Niall Ferguson Explains Why Keynesian Policies Are Dooming The World Economy To Round After Round Of Asset Bubbles

Tyler Durden's picture

If there is one thing that everyone should watch to understand just why every policy attempt to fix the ongoing depression is doomed, it is the following short clip from Niall Ferguson in which he deconstructs the primary fatal flaw of Keynesianism. Ferguson explains why those who push for Keynesian policies in a globalized world are doing nothing to stimulate the economy, but merely inflate ever more bubbles. Quote Ferguson: "I wonder if it's worth revisiting the now familiar debate about whether or not Keynes can save us. Because I have some doubts about this. Deep doubts." Zero Hedge has no doubts about this - we are confident that the confines of a theoretical Keynesian system have been the recipe for the disaster unfolding now before our eyes (which is not to say that Austrian economics is necessarily better, although intuitively they certainly make a far more compelling case, and would certainly not have led to the current pre-apocalyptic economic situation, which only the most addicted to Kool Aid pig lipstickers refuse to acknowledge). However, that is not news - we have always made our position on the false voodoo religion of economics well known. We are, however, happy that more and more of the "mainstream fold" are finally starting to question the key flawed premise of this fundamentalist doctrine.

Ferguson continues "Remember what Keynes wrote in the 1930s about stimulus and the way in which government could get an economic going again really applied to a post-globalization world in which trade and capital flows had largely broken down, and most economies were quite isolated units. That's something that Keynes made clear in the German edition of the General Theory when he said the theory applies better in a closed totalitarian economy." The conclusion - in a globalized world, such as that preached by the BRIC pundits whereby developing nations will bail everyone else out, or so the legend goes, additional stimulus will always and inevitably merely lead to bubbles - either commodity or emerging markets. And all we have is a bunch of idiot Ivy League Ph.D.s' wrong interpretation of Keynesianism to thank for destroying the economic system as we know it.

Niall on the direct effect of existing failed Keynsian policies in a globalized world:

Globalization has not broken down. In fact the US economy is more open than it has ever been. That means that stimulus, both monetary and fiscal if very prone to what is called leakage. We've had an enormous of stimulus in the US, it's the biggest fiscal stimulus in the world, and huge unprecedented monetary stimulus. What's been stimulated? Not jobs in Michigan. What's been stimulated has been commodity markets and emerging markets. Because the liquidity just leaks out, and that's why another round of stimulus would not stimulate in the promised way. It would stimulate the wrong things. And those things, commodity markets and emerging markets, are already overstimulated to the point of being nearly bubbles.

So simple, yet so incomprehensible by the cadre of false Keynesian prophets who will never admit to this most elegant of realizations. It also means that America can expect more such farces as double stimulus roadsigns, and oil back at $140 (or much higher) before even another job is created out of all the excess money sloshing around.

Must watch clip.


And for those who would rather work in the confines of these two mutually exclusive worlds (Keynesianism and Globalization), there is one thing we would like to share with you, and that is the following extract from an interview by Peter Cook of the last person standing in Obama's economic team Tim Geithner:

They're also letting their exchange rate move up.  And they're doing that because it's in their interest.  Makes no sense for China to have monetary policies set by the Federal Reserve.  They're an independent country, large economy.  They need the flexibility to run their policies in a way that makes sense for China.  And that requires that their exchange rate move up over time, as they're now doing.

That our economic leaders are stupid enough to utter the bolded is sufficient validation that we are all doomed: not only is the world being guided by a flawed economic religion, but its priests are the most intellectually challenged individuals ever to enter "public" service.

And as an aside, those who wish to hedge bubbling emerging market exposure, SocGen's Dylan Grice had a great analysis of various cheap inflationary (compared to rich deflationary) EM hedges (link).

h/t Credit Trader

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gkm's picture

A little anecdotal evidence of why the run in gold has yet to begin.  My parents went to an estate auction this weekend where, as usual, jewelery and such were sold first.  A gold coin from the late 1800's which had been appraised in the 1980's (i.e. probably at the height of the pricing then) at around $2300.  It had all of 3 bidders and sold for $225.  So pure gold being almost twice the price of what it was in the 1980's peak hasn't inspired people to want to buy gold.  A very good sign for gold's future.

