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The Keynesian Revolution Has Failed: Now What?

Tyler Durden's picture




 

Authored by Scott Minerd of Guggenheim Securities,

A Premonition From a Halcyon Era

In 1968, America was literally over the moon. Apollo 7 had just made the first manned lunar orbit and the nation would soon witness Neil Armstrong’s moonwalk. The United States was winning the war in Southeast Asia and the Great Society was on the verge of eliminating poverty. I remember my father taking me to the Buick dealership that summer in Connellsville, Pennsylvania, where he bought a 1969 Electra. As we drove home I asked him why we had bought the 1969 model when we had the 1968 one, which seemed equally good.

“That’s just what you do now,” my father said, “Every year you go and get a new car.” “Wouldn’t it be better,” I asked as a precocious nine year-old, “if we saved our money in case a depression happened?” I will never forget my father’s reply: “Son, the next depression will be completely different from the one that I knew as a boy. In that depression, virtually nobody had any money so if you had even a little, you could buy nearly anything. In the next depression, everyone will have plenty of money but it won’t buy much of anything.” Little did I realize, then, how prescient my father would prove to be.

Five years have passed since the beginning of the Great Recession. Growth is slow, joblessness is elevated, and the knock-on effects continue to drag down the global economy. The panic in financial markets in 2008 that caused a systemic crisis and a sharp fall in asset values still weighs on markets around the world. The primary difference between today and the 1930s, when the U.S. experienced its last systemic crisis, has been the response by policymakers. Having the benefit of hindsight, policymakers acted swiftly to avoid the mistakes of the Great Depression by applying Keynesian solutions. Today, I believe we are in the midst of the Keynesian Depression that my father predicted. Like the last depression, we are likely to live with the unintended consequences of the policy response for years to come.

This Depression is Brought to You By...

John Maynard Keynes (1883—1946) was a British economist and the chief architect of contemporary macroeconomic theory. In the 1930s, he overturned classical economics with his monumental General Theory of Employment, Interest and Money, a book that, among other things, sought to explain the Great Depression and made prescriptions on how to escape it and avoid future economic catastrophes. Lord Keynes, a Cambridge educated statistician by training, held various cabinet positions in the British government, was the U.K.’s representative at the 1944 Bretton Woods conference and, along with Milton Friedman, is recognized as the most influential economic thinker of the 20th century.

Keynes believed that classical economic theory, which focused on the long-run was a misleading guide for policymakers. He famously quipped that, “in the long run we’re all dead.” His view was that aggregate demand, not the classical theory of supply and demand, determines economic output. He also believed that governments could positively intervene in markets and use deficit spending to smooth out business cycles, thereby lessening the pain of economic contractions. Keynes called this “priming the pump.”

On Your Mark, Get Set, Spend

Since the Second World War, policymakers concerned with both fiscal and monetary policy have opportunistically followed certain Keynesian principles, particularly using government spending as a stabilizer during periods of economic contraction. In 1968, steady economic growth and low inflation had led optimists to declare that the business cycle was dead. When President Nixon ended gold convertibility of the dollar in 1971 he justified it by declaring that he was a Keynesian. Even Milton Friedman, founder of the monetary school of economics, told Time magazine that from a methodological standpoint, “We’re all Keynesians now.”

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 complementary aspect of Keynes’ guidance on deficit spending – raising taxes during upswings – was rarely followed because of its political unpopularity. As a result of the constant fiscal support without the tax increases, businesses and households became comfortable operating with continuously higher leverage ratios. The conventional wisdom was that this government backstop could never be exhausted.

A MOUNTAIN OF DEBT

The calamity in the financial system in 2007 and 2008 signaled the beginning of the unraveling of the global debt supercycle. The Keynesian model dictated that the best way to fix the problem was to run large deficits and increase the money supply. Keynes had based his prescriptions for this type of action on the early mismanagement of the Great Depression which he felt had prolonged the losses and hardship during that time. As is the case with most groundbreaking philosophies, Keynes’ disciples carried his views much further than could have been imagined during the period in which the master lived.

The Depression My Father Knew

Keynes viewed governments’ attempts at belt-tightening during the Great Depression as ill-timed. Although President Roosevelt invested in massive public works projects under the New Deal starting in 1933, almost four years into the crisis, the U.S. government maintained a policy of attempting to balance the budget as the depression raged on. Keynes’s response was: “The boom, not the slump, is the right time for austerity at the Treasury.” The other problem, according to Keynes, was that the Federal Reserve’s attempts to lower real interest rates and inject cash into the system were too modest and too late to avoid what he referred to as a liquidity trap, leading people to hoard cash instead of consuming.

To illustrate the dynamics of the liquidity trap Keynes cleverly invoked the analogy of “pushing on a string.” He said that at some point, attempting to stimulate demand by easing credit conditions is like trying to push a string that is tied to an object you want to move. Whereas you can easily pull something toward you by the string to which an object is tied (raising interest rates to slow growth), attempting to carry out the opposite by reversed means (lowering interest rates to try to induce lending to otherwise unwilling borrowers) is not always successful. This is especially true when the rate of inflation becomes so low that it becomes impossible to set interest rates below it.

This Time It’s Different

What sets the current downturn apart from any other since the Great Depression is that, for the first time since the 1930s, we have had severe asset deflation (declining real prices) in the face of relative price stability. Periods of asset deflation occurred between the 1960s and 1990s, but nominal prices were supported by rising inflation levels. Against the backdrop of a rising price level, nominal asset prices remained stable or continued to increase as real asset prices declined. This protected asset-based lenders from severe losses resulting from declining nominal prices.

During the 2008 crisis, inflation levels were close to zero and unable to offset falling real asset values to stabilize nominal prices. This caused a debt deflation spiral to take hold as nominal prices fell. In contrast to the Great Depression, policymakers took extreme measures in 2008 to prevent a total collapse of the financial system and head off a deflationary spiral like that experienced in the 1930s. These policies included sharply increasing the money supply and engaging in an unprecedented amount of deficit spending.

