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Guest Post: The Death of Demand - The Post-Consumer Debt Economy

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

The Death of Demand: The Post-Consumer Debt Economy

Keynesians claim more debt will goose "demand;" they're wrong. Boosting debt has distorted the economy for 40 years, and the end-game is finally approaching.

Keynesians are constantly demanding more debt be taken on to spark "demand" for more stuff. What if debt-fueled demand is dead, expired of natural causes? If so, then the Keynesians are pushing on a string.

The truth is the U.S. has long been a post-consumer economy. Everybody already had a TV, phone, car, etc. 40 years ago, which is coincidentally when wages began their 40-year stagnation and the nation's public and private debts began exploding higher as the forces of financialization took over.

In other words, the only way to get people to buy more crap was to give them vast quantities of debt.

Now that debts exceed 350% of the nation's GDP, we've reached the end of the financialization process: we can't afford any more debt unless the interest rate is near-zero.

Hey, isn't that the Federal Reserve's policy now, forever and ever, near-zero interest rates? No wonder. If the nation had to pay a historically average rate of interest on its debts, the economy would quickly implode like a supernova star.

Take a look at this chart, courtesy of the excellent Market Ticker. It shows how much GDP has been created by each additional unit of debt. In other words, if we add $1 of debt, how much did that goose the GDP? If you follow the zero line, you will find that $1 of debt rarely boosts the GDP more than $1.

I added the red lines to show the generational shift that occurred in the mid-1970s: debt no longer boosted GDP by much, so more debt had to be taken on to keep goosing the GDP.

This meant that more of the nation's income was diverted to servicing the rising debt, which also meant that wages stagnated and profits to the financial sector skyrocketed. As those profits grew to dominate the profits of Corporate America (roughly, the S&P 500), then the political power of the financial sector and wall Street rose proportionately.

Big picture, this reliance on debt for "growth" has led to the banks owning the government and the economy. This is the Dark Side of Keynesism. The "borrow more, we need more demand!" thumpings of "liberal" economists like Krugman and Reich are completely blind to the fact that the borrowing they demand is precisely what has sold the nation down the river and handed control to the banks and Wall Street.

These structural changes are why the naive bleatings of these same Keynesians to "control the banks" are failing: by making the economy totally dependent on ever more borrowing and debt, the Keynesians created the financialization monster. Now that it controls the economy, they're whining, please Mister Too Big to Fail Bank, please hand back control to us nice economists.

It doesn't work that way. Having sold your soul to the debt monster, the monster now controls you.

Here is a chart of the Keynesian model of financial pathology. As private debt has flattened out--people simply can't borrow any more, as their incomes are flat and they're already maxed out on debt--the Federal government a.k.a. Savior State has ramped up its borrowing to replace private debt.

Meanwhile, total debt continues to zoom ever higher. The Federal Reserve is playing a game of Pretend: Let's pretend that if interest rates are near-zero, we'll always be able to borrow more. Hey, what's a trillion dollars at zero interest? You and I could make the interest-only payments each month, because they're zero.

But shoving "free money" into banks and Wall Street doesn't filter down to John Q. Citizen: it simply incentivizes massive speculation in stocks, commodities, seaside resorts, empty cities in China, you name it. This is the basis of the current stock, bond and commodities booms in the global economy: push trillions of dollars in "free money" to financial players, and guess what, that hot money flows out seeking a fat return.

The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society. Like frenzied rats in a cage, they only have one lever to push to release the cocaine-laced pellets, and so they've been pushing it for 40 years.

Now they're hitting the bar with frantic energy, hoping the crazed and addled rats around them can dredge up some "demand" for more pellets to "consume." But the consumer-rats are bloated and lethargic; they've consumed so much debt-drug that they're near death.

Like a star which has expanded and now cannot maintain its grand state, the debt-based consumerist economy is now poised to experience a supernova implosion.



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Tue, 06/21/2011 - 10:40 | 1388890 Ancona
Ancona's picture

Well written.

Tue, 06/21/2011 - 10:51 | 1388945 So Close
So Close's picture

This is exactly what consumers did with low interest ARM, negative amt mortgages on their homes.  Assuming home prices will always go up.   The fed is assuming they can always print more money.  Echos of what Marc Faber and Jim Rogers have been saying for years.

Tue, 06/21/2011 - 10:59 | 1388963 So Close
So Close's picture

I am long silver (85%) and short the spy (15%).  My thought was that if this market cratered and took everything lower I could convert the spy gains into more PM's.  At least gold and silver are moving higher.

Tue, 06/21/2011 - 16:55 | 1390213 PulauHantu29
PulauHantu29's picture

Good move. My brother started reading ZH about 2 years ago and sold his house since he saw prices plunging for years.The tiny profit he took out (before it dropped another 35%) he put into gold and silveETFs.....very smart move.

As the house plunged over and silver rose substantially.

Tue, 06/21/2011 - 12:01 | 1389168 AnAnonymous
AnAnonymous's picture

Assuming home prices will always go up.


Similar stuff as the US betting there would always be indian lands to rob during the 19th century.

Tue, 06/21/2011 - 10:56 | 1388956 slewie the pi-rat
slewie the pi-rat's picture

rilly.  it will be 8AM here in a few.  it is too early for a pi-rat to enjoy these mixed meta-z of the cocained-addled rats feeding @ the keynesian lever getting snuffed by the collapsing supernova. 

oh!  the humanity!

Tue, 06/21/2011 - 11:20 | 1388976 IBelieveInMagic
IBelieveInMagic's picture

There is plenty of potential demand -- only drawback is that it is in Asia and Africa and South America. But, the global financial system is oriented to favor and support consumption in the developed economies (USD+swappable).

So, the effort is to solely keep the game going to favor the developed economies by threatening MAD. 


Tue, 06/21/2011 - 12:03 | 1389189 MiguelitoRaton
MiguelitoRaton's picture

Is 2007 the start of another phase shift down? If so, it could become very clear that we cannot solve a debt problem by adding more debt.