What was selling?  A used car sold for a stupid amount and antique toys were in demand.  The sheeple were out in droves.

doolittlegeorge's picture

let's see.."nobody makes anything anymore."  REALLY?  That's interesting.

traderjoe's picture

How much gold was in the coin, i.e. what was the melt value? Just wondering if those sorts of sales are worth attending...

Arius's picture

i suppose you have the answer at the valuation in 1980s...i wondered what state was? perhaps, somewhere mid west?

gkm's picture

Couldn't say.  I heard the weight was 0.4 ounces but I'm not sure what content a coin of that vintage would have for gold.

PeaBird's picture

the standard for coins of that vintage are normally in the 91.67% range for fineness.

MeTarzanUjane's picture

My moms sisters fathers aunt goes to the flea markets in Biloxi Mississippi. She does dig up some gold. She goes at 10 am with her son Kooter. Her name is Dottie. Her daughter is a blackjack dealer at the Beau Rivage in Biloxi and she has a ferret named Marlana.

Dottie and Kooter once came home with a big 14k gold bracelet and she sold it on eBay for $16 before commissions. So I figure most jewelry will bring about $1 a caret. That's good money for one days work at the flea market.'s picture

Your mother's sister's (your aunt's) father is your grandfather. His sister is your great aunt. Kooter and his sister are your first cousins once removed. Marlana is no relation.

Gold karats are a measure of purity not weight and can not be priced as such. One  might own a one gram chain of 14k gold or a ten gram chain of 14k gold and the price of each would obviously differ by a factor of ten.

MeTarzanUjane's picture

I'm not really sure what you're saying but it sounds good. Ever been to to the flea markets in Biloxi?

Bartanist's picture

Unemployment for the college educated is <4.5%. For those with advanced degrees unemployment is around 3%

I don't know who goes to estate sales, but my guess is that they are employed and have disposable income or are in the resale business. So, it is debatable whether they feel they need gold as a way to protect themselves.

However, my guess is that the gold coin was a small weight piece and it was not valued based on being a collectable ... or littl extra value was given to it as a collectable.

NOTW777's picture

"Unemployment for the college educated is <4.5%. For those with advanced degrees unemployment is around 3%"

incredibly deceptive stat.  many people with college degrees are working for $15/hr;  saw an ad for attorney position in SD recently, requiring experience for $25/hr.  how many college grads are moving back home to live with parents cause they cannot support themselves.  ask engineers, or tech grads what they are doing.

tmosley's picture

We hire recent graduates with 4 year degrees in the hard sciences for $10-13/hour, mostly at the lower end of that scale, and we can't give a raise for a year.  Every time I post a job, I get at least 30 applicants, and they aren't repeats most of the time.

We're paying pennies for the cream of the crop, and turnover is at a record low despite abysmal pay.  I like to think that it is because I'm a good manager, and that MIGHT be a part of it, but more than likely, it is because they just can't find another job, and this is the only way to pay the bills.  The only reason anyone even thinks about leaving is so they can move back in with their parents, but they have had problems finding jobs where thier parents live.

And this is in TEXAS, which has one of the lowest unemployment rates in the country.

NOTW777's picture

California is similar and has even higher cost of living

Red Neck Repugnicant's picture

It is no surprise that you're from Texas.

nobita's picture

i am not from texas but your comment is junk.
please post less.

Spitzer's picture

Oil rig newbies here in Canada still get $27.50 an hour, no experince, no education. Truck drivers and wire liners get 30 to 40 an hour.

Dburn's picture

saw an ad for attorney position in SD recently, requiring experience for $25/hr.