In many ways the swift policy action proved highly effective. Instead of the 25 percent unemployment seen in the 1930s, joblessness reached only 10 percent. While unemployment now stands at roughly eight percent, if one uses the labor force participation rate from 2008, the level is still higher than 11 percent. Although there was a 3.5 percent decline in the price level between July and December of 2008, policymakers immediately tackled and reversed the deflationary spiral. This compares with the Great Depression, when between 1929 and 1933 the general price level declined by 25 percent.

THE GREAT MALAISE

The Aftermath

Though some may be cheered by the relative policy successes this time around, at the current trajectory it will still take almost as long for total employment to fully recover as it did in the 1930s. While job loss was not as severe this time, the recovery in job creation has been much slower. Although nominal and real gross domestic production have returned to new highs on a per capita basis, we are still below 2007 levels. In the same way the Great Depression and the depressions before it lasted eight to 10 years, we will likely continue to see constrained economic growth until 2015-2016 (roughly nine years after U.S. home prices began to slide). Only then will the excess inventory in the real estate market be absorbed, allowing the plumbing of the financial system to function, and supporting an increase in the economic growth rate.

HOME GAME

At what cost did we attain this “success”? Like any strong medicine, the policies pursued since 2008 have had, and are continuing to have, unintended side effects. The most glaring feature of today’s global landscape is that governments around the world have exhausted their capacity to borrow money and have turned to their central banks to provide unlimited credit. In the United States, it has taken an average annual deficit of $1.2 trillion and multiple rounds of quantitative easing just to keep the economy growing at a subpar rate since 2009.

In their 2009 book, This Time It’s Different: Eight Centuries of Financial Folly, the economists Carmen Reinhart and Kenneth Rogoff catalogue more than 250 financial crises and conclude that the U.S. cannot reasonably expect to circumvent the outcome that has befallen all overleveraged nations. In the authors’ words:

…Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.

Sovereign powers saddled with debt loads as large as those of the U.S., Europe, and Japan today are jeopardizing their long-term economic wellbeing.

IT TAKES LONGER THAN YOU MIGHT THINK

In an October 2012 whitepaper, Reinhart and Rogoff re-emphasized their findings that the U.S. cannot expect to quickly emerge from what occurred in 2008. They point out that 2008 was the first systemic crisis in the U.S. since the 1930s so the consequences have been much more significant than fall-outs from normal recessions.

What Comes Next?

The most important question for investors concerns how public sector debt levels, which have risen exponentially over the past half-decade, will ultimately be discharged. As Reinhart and Rogoff discuss, there are three options to reducing debt levels. The first is restructuring, also known as default. For obvious reasons this is painful and typically avoided except under the most dire circumstances. Governments can also pursue structural reform, which in today’s case would mean greater austerity. Implementation of this would stand in stark opposition to Keynes’s recommendation that the fiscal and monetary spigots be kept open during hard times. Although tightening is arguably the best long-term path, it appears unlikely that it will be the primary policy of choice in the near future. The third method, toward which I see global central bankers drifting, is to keep interest rates artificially low and permit increasing levels of inflation in the economy.

Pushing down the cost of borrowing and allowing the price level to rise is known as financial repression. The real value of debtors’ obligations is reduced by financially repressive policies. Keynes warned of the dangers of inflation in his early work, The Economic Consequences of the Peace, which presciently criticized the harshness of the Treaty of Versailles:

...By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens … As inflation proceeds and the real value of the currency fluctuates wildly, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless.

Keynes re-iterated his views in the mid-1940s when he visited the United States and saw programs that were touted as Keynesian although he viewed them as primarily inflationary.

Financial repression is nothing new. Between the 1940s and the early 1980s, the United States reduced its national debt from 140 percent of GDP to just 30 percent while continuing to run sizable deficits. The difference between then and now is the magnitude of the debt mountain on the Federal Reserve’s balance sheet that will need to be eroded. A subtle shift has begun in which policymakers are starting to think of inflation as a policy tool rather than the byproduct of their actions. Despite Keynes’ warnings, it appears that higher inflation will continue to be the monetary tool of choice for central bankers tasked with cleaning up sovereign balance sheets.

Investment Implications

The long-term downside of mounting inflationary pressure will ultimately accrue to bondholders and income-oriented investors. The case can be made that we are marching headlong into a generational bear-market for bonds. During the next decade, holders of Treasury and agency securities will likely realize negative real returns. Despite this, these assets continue to trade at extremely rich valuations. Exactly when the market will awaken to this anomaly in securities pricing remains to be determined. The analogy I would use for the current interest rate environment is that of a balloon being held underwater. When the Fed withdraws from the market and allows interest rates to find their economic level, the balloon will inevitably ascend.

A TIME TO SHORT?

If investors need to stay in fixed-income assets, they should transition into shorter duration credit and floating-rate products like bank loans and asset-backed securities. If duration targeting is a concern for liability-matching purposes, adjustable-rate assets can be barbelled with long-duration securities like corporate bonds or long duration agency mortgage securities. Equities and risk assets are likely to rise as the money supply grows.

Gold, as I discussed in my October 2012 Market Perspectives, “Return to Bretton Woods,” has significant upside and should be included in any portfolio designed to preserve or grow wealth over the long-term. Depending on the scale of the current round of quantitative easing and the decline in confidence in fiat currencies, the price of an ounce of gold could easily exceed $2,500 within a relatively short time frame and could ultimately trade much higher.

STRIKE WHILE THE PRESS IS HOT

The World is Waiting

The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. 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. Nations have exceeded their ability to finance themselves without relying on their central banks as lenders of last resort and increasingly large doses of monetary policy are required just to keep the economy expanding at a subpar pace. 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. Today, the world is waiting for someone to come forward and explain how we are going to get out of our current circumstances without suffering the unintended consequences created by so-called Keynesian policies.

Early in his life, Abraham Lincoln wrote that he regretted not having been present during the founding of the nation because that was when all the positions in the pantheon of great American leaders were filled. By resolving America’s Imperial Crisis through the Civil War and the abolishment of slavery, Lincoln would go on to join those lofty ranks himself. Much like that crisis needed Lincoln, the current crisis needs someone who can identify new tools to resolve the present economic crisis. Until then we are condemned to a path which leads to further currency debasement and the erosion of purchasing power, with the result being a massive transfer of wealth from creditor to debtor. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion. It would seem my Dad could hardly have been more correct when he described the next depression from behind the wheel of his 1969 Buick.

