Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economy ipso facto has recovered. Or it’s just about to recover, any time now.” But to quote the comedian Richard Pryor, “Who ya gonna believe? Me or your lying eyes?” However, as Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.
The plague of our time is Keynesian economics. It has destroyed the economics profession and enabled the political class to obtain powers never intended. Keynesian economics provided the intellectual cover for the criminal class we politely call “government” to plunder its citizenry.
This past week we read some very diverse articles, which, hopefully, will stimulate your grey matter over the weekend as you indulge in melted artifical cheese, processed fillers, and copious amounts of artificial colorings and flavors during the Super Bowl showdown (assuming you did not order any of the party packs). With everybody hoping that someone else is going to pull them out of the quicksand - who is left to do the pulling?
We may not know much about "Keynesian economics" (and neither does anyone else: they just plug and pray, literally), but we know one thing: when real disposable personal income drops by 0.2% from a month earlier, and plummets by 2.7% from a year ago, the biggest collapse since the semi-depression in 1974, something is wrong with the US consumer.
It’s ironic that in a day and age where Keynesian economics is the “accepted view” we still don’t pay enough attention to what Keynes said about inflation: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some..." The problem today is that some people believe inflation is lower than it actually is. The Consumer Price Index CPI is used to measure the cost of maintaining a certain standard of living. Now it measures the cost of maintaining a certain level of satisfaction. You can argue the magnitude of the inflation understatement but you can’t argue that the official numbers are accurate. Under reporting inflation has led to many predictable outcomes.
With 72% of those polled believing "big Government" is more of a problem now than 4 years ago, it is hardly surprising that Ron Paul blasts "the failure of government is all around us" in this brief FOX news interview. Perhaps it is the fact that "Obamacare has been such a trasparent failure of big government," along with Keynesian economics, and the NSA debacles; that more and more of even the most liberal are realizing just what America has become. "It's really great news that people are starting to recognize this," Paul adds, because there is no way to replace the status quo "until people give up on what we have."
After studying and teaching Keynesian economics for 30 years, it is clear that the “sophisticated” Keynesians really do believe in magic and fairy dust. Lots of fairy dust. Austrians such as Mises and Rothbard have well understood what Keynesians do not: the structures of production within an economy are heterogeneous and can be distorted by government intervention through inflation and massive borrowing. Far from being creatures that can “save” an economy, the Debt Fairy and the Inflation Fairy are the architects of economic disaster. Despite Keynesian protestations that the U.S. and European governments are engaged in “austerity,” the twin fairies are active on both continents. The fairy dust they are sprinkling on the economy, however, is more akin to sprinkling ricin on humans. In the end, the good fairies turn into witches.
Many believe that government and its partner the Federal Reserve are wise and strong enough to avoid this crash. If printing money and spending money were a solution, there would be no poverty anywhere in the world. Even the poorest country has a government and can afford a printing press. Thus far there has been no collapse. However, that is equivalent to the man who jumps off the Empire State building and is heard to say as he flashes by the fortieth floor: “So far, so good.” His fate was sealed when he jumped. Similarly, so is our economy’s. Economics has its own gravity. A complete cleansing of the mal-investments, distorted incentives and regulatory burdens must occur before a true recovery can take place.
This morning, as part of the US Treasury's report on global currencies, Secretary Lew made the following remark:
- *LEW SAYS JAPAN 'APPEARS TO BE TURNING AN ECONOMIC CORNER'
Which got us thinking... when have we heard the US Treasury say exactly the same thing... (for exactly the same "policy-based" reason)... The answer is 10 years ago!
"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in the general price levels." Importantly, this evidence is mounting that the Federal Reserve has now become trapped within this dynamic. The important point is that, for the first time that we are aware of, someone (of apparent note to the status quo) has verbally stated that we are indeed caught within a liquidity trap. This has been a point that has been vigorously opposed by supporters of the Federal Reserve actions.
In this exclusive interview with Birch Gold Group, former Congressman Ron Paul shares his opinions on a number of topics, including investing in physical gold and silver, the future of the U.S. dollar and the role of the Federal Reserve.
“The longer [Quantitative Easing] lasts, the worse the correction will be when eventually people give up on our dollar and give up on our debt.”
The future of the US economy with Chairman Yellen at the helm is grim indeed, which provides all the more reason to end our system of central economic planning by getting rid of the Federal Reserve entirely. Ripping off the bandage may hurt some in the short run, but in the long term everyone will be better off. Anyway, most of this pain will be borne by the politicians, big banks, and other special interests who profit from the current system. Ending this current system of crony capitalism and moving to sound money and free markets is the only way to return to economic prosperity and a vibrant middle class.
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
Do you wonder what to make of America’s soaring government debt and what it means for the future? Or, if you already have it figured out, are you interested in research that might challenge your position? Either way, you might like to see the results of this exercise:
1... Take each historic instance of government borrowing rising above America’s current debt of 105% of GDP.
2... Eliminate those instances in which creditors received a lower return than originally promised, due to defaults, bond conversions, service moratoriums and/or debt cancellations.
3... Of the remaining instances, consider whether and how the debt-to-GDP ratio was reduced.
In other words, let’s see what history tells us about today’s debt levels and what comes next. You may find the answer surprising.
When it comes to the very simplest axiom on modern Keynesian economics, it seems one can't repeat it enough times: have leverage, have growth... don't have leverage, don't have growth. That is the reason why in early summer, China tried to conduct a mini-taper of its own to streamling its monetary pipeline which had been so filled with bad and non-performing credit, that the PBOC effectively pulled the switch on new liquidity for over a month. What happened almost immediately after, when rates on ultra short term funding soared to 20%+, nearly destroyed the domestic banking system and resulted in a major slowdown in the Chinese economy. "Luckily" for China, its close encounter with the taper was brief, if quite painful, and following a period of shock, the Chinese central bank had no choice but to resume injecting banks with their daily dose of monetary morphine all over again. This in turn, has brought us to square one: nothing in the local banking system has been fixed, and what's worse, while China has bought itself a few months respite, the dominant old problem of a collapsing credit impulse, as decribed before, in the country with the largest corporate credit bubble in the world, is about to come back with a bang in a few short months. In short: China just did what the US has boldly done so many times before - kicked the can.