Guest Post: The Dangerous Blindspots of Clueless Keynesians

Tyler Durden's picture

Via Charles Hugh-Smith of OfTwoMinds blog,

The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy's fatal disease.

If we want to trace today's policy failures back to the source, we find ourselves at Richard Nixon's famous statement that "We are all Keynesians now." The fundamental Keynesian project is that the Central State and Central Bank should manage market forces whenever the market turns down.
In other words, the market only "works" when everything is expanding: credit, profits, GDP and employment. Once any of those turn down, the State and Central Bank "should" intervene to force the market back into "growth."
The Keynesian has two basic tools: the State can borrow and spend money (fiscal stimulus) and the Central Bank can create money and "inject" it into the economy (monetary stimulus): quantitative easing, lowering interest rates, extending unlimited credit to broker/dealer investment banks and financial institutions, etc.
The sharper the downturn, the greater the State/Central Bank intervention. This accounts for the martial analogies of State/CB responses: "bazookas," "nuclear option," etc., as the market is overwhelmed with ever greater fiscal/monetary firepower.
After basically voiding the market's ability to price risk and assets, the Keynesians believe the market will naturally resume pricing risk and assets at "acceptable to Central Planning" levels once fiscal and monetary stimulus is dialed back.
The entire Keynesian Project has numerous blindspots. When reality inconveniently fails to meet Keynesian expectations, reality is ignored or massaged to suit the Keynesian Cargo Cult's belief system.
For example, the Grand Poo-Bah of the Keynesian Cargo Cult, Paul Krugman, loves to repeat that massive fiscal-stimulus deficits haven't raised interest rates, confounding doomsdayers, but he never mentions the Federal Reserve's role in this magic: what would interest rates be if the Fed wasn't buying hundreds of billions of dollars of Treasury bonds every year?
The honest position would for Keynesians to state that the Central Bank's role is to print money to enable unlimited, fiscally reckless spending by the Central State. But dishonesty is a modest Keynesian fault compared to the blindspots in their core policies.
Here is a partial list of Keynesian blindspots:
1. The Keynesian Model no longer works; it is counter-productive and destructive.
2. Markets that have been managed by the Central State/Central Banks are broken and no longer function in pricing risk and assets.
3. Keynesians are incapable of recognizing opportunity cost: the money they borrow and squander on sinkholes is no longer available for productive uses.
4. Keynesians are blind to the difference between an investment that yields a positive return and a sinkhole that sucks scarce capital away from productive uses.
5. Keynesians are incapable of recognizing institutionalized moral hazard is the inevitable consequence of flooding the financial sector with cheap, easy money.
6. Keynesians are blind to the fact that cheap, easy money at near-zero rates destroys the premium on real capital (saved cash), fatally distorting the economy and finance.
7. The Keynesians are blind to the eventual consequences of higher interest rates on rapidly rising sovereign debt. What's left of the private market for bonds eventually recognizes that Central Planning has pushed the risk of default or currency depreciation much higher. That will push interest rates higher, unless the central Bank buys essentially all newly issued Treasury debt.
Regardless of who buys the debt, increasing sums of national income are diverted to pay interest on debt taken on to fund marginal-return Bridges to Nowhere, starving the State and economy of income and investment capital. Default is the only possible endgame when debt rises faster than income and productivity.
8. Keynesians are blind to diminishing returns: ever-higher debt produces ever-smaller returns.
I have often identified Keynesian economists and the Federal Reserve as cargo cults.

After the U.S. won World War II in the Pacific Theater, its forces left huge stockpiles of goods behind on remote South Pacific islands because it wasn’t worth taking it all back to America.

After the Americans left, some islanders, nostalgic for the seemingly endless fleet of ships loaded with technological goodies, started Cargo Cults that believed magical rituals and incantations would bring the ships of “free” wealth back. Some mimicked technology by painting radio dials on rocks and using the phantom radio to “call back” the free-prosperity ships.