 

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Tue, 12/04/2012 - 12:26 | 3032625 insanelysane
insanelysane's picture

We're just not spending enough!!! </sarc>

Tue, 12/04/2012 - 12:37 | 3032655 CH1
CH1's picture

the current crisis needs someone who can identify new tools to resolve the present economic crisis

In other words, "to return to good times without ever paying for our sins."

They are waiting for the Santa Claus Messiah.

Tue, 12/04/2012 - 12:40 | 3032664 flacon
flacon's picture

Now what? Now we get to kill people. Isn't that what comes next?

Tue, 12/04/2012 - 12:45 | 3032677 Hugh_Jorgan
Hugh_Jorgan's picture

Now what? We pay the bill for the last 40 years of ignorance and stupidity, that's what.

Better learn how to shoot and how to grow food...

Tue, 12/04/2012 - 13:04 | 3032734 venturen
venturen's picture

I thought bankers were already doing that?

Tue, 12/04/2012 - 12:38 | 3032656 nope-1004
nope-1004's picture

When the Fed withdraws from the market and allows interest rates to find their economic level, the balloon will inevitably ascend.

The Fed won't allow this to happen.  We will hit some type of crisis point before they allow any "free market" forces back in this ponzi.

Benocide could give a shit about the average American, or human, for that matter.

 

Tue, 12/04/2012 - 13:06 | 3032741 Nostradamus
Nostradamus's picture

I have to agree. What many of these authors don't seem to understand is that the entire financial system, as it exists in its present form, is now permanently conditioned upon QE and ZIRP. These are the policies that are delaying the collapse. Remove them, and the system collapses sooner. The FED, therefore, will withdraw from the market only after the currency begins to show undeniable signs of failure, meaning noticeable and problematic increases in prices of consumer staples.

Tue, 12/04/2012 - 13:23 | 3032789 NotApplicable
NotApplicable's picture

As always, these authors are part and parcel of the Kool-Aid Corps.

I can only hope these people are young enough not know better, or too old to let go of a lie.

Otherwise, for their age, they're either stupid squared, believing what ever headline LIESman tells them, or dangerously disingenuous (a distiller of said Kool-Aid).

Tue, 12/04/2012 - 18:34 | 3033716 fockewulf190
fockewulf190's picture

I have a feeling, that sometime in the future, gold repatriation part deux will be announced and the gold price will be fixed within the US. The majority of the MSM media machine will, of course, back the President´s decree, and probably demonize those who resist as "anti-social hoarders" who stand in the way of just monitary policy.  Gerald Celente said a while back, that he had diversified his stack, and was starting to buy silver as a hedge against just such an occurance...one which he predicted as an event likely to happen.   

I believe China is preparing for this financial black swan.  When repatriation happens, China will make it´s move.  It will reject any unilateral fixing of a worldwide commodity such as gold, declare the dollar as too weak to continue as the world´s reserve currency, finally declare it´s true gold reserves (which will probably shock the world), and offer the now gold backed renminbi to the world as the new reserve currency of trade.  The coup will then be complete, and the dollar will implode.

Tue, 12/04/2012 - 13:09 | 3032746 masterinchancery
masterinchancery's picture

Yes,the last crisis was 15% inflation in 1979, this time it will be foreign repudiation of the dollar, followed by Weimar style inflation.

Tue, 12/04/2012 - 13:20 | 3032756 Paper CRUSHer
Paper CRUSHer's picture

Ol' Benny Boy continues to apply pressure, his foot is firmly planted on that monetary accelerator pedal, when we reach crisis point he will have no alternative other than to stick an umberalla between the drivers seat and the gas pedal then to clear his dumbass(will not be stay for on for next term as Fed Chairman in 2014) by jumping clear at the last moment and send the U.S. economoney  hurtling towards its final destination .

Tue, 12/04/2012 - 12:41 | 3032671 Silver Bug
Silver Bug's picture

Time to move on and base our economy on Austrian economics. Not this hocus pocus fake money saturated economy where everyone is on food stamps.

 

"Five most common gold and silver investing mistakes. Free eBook."

Tue, 12/04/2012 - 12:47 | 3032685 MillionDollarBoner_
MillionDollarBoner_'s picture

There you go again...trying to make sense of it all, based on fundamentals...

Its all about the FED, stoopid!!!

Tue, 12/04/2012 - 13:10 | 3032749 masterinchancery
masterinchancery's picture

Until it isn't.

Tue, 12/04/2012 - 12:48 | 3032688 Clueless Economist
Clueless Economist's picture

I agree Mr Insanelyinsane.  We need to print and spend trillions more and invest them is shovel-ready infrastructure jobs.

The only way to get out of this mess is more debt.

Why are some folks so thick that they can not grasp the obvious? 

Tue, 12/04/2012 - 13:20 | 3032783 masterinchancery
masterinchancery's picture

We should invest the money in wheelbarrows.

Tue, 12/04/2012 - 12:53 | 3032692 Biggvs
Biggvs's picture

So the Zero Hedge catch-phrase is "On a long enough timeline the survival rate for everyone drops to zero." Which is from Fight Club of course... but was Palahniuk just paraphrasing Keynes? (“in the long run we’re all dead.”)

Which means the ZH slogan derives from Keynes?!?? (Head explodes.)

Tue, 12/04/2012 - 13:19 | 3032778 forwardho
forwardho's picture

B, My sentiments exactly. At the least a strong sense of deja-vu

Tue, 12/04/2012 - 12:30 | 3032626 TruthInSunshine
TruthInSunshine's picture

 "Now what?"

Really, Scott Minerd of Guggenheim Securities? Really?

We print more thusly.

"Deficits don't matter."

-- Co-signed by Dick Cheney & Paul Krugman

 

Tue, 12/04/2012 - 12:50 | 3032694 JustPrintMoreDuh
JustPrintMoreDuh's picture

Duh ... 

