Fast forward to today when we are about to learn that Newton's third law of Keynesian economics states that every boom, has an equal and opposite bust. Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the "recovery" has been flooded with. Here is JPM's Michael Feroli explaining why Houston suddenly has a very big problem.
What was truly notable in Weidmann's statement is his open jab at the stupidity of Keynesian economics itself. To wit from Bloomberg: ECB Governing Council member Jens Weidmann says at event in Berlin that consumer prices in euro area “are strongly influenced by the energy prices, which are at the moment experiencing a positive supply shock.” The punchline: "There’s a stimulant effect coming from the energy prices - it’s like a mini stimulus package." But wait a minute, isn't deflation under Keynesian voodoonomics, the biggest bogeyman imaginable? It turns out deflation is only bad when it impacts... the S&P 500.
Long ago, Keynes himself pointed out, perhaps inadvertently, the profound difference between GDP and wealth. If we merely want a higher GDP print - which measures spending, not wealth - governments should handout spoons so that millions of citizens can dig holes and millions more refill them. It would appear that the statesmen of Brussels are fixing to try the modern day equivalent of just that.
"As a father, I want to raise responsible adults, which is why my wife and I will not be heading to the polls this election. Previously, I would have seen this stance as many people do: as an irresponsible act. Both Democrats and Republicans support militarism, taxation, spying on us, inflation, redistribution of wealth, Keynesian economics and corporatism once they get in office. My children need not to identify with this group of sociopaths, so to vote would be a bad example for them." Simply put, The lesser of two evils is still evil.
In less than the time it takes for a chrysalis to release one of life’s remarkable transformations, many once called “capitalists” woke to find the world they once new changed into something only dreamed or told in folklore. In this new fairytale land there must certainly be a pot of gold at the end of every “rainbow.” However, one would be mistaken. For one must remember this is a “Keynesian Shangri-la” and gold here is useless. Today, at the end of these self propagated rainbows lies a Central Bank ready and willing to print as much money as one needs to see those vivid colors so plainly; only the term Technicolor® seems appropriate as a descriptor. “Markets right themselves with pain… That’s Capitalism. Back room manipulation to avoid pain only increases the severity of the pain to be felt down the road.”
FOMC stops buying securities in the open market and the world falls apart, right? WOW. Are you folk’s economists, traders, or just a bit naive?
And then there is BusinessWeek, which quite to the contrary, is urging its readers in its cover story, ignore common sense, and do more of the same that has led the world to dead economic end it finds itself in currently. In fact, it is, in the words of NYT's Binyamin Appelbaum, calling the world governments to become the slaves of a defunct economist. And spend, spend, spend, preferably on credit. Because, supposedly, this time the resulting crash from yet another debt-funded binge will be... different?
"While monetary weapons can be a good first step to remedying an economic crisis, they are clearly not enough on a standalone basis to return an economy to stability and growth. My concern is that there has been an almost total academic capture of the mechanism of the Fed and other central banks around the world by neo-Keynesian thinking and hence policymaking, while the executive and legislative branches of the government have turned a blind eye to the necessary reforms. So while the plan has thus far worked brilliantly for Wall Street, what central bankers have succeeded in doing is preventing, or at least postponing, the hard choices and legislative actions necessary by our politicians to fully implement a sustainable and prosperous future for our children—and theirs...Today I view the world as “risk-uncertain,” and in these instances I recommend the armored vehicle."
This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as one starts to think more seriously about the components of the balance of payments, it is clear Keynes wad right in his call for a hybrid currency when he recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing. On the heels of Treasury Economist Kenneth Austin and former-Obama chief economist Jared Bernstein discussing the end of the USD as a reserve currency, Michael Pettis summarizes 10 reasons the USD's reserve status has become an 'exorbitant burden'.
"...what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status...The privilege of having the world’s reserve currency is one America can no longer afford."
- former Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Financial markets are complex in normal times. When government is actively supporting them, they only become more so and more dangerous. If today’s financial markets were rated like movies, they would be rated “R” (perhaps, “X”). Whether the “R” stands for risky or restricted is immaterial.
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later. In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath - a century of drift toward statism, militarism and fiat money - that was actually triggered by the events at Sarajevo.
One major factor to the slow growth/low inflation in the U.S. is the Wall Street Yield Trade. By incentivizing unproductive use of capital, low interest rate via monetary policy is actually deflationary.
If oil is “just another commodity,” then there shouldn’t be any connection between oil prices, debt levels, interest rates, and total rates of return. But there clearly is a connection. As we have seen, rising interest rates will bring an end to our current equilibrium, by raising costs in many ways, without raising salaries. It will also reduce equity values and bond prices. A rise in the cost of extraction of oil, if it isn’t accompanied by high oil prices, will also put an end to our equilibrium, because oil producers will stop drilling the number of wells needed to keep production up. If oil prices rise (regardless of reason), this will tend to put the economy into recession, leading to job loss and debt defaults. The only way to keep things going a bit longer might be negative interest rates. But even this seems “iffy.” We truly live in interesting times.