No doubt that his services will be billed out at something reasonable like $50.00 per hour? HAHA. It will be billed out at prevailing rate so the partners can take advantage of the current job market. Even govt jobs pay far more than that for Attorneys. I was checking tuition rates for the three year program offered by a university I would put in the C+ status of law schools. $20,000 a semester for in-state students and $49,000 for out of State. That comes to $40 grand a year plus books and living expense because it is pretty damn hard to work at least in the first year. So the cheapest they walk out with is $120G in debt of they are able to pay living expenses. If not and they are incredibly frugal, it will run $170-$200G for a 2nd to third rate law school. The one thing I like about "community" type law schools like this is they are taught by practicing attorneys who give a lot of practical training that theoretical ( expensive) law schools don't give on the assumption you will learn the nitty gritty of a practicing attorney in your first few years as an an associate.

I'm actually considering giving it a run. I think Bankruptcy Lawyers will be busy for years. Plus I am on a slow burn from hell about the trampling of the rule of law. I'd love to be able to get close enough to throw some fucking sand in the faces of even local bankers. At least I can say I tried.

i-dog's picture

"No doubt that his services will be billed out at something reasonable like $50.00 per hour? HAHA."

I would hope that they would be billing him out at $75 per hour, or more, else they will be out of business in no time!

If enough people junk me, I'll explain why (though it should be taught in high school instead of teaching Socialism 101, Socialism 201, etc). :)

RockyRacoon's picture

That gold outlook can change with a few more articles like this one:

USA Today of all things!

cranky-old-geezer's picture

"A 5% to 10% position in gold is enough for nearly everyone."

They destroyed their credibility with that statment.  

The statement has no basis in fact, and no facts are given to support it.   It's pure opinion of the writer, and therefore worthless.

The article is more gold-bashing.  It won't stir anyone's interest in gold ownership.

chopper read's picture

that statement is designed by financial planners to serve financial planners.  Its there way of acknowledging gold whilst minimizing its importance relative to fiat investments from which they get paid in perpetuity.  

Cognitive Dissonance's picture

that statement is designed by financial planners to serve financial planners.


As a Certified Financial Planner I actually take great risk when I recommend to my clients that they hold Gold and Gold miner positions of 20%, 30% and even more for the younger clients. Why? Because it's so far from "conventional wisdom" that if a client were to complain to the SEC, FINRA or even the CFP board, I could be in genuine trouble for violating my "fiduciary duty".

Of course, holding 50 or 60% in stocks is perfectly acceptable unless the client is in their 70's or 80's and I can't justify it, which isn't that hard if they have a decent income without touching their investments. The deck has always been stacked towards paper assets.

chopper read's picture

i hear you.  imagine if some 'rogue' fiduciaries overseeing a public pension plan invested in physical gold 10 years ago.  of course, it never would have happened because they are scared shitless of getting sued on the basis of 'studies' presented by the Wall Street Industrial Complex. 

ironically, if there is a collapse of fiat, Joe Sixpack may finally get his revenge on the system.  it is much easier to opt out of an IRA or 401(k), take the penalty, and buy gold and silver online within days.  He has no 'fiduciary responsibility' other than to save his own ass. How nimble are public pension plans by comparison?  Pension fund trustees are damned if they do buy gold, and damned if they do not!  By the time they get the investment policy statement changed because gold is at $3,000, old Joe is sitting in a fat winner. 

prophet's picture

Not to mention that lead along with a few other assets classes did even better than gold. 

I think 4% is a good base allocation to an "asset class", 8 is pushing it and 12 is a hard top.  25 good ideas at 4P, 12.5 ideas at 8P, or if you are dead certain then perhaps 8.5 ideas at 12.5P.   


TheGreatPonzi's picture

Agree. The figure of 5 or 10% is completely arbitrary and ridiculous.The same journalists would recommend you to place 95% into stocks when the economy is 'growing'.

According to the mainstream medias, betting on economic growth therefore deserves more money than betting on economic or monetary downfall.

And of course, 5% of your 1000 dollars savings will only buy you 1 gram of gold (15 days of food), when 5% of your 1,000,000 dollar savings will buy you 1,171 grams of gold (48 years of food). In very troubled economic times, it can mean that the first will die, and the second will live. If the first had increased his stake from 5% (15 days of food) to 50% (150 days of food), his chances of survival would increase by the same amount. Thus, advocating 5% in gold means that the probabilities of an economic downfall are only 5%. And even if this were true, the law of assymetrical risks recommends you to have more than 5% of your $1,000 savings in gold.