Tue, 06/21/2011 - 10:43 | 1388901 WALLST8MY8BALL
WALLST8MY8BALL's picture

Sometimes feel I'm running around.
When I'm running around,
running around. Round, round.
Sometimes feel I'm lost when I'm found.
Yes I'm lost when I'm found,
head in the ground. Boo! Hoo! Hoo!
People feel so free when they're bound.
To the circular pound after circular pound.
Wow! Wow! Wow!
I believe in death after life.
Yes in death after life. Switch off the light.
Bye! Bye!
Neo consumer! Neo consumer!
Sometimes I get lost in the mall.
Well I'm feeling so small.
No longer tall.
Insignificant and in thrall
of the force of it all.
Back to the wall.
Bang! Bang! Bang!
Shit hole made to look underground.
Where I'm buying my round.
Spending all my time buying stuff.
When I've more than enough.
More than enough.
Cough! Cough!
Neo Consumer! Neo Consumer!


Tue, 06/21/2011 - 10:43 | 1388903 baby_BLYTHE
baby_BLYTHE's picture

and the market screams higher

you cannot make this stuff up

Tue, 06/21/2011 - 10:52 | 1388930 economessed
economessed's picture

Blythe, I'll pick a fight with you.  It's not the market screaming higher...  because a market is the pure expression of all human optimism, fear and various yardsticks of worth discovering a clearing price where a buyer is happy and a seller is happy.  We don't have a market screaming higher, we have a small number of algorythmic machines sending ones and zeros to each other over fiber optic cables.  The market is dead.  Whatever happens now depends on coal-fired power plants to generate electricity and feed it over long distances to the silicon-based devices who will do what they have been programmed to achieve.

Tue, 06/21/2011 - 10:54 | 1388959 baby_BLYTHE
baby_BLYTHE's picture

alright, it is fight club after all.

All I am saying is that POMO is coming to an end, the FED may even kick off a slight 'tightening cycle' all while Americans are totally broke.

Where is all the liquidity/capital going to flow from?

Even if the FED were to target 'price fix' interest rates, like PIMPCO's Gross suggests, how  is this ultra bullish for stocks? yes, for bonds I suppose. But stocks and the general economy?

Tue, 06/21/2011 - 10:57 | 1388960 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

Were you sitting in the lotus position while you wrote that?  Blythe's post was better written.

Tue, 06/21/2011 - 11:07 | 1389011 SheepDog-One
SheepDog-One's picture

Must pump.....bubble stawks....must keep.....DOW 12,000.....must pump.....stawks....

Tue, 06/21/2011 - 10:43 | 1388904 the not so migh...
the not so mighty maximiza's picture

Nice and concise.  You should have a PhD.


Tue, 06/21/2011 - 10:49 | 1388937 disabledvet
disabledvet's picture

she does.

Tue, 06/21/2011 - 14:15 | 1389617 I did it by Occident
I did it by Occident's picture

But most PhDs I know aren't "concise" at all!  they like to wax eloquent and all that.

Tue, 06/21/2011 - 10:40 | 1388907 Note to self
Note to self's picture

So how do we go about getting a Jubilee declared?

Tue, 06/21/2011 - 10:44 | 1388920 Cassandra Syndrome
Cassandra Syndrome's picture

It will passively happen, the tipping point is past, debt can no longer be mathematically serviced with the declining incomes. Either it is inflated away or written off.


Tue, 06/21/2011 - 11:31 | 1388951 Dr. Richard Head
Dr. Richard Head's picture

I forced my unsecured creditors to take a 50% haircut on part of the debt that I "supposedly" incurred and then a 73% (or so) haircut on another - Citi and JP Morgan respectively.

Tried to force a haircut on my mortgage and car, but my bank actually owns the note for the car and home like the banks of yore.  I guess I could challenge it on lack of consideration, but I decided against it.  Instead trying to arbitrage dollars in silver and gold, along with hopefully taking advantage of the inflationary pressures that is raising the wage boat that I am in right now. 

Zero debt is the goal for me , hence the jubilee.

Tue, 06/21/2011 - 10:50 | 1388939 disabledvet
disabledvet's picture

you're not celebrating?  i don't understand...

Tue, 06/21/2011 - 10:41 | 1388908 economessed
economessed's picture

Another excellent article, Charles, but I much prefer to label the scenario you've outlined as "Post Growth" rather than Post-Consumer Debt.  Japan is the new model for a post growth economy, and if we're ever lucky enough to rid ourselves of the Federal Reserve, we'll benefit from the deflationary force that is the incoming tide of a Post Growth lifestyle.

Tue, 06/21/2011 - 10:41 | 1388909 Cassandra Syndrome
Cassandra Syndrome's picture

Good article and charts. Sums up the Keynesian Kamikaze Policies of the last 80 years. The Extend and pretend and pray and delay games are over.

Tue, 06/21/2011 - 10:56 | 1388968 writingsonthewall
writingsonthewall's picture

...and your in danger of sparking nonsens like this.

"Sums up the Keynesian Kamikaze Policies of the last 80 years"

Keynes? - for the last 80 years? It wasn't implemented anywhere until post war - and it's not been used by any right-centre Government.


In fact Keynes has the 'honour' of being the theory everyone turns to after it all goes wrong.


You should really read about your subject before talking like you know what you're on about.

...are you suggesting Reagan was a Keynes man? - ha ha ha ha ha ha. you'll be blaming "the crash" on Obama.


Tue, 06/21/2011 - 11:36 | 1389083 Raynja
Raynja's picture

1930s to 2011 is about 80 years.

Gdp = c + g + i + ex-im is the basis for keynes
FDR increased g to keep the economy going before wwii.

Yes govt ramps up spending after the crash based on above model, what's your point?

Tue, 06/21/2011 - 12:07 | 1389193 writingsonthewall
writingsonthewall's picture

"1930s to 2011 is about 80 years"

I don't deal in 'roughly' - JMK wrote his theory in 1936 (that's 75 years already) - and unless you have some wierd ideas about the connection between educational establishments and the state - nobody tried to adopt the policy until after the war (they were a little busy)

Keynesian economics was adopted by some countries but when monetarism became popular and Keynes couldn't explain the rising unemployment in the 70's - this was adopted in most western countries - until the next crash when they all returned to keynes to solve their problems.

