. Can anybody trust Soviets? At the Nuremberg Process, the Soviets claimed that Nazi slaughtered 40,000+ Polish POW and intellectual elite in the Katyn Woods. Nazi were condemned for this war crime. In 1990, the Soviets admitted that they were responsible for the crime!
    • Speaking about mass war crimes killing civilians, the USA used nukes against pure civilian targets in Hiroshima and Nagasaki. If it did not work, the USA were planning to gas Japan in violation of the international treaties America was a signatory. I rest my case!
New_Meat's picture

I wonder if Woodrow Wilson and the Rosenfeldts had anything to do with that?

- Ned

assembler's picture

You sir, are an anti-semite revisionist. 

Jewish Bolshevism..., is a pejorative stereotype...


breezer1's picture

heres FOFOA , latest on confiscation...

Fred Hayek's picture

I know Stalin was not jewish.  I'm pretty sure Lenin was not jewish.

MarketTruth's picture

ATG, forget FRACTIONAL reserve, Bernanke and their ilk want ZERO reserves:

"Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system" -- Federal Reserve February 10, 2010

Muscletonian's picture

When did the great anomalies start to appear in S&P (Equities in general)?


I would say after the "flash crash". In a conspirational mind, I then ask myself, was the "flash crash" staged? And if so why?


Fact: One CME member firm had only sell orders that day (there is 250 in total). Is that any where near logical or rational. I say hell no, thats as black a swan as you'll ever see or find.


My thoughts: PPT staged the charade to see what would be the outcome when selling massively in the market (with HFTs and other computerized buy/sell programs running the market). They got a 10% downswing in 10 minutes, not really what they ever could dream of even in a worst case scenario.

After that we have seen strange buying on dips when all macro data has been awful, PPT just don't want that to happen again, anyway not until the stupid/lazy europeans are back from their vacations. A new sovereign debt crisis in Europe will suit Benron and Turbo T much better, those european assholes demanded austerity at the last G20 meeting, totally blanking Turbo T's fiscal efforts. Much better to make it look like the schmucks in Europe fucked it up. And then go for the next round of mega QE on a worldwide basis, no harm no foul if all currencies are inflated at the same time.

Sounds wacky I know, but the actions in the market have been way wackier. Sorry for introducing the thought here, but wanted to keep fresh in everybodys mind.


New_Meat's picture

Musc-I agree with your direction of your thinking. But:

"I say hell no, thats as black a swan as you'll ever see or find."

Pretty much, the "black swan" is a shit-happens event, one of those butterfly-wing-beating-causes-tornado-in-Kansas kinds of things.

Fraud, on the other hand, well that is the consequence of intended human action.

Now, I'd say that your scenario is highly likely, and the black swan would have been, like, meltup 100% in response to the fraud.  Now, that would have been unexpected.

Everything is a random variable? Prof. Taleb, thanks for screwing up my mind.

But "Black Swan" was this huge book in the Hamptons:

but the bulk of the WS crowd can't comprehend random variables, nor fat tails, nor non-gauss distributions, and there you go.

- Ned

Muscletonian's picture

When did the great anomalies start to appear in S&P (Equities in general)?


I would say after the "flash crash". In a conspirational mind, I then ask myself, was the "flash crash" staged? And if so why?


Fact: One CME member firm had only sell orders that day (there is 250 in total). Is that any where near logical or rational. I say hell no, thats as black a swan as you'll ever see or find.


My thoughts: PPT staged the charade to see what would be the outcome when selling massively in the market (with HFTs and other computerized buy/sell programs running the market). They got a 10% downswing in 10 minutes, not really what they ever could dream of even in a worst case scenario.

After that we have seen strange buying on dips when all macro data has been awful, PPT just don't want that to happen again, anyway not until the stupid/lazy europeans are back from their vacations. A new sovereign debt crisis in Europe will suit Benron and Turbo T much better, those european assholes demanded austerity at the last G20 meeting, totally blanking Turbo T's fiscal efforts. Much better to make it look like the schmucks in Europe fucked it up. And then go for the next round of mega QE on a worldwide basis, no harm no foul if all currencies are inflated at the same time.


Sounds wacky I know, but the actions in the market have been way wackier. Sorry for introducing the thought here, but wanted to keep fresh in everybodys mind.

Also what happened to all the hearings etc etc after the "falsh crash". Didnt hear much more did we?