Summarized: one should not recommend gold buying on the basis of a percentage, but rather in absolute grams. 145 grams is, to my mind, sufficient for surviving during 6 years without ever lacking food. After that, the grams you add to your portfolio are comfort grams, which will be able to be used for another mean than survival.

prophet's picture

Yes, the 145 grams would be what is known as an emergency fund in financial planning parlance.  It is distinctly separate from the investment portfolio. 

RockyRacoon's picture

That summary is at today's food prices, of course.  A correction would be made to correlate with food costs.

BTW: I was posting that USA Today article as a note that the discussion of gold has gone to some main stream discussion.  It's crap, but relevant in that sense.

MsCreant's picture

Agreed. I have a colleague asking me about gold. I gave him a big heaping scoop of reality (HFT, front running, bid stuffing, potential confiscation of IRAs and 401ks). He is a statistician, he followed everything with one explanation. He told me he wasn't going to be able to sleep tonight. 

Folks are starting to wake up. The thing is, they are waking up and reacting without enough information. Here is more of the problem, for anyone here afterhours reading.

My colleague, after hearing all this, says to me "Can I pay you to manage my money for me?" Do you get how bad this is? I am a nobody who trolls these and a few other sites, and reads a lot of alternative (sometimes garbage) news. I look up charts on my own here and there. It is the knee jerk reaction of my adult male colleague to look to someone to figure it out for him. He is a smart guy. What of the rest of America who do not have Ph.D.s in Demography? This is what we are dealing with.

i-dog's picture

You are not a nobody!

chopper read's picture

scary point.  of course, the simple answer is that he does not need your help to sell everything and buy physical gold.  But how was this not his first reaction?  great observation.

RabidLemming's picture

Numismatic value and melt value are very rarely related. 

TheGreatPonzi's picture

Instead of seeing Keynesian policies and debt/monetary bubbles as policies which could have been right, but are not, people should start to realize that these policies were profoundly ridiculous and nonsensical since the beginning.

And I do think that the FED is very aware of that. A 5-year-old child can understand that you can't create real wealth with debt, printing presses and idiocy. It's like saying that a bum who owes $200,000 to a coke dealer is rich.


Sqworl's picture


It's like saying that a bum who owes $200,000 to a coke dealer is rich.

sushi's picture

+ 2000

The debt to the coke dealer represents an asset so he is richer by $200,000 as is the houseowner, er, cokehead, who is also up by $200,000. A rising tide of blow lifts all boats.

masterinchancery's picture

A perfect example of stimulus.'s picture

no i have a perfect example of stimulus.

not telling you, though.

chopper read's picture


Keynesian economics = over the long-term, everyone can have a free lunch.

Austrian economics = over the long-term, there are no free lunches.  


TheGreatPonzi's picture

"Keynesian economics = over the long-term, everyone can have a free lunch."

Is it a joke?

chopper read's picture

keynesianism is to economics what astrology is to astronomy. 

no joke - it's true!

snowball777's picture

Then the Austrian school plays Tarot to economics' Poker.

chopper read's picture

probably true, too.  one thing is certain, there are no free lunches.  sorry, Keynesians.


keynesianism = centralization of power

austrianism = decentralization of power


is there really still a debate about which one is better? 


keynesians = smarmy elitest twats

austrians = lovers of liberty

Red Neck Repugnicant's picture

Most of the comments about Keynesian economics on ZH...


people who have no fucking clue what Keynesian economics is.

You brain-washed morons are twisting, bashing, thrashing, manipulating and distorting an economic theory without having the slightest clue what it truly is.

Palin/Disinformation 2012

NOTW777's picture

red neck, your name calling is so erudite, so convincing, - not.

tell george soros - name calling doesnt work anymore. rome is burning. your koolaid days are over.

your time of accounting is due

chopper read's picture

keynesians = oppressive British Empire circa 1775

austrians = industrious revolutionary colonists circa 1776


...its so simple!