So the original claim of 'keynesian policy for the last 80 years' is crap - at best it was about 30 out of the last 80 - and not much in America who have always resisted any form of Government stimulus (except after the great depression) - which is the FDR to which you refer.

...and my point is (apart from the inaccurate claim) is that.

a) You cannot pin this mess of Keynes (despite how desperate you are, the facts don't support it)

b) None of this current 'plan' has got anything to do with Keynes - he did propose borrowing, but he also proposed Government saving in the boom (as I mentioned before)


It seems that simple concepts are quite difficult to get across - I can see the appeal of inaccurate (but easy to remember) phrases like "disasterous keynsian policies of the last 80 years" for simple people - but it doesn't help you identify the root cause of the problem.


Have you never seen a panic before? What happens is people try anything and when it doesn't work they start blaming everything - except (usually) the very thing that is at fault.


I came on ZH for a better class of blogger - some of you are very disappointing.

(p.s. I am well versed Gdp = c + g + i + ex-im - you only need to raise g when i and c are low - but George Bush decreased taxes (raising i) and raised g when i and c were already booming - hence the crash)

Tue, 06/21/2011 - 18:52 | 1390638 Kayman
Kayman's picture


Long before Keynes published the General Theory "keynesian" economics was practised under JMK's advice.

If you want a better class of blogger, why not start your own site.

P.S. The only thing of any intelligence you have to offer, is that JMK is turning over in his grave over the spendthrift spending occurring in his name.

Tue, 06/21/2011 - 13:13 | 1389361 Hacked Economy
Hacked Economy's picture

Read your history, Fozzie.  John Meynard Keynes died in 1946, so he couldn't have wondered about anything in the 1970s.  And he published his theory long before that year, the leaders of the major world powers were already actively using his theories.  You really do need to figure out what you're talking about before spewing.

Keynes was a socialite in the early 1900s, and he was able to directly tickle the ears of a number of elite people in power as early as the 1910s.  He can't be blamed for the entire shift of the world off of the gold standard, but he was whispering in the conductor's ear as the train was switched to a different set of tracks.

The century from 1830 to 1930 is now known as the Classical Gold Period in the U.S.A., and by the turn of the century (1900), most of the modern world was on the gold standard.

By 1930, most of the world had reversed itself and removed from it (with the U.S. not quite there yet), as the Great War needed to be paid for with newly printed money, among other reasons.  But Keynes had already sown the seeds of his theories, in which the removal of the gold peg and the encouragement of debt were the foundations of a "healthy" move toward forced growth.  He also convinced TPTB that they would be able to successfully soften the effects of the boom/bust cycles through manipulation.

FDR himself began implementing full Keynesian philosophy - at Keynes' own urging - in the early/mid 1930s to facilitate his New Deal aspirations, well before the post-WWII period.

Tue, 06/21/2011 - 18:55 | 1390649 Kayman
Kayman's picture

Hacked Economy

Read your summary after sending my response.

Thank you. Nuff said.

Tue, 06/21/2011 - 12:51 | 1389332 AnAnonymous
AnAnonymous's picture

Sums up the Keynesian Kamikaze Policies of the last 80 years.


The US 19th century policies were just as Kamikaze. And when they matured, they gave 2 WW and several severe depressions.

 Keynes might have failed but in providing an alternative to the current scheme used that is the expansionist scheme.

Existed, used way before Keynes was born.


Expansionists would like to deflect the storm on someone else. But the current situation is nothing new and corresponds with expansion scheme. 

Tue, 06/21/2011 - 10:45 | 1388910 shortus cynicus
shortus cynicus's picture

This article underestimates the progress made in electronic printing technology.


Tue, 06/21/2011 - 10:47 | 1388916 10kby2k
10kby2k's picture

ZIRP has far reaching effects. These are extreme times. Rationality is at a minimum.

Tue, 06/21/2011 - 10:44 | 1388919 sixmil
sixmil's picture

40 years of papering over failed trade and labor policy

Tue, 06/21/2011 - 15:44 | 1389383 Mad Cow
Mad Cow's picture

The problem is usury, world-wide. It's fairly simple. You can't have a currency with debt attached to it, at its creation, along with fractional reserve banking. Fraud.

Now that we understand the problem, is it possible the usury addled pushers of debt will stop? Not a chance. These psychotic children with matches would burn the world down before giving up usury, and their megalomaniac vision of a planetary-wide, centrally-planned, slave-plantation. We're stuck on Mr. Toads Wild Ride doing 150 MPH into a dead end street. Enjoy joy your day.

Tue, 06/21/2011 - 10:49 | 1388923 gwar5
gwar5's picture

Frightening to realize that the US is the consumer is (was) the engine of the world and 70% of our own economy is the consumerism. We all know what is going to happen now that the US consumer is broke and credit is gone.

China knows too, and they are hurrying to create their own domestic consumption to make up for loss of US consumption. They're at least doing a better job reconciling with reality than our own central planners are. 

Tue, 06/21/2011 - 11:01 | 1388971 youngman
youngman's picture

And there are Economists and Politicians that still think we will grow our way out of this depression....that are high wage costs are no problem to the rest of the manufacturing world...that are business killing regulations are no problem...that our high coporate taxes are competitive with the rest of the world...that our schools are teaching what we need to succeed...teaching Rap vs engineering...that our social saftey net is not killing us....or breaking our bank...oh well...I watch from the sidelines now...

Tue, 06/21/2011 - 10:50 | 1388924 Fix It Again Timmy
Fix It Again Timmy's picture

Money is freedom, debt is slavery - and your choice is...?

Tue, 06/21/2011 - 10:50 | 1388927 Charley
Charley's picture

Debt doesn't have to increase; only spending.

Tue, 06/21/2011 - 10:53 | 1388932 buzzsaw99
buzzsaw99's picture

during the inflation of the 70s everyone thought the dollar was doomed but it somehow survived. we must assume this time is different, that they intend to debauch without end and steal as much as they can from all of us along the way.

