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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.

 


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Wed, 01/02/2013 - 11:29 | Link to Comment LiesAreTheOnlyTruth
LiesAreTheOnlyTruth's picture

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

Wed, 01/02/2013 - 11:44 | Link to Comment WakeUpPeeeeeople
WakeUpPeeeeeople's picture

*

Wed, 01/02/2013 - 11:49 | Link to Comment trav777
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.

Wed, 01/02/2013 - 11:56 | Link to Comment Chief KnocAHoma
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?

Wed, 01/02/2013 - 12:13 | Link to Comment Sophist Economicus
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!

Wed, 01/02/2013 - 12:33 | Link to Comment Vince Clortho
Vince Clortho's picture

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

Wed, 01/02/2013 - 13:06 | Link to Comment negative rates
negative rates's picture

Troublesome indeed!

Wed, 01/02/2013 - 15:09 | Link to Comment Grinder74
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."

Wed, 01/02/2013 - 17:04 | Link to Comment TPTB_r_TBTF
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

Wed, 01/02/2013 - 15:52 | Link to Comment Titus Flavius C...
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."

 

 

 

 

Wed, 01/02/2013 - 18:28 | Link to Comment IvyMike
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.)

Wed, 01/02/2013 - 12:53 | Link to Comment SilverMoneyBags
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!"

Wed, 01/02/2013 - 11:32 | Link to Comment buzzsaw99
buzzsaw99's picture

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

Wed, 01/02/2013 - 11:48 | Link to Comment Ghordius
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)

Wed, 01/02/2013 - 12:23 | Link to Comment Salon
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.

Wed, 01/02/2013 - 12:57 | Link to Comment SilverMoneyBags
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.

Wed, 01/02/2013 - 17:43 | Link to Comment IvyMike
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

Wed, 01/02/2013 - 12:59 | Link to Comment Vince Clortho
Vince Clortho's picture

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

Wed, 01/02/2013 - 17:45 | Link to Comment IvyMike
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

Wed, 01/02/2013 - 11:32 | Link to Comment DaveyJones
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.  

Wed, 01/02/2013 - 14:27 | Link to Comment mkhs
mkhs's picture

Are you asking to be banned?

Wed, 01/02/2013 - 11:33 | Link to Comment TooBearish
TooBearish's picture

sorry Central planning works! keep buying!!!

Wed, 01/02/2013 - 11:49 | Link to Comment duo
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.

Wed, 01/02/2013 - 11:53 | Link to Comment trav777
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

Wed, 01/02/2013 - 12:11 | Link to Comment duo
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.

Wed, 01/02/2013 - 12:21 | Link to Comment Dr Benway
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.

Wed, 01/02/2013 - 12:43 | Link to Comment DaveyJones
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

Wed, 01/02/2013 - 18:41 | Link to Comment IvyMike
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.

Wed, 01/02/2013 - 12:45 | Link to Comment GMadScientist
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!

 

Wed, 01/02/2013 - 13:10 | Link to Comment negative rates
negative rates's picture

Cause Ben's a big fat zero, or two. 

Wed, 01/02/2013 - 11:36 | Link to Comment fonzannoon
fonzannoon's picture

Just buy my book. Please?

Wed, 01/02/2013 - 14:23 | Link to Comment ElvisDog
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.

Wed, 01/02/2013 - 11:35 | Link to Comment Zer0head
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

Wed, 01/02/2013 - 19:20 | Link to Comment Radical Marijuana
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.

Wed, 01/02/2013 - 11:36 | Link to Comment knowless
knowless's picture

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

Wed, 01/02/2013 - 11:39 | Link to Comment Mercury
Mercury's picture

Hey Obama - you suck at central planning.

Wed, 01/02/2013 - 11:43 | Link to Comment Bollixed
Bollixed's picture

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

Wed, 01/02/2013 - 11:49 | Link to Comment DaveyJones
DaveyJones's picture

he's just first in line

Wed, 01/02/2013 - 11:38 | Link to Comment Hedgetard55
Hedgetard55's picture

Good summary.

 

He forgot to mention WW2 destroyed our industrial competition.

Wed, 01/02/2013 - 12:07 | Link to Comment Dr Benway
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.

Wed, 01/02/2013 - 12:38 | Link to Comment hllnwlz
hllnwlz's picture

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

Wed, 01/02/2013 - 12:15 | Link to Comment shovelhead
shovelhead's picture

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

 

Wed, 01/02/2013 - 12:49 | Link to Comment FrankDrakman
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.  

Wed, 01/02/2013 - 14:30 | Link to Comment ElvisDog
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.

