Keynesian Stimulus

If you are not Professor Paul Krugman you probably agree that Washington has left no stone unturned on the Keynesian stimulus front since the crisis of September 2008. By the time the “taper” is over later this year (?) the Fed’s balance sheet will exceed $4.7 trillion - $4 trillion in new central bank liabilities in six years. All conjured out of thin air.  Professor Krugman proposing to “do something”... In short, Krugman wants to double-down on the lunacy we have already accomplished. Unfortunately, we are presently nigh onto “peak debt”; there is no “escape velocity” because the Fed’s credit channel is broken and done. Going forward, the American people will once again be required to live within their means, spending no more than they produce. By contrast, Professor Krugman’s destructive recipes are entirely the product of a countrafactual economic universe that does not actually exist. He wants us to borrow and print even more because our macro-economic bathtub is not yet full. And that part is true. It doesn’t even exist.

The Whole World Has Gone Into Debt

President Barack Obama has recently released his budget in which he calls for an “end of austerity.” This is an amazing statement from a president whose government has spent the highest percentage of GDP in history and added more to the national debt than all past presidents combined. What must he mean by austerity? The president’s rejection of austerity represents the Keynesian view which completely rejects austerity in favor of the “borrow and spend” — increase aggregate demand — approach to recession. What he really is rejecting is the infinitesimal cutbacks in the rate of spending increases and the political roadblocks to new spending programs. President Obama and Congress should get busy doing what is best for the economy and the American public instead of enriching themselves and those who feed at the public trough.

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.

Despite Tom Keene's best efforts to appear fair-and-balanced, this brief interview on Bloomberg TV places ECRI's Lakshman Achuthan in the uncomfortable position of destroying every propagandized 'fact' that the mainstream media is entrusted with disseminating to the Pavlovian investing community. From recessions with job growth ("a US recession began in 2012") to the wealth divide and from GDP revisions to job quality differentials, Achuthan warns the US is becoming Japan, "U.S. growth over the last five years is weaker than Japan during the Lost Decades." Keene's insistence that things are on-the-up (though admitting that Achuthan's call on the decline in growth was correct) is met with the rhetorical question, "you wouldn't have four years of zero-interest rate policy and quantitative easing if everything was okay."

"Perhaps the success that central bankers had in preventing the collapse of the financial system after the crisis secured them the public's trust to go further into the deeper waters of quantitative easing. Could success at rescuing the banks have also mislead some central bankers into thinking they had the Midas touch? So a combination of public confidence, tinged with central-banker hubris could explain the foray into quantitative easing. Yet this too seems only a partial explanation. For few amongst the lay public were happy that the bankers were rescued, and many on Main Street did not understand why the financial system had to be saved when their own employers were laying off workers or closing down." - Raghuram Rajan

This is the essential primer on the Fed that every high school and college student in America should read. If they study this short essay, they will grasp the essence of the Fed and understand why the financial Status Quo is doomed.

We discussed the new skirmishes this weekend in the very public debate about Carmen Reinhart’s and Kenneth Rogoff’s (RR) government debt research as they fought back against Paul Krugman's smear campaign. Krugman, of course, is one of the pundits who last month published “incomplete, exaggerated, erroneous and misleading” reports about RR’s research, as we explained at the time. We still haven’t found an RR critic who’s made a genuine effort to estimate how much debt is too much and in an effort to, we read Krugman's book (cover-to-cover) to see if there was anything more to Krugman’s positions than über-Keynesianism and boasts that his adversaries were proven wrong. Krugman's logic is full of holes. Near-term inflation and interest rate predictions have little to do with one’s beliefs about the mostly long-term risks of excessive debt. Krugman’s use of decidedly non-Keynesian episodes of debt reduction to justify his Keynesian beliefs reminds me of the many times (too many) that I’ve encountered 'circular reference' errors in Excel. His logic is no less flawed or 'circular.' But since there’s no spreadsheet involved, we’ll call it an error of induction. We think it’s time to change focus and consider the questionable thresholds, selective data use and induction error in Krugman’s work.