Cathartes Aura's picture

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements,

Party. Over.


thanks Market Truths & Ned Zepp & Rusty, & David Pierre, and all the rest of you brilliant questioners of (almost) all things fed us - I'm out to my garden, but seriously, thanks for the laughter generated - absurdity has taken hold, it's crazier than any one of us can imagine - get practical - aquaponics beyotchez! 

oh, and if you haven't watched this, do.  what's left but realisation, eh?


I've said it before, but y'all do rock, best wishes to you & yours, and thanks to Zero Hedge for holding the space. . .

New_Meat's picture

Aura, there was a time when I had a pretty big garden, not too much money, and sometimes a really frustrating day.  I'd come home and my bride would calibrate me by a) how much I said and b) how quickly I went out the door to the garden.

Many weeds died, life got better.

Grew my first jalapeno and habanero those years.  Not so much back in NE.

- Ned

ColonelCooper's picture

Ned -  Funny how that "out to the garden" thing goes.  You get home after a shit ass, SHIT ass day; the last thing I want to do is go pull weeds and thin beets and carrots.  I'd rather go wet a line, or just sit on the damn porch with a glass of bourbon.  Nonetheless, I grab a beer and head out.  Inevitably, the beer is left half full, warm on the corner post, and I'm calmly weeding.  It may be the most therapeutic thing in my life.  Probably next to sitting in a deer stand.

bugs_'s picture

What an incredible summary.  Excellent one liners

...paying for the funeral...

...keynesian endpoint...

Way to go!


knukles's picture

Unfortunately, we the common man shall likely continue paying for the funeral for generations hence, for our Esteemed, Trusted, Honorable Elected Representatives (my Congressman actually introduces himself like that) shall need additional tax revenues to further the Ponzi.

Number 156's picture

...and we are still digging the hole in which to lay his coffin.

Noah Vail's picture

No fan of Keynes, I will say that he never advocated deficit spending to this degree. From what I know of him I'm sure the man would be horrified at what goes on in his name. He was no wild-eyed idiot.

ATG's picture

Yes, Keynes practiced balanced budgets with hidden value and reserve surplus.

NeoKeynesian DC economists perverted his work.

Fabian socialist Mathematics Don Nobel Laureate Pederast Baron John Maynard Keynes ran the money as Bursar for Kings College at Cambridge in 1924 and ran 30,000 pounds into 380,000 pounds when he passed in 1946, using contrary income value investing, spending the dividends on College expenses, earning 12% CAGR during the Depression and WWII while markets went down -15% the same time period...


NotApplicable's picture

Any politically connected person who actually believed that government would pay down the debt during the "good times" (as his theory dictates) qualifies as a wild-eyed idiot.

Now, whether Keynes believed they would do so is a different question. And one that he never had to answer.

THE DORK OF CORK's picture

Hey - Ireland payed down our fiscal debt to zero - but it did not mean jack shit.

We had Friedmanites everywhere blowing up massive monetary bubbles that had negative return.

Caviar Emptor's picture

We had the same geniuses here in the US aka "supply-siders", trying to substitute massive deficits for actual economic growth. To combat the inflationary consequences of their money printing and loosening of credit standards they encouraged outsourcing and offshoring and thus gutted US industrial and manufacturing might. The result was a nation that consumes much and produces little. 

Disambiguation's picture



Offshoring has moved many jobs to low cost labor pools, but to claim that the insdutrial and manufacturing might of the country has been gutted, belies the fact that the US manufacturing has been reduced only in head count, via increased productivity. US manufacturers produce more today than they did 10, 20, 30, 40, or 50 years ago, but they do it with a reduced and more automated labor force. There has been a lack of overall growth in industrial out put, but not a shrinkage. Meanwhile, as you state, consumerism has exploded, as have the "service industries" which support consumerism, and all of this has been supported via an unsustainable credit accumulation.

Caviar Emptor's picture

Hehe. US manufacturing employment that you say is so huge is mostly foreign workers in foreign factories in foreign countries. Not US workers. Beginning in the 1970s and especially in the 1980s, The entire Great Lakes economy was gutted as a result of offshoring, as was what was left of Eastern textile manufacturing and garment workers. Major appliances, autos, electronics, building supplies, chemical products, and even much of agricultural products all were offshored, outsourced (your glass of OJ is 65% Brazilian). All those were previously areas of American industrial might and know-how, creating jobs and demand for satellite industries, support and logistics industries, R&D as well as services (legal, financial, customer support etc). Those companies also reinvested in America, not China. Now since the 2000s, even service workers are being gradually outsourced: Banks employ workers in India to take your calls, back office work is offshore, IT and support outsourced. 