Tue, 06/21/2011 - 10:58 | 1388964 Dr. Richard Head
Dr. Richard Head's picture

I tend to believe that thought process, but there is something else that is going on that was not as pervassive in the 70's, which is the global asset shifting between countries through proxy currencies and trade balances.  To me it looks like this shell game could go on for much longer as all fiat currencies are going throuh the same manipulation. 

I wish it would end, but the music keeps playing.  That breaking point seems so ellusive to me.

Tue, 06/21/2011 - 11:16 | 1389024 hedgeless_horseman
hedgeless_horseman's picture

...the global asset shifting between countries through proxy currencies and trade balances.

1)  Get in front of the wave and surf it

2)  Paddle back out

3)  Repeat

Tue, 06/21/2011 - 12:06 | 1389167 hedgeless_horseman
hedgeless_horseman's picture

Schapiro: SEC Is Weighing 'Reverse Merger' Curbs

So Mary and the tranny-porn addicts have been reading Tyler.

Tue, 06/21/2011 - 19:06 | 1390678 Kayman
Kayman's picture


1970's inflation ended when Volker raised rates into the high teens.  I can't even see rates in the high single digits, with all the debt overhang we have.

I personally think Bernanke got his nuts sheared off in the printing machine; now we have Chairman Eunuch.

History can guide you or blind you. Bernanke chose the latter.

Tue, 06/21/2011 - 10:49 | 1388936 WineSorbet
WineSorbet's picture

Yes, another well written article that is absolutely correct.  Denninger also is correct.  Yet if we listened to either and invested based on these excellent anaylises, we'd be broke.  Don't junk me.  I'm as frustrated as all of you. :)

Tue, 06/21/2011 - 10:56 | 1388950 disabledvet
disabledvet's picture

look girls!  a man in need of a kiss!

Tue, 06/21/2011 - 10:59 | 1388977 WineSorbet
WineSorbet's picture

I'll turn into a prince :)

Tue, 06/21/2011 - 11:11 | 1389022 DaveyJones
DaveyJones's picture

you mean the avatar formerly known as prince

Tue, 06/21/2011 - 11:49 | 1389130 Stax Edwards
Stax Edwards's picture

Couldn't help myself :P

Tue, 06/21/2011 - 10:51 | 1388947 writingsonthewall
writingsonthewall's picture

"The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society"

That's not really fair - the Keynsians were only asked to assist after the shit hit the fan. The monetarists led the boom - and they have turned to Keynsians is their desperation.

As I have said many times before - Keynes would have advocated Governments SAVING in the booms (i.e. raising taxes George, not cutting them you dolt) in order to provide the funds for the stimulus now (and not having to borrow so heavily)

This is like blaming the man who comes to fix the boiler and reveales it's going to cost $500 to repair - due to the original man who fitted it incorrectly.

The attack of Keynes is unwarranted and demonstrates a lack of understanding of Keynes's theory of employment.


I have noticed, sometimes we get 'intelligent and balanced Tyler' and sometimes we don't.


You don't suppose he's schizophrenic do you?

Tue, 06/21/2011 - 11:05 | 1388992 slewie the pi-rat
slewie the pi-rat's picture

to the extent that keynes = fiat money via debt, i wld not be overly concerned abt tyler's mental health, if i were you...

...or charles hugh smith's, either...

Tue, 06/21/2011 - 11:14 | 1389016 writingsonthewall
writingsonthewall's picture

....are you trying to be backward?

Keynes has got little to do with FIAT currency - it's got to do with Government supplying demand when the private sector can't (recession), borrowing if neccessary.


This is what concerns me - you're confusing different concepts and wrapping them all up as 'keynes'.

You can (and we did) have Keynes without FIAT - there's nothing in Keynes's theories which advocates using FIAT to pump up the economy.

Borrowing (by Government) to stimulate demand = fine

Printing money to create stimulus = not so fine


When I read statements like yours (and to a lesser extent this article) - it makes me picture a barren scene with people standing with their mouths open - aghast at the econmic carnage that lays before them...and not one of them really understanding how we got here.

Tue, 06/21/2011 - 11:53 | 1389129 slewie the pi-rat
slewie the pi-rat's picture

no, not backward, and i'm not going to argue keynes with you or with leo.  somethning may be interfering with yer intelligence, asswipe. 

to the extent that keynes = fiat money via debt, and so on.  also, the article was not written by tyler. 

go troll somewhere else.  you are not thinking straight, shithead.  if you want to feel sorry for people who are not keynesians who who don't understand him correctly, fine;  i can see where this author might fire you up.  but others may not be as lacking in understanding as you project, along with the projection of your mental illness onto someone whom you confusedly and mistakenly believed to have written this, fukface.

Tue, 06/21/2011 - 12:15 | 1389216 writingsonthewall
writingsonthewall's picture

Oooo - keep your hair on, I can apologise for mistakenly thinking this was Tyler's post - I didn't recognise the style.

(and for your information the schizophrenic reference was one to the film fight club when Tyler Durden was the alter-ego of Joe)

I'm no troll mate - this is on topic - just because I don't agree with the author - doesn't mean I'm a troll.

The problem is the author (I presume) is proporting to be 'an expert' - and yet he has made some very simple mistakes - or rather partizan ones.

This is the problem with economic crises - the first casualty is the truth. I have heard so much nonsense flung around by the partizans about various subjects - which upon deeper questioning they are found to be wanting.


This is coincidently how we're all going to get fucked - because too many people believe what they read without properly analysing it - allowing them to be manipulated by the authors prejudices.


Tue, 06/21/2011 - 14:11 | 1389620 Hacked Economy
Hacked Economy's picture

Fozzie, I will concede that you appear to be honestly trying to clear up the misconceptions that many here hold regarding Keynes.  But note that he DID postulate that a government's ability to fully manipulate its money supply was limited by that currency's peg to gold.

You're correct that one of Keynes' main arguments was that a government should stockpile cash in time of plenty in order to inject it later back into the economy during downturns.  This is meant to soften the effects of the notorious boom/bust cycles.  It's also the same argument why the Federal Reserve was created in response to the Panic of 1907. essence, you have some kernels of truth in your arguments, and you're right to engage in other people here (because some of us DO unfortunately over-simplify our rash statements).  But in this case regarding Keynes...he was wrong.  Flat-out wrong.  He actively pushed his theories, and now we're watching the endgame of the debt/manipulation/fiat circus about 80 years later - as a previous commenter already said.

