What does it mean that China is making a lot of noise about the Federal Reserve’s loose monetary policy?
Keynesian economists believe, regardless of logic and data, that economies can be managed from the top down. In their world, economies are little different than machines. Change some inputs here, speed them up over there, add some lubrication, etc. and the machine will respond in the fashion desired. Output can be “managed” to whatever level needed purely by adjusting the parts of the machine. Austrian economists on the other hand do not see a machine. They see millions of individuals all making decisions to improve their own lives. The price system provides the coordination among these separate pieces, performing a function no human, supercomputer or government could ever accomplish. For Austrians, economics is a bottom up approach. To effect change, you must change the incentives and disincentives that individual decision makers are afforded. “Those who cannot remember the past, are condemned to repeat it.” George Santayana. Ideology is powerful, capable of masking unpleasant facts. Whether we recognize it or not, we are all slaves to ideology.
The Christmas Eve classic rinsed, lathered, washed and repeated...just like the real world.
Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).
We are now approaching the fourth Christmas of the great debate between the benign supporters of Santa Keynes and the walnut-hearted acolytes of the Hayekian Grinch. Or at least that’s how Keynesians seem to see it. Far from being a success, Keynesian policies have retarded recovery and extended the downturn, just as they did in the 1930s and the 1970s. They’re the “moral” policy present that keeps on taking, supported by those who claim that their opponents have hearts “two sizes too small.”
In the fall of 1996, John Cassidy arranged to interview Paul Samuelson in his office at M.I.T. for an article he was writing on the state of economics. He began by asking Samuelson whether he was still a Keynesian: "I call myself a post-Keynesian," Samuelson replied. "The 1936 Model A Keynesianism is passé..." He recalled attending an event that was held in Cambridge, England, in 1986 to mark the one-hundred-and-fiftieth anniversary of Keynes's birth. "Everybody was there. And they all stood up and said, 'I am still a faithful Keynesian. I am still a true believer.' I was a bit rude. I said, 'You remind me of a bunch of Nazis saying, I’m still a good Nazi.' It’s not a theology: it’s a mode of analysis. I think I am a different Keynesian than I was ten years ago."
Isaac Newton, the father of classical mechanics and progenitor of nearly every technology we use today, was easily one of the top 10 most influential minds in all of human history... Yet as accomplished as he was, Newton credited the brilliant scientists and philosophers who came before him, acknowledging that his insights would not have been remotely possible without the foundations laid by great thinkers– Archimedes, da Vinci, Descartes, etc. No doubt, all great ideas flourish by expanding upon the works of others. Unfortunately, so do terrible ones. And one of the worst ideas in history that continues to play out today is the grand experiment of fiat money. The idea is simple. Rather than allowing money to be scarce and have intrinsic value, our fiat system grants power to a tiny elite to conjure money out of thin air. Presumably, if the ones in control are smart, honest guys, then everything should be fine. Fiat was a total failure right from the beginning... and yet the economic engines deep below are steered by people who worship at the cult of bad ideas.
The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. In dampening each successive downturn, authorities accumulated increasingly larger deficits and brought about a debt supercycle that lasted in excess of half a century. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed’s balance sheet beyond anything previously imagined. Some have referred to this as reaching the Keynesian endpoint. Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.
Salma Hayek is beautiful, rich and famous. Friedrich Hayek is a deceased Austrian economist. He wasn’t very good looking, certainly not wealthy but he did become famous – but only 20 years after his death and then only within the make believe world of nerdy economists. Fortunately for the World today, if we are lucky, Friedrich Hayek may become the most famous Hayek of them all. Until then, the World remains firmly trapped in an economic hell created by Friedrich’s (and therefore Salma’s) arch enemy – John Maynard Keynes. IceCap's Keith Dicker points out that, as most politicians and central bankers view the World in very short time frames, to truly understand the devastation wreaked by Keynesian economics, one has to take a step back and see how the financial destruction accumulated over time. It is true that these policies initially provided sugar highs for the economy – but the 3 step cycle of cutting interest rates, cutting taxes and borrowing money to create growth has finally reached its end point. If Mr. Keynes was alive today, we are confident he would be embarrassed that his lifelong work had been so severely distorted.