The Keynesians are like deluded members of a farcical Cargo Cult. They ignore the reality of debt, rising interest payments and the resulting debt-serfdom in their belief that money spent indiscriminately on friction, fraud, speculation and malinvestment will magically call back the fleet of rapid growth.
To the Keynesian, a Bridge to Nowhere is equally worthy of borrowed money as a high-tech factory. They are unable to distinguish between sterile sand and fertilizer, and unable to grasp that ever-rising debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs.
The Cargo Cult faithful do not understand diminishing returns: at some point, the interest on skyrocketing debt drains income and capital from potentially productive investments to pay for previous unproductive spending on fraud, friction and malinvestments, starving the economy of productive investment.
"Free money" creates moral hazard, which means that those who can borrow money for almost nothing and never have to pay it back act entirely differently from those paying market rates for money and backing their loan with real collateral that is at risk.
The Keynesian definition of Heaven is World War II, because that war "proved" that digging a gigantic hole (global war) and filling it with trillions of dollars of borrowed money is the perfect (and perhaps only) way to create enough "aggregate demand" to lift an economy out of depression.
What clueless Keynesians cannot see is that World War II was a one-off and cannot be duplicated. The Global War "solution" had a key characteristic that is almost universally ignored.
Depression-era calls to bulldoze homes to be rebuilt and destroy grain so it could be regrown were rightly dismissed as malinvestment on a vast scale. But war is more or less an equivalent malinvestment on a grand scale. Hundreds of ships were built and then sunk, thousands of aircraft were built and then shot down or lost, and monumental mountains of provisions and supplies were manufactured and then either consumed or lost to enemy submarines, bad weather, rot and a host of other causes.
At the end of the war, most of the leftover goods manufactured--ships, tanks, aircraft, munitions, etc.--were mothballed or scrapped.
Despite this staggering waste, the war spending launched a long boom. How did it work this magic? One, it constructed new plant; unlike the Keynesian calls to bulldoze houses so they could be rebuilt, the war investment created factories that could then be converted to produce goods.
More importantly, the war spending created a vast pool of private capital--what we call savings. As resources were diverted to the war effort, rationing limited both the manufacture and availability of consumer goods. Meanwhile, tens of millions of people were put to work, either in the Armed Forces or in the war manufacturing sector, and most had few opportunities to spend money. Industrialists also piled up war profits.
Though the 1930s Central Planning extend-and-pretend policies did not write off the overhang of debt that had depressed the economy and destroyed the market's ability to properly price risk and assets, this gargantuan pool of private capital simply overwhelmed the remaining debt overhang.
Third, trust in the system was restored: the Federal government had effectively "won the war" by printing money and drawing upon the nation's vast surplus of energy and labor, and the manufacturing and financial sectors had been brought to heel by the extraordinary demands of the war and by legislation that had responded to financial fraud and over-reach of the late 1920s.
Keynesians are blind to the fact that the root of "capitalism" is capital. Capitalism requires two fundamentals--capital to invest and open markets for goods and services that transparently price risk, assets, hedges and goods.
Note that debt, and fiscal and monetary intervention are not essential to capitalism. Indeed, if we explore the roots of modern capitalism in the 14th and 15th centuries, we find that commercial credit and hedges were the key ingredients of success, not debt. Lacking sufficient coinage to handle the rising volume of trade, merchants settled accounts at the great trading fairs in Europe.
Long, risky trade voyages were hedged with the equivalent of options and limited stock companies that distributed risk for a price. Leverage was limited by the transparency and appetite for risk.
Compare that with Bernanke's Keynesian policies, all of which severely punish savers (i.e. the accumulation of capital) and reward leverage and debt. By lowering interest rates to zero, Bernanke has imposed the opposite of the World War II experience of forced savings--he has made cash into trash and pushed everyone into risk assets.
By making credit dirt-cheap and backstopping financial-sector losses (i.e. institutionalizing moral hazard), Bernanke has destroyed the market's ability to discipline malinvestment and openly price risk and assets.
World War II launched a boom precisely because private capital accumulation/savings were enforced; when the war ended, there was a vast pool of capital available for investment and consumption.
Keynesian policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market's discipline and transparent pricing of risk, debt and assets, Keynesians have explicitly set out to re-inflate destructive, massively unproductive credit bubbles.
This is why the Central Planning Keynesian policies has failed so completely, and why they will continue to fail. The Keynesians are not engaged in capitalism, they are engaged in the destruction of capital, productive investment and the open pricing of risk, debt and assets. The markets are not allowed to price risk, capital and assets, so the economy is crippled. The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy's fatal disease.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LiesAreTheOnlyTruth's picture

It's just another in many Fed Hockey Stick Market Pumps.  Keep buying, make money from all this printing folks!!

trav777's picture

let's see..if the Fed weren't buying bonds, the USG would just be BK is all.  They still couldn't give away bank credit even at 0%, though.