Let's all keep our arguments tight, but Keynes is the big loser in this one.  He screwed us all.

Tue, 06/21/2011 - 19:23 | 1390715 CompassionateFascist
CompassionateFascist's picture

Goobermint...stockpile money....when there's votes to be bought in the here and now? Keynes was either naive, a fag, or a complete idiot. Actually, all 3.  

Tue, 06/21/2011 - 11:57 | 1389144 Alasdair
Alasdair's picture

Thank you.  Debt is supposed to be a tool used in times of trouble and it was turned into our permanent S.O.P.  I can't believe I don't hear this more often.  Thanks for the injection of sanity.

Tue, 06/21/2011 - 12:29 | 1389271 ElvisDog
ElvisDog's picture

I think the main objection to Keynesism (sp?) is that as a solution to a bust it is a complete failure. It's a very simple concept really - the solution to an economy that can't service its current debt load is not to add on more debt. And the whole "animal spirits" concept is a load of shit, as is the "priming the pump" theory. The reality is that an economy (like a junkie) quickly becomes completely dependent on the government pump-priming. The hand-off to private, self-sustaining economic growth doesn't occur. As soon as you remove the stimulus, ala 1937, the economy slips back into recession.

Tue, 06/21/2011 - 19:14 | 1390692 Kayman
Kayman's picture


Neither fiscal policy nor monetary policy can function independent of each other.  Maybe take a few more courses and get a clue.

Tue, 06/21/2011 - 11:12 | 1389012 Boxed Merlot
Boxed Merlot's picture

As I have said many times before - Keynes would have advocated Governments SAVING in the booms (i.e. raising taxes George, not cutting them you dolt) in order to provide the funds for the stimulus now (and not having to borrow so heavily)...


What constitutes "booms"?  They appear after the fact easily enough, but during the event, not so much so.  Seems to me the real issue is interest.  This is the "yeast of the Pharisees" we all need to be so careful about.


There should be no reason in the world any sovereign nation should pay a non-sovereign entity tribute, especially when nothing more than ether backs the currency the nation is paying for.  imho.

Tue, 06/21/2011 - 11:14 | 1389031 writingsonthewall
writingsonthewall's picture

You didn't realise we were in a boom?

I would have thought the low interest rates - or as I call it - the Greenspan 'put' - was a sign of things to come.

Basically if people are in work - we're in a boom - if they're out of work - we're not.


you might find it hard to tell when we're in a boom - but Government knows through it's tax take - George Bush knew but he thought he would fuel the boom with tax cuts rather than reigning it in (plus have a few wars with the excess revenue - someone had to keep Halliburton going)

I'm not advocating Keynesian policies - but we really need to get the facts straight before we start maligning it for creating the problems we have now.

Tue, 06/21/2011 - 13:26 | 1389452 Bob Sacamano
Bob Sacamano's picture

Get real.  Very naive to believe government will accumulate idle cash savings for a rainy day.  Politicians are in the business of getting re-elected and spending is the best way to accomplish such with most American voters (particularly the 47% of people who pay zero federal income tax). 

You saw how the Social Security taxes remitted over the past 50 years were put in a lock-box to ensure they would be there for retirement - a very Keynesian approach that had no real chance of working. 

Even if you bought Keynes' theory, there is no discipline in government to actually execute the theory. 

Re: booms -- the US has been in a "boom" many of the years since WWII -- boom needs to be defined relative to the rest of the world economy.


Tue, 06/21/2011 - 11:26 | 1389065 MachoMan
MachoMan's picture

keynesianism has grown far outside the boundaries imposed by keynes...  grown into the direction as convenient for the time...  to attack keynesianism is not to attack keynes...  important distinction.

Tue, 06/21/2011 - 12:41 | 1389315 AnAnonymous
AnAnonymous's picture

keynesianism has grown far outside the boundaries imposed by keynes... 


US citizens are so funny.


But expansion and its associated Ponzi schemes existed and were applied way before Keynes was born.

The perpetual debt scheme against the prediction that future gains will cover present debt is old, pretty old.

The whole 19th US century was built on the principle and when the situation matured, it gave the Great Depression.


One could argue that Keynes failed to offer an alternative as seducing as the expansion scheme but this guy is certainly not the author of a scheme that was applied before he was born.

Tue, 06/21/2011 - 14:05 | 1389603 MachoMan
MachoMan's picture

I'm not really sure there has ever been an alternative to the expansion scheme...  they all are, ultimately (some moreso than others)...  further, even if there was, it could never be more alluring than an expansionary policy...  it's just how we're wired.

In the end, arguing for reserves to be held by the government for stimulative use in the downturns (keynes) is vastly dissimilar than the notion of printing with reckless abandon (keynesianism)...  I think this is the point I was trying to make...

Tue, 06/21/2011 - 15:17 | 1389814 fallout11
fallout11's picture

The expansion scheme has been around since the Roman empire at least, as it was the basis for Rome's wealth (via conquest and subsequent tribute/resource extraction). Rome quickly came to rely on these inputs and steady expansion via conquest, and once natural limits on expansion were reached (orders to legions on the frontier took months to arrive and were obsolete by the time they did, etc), the game was up.  Anthropologists refer to such as a "maintenance crisis", i.e. they could not afford to maintain the size and complexity of the society they had constructed. Failure to pay the army, desertion, managed collapse/withdrawal, debasement of the currency, increased taxation of the middle class, and more followed.  Classic ponzi scheme, trying to run faster than you are falling to prevent hitting the ground.  It only works for a while.


Tue, 06/21/2011 - 14:36 | 1389692 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

I have noticed, sometimes we get 'intelligent and balanced Tyler' and sometimes we don't.

Guest post means not written by Tyler.

Tue, 06/21/2011 - 18:36 | 1390610 ToddGak
ToddGak's picture

Dude, sweet avatar.  I remember that sticker on poisonous products from my youth.