Wed, 01/02/2013 - 12:57 | Link to Comment michael_engineer
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.

Wed, 01/02/2013 - 11:39 | Link to Comment lolmao500
lolmao500's picture

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

Wed, 01/02/2013 - 11:45 | Link to Comment steve from virginia
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.

Wed, 01/02/2013 - 11:51 | Link to Comment Salon
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.

Wed, 01/02/2013 - 13:15 | Link to Comment negative rates
negative rates's picture

If they didn't have it, why are you so upset about it?

Wed, 01/02/2013 - 16:08 | Link to Comment auric1234
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.

 

Wed, 01/02/2013 - 16:24 | Link to Comment steve from virginia
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.

Sat, 01/05/2013 - 11:46 | Link to Comment csmith
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.

Wed, 01/02/2013 - 11:46 | Link to Comment Fix It Again Timmy
Fix It Again Timmy's picture

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

Wed, 01/02/2013 - 11:48 | Link to Comment Salon
Salon's picture

Repblicans are clearly pussies.
There is no meaningful control on the budget or QE

When permabear Ambrose Evans Pritchard throws in the towel you know this is gonna be the cyclical bull of the decade.

I aint watching from the sidelines.

Wed, 01/02/2013 - 11:49 | Link to Comment agent default
agent default's picture

The problem with throwing money to the economy is that you have no control of where it goes.  And if the market thinks that a particular sector is not worth investing into, no mater how much you print, you can be certain that almost nothing will flow into the sector the market has rejected. 

Keynsians are serious crackpots first and foremost.  They are all academics, with zero practical experience in real life economics and finance.  Zero, none, nada.  Fifty or so "experts" acknowledging  each other as experts,pretending to be relevant to reality.  Meanwhile everybody else with the slightest real world experience realizes they are morons.

 

Wed, 01/02/2013 - 11:49 | Link to Comment Stock Tips Inve...
Stock Tips Investment's picture

Unfortunately, the global crisis has led to the reproduction of the Keynesians. If you read the newspapers, magazines, listen to the radio or watch television, we appreciate it. Europeans seem to see no alternative but to keep spending to prop up its economy. In Japan it is the same. And here we hear many (too many) voices argue something like that. I hope this is just another phase of the crisis and that once more, sanity and responsibility resume their place.

Wed, 01/02/2013 - 11:51 | Link to Comment Racer
Racer's picture

And I wonder if today/or very near to today, is the high point and an island reversal will ensue from here

Wed, 01/02/2013 - 11:54 | Link to Comment Seasmoke
Seasmoke's picture

Who cares about blind spots. Just move lanes whenever you want. If the guy in the other lane doesn't like that. Well Fuck him !

/SARC

Wed, 01/02/2013 - 11:59 | Link to Comment Renewable Life
Renewable Life's picture

We can bitch and bitch, but it's a fact we have one economic political class and one party in this democracy (I use that term loosely) and its ideology is 100% Keynesian!!

There's no opposition to this bullshit on any level of our society and we saw it again last night!! These hypocrite GOP cocksuckers can give lip service to their constituents, but when the rubber meets the road, they believe spending is the answer JUST as much as the DEM cocksuckers!

There isn't a single politician in that town of DC, that really believes that the free market and entrepreneur capitalism is the answer, in their heart!!

It's fucking actually crazy and stunning to come to terms with the reality, that our politicians are actually ALL socialist central planners, at this point!! And that's exactly the fucking terminology we should start using, to their fucking faces, when addressing these bastards in Congress, and I mean every fucking republican and democrat who voted for debt ceiling increases last year, this bullshit last night, and who will vote for the debt ceiling increase next month, should be labeled publicly, as what they are:

A Socialist Central Planner, period!

Wed, 01/02/2013 - 11:59 | Link to Comment MassDecep
MassDecep's picture

Thanks Ren Life, could not have said it better. I think we are all in for a rude awakening, even us ZH'ers. As much as I prepare, it is still a maddening shock when reality sets in, with the realization of how screwed we are. And that doesn't account for all the devious crap they have planned.

Wed, 01/02/2013 - 12:27 | Link to Comment Salon
Salon's picture

Cyclical bull of the decade just started today.

There is no stopping the perfect storm of fiscal and monetary policy convergence.

Should last 18 months until it blows up.

Me and robotrader are not gonna watch from the sidelines.

Wed, 01/02/2013 - 12:54 | Link to Comment Dr Benway
Dr Benway's picture

Good luck timing the crash exactly and thus avoiding it.