Look, if there were any BORROWERS out there, they could get away with charging more than 0% for money.

Chief KnocAHoma's picture

Look this shit keeps working, so why fight it. Everyone inject more hopium and let the good times roll. When you wake up and feel like shit, inject even more. What could possibly go wrong?

Sophist Economicus's picture

The most dangerous thing anyone can think is that PK and the rest of the merry band of Keynsians are "clueless".   They know exactly what they are doing and why they are doing it.    The big fallacy of this article is the assumption that these folks want a capitalist system.    They don't!

Vince Clortho's picture

Yup.  Charles article is right on the button, if he replaces "clueless" with "malevolent-blood-sucking-paraasites".

Grinder74's picture

I wouldn't say it's so much intelligently and intentionaly doing it, as much as it's the only way they know how.  Like the woodpecker who doesn't understand my metal drain spout won't budge, these parasites can't figure out how or why to stop.  Like Qui-Gon said, "The ability to speak does not make you intelligent."

TPTB_r_TBTF's picture

Why would a parasite want to stop?  Why would a parasite consider how to stop?


There are at least three groups (*) who want a power vacuum to occur so that they can fill it.  The only thing these people might be doing "wrong" is ... maybe they are taking longer than they planned to achieve their goal.

(*) marxists, zionists, black nobility

Titus Flavius Caesar Vespasianus Augustus's picture

Very well said!

This shit really isn't that complicated - little pieces of paper have no instrinsic value, and the likes of Krugman and Bernanke absolutely know what they are doing.


It's about theft - it's about the acquisition of more and more real, valuable assets - and about the control of information.

Iran, also, is about enriching banks and oil companies.



What's remarkable is how through sheer obfuscatory language, economics professors have succeeded in hiding their theft.


Economics is magician tricks in the real world - not "science."





IvyMike's picture

Nearly all humans now express the "pious hopes" of one of several Cargo Cult sects--whether Communist or Capitalist--as described by William R. Catton Jr., in "Overshoot," (1980, University of Illinois Press, pages 187 to 195.)

SilverMoneyBags's picture

Youre making money but losing value. The profits don't come from work and they don't create value. The real battle cry should not be make money from printing, it should be "Keep and create VALUE from NOT printing!"

buzzsaw99's picture

He never questions the very existence of the fed. small minded at best.

Ghordius's picture

In defence of Lord Keynes: he advocated budget surpluses and paying back debt during good times

Nixon declared himself as Keynesian, but he was at war, big time, saving the world from big dominos from outer space or something

Krugman is not a Keynesian, he is a NeoKeynesian, as all those who say "deficits don't matter, ever"

I also dislike this "spread over all slices of bread" manner of using everywhere "Central Planning"

It sounds like we were in a Communist System, which we really, really aren't, by far (otherwise we'd be exchanging toilet paper for opera tickets - you have to have experienced it to believe it)

Salon's picture

It doesnt work in practice, especially in a mobocracy.

No political party can recommend surpluses in good times or they will be relegated to minority status.

Yogi Berra had it right.

In theory there is no difference between theory and practice. In practice however there always is.

Communism sounds nice in theory too.

SilverMoneyBags's picture

It doesn't sound like we are in a Communist system, it sounds like we are in a State Capitalist system. Re-read your definitions.

IvyMike's picture

Capitalism, Communism, what's the difference? Both are nearly identical economic systems of industrial State sociopolitical typology. (Civilization.)

"State capitalism would be a step forward..."

~V. I. Lenin, Lenin’s Collected Works, 1st English Edition, Progress Publishers, Moscow, 1965, Volume 32, pages 329-365

Vince Clortho's picture

Central Planning is exactly what is happening.  If you don't see it, you are not looking very hard.