Wed, 06/22/2011 - 11:55 | 1391991 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

Mr Yuck says wagfdsmb.

Tue, 06/21/2011 - 10:52 | 1388952 monopoly
monopoly's picture

They will print until it all blows up. Then, and not until, they will deal with the debt.

Tue, 06/21/2011 - 10:53 | 1388957 Oh regional Indian
Oh regional Indian's picture

In the swing to the other side, underway as we type here, we will once again pass deeply into demand-side economics. But the overheads are too low and middle men would make nothing.

Yup, I'm a dreamer, but a lucid one.


Tue, 06/21/2011 - 10:55 | 1388965 buzzsaw99
buzzsaw99's picture

They don't care about usa consumers, they are debauching abroad to try to stimulate emerging market consumers while killing fixed income investments domestically. They care only about themselves.

Tue, 06/21/2011 - 11:03 | 1388978 Version 7
Version 7's picture

Very nice piece of analysis.

Tue, 06/21/2011 - 11:01 | 1388986 mayhem_korner
mayhem_korner's picture

Great chart.

Now let's play through the options...increase taxes and the cmdebt line falls (defaults by workers)...cut entitlements and the cmdebt line falls (defaults by retirees)...print money and the scale of the graphic goes asymptotic (looks like a winner!)

Tue, 06/21/2011 - 11:06 | 1388993 PaperBear
PaperBear's picture

The dollar is doomed because it's gold/silver content was dumped then it's gold backing was dumped. There is nothing left to dump.

Tue, 06/21/2011 - 11:06 | 1388995 fuu
fuu's picture

someday this war will end

Tue, 06/21/2011 - 11:03 | 1389000 css1971
css1971's picture

Paper. 1000, 2000, 5000 dollar notes. You know it makes sense.

While you're at it, a few  1,000,000,000,000 notes to pay the national debt.


Tue, 06/21/2011 - 11:10 | 1389010 mayhem_korner
mayhem_korner's picture

There's an RFP on the street for engravers for the $1T and $10T notes.  Should be on a fast track...

Tue, 06/21/2011 - 11:03 | 1389002 disabledvet
disabledvet's picture

and to think you cheapen it by calling it a "mere Ponzi scheme."  when last i checked that clown was in prison "being celebrated by other clowns" no less.  The perfect crime IS THE ONE YOU GET AWAY WITH.  Lloyd just forgot "we draw the line at testifying before Congress."

Tue, 06/21/2011 - 11:04 | 1389004 PaperBear
PaperBear's picture

CFTC data shows bullish positions on gold/silver were trimmed, so time for the next leg up to start.

Tue, 06/21/2011 - 11:05 | 1389006 SheepDog-One
SheepDog-One's picture

The free money is all gone, bought 18 months thats all to the tune of $27 trillion in new debt, now plunge back into the abyss.

Tue, 06/21/2011 - 11:12 | 1389025 DaveyJones
DaveyJones's picture

"like frenzied rats in a cage"

best economic description yet 

Tue, 06/21/2011 - 11:13 | 1389026 MarcusAurelius
MarcusAurelius's picture

It is that simple folks. Unless debt is washed from the system you get a Japan style recovery that keeps hitting the wall. Steve Keen (another brilliant non-conformist economist) gets it very well. So does Prechter. To quote Keen "using the accelerator theory it will likely be called the quadruple dip, before it is over".

I will emphapsize that the only GOOD debt is the debt that is used by companies to expand their market share by selling products that the worlds consumers need and will make all our lives that much better. The rest is ponzi style lending that eventually implodes on the very people using the cheap money to chase unrealistic returns. The hyper inflationary scenario that everyone is calling for is none other than what the autor is explaining here. However the overall trend is still very much deflationary which is why Bernanke keeps saying that CORE inflation is stagnant. He's right. It is.

Tue, 06/21/2011 - 11:14 | 1389034 chartcruzer
chartcruzer's picture

simply put,   at some point the debt load itself drags the economy into the abyss.


Tue, 06/21/2011 - 11:16 | 1389039 Printfaster
Printfaster's picture

Real debt is generated by factoring, done in the course of production and distribution.

Any other debt whether governmental or private merely steals from productive debt.  The more debt removed from production and distribution, means less production and distribution as production and distribtution becomes unprofitable.

Current examples include the "cost of electricity will necessarily skyrocket", which will curtail production and curtail distribution.  This sort of thinking ("thinking" is far too generous a term for whatever process generated this statement) will leave everyone to gather acorns and pound them for meal.

Tue, 06/21/2011 - 11:24 | 1389053 BobPaulson
BobPaulson's picture

So are we "post" consumerist now? Shit that's a relief. I thought everybody was a bunch of materialistic morons buying useless crap to replace their disfunctional relationships, disfunctional mental health and disfunctional social contract. Looking forward to the effects of that. I was hoping to spend some time doing things with my hands and talking to my neighbour instead of jacking off with electronic gadgets and talking to people I don't know in 128 character sentence fragments.

Tue, 06/21/2011 - 11:38 | 1389096 hedgeless_horseman
hedgeless_horseman's picture

I was hoping to spend some time doing things with my hands and talking to my neighbour...

There's an app for that.

Tue, 06/21/2011 - 11:51 | 1389118 stirners_ghost
stirners_ghost's picture

"disfunctional social contract"

Is that like dysfunctional ten commandments?

Dysfunctional Santa Claus?

I'm biding my time for post-subservience and post-gullibility; to wit, post-Hobbes.

Tue, 06/21/2011 - 11:25 | 1389061 straty01
straty01's picture

Banking/finance/markets is not the whole picture, its the wars that the USA/UK has committed to never end. Sure, we can get upset with ZIRP, TBTF and so on but what is worse?

An obvious manipulation of the market or (for example)1.5 million on each tomahawk missile spent? A missile kills people and destroys buildings. What would society prefer? Better health and education or war? If the USA\UK is #1 and their is no war on home soil why do they keep wasting money on destruction? What purpose does it achieve for the benefit of the planet?

The 'stimulus' for the Great Depression in the 1930's was WW2. Obama publicly stated he was against the wars but he has increased conflict and spends money like a drunken sailor on leave.