Wed, 01/02/2013 - 11:53 | Link to Comment Neo1
Neo1's picture

Irrecusable obligation, which according to 'Bouvier's Law Dictionary' (1914 ed.), is "a term used to indicate a certain class of contractual obligations recognized by the law which are imposed upon a person without his consent and without regard to any act of his own." This is distinguished from a recusable obligation which, according to Bouvier, arises from a voluntary act by which one incurs the obligation imposed by the operation of law. The Income Tax succinctly described is an irrecusable obligation.
However, if anyone else accepts this private credit and uses it to purchase goods and services, the user voluntarily incurs the obligation requiring him to make a return of income whereby a portion of the income is collected by the IRS and delivered to the Federal Reserve banksters. Actually the federal income tax imparts two separate obligations: the obligation to file a return and the obligation to abide by the Internal Revenue Code. The obligation to make a return of income for using private credit is recognized in law as an irrecusable obligation. The voluntary use of private credit is the condition precedent which imposes the irrecusable obligation to file a tax return. If private credit is not used or rejected, then the operation of law which imposes the irrecusable obligation lies dormant and cannot apply.
A Banksters defeatism (realization of defeat) nightmare, Being forced to Return to Real Money=United States Note=Lawful Money, Use the Remedy within the Federal Reserve Act. Redeemed 12USC411, Refusal Penalty 12USC501a http://savingtosuitorsclub.net Stop being a Slave!!!!!! This is Tax Free Money!!!!!!!! www.stormthunder.com

Wed, 01/02/2013 - 11:53 | Link to Comment luna_man
luna_man's picture

 

 

Now that I know the "keynesian", has an "blind spot"... I think I'll try and add to my "short" position!...Right?

 

MY MAIN MAN

Wed, 01/02/2013 - 12:05 | Link to Comment busted by the b...
busted by the bailout's picture

1. The Keynesian Model no longer works; it is counter-productive and destructive. – Prove it.  It IS working; the economy has been improving, not getting worse.

 

2. Markets that have been managed by the Central State/Central Banks are broken and no longer function in pricing risk and assets.   --Markets have been “broken” by the Fed’s money creation.  Did Keynes’s advocate for that?

 

3. Keynesians are incapable of recognizing opportunity cost: the money they borrow and squander on sinkholes is no longer available for productive uses.  -- Nonsense.  There is no opportunity cost when business refuses to invest in new productive investments.  The G is spending to replace the reduced private sector investment that came first.  At ZIRP and with corporations holding high levels of cash (even increasing dividends) there is no shortage of cash to invest.

 

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.  -- Same as previous.

 

5. Keynesians are incapable of recognizing institutionalized moral hazard is the inevitable consequence of flooding the financial sector with cheap, easy money.  -- I think they know it, but accept it as necessary to stave off the deeper depression and deflation that might have ensued without it.  But I agree it needs to stop, and TBTF needs to end.

 

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.  -- Same as previous, plus the economy has not died yet.  Your hyperbole sounds good, but can’t be substantiated.

 

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.  -- They know it, and I assume they fear it, but feel they have no choice but to pursue this path.  The hope is the economy will be storng enough to withstand slowly rising rates.
 

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.  -- Wrong;, inflation is another possible endgame.  You can call that default if you like, but most people will not see it that way, especially if it happens gradually over several years.
 

8. Keynesians are blind to diminishing returns: ever-higher debt produces ever-smaller returns.  -- And Austrians and Supply-siders are blind to the diminishing returns that can be achieved from cutting taxes and adding to productive capacity.  It worked great in the Reagan era, but not in the more recent Bush era.  Supply side economics was/is maxxed out, but they don’t see it.

 

Wed, 01/02/2013 - 12:17 | Link to Comment therearetoomany...
therearetoomanyidiots's picture

Nice fantasy world you're locked up in.  If we look around the planet, as mentioned below, Japan, Europe, South America, and ESPECIALLY the US has been practicing Keynesian economics for some time now and we have world wide economic farce.  Not collapse.   This is beyond anything, as you note, that Keynes believed in, much like capitalism now or marxism in the early part of the 1900s, the Tea Party and OWS, all are corrupted by the power hungry.   Your effort to defend 'Keynsian Economics" is just as futile as expecting Americans to choose "capitalism'.   They don't even know what it means. 

To argue Keynes, Hayek, Socialism, it's all moot.  

We in the US had it, for a while but it's gone.   Something that was resoundingly declared on November 6th with a huge exclamation point.   That was the last chance, the last gasp.  It's over folks, all over, and we aren't going back.   The police state will grow from here, bigger and worse than ever and we will see misery and death we haven't before, except maybe under stalin and mao. 