Tue, 12/04/2012 - 12:27 | 3032630 Oh regional Indian
Oh regional Indian's picture

Why, the answer is obvious.

Take a nce old aluminium baseball bat to the edifice of Milton Freidman and the Chicago school.

Chicago style.

That is what has done the US in. They are who has done the US in.

Deep Fried in Freidmanism.

ori

Tue, 12/04/2012 - 12:52 | 3032697 MillionDollarBoner_
MillionDollarBoner_'s picture

Friedman ain't even got started yet.

The goons squads are still being formed. The repressive laws are only just being enacted.

Read "The Shock Doctrine" by Naomi Klein. Coming to a detention centre near you, soon.

http://www.naomiklein.org/shock-doctrine

Tue, 12/04/2012 - 13:21 | 3032784 TruthInSunshine
TruthInSunshine's picture

Some of what Naomi Klein has to write is very interesting, but she is an enigma, or more accurately, a paradox, to me, in terms of how to assess her world view generally.

Tue, 12/04/2012 - 13:35 | 3032826 Spastica Rex
Spastica Rex's picture

I blame Edward Bernays.

Tue, 12/04/2012 - 12:32 | 3032642 Incubus
Incubus's picture

Keynes was more nihilistic than the Joker.

And he's fooled all of western civilization, too.

 

Jokes on you, bitches. 

Tue, 12/04/2012 - 12:32 | 3032643 jojomama
jojomama's picture

If Keynesian Revolution has failed, then the Fiscal Cliff doesn't matter either.  It is all hype and will have no effect on the economy.

Tue, 12/04/2012 - 12:35 | 3032645 BLOTTO
BLOTTO's picture

Dont worry, all is fine...The Royals are in the news again...every day - since last May...

.

Kate Middleton is going to have twins - one boy one girl - right out of the Arthurian legend. Sounds like a familiar movie, right Anakin?

.

Where can i make a bet with a bookie?

Tue, 12/04/2012 - 13:45 | 3032866 spanish inquisition
spanish inquisition's picture

Gonna lay mine on a C section so they can yank out the boy first.

Tue, 12/04/2012 - 16:15 | 3033365 MillionDollarBoner_
MillionDollarBoner_'s picture

Bread and circuses...

Tue, 12/04/2012 - 12:34 | 3032646 eaglerock
eaglerock's picture

This never was Keynesian.  The concept is to save money during good times, and spend during bad.  We deficit spend during both good times and bad. 

Tue, 12/04/2012 - 12:47 | 3032686 Oh regional Indian
Oh regional Indian's picture

This is the Chicagoans big victory. Deflecting their Deficit in any season model to a largely mis-understod Keynes (well, mis-interpreted anyways).

There is no mis-interpreting Milton.

ori

Tue, 12/04/2012 - 19:27 | 3033832 NidStyles
NidStyles's picture

Milton was a Keynesian. The only difference between Milton and Keynes was Irving Fisher.

Tue, 12/04/2012 - 12:35 | 3032651 Madcow
Madcow's picture

without new - volutary - private borrowing, the money supply can't grow 

if new cash can't be created - then there's no way to feed all the previously existing debts, rents, etc - 

they system doesn't slow down or contract - it seizes up and dies. 

google "sudden stop."  

start getting used to the idea of a future with no "desk jobs" or "grocery stores."

 

 

Tue, 12/04/2012 - 12:40 | 3032662 Dangertime
Dangertime's picture

Well, the long-run is now here. 

 

And while Keynes is in the envious position of being dead, the rest of us are not.  And thus we have to deal with the fruits of his idiocy.

Tue, 12/04/2012 - 12:44 | 3032667 Super Broccoli
Super Broccoli's picture

The fact is this crisis is due to Keynesianism.

The solution can never be the problem ...

I remember when i was a kid in the economy class, we use to make fun of those african countries spending like crazy on useless infrastructure hoping to create some kind of economical boom. Well we're not smarter after all !

Tue, 12/04/2012 - 13:02 | 3032726 AT
AT's picture

We elected an african. What do you expect?

Tue, 12/04/2012 - 12:43 | 3032674 shovelhead
shovelhead's picture

When I think of Mr. Keynes pump priming exercise, a vision of an old fashioned hand pump from a well appears.

Neo-Keynesians (if such a term could be considered accurate) have replaced that quaint pump with a nuclear powered behemoth that has no off switch.

Keynes may have been misguided towards monetary policy but he wasn't insane.

That appellation must be reserved for his hyperactive descendants who misuse his name.

Tue, 12/04/2012 - 12:45 | 3032679 Debugas
Debugas's picture

the solution is to write-off most of the debts

but the creditors will not let it to happen

Tue, 12/04/2012 - 12:47 | 3032681 mayhem_korner
mayhem_korner's picture

The Federal Reserve, empowered by a compliant Congress and White House, averted the complete ruination of the financial sector that could have occurred in 2008...

 

If "averted" means "deferred, exacerbated, protracted, and compounded", I'm with ya...

Tue, 12/04/2012 - 12:53 | 3032701 Aurora Ex Machina
Aurora Ex Machina's picture

The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do.

Tue, 12/04/2012 - 13:26 | 3032796 seek
seek's picture

And in case anyone suspects those are the rantings of a madman... that quote is from Karl Rove, so you're right.

Tue, 12/04/2012 - 12:53 | 3032702 steve from virginia
steve from virginia's picture

 

 

 

Ho hum, another inflation prediction. HEY! Where's the BEEF?

 

"Five years have passed since the beginning of the Great Recession ...  virtually nobody had any money ..."

 

Just like now, virtually nobody has any money, those with money (plutocrats) spend to no effect as there are too few of them. (There are also too many of them but that is another story.)

 

It IS different this time! We have run out of cheap capital to waste. All of our efforts @ stimulus, easing and kick-to-the-groin austerity are efforts to retrieve long-gone capital.

 

Just like you can't fill your car gas tank by pushing the car backwards for 200 miles, there is no way to retrieve capital that has been wasted by wasting even more! Yet, this is what the incredible economic brain trust hopes to do. It isn't just the Keynesians ... it's all of them. The Austrians make the same hollow promise: "eliminate the cost factor of government ... " they claim, "capital is magically regained."