Following today's dismal GDP print, the massive ongoing borrowing being undertaken by our government, and the Bernankian policies which appear inescapable (and entirely ineffective for anything but the market), we thought Ken Rogoff's recent op-ed from the FT was extremely appropriate. Many foreign observers look at the US budget shenanigans with confusion and dismay, wondering how a country that seems to have it all can manage its fiscal affairs so chaotically. The root problem is not just a hugely elevated level of public debt, or a patently unsustainable trajectory for old age entitlements. It is an electorate deeply divided over the direction of government, with differences compounded by changing demographics and sustained sluggish growth. It is hard to escape the notion that today’s budget battles are but a skirmish in a much longer-term war that won’t be settled soon. The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much. The US debt level is a constraint.

Keynesian stimulus policies (deficit spending and low-interest easy money) create speculative credit bubbles. The U.S. economy is a neofeudal debt-serf wasteland with few opportunities for organic (non-Central Planning) expansion. The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse. Put another way: we've run out of speculative credit bubbles to exploit.

Keynesian policy requires an expansionist Central State and Bank bent on imposing central planning on every level of the economy. Keynesians are natural partners with the neofeudal financial Aristocracy which benefits so enormously from Keynesian print-borrow-blow policies. The standard Keynesian cargo-cult analysis of our economic woes: 1. The problem is a lack of aggregate demand, i.e. people buying stuff and services; 2. As a result, the economy is running below capacity, i.e. economic output is below potential; 3. The solution is fiscal and monetary stimulus, i.e. the Central State borrowing and spending trillions on politically directed programs and the Federal Reserve printing and injecting trillions of "free money" dollars into the financial sector to boost borrowing and lending. The cargo-cult program has failed for a number of fundamental reasons. Let's illuminate these reasons with a few thought experiments.

Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends. In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.

Ministry of Finance official: “That’s why the MoF is trying to gain control over the Bank of Japan.”

Japan is the leading-edge of the crumbling model of advanced neoliberal capitalism: that consumerist excess creates wealth, prosperity and happiness. What consumerist excess actually creates is alienation, social atomization, narcissism, and a profound contradiction at the heart of the consumerist-dependent model of "growth": the narcissism that powers consumerist lust and identity is at odds with the demands of the workplace that generates the income needed to consume... The younger generation of workers raised in a consumerist "paradise" are facing an economic stagnation that reduces opportunities to earn the high income needed to fulfill the consumerist demands for status symbols. Given the hopelessness of earning enough to afford the consumerist lifestyle, they have abandoned traditional status symbols such as luxury autos and taken up fashion and media as expressions of consumerism. But the narcissism bred by consumerism has nurtured a kind of emotional isolation and immaturity, what might be called permanent adolescence, which leaves many young people without the tools needed to handle criticism, collaboration and the pressures of the workplace. Narcissism is the result of the consumerist society's relentless focus on the essential project of consumerism, which is "the only self that is real is the self that is purchased and projected.".. The ultimate contradiction in this debt-consumption version of capitalism is this: how can an economy have "endless expansion and growth" when pay and opportunities for secure, high-paying jobs are both relentlessly declining? It cannot. Financialization, consumerist narcissism and the end of growth are inextricably linked.

"My Doctor’s an idiot.  A few years ago, he started expressing concerns about my weight, pointing at this chart supposedly showing how much a man of my height should weigh.  One glance at his stupid chart and it was clear to me that he had completely misdiagnosed my condition.   There was nothing wrong with my weight, I just wasn’t tall enough.  Clearly I needed to grow my way out of this. So I went home and googled “how to stimulate growth.”  Once I got past the all the baldness cures and penis pumps (it’s not my bag, baby), I found hundreds of papers so incredibly boring I knew they had to be true.  In no time, I was able to design and implement my own stimulus plan based on the irrefutable scientificky principles of Nobel prize winners and other people so smart they never had to do an honest day’s work in their lives.  Despite the difficulty climbing stairs, I was feeling pretty good about things until my last check-up..."