IceCap Asset Management: 'Not' Salma Hayek And The Keynesians' 3 Big Mistakes

Tyler Durden's picture

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.

 

The war that no one heard about

Few people in the World are even vaguely familiar with perhaps the most important war over ideology ever waged. Some may say the American-Soviet cold war was the tops – yet this riff over 4 legs good, 2 legs bad had nothing on what we are about to share with you.

On one side, you had Friedrich Hayek and the Austrian School of Economics, while the other side was anchored by John Maynard Keynes and the later to be named Keynesian Economics.

 

It’s no coincidence

Since WWII, the Americans, Japanese, British and Europeans have spent way more money than they owned. But that was ok because the money they borrowed wouldn’t have to be repaid until some far away day in the future.

Unfortunately the future has now arrived and today, the next generations of Americans, Japanese, British and Europeans have all plunged into a deathly debt spiral.

Today it is no coincidence that the Americans, Japanese, British and Europeans have all set interest rates as close to 0% as possible.

Also today, it is no coincidence that the Americans, Japanese, British and Europeans are all printing money.

And finally, today it is also no coincidence that the Americans, Japanese, British and Europeans ignored Friedrich Hayek and instead followed the economic principles of John Maynard Keynes.

Today the entire global economic and financial system is rooted in unwavering support for John Maynard Keynes and his beliefs in deficit spending and debt-fueled growth.

 

Money makes the World go ‘round

Arts, science, and politics certainly makes the World go ‘round. Yet, nothing can move without money and capital. Thank goodness we have an army of academic and real-world economists tackling the dynamics of money.

Of course, when it comes down to it we should be grateful that Mr. Hayek and Mr. Keynes, both grappled with perhaps the most fascinating economics question of all time – what causes the economy to move and what should be done when it stops moving?

Mr. Hayek’s business cycle theory was groundbreaking to independent thinkers, yet terrifying to anyone with ambitions to become central bankers or masters of the universe.

The groundbreaking component was actually very easy to understand. In essence, the best way to influence the economy was to not influence the economy. Rather, instead of tinkering with interest rates, taxes and deficit spending, masters of the universe should instead focus on ensuring the amount of new money released into the economy was just enough to equal the natural growth rate of the economy.

Sadly, our great leaders dismissed this concept. Instead of giving us “not too much” and “not too little,” we received “way too much” and never “too little.”

Of course, the mere idea that one could not use their financial and economic acumen to control the World was clearly not acceptable to central bankers. It was even more preposterous to politicians who promised multiple chickens in multiple pots. Of course, exactly who paid for these extra chickens and extra pots was highly irrelevant.

Mr. Keynes’ view was very different in that he believed the business cycle could be influenced by a government’s use of fiscal policy which included taxes, spending and deficits.

So, instead of embracing Mr. Hayek’s theory, the masters of the universe obviously opted for Mr. Keynes’ economic theory.

Unfortunately, and through no fault of Mr. Keynes, over the years governments and their advisors have only seen a one-way street in that changes could only occur in one direction.

  • Taxes were always reduced, never increased.
  • Spending always increased, never reduced.
  • Deficits always grew, never eliminated.

If Mr. Keynes was alive today, we are confident he would be embarrassed that his lifelong work had been so severely distorted. Yet, presented with today’s economic dilemma - he would also be highly excited to begin his new and improved economic thesis.

 

IceCap Asset Management Limited Global Markets November 2012