We need solutions, not wars or money printing. Has the world ever been more illusory? Does anybody remember Rumsfeld admitting on Sept 10, 2001 that 2.3 trillion was 'missing' from the treasury, great timing. The banks/markets are a sideshow to an even greater problem we must all face. I am sure the Germans never comprehended Russian tanks rolling into Berlin, their government lied to them for years, just like ours is now, their is a universal law which will eventually be applied here, the planet has simply had enough.  Insanity reigns supreme

Tue, 06/21/2011 - 13:02 | 1389365 Lower Class Elite
Lower Class Elite's picture

As a former drunken sailor, I must take offense at your comment.  I can assure you I was quite judicious when considering how to squander my paycheck. 

Tue, 06/21/2011 - 18:44 | 1390625 ToddGak
ToddGak's picture

Without war industry, what industry would we have?  Making and then destroying all these bullets and bombs is great business.  Every missile that's fired is keeping someone in a job.

Tue, 06/21/2011 - 11:36 | 1389067 Don Gorgon
Don Gorgon's picture

Outside of the decision makers, who are these dolts keeping the "spirit of consumerism" alive?  Is it just the ignorant and decadent portions of the remaining money changers?   

Tue, 06/21/2011 - 11:28 | 1389069 Kilgore Trout
Kilgore Trout's picture

Fade to alternate universe. Krugman and Reich read this and slap their foreheads,

"Oh! I SEE it now!"

Tue, 06/21/2011 - 11:28 | 1389070 slewie the pi-rat
slewie the pi-rat's picture

this is short, and "as advertised":  Jun 21, 2011 Bank reserves, money supply, and a secular change in credit Steve Saville 321gold 

here, SS seems to agree, in general, but, so far, without the supernova

Tue, 06/21/2011 - 11:35 | 1389079 Bastiat
Bastiat's picture

The cocaine laced rat pellet analogy is excellent.

Tue, 06/21/2011 - 11:41 | 1389104 the grateful un...
the grateful unemployed's picture

Here is a chart of the Keynesian model of financial pathology. As private debt has flattened out--people simply can't borrow any more, as their incomes are flat and they're already maxed out on debt--the Federal government a.k.a. Savior State has ramped up its borrowing to replace private debt.

The solution to this transfer of debt from the public to private sector is to "privatize" government. Public debt magically becomes private debt. While efforts to privatize have been spotty, (private prisons, private education, private security, private or toll roads - there will soon be private fire protection), government spending has actually gone up. Part of the problem is corporate America can't keep up with the demand, margins are thin, as competition for a shrinking consumer base requires more government stimulus. Sure you don't have a job, but a twelve pack of Coke is only $3.
Obama the Socialist, and Bush, the corporatist, were a perfect one two punch. Demand, Supply who cares? Government will continue to oversee this economic transference, playing the role of Adam's Smiths invisible hand. Now seeing that there are education opportunities in rural America, taking a bribe here, some graft there. Business as usual for them, except they no longer handle the money. No taxes, no committees, just some minor regulating, mostly to see everyone gets a fair share of the pie. If you don't think this is going to work, feel free to junk this reply.

Tue, 06/21/2011 - 11:41 | 1389105 LawsofPhysics
LawsofPhysics's picture

Yes, simply put, infinite paper does not insure infinite growth on a very finite planet.

Tue, 06/21/2011 - 11:53 | 1389131 Kat
Kat's picture

When the near zero interest rates did filter to John Q. Public, then he too speculated on houses and securities.  That was no better than Wall Street doing it.

Printing tons of money does not eliminate scarcity.  All it does is create bubbles and inflation.  Keynesianism, no matter how diseased, will never die.

Tue, 06/21/2011 - 19:29 | 1390740 Kayman
Kayman's picture

Keynesianism, no matter how diseased, will never die.

John Maynard gave academic credence to the free lunch theory.

Tue, 06/21/2011 - 11:58 | 1389137 tahoebumsmith
tahoebumsmith's picture

The rats did so much blow they broke the wheel they used for their daily exercises. Now they sit around bloated and lethargic and just wait for their next treatment. They are on methadone now, as the Keynsians know it is better to provide them with their treatment so they have more control over their little experiments.

Tue, 06/21/2011 - 12:21 | 1389242 rlouis
rlouis's picture

"Big picture, this reliance on debt for "growth" has led to the banks owning the government and the economy. This is the Dark Side of Keynesism. The "borrow more, we need more demand!" thumpings of "liberal" economists like Krugman and Reich are completely blind to the fact that the borrowing they demand is precisely what has sold the nation down the river and handed control to the banks and Wall Street."

Hey - that was the plan!  Convert imaginary money (created by banks from thin air to fund gov. debt) into real wealth and real power to control "the" nation. 

The fact that the interest rate is now 0.0% is an indication of how worthless it is.  If it had value it would cost something.

Tue, 06/21/2011 - 19:35 | 1390742 Kayman
Kayman's picture


If it had value it would cost something.

Good point.

Tue, 06/21/2011 - 12:35 | 1389282 Andy Lewis
Andy Lewis's picture

It's called industrial policy.  Check into it.

Tue, 06/21/2011 - 12:36 | 1389299 GoinFawr
GoinFawr's picture

"In other words, the only way to get people to buy more crap was to give them vast quantities of debt."

Well, that and planned obsolescence

Tue, 06/21/2011 - 12:41 | 1389313 the grateful un...
the grateful unemployed's picture

yes and then 'give' them the crap, and charge them to use it. when gasoline is $10 a gallon, cars will be free, (and only the rich will drive them). this should come as no surprise to people, a mere continuance of US economic policy.

Tue, 06/21/2011 - 20:52 | 1390821 Prometheus418
Prometheus418's picture

It's a damn shame to see the American Spirit fallen so far.

Ever seen one of these?

Gas hits $10/gal, and you might.

Tue, 06/21/2011 - 21:04 | 1390835 GoinFawr
GoinFawr's picture

I know I am going to get a good deriding for this but: those look kinda cool!