 

Get rid of the government and oil will reappear in depleted oil wells. Right!

 

The only thing that works and is proven to do so is conservation. Not that girly 5% but a manly 90% conservation of capital. Pay good money to those who conserve capital rather than to those who waste it.

 

Where is a good place to start the new regime? Look to the end of your driveway! That new car every year (or three) has bankrupted the world. More cars = more bankruptcy. Once the bankruptcy actually sets in ... you probably won't want to be anywhere nearby.

 

Drive a car or have something to eat, that's the choice that is coming to a town/suburb near you.

 

 

Tue, 12/04/2012 - 12:58 | 3032712 mayhem_korner
mayhem_korner's picture

 

 

Is "Steve from Virginia" some funky code for "recovering from schizophrenia"?  How many people and conflicting thoughts can you stuff into one post, dood?

Tue, 12/04/2012 - 13:00 | 3032722 steve from virginia
steve from virginia's picture

 

Sorry Mayhem, economics is hard.

 

:)

Tue, 12/04/2012 - 13:15 | 3032765 forwardho
forwardho's picture

If you cannot follow his logic... Then it is your thoughts which are contained in a very small box, not his. +1 steve

Tue, 12/04/2012 - 14:06 | 3032854 TruthInSunshine
TruthInSunshine's picture

I think that Steve, and Steve, please do correct if I'm wrong, as I'm about to re-phrase your words, is saying that printing fiat and essentially distributing in narrow bands to the sectors/"market" participants that are most favored (or deemed to be at highest risk of collapse, i.e. banking) by the Fed & Treasury, does little to nothing to replace true economic output that has been seriously damaged or destroyed.

Unless a wide array of economic participants, most notably a (now decimated) middle class, that actually has a need to consume and will consume if given the opportunity to do so, is able to accumulate purchasing power, there can and will be no sustainable recovery in employment, wages, or aggregate demand.

This is why Krugman is very deceptive in his prescription for an economic recovery. Krugman's fundamental plan consists of raising significant additional revenue via higher taxation, having government expend that additional amount of revenue in addition to the amounts it already is spending (on a current model of deficit spending of 44 cents per dollar of actual revenue remitted), and then, if need be, have government increase both the amount of revenue it extracts via taxation and deficit spending it engaged in, in order to boost employment, wages & aggregate demand.

Krugman fails to level with his readers by omitting the fact that his plan is not sustainable since it's based on an absolute Ponzi whereby the Federal Reserve essentially, as the buyer of last resort, monetizes most or nearly all of said deficit spending forever (literally)...(Krugman literally denies that interest yields on tnotes are where they're at due to Federal Reserve purchases of that debt, instead arguing they're priced based on organic supply/demand forces), that for each dollar of additional revenue that government extracts via taxation there is a countervailing crimping of additional aggregate demand, and that the U.S. Governmental and quasi-governmental work force is already massively bloated by any historical standard (as is itslevel of pay and benefits) which means that expanding it further (at great cost) produces marginally weak (and arguably - I'd argue it - negative) stimulation of aggregate demand (since this is, again, merely robbing the private sector of aggregate demand).

Krugman's plan essentially is a new spin on robbing Peter further to pay Paul, but it helps to understand that the Peter that Krugman wants to further steal from is actually far more productive and holds the potential for far more stimulation of employment, wages and aggregrate demand, than the Paul he wants to give the stolen money to.

Tue, 12/04/2012 - 14:09 | 3032970 steve from virginia
steve from virginia's picture

 

 

"... his (Krugman's) plan is not sustainable since it's based on an absolute Ponzi whereby the Federal Reserve essentially, as the buyer of last resort, monetizes most or nearly all of said deficit spending forever (literally)..."

 

Central banks grasping at straws, putting coats of paint on a tarpaper shack. Something is due to fail somewhere and the expensive paint jobs will have been in vain. Wth central banks lending with desperation everywhere in the world ... what comes next ... when the 'perpetual' lending falls short of what is really needed?

 

Default/repudiation is coming. One way or the other.

Tue, 12/04/2012 - 13:48 | 3032881 mayhem_korner
mayhem_korner's picture

 

 

'splain it, then.  It's a compendium of randomized words with no coherent central thought.  Maybe he was trying to articulate something intelligble, like 'retention of surplus production (capital savings) is a sustainable economic construct which has been lost and is unrecoverable', but he didn't.  I'm sure he's real smart, but...

Tue, 12/04/2012 - 19:39 | 3033856 NidStyles
NidStyles's picture

Not sure which Austrians you have read, but Austrian School advocates Saving to build Capital formations. Rothbard wrote an entire book about it, and so did Mises. They both discussed how savings is the root of all Capital formations. 

 

You are correct on your criticism if you in reality meant to say the Chicago Boys or Friedman though while thinking they were Austrians. The very core of Austrian School is Capital Formations, and the never once have any of them stated that the lost Capital would re-appear, just that the flow of it would reappear and that it can be rebuilt even at a lesser quantity.

Tue, 12/04/2012 - 12:55 | 3032705 orangegeek
orangegeek's picture

Ludwig Von Mises

Tue, 12/04/2012 - 13:09 | 3032708 forwardho
forwardho's picture

We currently find ourselves "where no man has gone before"

Any comparison with the 1930's depression is a pointless exercise. At that time we had almost 50% of population working on farms, and NO entitlement culture. Everyone wanted to work, not one in hundred would accept a handout. This is not our grandfathers America. We have become a deeply selfish and self centered people. Do you see a population willing to work together? Or just a desparate mass scrambling to get whats "mine". I have become jaded, mea culpa.

 

 

 

 

Tue, 12/04/2012 - 13:12 | 3032760 hannah
hannah's picture

"We currently find ourselves "where no man has gone before"....we are in hillary clinton's vagina....?

Tue, 12/04/2012 - 12:58 | 3032713 LongSoupLine
LongSoupLine's picture

Don't call it a "revolution"...

 

 

Revolutions are by the masses, not a select few with the power of printing.

 

This was a Keynesian oppresive coup over the middle class.  so, with that, the next step is...revolution..