IvyMike's picture

State Society's (Civilization's) central economic planning has been happening in North America since 1492. And it's always about taking at the end of a sword or gun.

"[The Native Americans] didn't have any rights to the land ... any white person who brought the element of civilization had THE RIGHT TO TAKE over this continent."

~Ayn Rand, US Military Academy at West Point, March 6, 1974

"Civilization [State Society] originates in conquest abroad and repression at home."

~Stanley Diamond, In Search of the Primitive: A Critique of Civilization, p. 1, first sentence of the book

DaveyJones's picture

"clueless Keynesians" Is that like wet water?

More importantly, Israel bans overly thin models:

"The skinny model issue has been a hot button for consumers since model Kate Moss helped bring in the "heroin chic" look in the early 1990s. Criticism has centered on the health of models as well as on the unhealthy images being promoted to young girls in magazines and fashion advertisements" - WSJ.

I call discrimination. WHere is the law protecting all us overly thin males?

In the 90s, I too tried the "heroin chic look" but got tired of all the Nirvana music. Plus my supervising prosecutor thought it got in the way.  

mkhs's picture

Are you asking to be banned?

TooBearish's picture

sorry Central planning works! keep buying!!!

duo's picture

Does anyone remember the now-buried CNBC clip when Kernan asked Bill Gross what it would take for him to lend his own money in residential real estate, and he said "5 points over the 10 year, 30% down, and a 750 credit score" (not an exact quote).  THAT's the real cost of money, what a guy who has some to lend would actually need to part with it.  Everything else is communist price controls.  Left socks, interest rates, the same thing.

trav777's picture

Bill Gross can fuck off...nobody should be paying his usury for real estate.

George Bailey was lending for 5 years at 5%.

Gross is full of shit...he's TRYING LIKE HELL to find ANYONE to BORROW his goddamned money and NOBODY WILL.  Nobody is beating down the door to borrow even at 0%...why the hell do you people think the Fed has dropped rates to 0?

Look at 30yr mortgages...even at THESE insanely low rates, there aren't willing or qualified borrowers.  The economy is BK

duo's picture

what Gross was saying is he wants 5% to cover his RISK of lending in residential RE.  He wants 5% to cover the RISK of his money not being worth the paper it's printed on when he gets it back.

ZIRP has removed $750 billion a year from our economy (from savers), but the income of all the net jobs created under ZIRP is less than half that.

Edit:   A true Misesean believes that debt should only be used to increase productive capacity, not to finance consumption.  Unless you're building sneakers in a basement sweatshop, your house is not a productive asset.  It is slowly being consumed and you pay taxes to watch that happen.

Dr Benway's picture

"debt should only be used to increase productive capacity, not to finance consumption. Unless you're building sneakers in a basement sweatshop, your house is not a productive asset."

Bingo, well put.

DaveyJones's picture

I prefer non GMO food to sneaker production. It also removes a lot of the money men and pesticides from my edibles

IvyMike's picture

A true Misesean...

...knows Fascism has merit.

"It cannot be denied that Fascism and similar movements aimed at the establishment of dictatorships are full of the best intentions and that their intervention has for the moment saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history."

~Ludwig von Mises, Liberalism

me·rit (n.) 1. Superior quality or worth; excellence 2. Demonstrated ability or achievement.

So much for faith in "True" economic systems.

GMadScientist's picture

Qualified: yes.

Willing: oh hell no.

Why would I want to buy now when rates are low, but principal is price-supported when I can wait and get low rates AND low principal?

Housing market stimulus FAIL!


fonzannoon's picture

Just buy my book. Please?

ElvisDog's picture

Hey CHS has to pay his bills too. He's not getting paid for the articles he links to ZH, so I don't mind if he does a little marketing at the end of his posts.

Zer0head's picture

"If we want to trace today's policy failures back to the source"


the source is not some economic philosophy, it is a bought and paid for government

Radical Marijuana's picture

Yeah, it is "throwing the baby out with the bathwater" to blame "economics" for it ending up serving fraud, because fraud became the most successful thing, which was therefore able to pay others to keep promoting that!