Together, the market and democracy are what we like to call "the system." The system has driven and enticed bankers and politicians to get the world into trouble. One of the side effects of the crisis is that all ideological shells have been incinerated. Truths about the rationality of markets and the symbiosis of market and democracy have gone up in flames. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? At first glance the world is stuck in a debt crisis; but, in fact, it is in the midst of a massive transformation process, a deep-seated change to our critical and debt-ridden system, which is suited to making us poor and destroying our prosperity, social security and democracy, and in the midst of an upheaval taking place behind the backs of those in charge. A great bet is underway, a poker game with stakes in the trillions, between those who are buying time with central bank money and believe that they can continue as before, and the others, who are afraid of the biggest credit bubble in history and are searching for ways out of capitalism based on borrowed money.
"Liquidity trap" was a term coined by John Maynard Keynes in the aftermath of the Great Depression. He argued that when yields are low enough, expanding money supply won't stimulate growth because bonds and cash are already near-equivalents when bonds pay (almost) no interest. Some, like Citi's credit strategy team, would say that it is a pretty apt description of the state of play these days. To their minds (and ours), there is very little doubt that central banks have played an absolutely crucial role in propping up asset prices in recent years, Why have markets responded so resolutely when growth hasn't? The answer, we think, is that in their attempts to free markets from the liquidity trap, central banks are ensnaring markets in what we'll call a "liquidity lure". That lure is three pronged... but tail risks are bound to re-appear and from this position, there is no painless escape.
The truth of the matter is that there is no such thing as a free lunch. The phony prosperity of monetary inflation is entirely illusory. You cannot get something for nothing. "So, whenever you see a criticism of austerity as fostering recession, you are reading a Keynesian. He may not call himself a Keynesian, but in this case, he is delusional. Only Keynesianism teaches that reduced national government spending (“austerity”) in a nation whose national government spends 40% of its GDP (Greece) will produce a recession." Keynesian economic pundits advance many fallacious arguments about government spending. Chief among them is the egregious notion that mortgaging your posterity with debt and deficits is somehow “virtuous.”
UBS' Art Cashin provides the clearest 'simile' for our current economic malaise as he remembers back 90 years... On this day in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money. But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity). Think it can't happen here? read on...
Some Shocking Perspectives On Inflation And Currency Destruction By None Other Than The Federal ReserveSubmitted by Tyler Durden on 09/18/2012 10:46 -0500
Going back to the FOMC's own archives reveals some truly stunning disclosures arising from none other than the Federal Reserve on the topics of inflation, currency "debauching", money creation, and what it would take for the Communists and Stalin to win. "I agree with you entirely that the Soviet dictators would like to bring about our economic collapse and, as you know, inflation is perhaps the greatest force for arraying the various sectors of a capitalistic economy against each other. John Maynard Keynes stated in his 'Economic Consequences of the Peace' (1919): 'Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency...Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.'"
When we started reading the LA Times article reporting that "the federal government has quietly been completing an audit of U.S. gold stored at the New York Fed" we couldn't help but wonder when the gotcha moment would appear. It was about 15 paragraphs in that we stumbled upon what we were waiting for: "The process involved about half a dozen employees of the Mint, the Treasury inspector general's office and the New York Fed. It was monitored by employees of the Government Accountability Office, Congress' investigative arm." In other words the Fed's gold is being audited... by the Treasury. Now our history may be a little rusty, but as far as we can remember, the last time the Fed was actually independent of the Treasury then-president Harry Truman fired not one but two Fed Chairmen including both Thomas McCabe as well as the man after whom the Fed's current residence is named: Marriner Eccles, culminating with the Fed-Treasury "Accord" of March 3, 1951 which effectively fused the two entities into one - a quasi independent branch of the US government, which would do the bidding of its "political", who in turn has always been merely a proxy for wherever the money came from (historically, and primarily, from Wall Street), which can pretend it is a "private bank" yet which is entirely subjugated to the crony interests funding US politicians (more on that below). But in a nutshell, the irony of the Treasury auditing the fed is like asking Libor Trade A to confirm that Libor Trader B was not only "fixing" the Libor rate correctly and accurately, but that there is no champagne involved for anyone who could misrepresent it the best within the cabal of manipulation in which the Nash Equilibrium was for everyone to commit fraud.