Tue, 12/04/2012 - 19:42 | 3033868 NidStyles
NidStyles's picture

Look around you, everyone is in on this thing. Your Professors teach this crap in University. The High-School teaches this. The Prisons teach this. Heck even the people living on the delusion are teaching it to their children and friends.

 

It has to be like 90% of the population are in on this scam.

Tue, 12/04/2012 - 12:58 | 3032715 francis_sawyer
francis_sawyer's picture

 The Keynesian Revolution Has Failed: Now What?

~~~

Don't worry ~ as soon as the jews are finished cleaning you out down to the lint in your pocket with the last scam, they'll have another one ready to screw your grandkids...

Tue, 12/04/2012 - 12:59 | 3032717 gaoptimize
gaoptimize's picture

I'm tempted to shitcan much of this article because of this: "The complementary aspect of Keynes’ guidance on deficit spending – raising taxes during upswings – was rarely followed because of its political unpopularity. As a result of the constant fiscal support without the tax increases, businesses and households became comfortable operating with continuously higher leverage ratios. The conventional wisdom was that this government backstop could never be exhausted."

Here are two charts that everyone needs to be aware, diseminate, and consider in their analysis:

http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets , taxes are 5X what they were 100 years ago.

http://blogs-images.forbes.com/joshbarro/files/2012/04/spending-GDP-chart1.png

(and don't give me shit about the sources.  These are the FACTS).

Articles like this only serve to confuse the issue.  The collapse of our civilization has been caused by the growth in Government and dependency, either individual or corporate.  Eveything else is a supporting side show.

Tue, 12/04/2012 - 14:21 | 3033015 dadichris
dadichris's picture

i disagree - the Govt is just easier to blame than the enigmatic real cause of the "collapse": privately issued credit-based fiat currency and fractional reserve banking. Remove those 2 things and then if things still go to shit i'll buy into the "blame the government" argument.

Tue, 12/04/2012 - 14:38 | 3033083 robobbob
robobbob's picture

I think there is just a slight clarification to phrasing needed.

raising taxes while keeping government spending at a fixed ratio to GDP.

you can't spend more than you can collect. you can't collect more than excess production creates.

Tue, 12/04/2012 - 19:44 | 3033877 NidStyles
NidStyles's picture

It's so easy to blame the man rather than the systems that man creates.

Tue, 12/04/2012 - 13:08 | 3032725 Mercury
Mercury's picture

Much like that crisis needed Lincoln, the current crisis needs someone who can identify new tools to resolve the present economic crisis....Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.

The present crisis can and will only be resolved by the two things government is currently standing athwart: deleveraging and market clearing.  No central planning or new paradigm necessary.

Tue, 12/04/2012 - 13:15 | 3032738 yogibear
yogibear's picture

Hey Krugman, Bernanke, Evans, Dudley and Yelen,

How about we make your PhDs and your garbage thesis to get it invalidated?  The experiment has failed. Admit it. 

Find a new financial icon to worship. Your realizing your students heads were filled with Keynesian trash, except for basic economics.

Tue, 12/04/2012 - 13:06 | 3032740 DUNTHAT
DUNTHAT's picture

 

All that stimulus debt and we are still going into a recession even before the "cliff"

Check out the ISM charts and Chicago Fed Activity Index below.  prepare accordingly.

https://skydrive.live.com/redir?resid=28D5B46EE3D15AE3!327&authkey=!AC7uPTlVNGCiM8k

Tue, 12/04/2012 - 13:12 | 3032758 IamtheREALmario
IamtheREALmario's picture

IMHO Keynes is just a second derivative of the real cause and effect. The cause is the creation of the Federal Reserve System giving the banks the POWER to print as much money as they want and give as much as they want to themselves and those who kowtow to them. It was always about consolidating the money power in the hands of the few large international banks that are given complete and total control over the money system

Then, just like the CNBC crew, they provide cover for the real reasons and actions of power consolidation by stating that they are following a Keynsian methodology, which is in fact total rubbish. First Hayek clerly showed that "so called" Keynsianism was proven to be a failure in the first half of the 19th century. Second, from my reading of Keynes, he would completely disagree with the rationale of what the bankers are calling Keynsian economics ... their "modified" Keynsianism is utter trash used as cover for their power grab and consolidation.

The end is near ... bring on the beginning!! 

Tue, 12/04/2012 - 14:16 | 3032997 dadichris
dadichris's picture

I agree - it's easier to promote your agenda behind a poster child.  Even better if they are deceased so they cannot dissent.

Tue, 12/04/2012 - 13:13 | 3032764 buzzsaw99
buzzsaw99's picture

The 1% have all the money, Keynes hasn't even been tried. This is a good article to cheer up the gold bugs as gold comes back to earth though.

Tue, 12/04/2012 - 14:17 | 3032996 Vooter
Vooter's picture

Today's gold price of $1,700 an ounce is equivalent to approximately $630 in 1980 dollars--the year gold went to $850. This means that gold is about 25% below its all-time high--why would it need to "come back to Earth" from such a level?

Tue, 12/04/2012 - 13:18 | 3032773 proLiberty
proLiberty's picture

Keynes started by assuming that government had the power to manipulate the value of the money in my wallet and bank accounts.   Not only that, but that it had the right to manipulate the value of any money that I could earn over my whole life.   In short, that government owned my economic life.

 

Tue, 12/04/2012 - 13:19 | 3032775 midtowng
midtowng's picture

Keynes gets a bad rap.

Every hack economists that calls himself a Keynesian, even if he doesn't really understand what Keynes said, gets attributed to Keynesianism.

Neo-Keynesianism (what we have today) was not what Keynes taught.

Tue, 12/04/2012 - 19:46 | 3033882 NidStyles
NidStyles's picture

I find that a lot of the people that make comments similar to yours haven't a clue what Keynes was actually saying.

 

It's sort of like that whole Communist Manifesto, some people get glossy eye's when the read the part about being exploited or treated unfairly and the glossy causes them to miss the part where it talks about killing people that oppose you.

Tue, 12/04/2012 - 13:28 | 3032805 Northeaster
Northeaster's picture

Have no fear, we are saved and everything is about to be fixed January 1, 2013:

http://www.bostonherald.com/news/us_politics/view/20221204source_elizabe...

For LoL's:

http://www.marketwatch.com/story/judicial-watch-obtains-records-detailin...

http://money.cnn.com/2012/08/21/pf/consumer-bureau-spending/?source=cnn_bin

Sen. Shelby (reminds me of Mr. Burns from The Simpson's) and Sen. Warren should make for a lovely couple in D.C.

Tue, 12/04/2012 - 13:34 | 3032812 muppet_master