Outsourcing was the only way to avoid inflation when the country ran massive trade deficits.

And you seriously believe that that this model is sustainable?

ColonelCooper's picture

I believe he was talking "output", vs. "employment".   Employment down, automation up, manufacturing still up.

Not taking a side, just interpreting.

KevinB's picture

I wish you Americans actually looked at the world beyond your borders, like, for example, next door.

Canada, under both Liberal and Conservative governments, paid down over $100 billion in national debt from 1997-2007, and, under the Conservative government of Stephen Harper, did so while cutting our national sales tax from 7% to 5%, and cutting both income and corporate taxes as the same time. Yes, in the current recession, they've run a deficit, but it's come in 1) lower than projected, and 2) they are now predicting a return to surplus next year.

Here's a clue: what happens in the United States is not necessarily what's happening in the rest of the world. Idiot.


DavidPierre's picture

My God man!

Look outside the USSA?


See all the above comments about the "Squirrels" cannibalizing each other when the SHTF in amerika.

Me...I'm looking to eat 'Slow Elk' that roam all over back in the mountains of BC. 

Don't even try to 'edumacate' them.  Waste of time and effort.

John Embry and Eric Sprott have been at it for years and see how far it has got them with all the stupid back and forth comments above from the "Squirrel's" South of the 49th.


JLee2027's picture

Here's a clue: what happens in the United States is not necessarily what's happening in the rest of the world. Idiot.

Since Canada is essentially dependent upon the US economy, I'm afraid if we go down, you'll be pulled down too....hope I'm wrong.

DavidPierre's picture

Consider the inverse. JLee.

'The US economy is essentially dependent upon Canada.'

Might want to chew over that thought for awhile.

If the US goes down, Canada just might go up; along with the R.O.W.

grunion's picture

I have always been rather ambiguous regarding canada but you are helping me to rethink my position to a less favorable view

hound dog vigilante's picture


Thank you for the necessary and over-due reminder that the USA in NOT the center of the universe. The pre-dominant USA-centric POV is one of the factors that got the USA into the mess that it's in now, and continues to hinder attempts to climb out of the grave it's dug for itself.

Outdated paradigms (USA #1 !!!) are fueled by vapor/ego, and will die hard.


robobbob's picture

the center of the universe is where ever you happen to be standing at the moment

and since most people commenting here are from the USA....


ColonelCooper's picture

@Kevin B:

It would seem that you really have no clue how important we Americans actually are.

Simply by birthright we are entitled to limitless food, shelter and entertainment.  You bitch simply out of envy.

Our country is rich beyond your wildest dreams.  When we need something, we simply "deem" it to be.

Now go watch an American $$ subsidized hockey game and be quiet.  I have apps to download on my new Ipad.

Thomas's picture

I concur. One of the fatal flaws of Keynes theories in application is that we never achieved a zero-sum game. If government spent necessary expenditures during lean times (sucking up resources and labor when they are cheap) and then backed off during affluent periods (letting the free market battle for the resources and labor), then maybe it would have worked. Keynsian economics in practice is problematic to the core because it never seems to reset. Stimulative environments become the new normal.

For those interested in this stuff, Hayek's "The Fatal Conceipt" does a remarkable job of poking a stick in the eye of all the clowns throughout history who thought we ought to be able to design complex systems better than they evolve. 

Note Added in Proof: We seem to return to Keynsianism every time we are deep shit. I am reminded of Tutor Turtle calling for Mr. Wizard.

Geoff-UK's picture

Saying Keynes should be forgiven for expecting politicians to reduce spending in good times is like saying Marx bears no responsibility for communism not working because he believed a man would work his ass off for a stranger 3,000 miles away.

Keynes knew he was telling politicians what they wanted to hear, and reveled in the adulation.'s picture

I am reminded of Tutor Turtle calling for Mr. Wizard.

Tutor: Help, Mr. Wizard!

Mr. Wizard: Razzle, dazzle, drazzle, drone, time for this for the one to come home!