Tue, 06/21/2011 - 19:37 | 1390748 Kayman
Kayman's picture


planned obsolescence

The Chinese have improved on this idea; it falls apart before you use it !

Tue, 06/21/2011 - 21:02 | 1390833 GoinFawr
GoinFawr's picture

Of course! Just another reason to offshore production... almost as 'good' as the 1972 Vegas that had rust on 'em before they left the showrooms.

I am Jack's utter lack of surprise.

Tue, 06/21/2011 - 12:46 | 1389318 AgShaman
AgShaman's picture

If you use the "D" words (Debts/Deficits) too will be shown the door.

Just ask Paul O'Neill and Dick Cheney

Tue, 06/21/2011 - 13:08 | 1389387 gianakt
gianakt's picture

Think the FOMC starts targeting for a higher dollar. As the low dollar is chocking off economic activity worldwide by causing commodity prices to rise. Lets see what the FOMC does tommorrow!!!

Tue, 06/21/2011 - 13:10 | 1389398 Stuck on Zero
Stuck on Zero's picture

No-one in power cares about the debt.  They don't pay it.  They only care about their short-term cash gains.  That's the problem.

Tue, 06/21/2011 - 13:08 | 1389408 downrodeo
downrodeo's picture

I'm more inclined to believe that they've got something up their sleeves. They've got to understand by now that we're never going to return to the days where consumption made up 70% of the GDP.

Tue, 06/21/2011 - 13:43 | 1389517 sgorem
sgorem's picture

What we have HERE is a failure to communicate. Guess I'll have to lower my propensity for the UN-political correctiveness in my language again and converse in the language that seems to make my point come across a little better for some here to digest. FUCK KEYNES, FUCK HIS THEORIES/IDEAS. The jist of the article for some of you clueless morons is that WE aren't dealing with theories, charts, expansion or contraction of debt/monetization. If you could read, and I'll quote, "Big picture, this reliance on debt for "growth" has led to the BANKS OWNING THE GOVERNMENT AND THE ECONOMY". When you have the inherent out-of-control government for decades, (owned solely by fraudulent and corrupt banks and other entities), then NO theories, assumptions, planning, posturing, printing, taxes, consumerism is going to do SHIT for you. Get it YET? We've been screwed since going off the gold standard mainly so we could produce more fiat to be horded and stolen FROM the working class while throwing them crumbs to survive and eek out a meager existence. It's ALL coming to an end in our lifetime, and I don't know how it will end, but better off getting down to basics as in NO debt, physical gold/silver in hand, and all of the essentials (223 cal.) for "survival" for what can turn out to be a real clusterfuck future for all of us. If you're prepared, then FUCK the TPTB. Have a great day.........

Wed, 06/22/2011 - 00:23 | 1390968 halodoc
halodoc's picture


"The refusal of King George III to allow the colonies to operate an honest money system, which freed the ordinary man from the clutches of the money manipulators was probably the prime cause of the revolution." Benjamin Franklin

Tue, 06/21/2011 - 14:46 | 1389745 Imminent Collapse
Imminent Collapse's picture

Finally, a clear vision.  The only question in my mind is:  when will it collapse.  It will last longer than we think but it will go quickly when confidence is lost. 

Remember the Boy Scout motto:  Be Prepared!

Tue, 06/21/2011 - 14:54 | 1389768 Syrin
Syrin's picture

I saw this ealsewhere, but thanks for posting here with commentary.   Yet ANOTHER clear, objective graphical demonstration that Keynesian economics are flawed and destrcutive.   Ask Japan or an of the European states following the same path.   How many decades of these failed policies must we endure before adopting proven and effective Austrian based economic policies?

Tue, 06/21/2011 - 16:13 | 1390046 PulauHantu29
Tue, 06/21/2011 - 16:44 | 1390092 Rynak
Rynak's picture

It's not just that debt doesn't work, and that people don't need all the crap that is pushed onto them. Another aspect is consumer buying power. Many people here would probably think, that me, a german - lives in a country of high prosperity and buying power.... when compared to the USA..... after all, germany is a china-style exporter, while the USA is a greece-style importer, right? And the GDP and debt numbers look so great for germany (as long as you assume that they will get all the lended money actually back), correct?

Well, becoming a china-style export-nation with inflating currency, is nice for megacorps.... but for normal corporations as well as the majority of the population (workers/consumers), it has the opposite effect of prosperity.

What a export-driven "pusher"-nation does, basically is to discount its own workforce, so that the producers can then cheaply export to other countries. And here, i come to the meat of this post: Workers, and consumers of goods, are one and the same people - at least locally. If we only were to consider the local market, discounting the workforce would lead to a massive reduction in buying power, so that all the goods that are produced cannot actually all be bought, because no one can afford all this stuff (that is, unless the sale price is discounted by the same amount, as the wages - but this would be to no benefit of corporations, so that whole procedure did nothing but devalue the currency). So, if we were thinking locally, discounting the workforce would lead to collapse in buying power, and thus demand - or ALL prices go down, so that no one gained anything.

Interestingly, this has and is happening in germany. It actually has been happening since almost 10 years. Besides of seeing it myself firsthand, i regularily get told this from my clients (who are mostly employers)..... to translate one of the most memorable statements i got to hear: "Shit, no one can afford anything anymore. They cannot even afford anymore to booze! Germany impoverishes."

But alas, the point of the whole experiment never has been to actually sell locally. It has been to produce at unsustainably low costs, and then sell elsewhere at unsustainably high prices (where this "elsewhere" will buy stuff with debt"). Corporations which use this business strategy, are ripping countries off twofold: First they rip the producing population off, and then they escape the consequences, by ripping the consumer population off by pushing them to buy on credit (but with them of course not lending that credit - thats what the producer countries do).

So, explained step by step:

1. Producer produces so cheap at Country A, that demand is ruined locally.

2. Country A collects taxes from producer, and then lends it to Country B.

3. Country B buys from producer with lended money, at overvalued prices.


This type of corporations - just as the banksters - are reckless parasites. They profit by ripping of everyone else involved. There is no point in trying to appeal to those corporations. If they leave a country, all the better.... just make sure that the marketshare they abandon, is picked up by responsible and fair local corporations.

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