muppet_master's picture

spx down -0.35% to 1404

never mind that it was pumped from 1343 weeks ago (i covered my QE3 announcement SHORTS @ 1360, 1354 and went long unloaded dead-cat-bounce-long-positions on black fri and RELOADED THE SHORTS LOL !!!)

quick bQE faithful follower of the QE-rapist-organizer QUICK PRINT $4T..quick RAISE THE DEBT BOMB LIMIT to $20T so that you can save the madoff-corzine ponzi scheme !! YOU DON'T WANT TO FAIL DO YOU?? LOL !!!

STUPID KENYISIAN FROM KENYA!!

Tue, 12/04/2012 - 13:35 | 3032831 realtick
realtick's picture

Leading Indexes Continue To Lead US To New Lows http://chartistfriendfrompittsburgh.blogspot.com/2012/12/leading-indexes...

Tue, 12/04/2012 - 13:45 | 3032865 yogibear
yogibear's picture

Have no fear the debt will be 20T soon enough. Fed printing to prop up businesses that should have failed and cleared the financial system. Ah, the Japanese economy. How did that work out for them?

We should a deficit  well over $20 trillion  by the end of Obama's term. 

How long will the rest of the world tolerate the criminals at the Fed monetizing their money while increasing the debt? 

The US being fiscally irresponsible shouldn't be tolerated much longer. No debt limit and infinite printing should be punished by responsible  countries.

Tue, 12/04/2012 - 13:48 | 3032878 max2205
max2205's picture

Cripe, Lincoln fucked us worst than the Fed

Tue, 12/04/2012 - 14:07 | 3032960 No Euros please...
No Euros please we&#039;re British's picture

Meh, we'll just call it Milton Mises, nicer sounding place to put on your address anyways.

Tue, 12/04/2012 - 14:08 | 3032968 Tombstone
Tombstone's picture

It hasn't failed in America yet.  In fact, we aren't even close to peak socialism.  Benny and the FED, along with The Dictator and his minions still have about another $20-30 trillion to spend before they are done.  Take heart all you welfare bums and those expecting to join the parade of free everything, your ship is still sailing to port and you will not be left behind.  Rejoice, happy days are here again!

Tue, 12/04/2012 - 14:11 | 3032979 ElvisDog
ElvisDog's picture

You know what makes this article stupid? The statement:

When the Fed withdraws from the market and allows interest rates to find their economic level

When exactly is that going to happen? Answer: Never.

Tue, 12/04/2012 - 14:13 | 3032986 dadichris
dadichris's picture

The ratio between of the real productive economy and the financial speculative economy has reached a tipping point where the economic model no longer works.

Tue, 12/04/2012 - 14:15 | 3032989 RunningMan
RunningMan's picture

It isn't a failure until something breaks. Pushing a rope is the perfect description for this market - you can't make business activity happen because of retrenchment and hoarding. But change won't happen unless people are starving. Keynes meets Bernays meets human nature. We are all stuck waiting for something to happen. Those lucky enough to have jobs are stuck there, while those without are also stuck but worse off. When the stimulus wears off, then people will want change, not before. Maybe the currency breaks first, but it seems like someone else's currency (liquid currency, not gold/silver until it is widely accepted for everyday needs) needs to be better. 

Tue, 12/04/2012 - 14:14 | 3032992 Clesthenes
Clesthenes's picture

You are so gentle.  You ask, approximately, “How can we save the system?”

I think a better question would be, “Does the system deserve to be saved?”

A major factor in your examination is the mountain range of US Treasury debt… and how to repay it.

It’s the nature of this debt that is so objectionable.  Governmental debt is the mechanism by which one generation of tax guzzlers cannibalizes following generations; or, more specifically, the mechanism by which people financially cannibalize their children and grandchildren.  Today there is enough governmental debt to cannibalize generations of Americans to the end of time – a tax of 100% on income won’t even pay the interest.  Don’t take my word for it; a former comptroller of the US and professional market watchers will tell you the same.  See the article, “Bad News for the Alternative Health…

In my book, a society that tolerates cannibalization of its children does not deserve to survive.

And more, the current state of federal debt was made possible by more than $1,000,000,000,000 of US Treasury debt being sold to Red China.  (Another $1.2 trillion is owned by Japan and Oil Exporting Countries.)  This indicates how much of the country is owned by the Chinese Communist Party (CCP).  What do you suppose they plan to do about this?  They, and the US Congress, have been preparing for the occupation of America by the CCP for at least twenty years.

But wait, did I write ONLY the Chinese Communist Party?  Sorry, my mistake.  We should be prepared to be occupied by an ALLIANCE among 1) Mexican and Columbian drug cartels, 2) Chinese Triads, and 3) the Chinese Communist Party – as revealed by testimony before a Congressional committee.

 

By failing to describe the problem in its real terms glosses over the enormity of crimes we discuss; and borders on giving “aid and comfort” to perpetrators of such crimes.

 

Tue, 12/04/2012 - 14:19 | 3033008 poldark
poldark's picture

When Keynes talked about increasing debt in the bad times and increasing tax in the good times he did not invisage debt of 400% of GDP and printing money equal to 20% of GDP.

Tue, 12/04/2012 - 19:51 | 3033892 NidStyles
NidStyles's picture

The problem is that Keynes thought the entire varied economy can be expressed with one term, and controlled centrally by masters of the theory. In reality it's a bunch of BS and rubbish that some British Lord made up to excuse and make way for control of the masses through economic rather than militaristic means.

Tue, 12/04/2012 - 14:27 | 3033037 tradewithdave
tradewithdave's picture

What does every company do when sales start to slack off a bit?  It's time for New & Improved. 

We have George Soros and INET.  It's Keynes inspired economic thinking... only NEW!  Get some today.  Grants available up to $50 million.  

 

http://tradewithdave.com/?p=13966

 

 

Wed, 12/05/2012 - 06:44 | 3033038 Radical Marijuana
Radical Marijuana's picture

Without a new economic paradigm ...

It often gives me wry amusement to listen to people talking about new paradigms! I find that those who say that then almost never follow through to actually do that ... I suppose that I should include myself in that observation, but nevertheless, throwing caution to the winds, I will speculate about what kinds of new paradigms we need.