I am generally against the anti-intellectual stance that blames the "sciences" for being captured by their funding, and therefore, ending up perverted into becoming unscientific. One should blame the triumphant runaway funding of frauds, due to the success of the privatized central bank fraud, by legalized counterfeiting, for all the rest of the consequences of almost every area of knowledge ending up being taken over by the ability of the those with the most money to fund the research and education, in a vicious spiral of more frauds.

Another obvious example is "medicine" that primarily became a "profit from disease system" instead of a health care system. OF COURSE, Obama's "health care" plan is an insane way to destroy the overall health of society, while making even bigger insurance companies become even more wealthy! Of course, what the White House says about the "facts" about that is all BS too!

What we need is a paradigm shift in basic human science, so that we address the driving force behind ALL of this, which was that warfare was the oldest and best developed of social sciences, YET, success in war was based on deceits. THAT was made the monetary system become runaway triumphant frauds, because it was able to be backed by the systems of military force, which were made through previously triumphant deceits.

The ONLY way that human sciences could become more genuinely scientific, and consistent with other sciences, is IF they were to go through paradigm shifts to become AXIOMATICALLY based on the understanding that human reality was ALWAYS organized lies, operating organized robberies.

As long as there are still delusions about false fundamental dichotomies regarding the assertions that there are any human beings that do not live through systems of illusions, backed by coercion, then we are still in a dead end of accepting the biggest bullies' bullshit social stories, and will continue to promote impossible ideals as the source of "solutions," which will continue to necessarily backfire and create the opposite in the real world.

There is nothing that stops "economics" from becoming a better science, except that it first would have to go through paradigm shifts, so that it could become integrated with ecology, and all the rest of the scientific ways that we understand other energy systems.

THE problem of a bought and paid for government is our most successful politicians are able to continue being successful by being the best professional liars, and immaculate hypocrites, because THAT was how the history of warfare made War King, which then morphed to make Fraud King. Since our civilization is controlled by the Fraud Kings, "economics" has become bullshit that serves the interests of those Fraud Kings, rather than operates in a genuinely scientific way. Therefore, the White House, etc., can routinely publish material which is primarily based on LYING BY OMISSION, and that keeps on "working" to fool enough of the people, enough of the time.

One of the fundamental reasons WHY America is in such sick shape is that almost all the "opposition" promotes the same bullshit as the elites, ... while only accusing the elites of not living up to those impossible ideals. Since those impossible ideals always will necessarily backfire in the real world, and cause the opposite things to actually happen, as long as the fake opposition keeps on promoting the same impossible ideals as the source of "solutions," then we are going to continue to go backwards, without any reasonable hope.

knowless's picture

instead of austrian can it be called misesian? it sounds better.

Mercury's picture

Hey Obama - you suck at central planning.

Bollixed's picture

More likely he sucks at the teat of the Puppet Masters.

Hedgetard55's picture

Good summary.


He forgot to mention WW2 destroyed our industrial competition.

Dr Benway's picture

And coincided/drove some of the great innovations of our time (something not replicated in later wars).

And freed Germany and Japan through cathartic crisis from fascism, allowing economic growth there.

And was a one-off unique event.

hllnwlz's picture

Maybe WW3 will free us from same. Oh look, a happy thought!

shovelhead's picture

Then, by God, we should do it again. Bring some urban renewal to Europe.


FrankDrakman's picture

He forgot to mention WW2 destroyed our industrial competition.

That's always a good point that most Americans conveniently forget. But what was more important was it destroyed millions of people. It's like clearing a section of forest; it opens up opportunity for new growth. Here's a grisly thought experiment:

If 10% of the American working age population was destroyed, what miracles would we see? Unemployment - even U6 - would plummet. With 16 million people moved off the dole and into tax paying jobs, you figure 16 mil x (1,000/yr new taxes (low ball) +18k/yr unemployent (low ball), SNAP etc, benefits saved) = 300 billion change in gov't balance. I think accurate figures would probably double this amount. A little jiggering of SS, Medicare, and horrors - maybe a reduction in defence - and the budget's back in balance.

The biggest problem facing the world today is simple to formulate, difficult to solve. Simply put it is "What do we do with everybody?". We can't figure out what to do the millions of Americans who went through high school smoking weed and getting drunk, are functionally illiterate, and have no marketable skills. (There's probably an equal number in Europe, Russia, and some other places that are the same; the Japanese took a different approach - they're just not having kids.) 50 years ago, you could plop them on an assembly line, teach them to do something repetitive and basically mindless, and pay them a living wage. Today, there's just not that opportunity. We have a huge number of basically useless people who demand to be fed, clothed, and have cable TV. Then, when they get old, they want free medical care to support their obese, diabetic bodies. In any dispassionate analysis, these would be considered parasites.

In my darker and more paranoid moments, I suspect that there are people at the top who've come to the same conclusion, and their plan is to foment a collapse, and use the riots in the streets to cull the herd. Unfortunately, TPTB aren't known for their surgical precision, and I fear that the slaughter will be indiscriminate. Thus the need for millions of bullets by DHS, etc. I fear even more that people who can actually read the US Constitution and start protesting these acts will be mown down just as quickly as the people whose SNAP cards are suddenly empty.

Dark times are unavoidable, but I hope I'm too paranoid.  

ElvisDog's picture

I think you are too paranoid, because I don't think TPTB have a long-term plan at all. They just want to keep the status quo (where they get billions of dollars and a fabulous luxurious lifestyle) going as long as they can. There is no Plan B. In fact, they most certainly don't want "indiscriminate slaughter" because that would upset the apple cart of their comfortable existence.

In a slightly related WW2 story, I read an interview with a guy who was a Japanese admiral during WWII. He said that the Japanese leadership basically just assumed the U.S. would surrender after Pearl Harbor. When that didn't happen, they had no Plan B. So, assigning sinister, well thought out long term plans to our leaders is giving them too much credit in my opinion.

michael_engineer's picture

And let's conjecture that rising resource extraction rates, especially those enabling more proverbial "energy slaves" for us to benefit from and provide structural support for growing the economy and industrialization, most likely greatly helped the recovery from the Great Depression and that might have even been the force maejure of the recovery.

lolmao500's picture

Can the Keynesians be hunted down like the brainless animals they are and eaten already?

steve from virginia's picture


This article has so many errors in it, the author must be a Charles Hugh Smith doppelganger, not the real thing.


 - Central banks don't create money they create credit and only do so in amounts equal or less than collateral. This isn't a rule but a condition ... a central bank that offers leveraged- IE unsecured loans is no longer a 'reserve' bank but an ordinary commercial bank that happens to be insolvent (bad loans exceed capital) ...


Banks w/ bad loans exceeding capital is the reason for the central bank to be acting in the first place.


Government can borrow or issue currency, the central bank can take bad loans onto its balance sheet, these are Keynesian tools (actually, they existed long before Keynes). Aside from these limited tools there is little the government can do ... otherwise the recession we endure today would have been over a long time ago.


Our crisis is a matter of actual productivity. Regardless of the system: hard-money, communism (planning committees), market-state (austrianism), the outcome is bankruptcy because of non-productive nature of industry which destroys its own capital and offers waste as the primary product.


BTW, the Great Depression ended in the US in 1948 when Milton Berle and Texaco Television Theater convinced millions of otherwise thrifty Americans it was 'cool' to buy goods they didn't need with money they didn't have.

Salon's picture

When the collateral is not worth what the central bank loans out for it ( in essentially permanent interest free loans) then the central bank is creating money.

If congress sells a bond and the Fed buys it with no intention of ever reversing the trade to any meaningful degree, then the central bank has created money.

auric1234's picture

Central banks don't create money they create credit

Sure. They don't create money. They produce all this credit by saving. Bernanke is hell of a saver you see, he's bailing out the entire country at his own personal expense.


steve from virginia's picture


The (recycled) savings-as-capital hypothesis is incorrect. There is no such thing.


All money-capital is credit, all of it. Otherwise, there could be no industry. Industry requires credit because it costs more at every point more than it earns.


All else is 'money laundering' and theft.

csmith's picture

Then what exactly is equty capital?

A free economy can function quite readily without debt, either short or long term. Equity (savings) can function quite readily as both a store of value and a medium of exchange.

Fix It Again Timmy's picture

It will be done, because I Keynes do it....