Generally speaking, paradigms do not change what exists, but only how we perceive what exists, which then MAY change what exists, because we will behave differently, after we change our paradigms. Economics is particularly interesting because of the degree to which human interests overwrite everything else within the attempts that economists make to be more scientific. The obvious most important point is to see that famous intellectuals were also hired guns. In the realms of economics, the most important trends for several Centuries have been the international banksters, as the biggest gangsters, or the supreme organized crime gang, covertly taking control of civilization. The economists that became most influential were the ones whose ideas most served the ulterior purposes of the international banksters. IF one wants a better paradigm, one has to have a better frame of reference, and that must include the banksters, who systematically took control of the money supply, and most of the economics profession, and so on and so forth.

A better paradigm has to understand that, however, such a better paradigm does not have a hope in hell of becoming influential, within the established systems, which are nearly 100% dominated by the well-established systems that the international banksters built. That is precisely the paradox surrounding the required intellectual revolution. The established systems must almost destroy themselves, BEFORE a new paradigm has any fighting chance to break through. The bigger problems are quite obvious. Economics, as it exists today, is deliberately insane, because it operates through a sublime mathematics which deliberately ignores ecology. Of course, it must do that, because ALL economics is organized lies, operating organized robberies, which are consistent with the laws of nature, BUT, only as frauds, backed by force.

It is barely possible to develop a better set of tools, within a new paradigm perception of economics, because the entire edifice of economics depends upon NOT facing the fundamental social facts. Rather, there is an increasingly hyper-complicated coded language, which manages to manage the economy while, metaphorically speaking, wearing rubber gloves and a gas mask.

It is theoretically not difficult to reconcile economics with energy laws and general systems theory, EXCEPT it then becomes plainly obvious that civilization is fundamentally based on frauds backed by force. Of course, it always was, and those doing that best were always the best at lying about doing that! Thus, economics was inside of militarism, and was developed through all the similarly tortuous paths as the history of militarism was, i.e., success in warfare being based on deceits, and spies being the most important soldiers, etc..

Revolution in economics paradigms should be integrated into a much more pervasive and profound set of paradigms throughout the whole of the philosophy of science, and especially the human sciences. Of course, the practically impossible problems with respect to that are that all the established systems are built on runaway triumphant frauds, backed by force, and therefore, more radical truth is perceived as an enemy of those. (That includes most of the controlled opposition, with old fashioned ideologies, as well as the dominant ideas promoted by the ruling elites.)

As George Orwell wrote: "In a time of universal deceit, telling the truth is a revolutionary act." No adequate change of economic paradigms can possibly be done without being revolutionary. Therefore, all the problems with regard to the structure of scientific revolutions are amplified more with respect to economics than with respect to anything else, other than those in militarism.  There is no practical point to doing that, which I can perceive in the foreseeable future, since the runaway triumph of the established frauds, and those who still benefit from them, continues to be utterly overwhelming. The elections are obviously puppet shows, put on by the mass media, to entertain morons, that have been brainwashed to believe bullshit. In the context of that social reality, it is quite impossible to imagine how more radical truth about anything could make any real differences. But nevertheless, the theory for a new paradigm in economics is obviously something which should arise from, and be integrated within, thorough revolutions throughout the whole of the philosophy of science. From a sublime point of view, it was far, far easier to change from thinking that Earth is the center of the universe, or that fire was an element, or any of the other profound paradigm shifts that occurred in the history of science, than to change the paradigms that are used to explain the combined money/murder systems, which are based on an abstract mathematics that does everything it possibly can to ignore the murder part of that integrated system.

Any genuine attempt to fashion a new economics paradigm should begin with the concepts of subtraction and then robbery, and accept that human realities are ALWAYS organized systems of lies, operating organized robbery. That view then can be reconciled with the rest of postmodern physics and biology, or thermodynamics and information theory. Then, economics can be made consistent with ecology. Then human ecology and industrial ecology can be reconciled with natural ecology. However, all of that potential progress is in a head on collision with the central social facts that what actually already exists is a combined money/murder system, and that there is no way to change one without changing the other.

Any improvements in the paradigms of economics should address how and why the international banksters were able to make and maintain the global systems of electronic fiat money frauds, backed by atomic bombs. Of course, one can not expect anybody who benefits from being within the established systems being funded to promote more radical truth to the public, and one can not expect that public to want to discover more radical truth, any more than the ruling classes want them to discover.

An adequate new paradigm in economics could NOT be based on any monetary reforms. It must be based on a monetary revolution. That revolution will surely be resisted by almost everybody who benefits from the established systems not having more radical truth revealed about them. Therefore, the established systems must malfunction way, way worse than they are, so far, before any reasonable chances exist for a new paradigm, through revolution in economics, could emerge sufficiently to be noticed and adopted by a larger group of people.

We can not be at all sure that civilization will survive its runaway sicknesses and insanities enough to have anything sufficient survive enough on the other side of what it is going through, when progress in all other sciences and technologies makes human beings become trillions of times more powerful, but that progress continues to be channelled through the same old social pyramid systems, in ways that are amplifying the established systems of force backed frauds by trillions of times! The development of any adequate new paradigm in economics is more dependent upon the problematic survival of those promoting it, and the matching problematic survival of the society that needs that paradigm shift, than upon such a paradigm shifting theory itself.

Tue, 12/04/2012 - 16:27 | 3033406 woggie
woggie's picture

the beast is on the gobble
and all that matters is we're all headed for it's belly
http://youtu.be/ntmthFyaYzY

Do NOT follow this link or you will be banned from the site!