 

Wed, 01/02/2013 - 13:06 | Link to Comment busted by the b...
busted by the bailout's picture

Keynesianism began during the GD and continued until it began to be reversed during and after the Reagan revolution in 1980.  From 1940 to 1980, we won WW2, built the interstate highway system, became the first and only nation to put a man on the moon, created the internet, became the world's biggest economy and sole superpower, and "defeated" the Soviet Union (through government spending on the military).  Sounds liked it worked pretty well to me.

 The "farce" you refer to did not begin until 30 years after Keynesianism and the policy of regulation of banking and business was gradually replaced by supply-side and free-market ideology.  I suggest that had much more to do with the cause of our current problems than Keynesianism.

 IMO, insufficiently regulated business was the cause of the GD and Keynesianism was the cure for it.  The same is true of our current Great Recession.  You can claim the cure is worse than the disease, but that can't be proven, because we don't know what might have happened without it.  And because, as you point out, the current measures have gone far beyond Keynesianism, we can't blame it for the eventual fallout of our present monetary and fiscal policies. 

 And we can't blame the current administration entirely either, because it began under the previous one.

 Neither Keynesianism nor free-market ideology are 100% correct.  IMO, we need both; each tempered by the other to create a middle path that avoids extremes and excesses.

 

 

Wed, 01/02/2013 - 13:50 | Link to Comment therearetoomany...
therearetoomanyidiots's picture

As only a Keynsian might argue. 

Somehow the truly great growth of the middle decades and later during Reagan Clinton - is the result of Keynesian spending?   I would argue that the unleashed LIBERTY TO AMASS CAPITAL by MANY is what spurred the growth.  People could actually build wealth, own a house, provide for their families and take care of others.  Only when the ability to meed the desires of the masses was matched by the ability to provide innovation to the masses was growth really seen.  

Bush, was the beginning of the end, a truly northeast liberal educational elitist of the worst kind, a true puppet.   And Obama is worse.  Government has grown by some kind of calculus unbefore seen and according to your theory, we should be seeing exponential growth in the economy if governmental spending actually worked.  Nuff said.  

While you claim the GD was caused by capitalism and was 'cured' by keynesinism, I believe the prevailing finanical and political thought nowadays is that FDR and Keynesianism PROLONGED the depression, not shortened it, and we are experiencing the same thing now, and surely, the GD was not caused by capitalism but governmental/capitalistic crony-ism.   What's worse, as I've been arguing is that the ideas keynese or Hayek are irrelevant, you think that Obama and the democrats spending others people money to give to politically connected unions, state and governmental unions and political corporate cronies is 'Keynesian' spending and is helping the economy?  That Bernankes printing is helping?   We are NOT growing.  

What's even more telling is that since the decline of the US over the past 5 years, THE ENTIRE WORLD IS SUFFERING.   This engine has slowed, and almost stopped.   Isn't it odd that the US sucks according tot he rest of the world yet when the US goes away, financially, the rest of world goes to sleep.  Even China is shitting it's pants.   But, hey, maybe China and Russia can start spending more and reinvigorate the rest of the world?  

I would argue that ANYTHING that increases the size of government is EVIL and against the very foundations of the country.   The foundations of the country weren't as much capitalistic as they were moral and pertaining to liberty.   Under liberty, free market exchange and ability to amass capital is the most freedom anyone can have n a world where masses of people must live together by common rules.   The government can step in to protect those liberties (as it did with child labor, slavery-eventually, etc) but once it gets involved in controlling the spending of money, it becomes corrupt and as we've seen in the past 20 years, extremely corrupt, this adminstration the worst so far.  

Keynes was wrong, as are you.  THere is no effiicinet collection and redistribution of money by governmental entities.   None.   Whether you take care of your less fortunate and needy is the realm of the moral and free and not the politically aspried.  

Wed, 01/02/2013 - 14:27 | Link to Comment Mr. Magniloquent
Mr. Magniloquent's picture

I think Hitler beat Eisenhower in building highways. What tangible benefit did the massive investment of putting a man on the moon achieve over which equivalent coordination and resources could have been applied elsewhere? The internet wouldn't have developed in any other environment? The USA defeated the USSR only to become the USSA? I shouldn't have even addressed these items, as they are tangent.

Keynesianism "stopped" in 1971 because the money ran out, and people were begining to smell and feel the wet ink on their FRNs. Stagflation was the resulting product then, just as it is now. How was speculative malinvestment fueled by cheap artifical credit cured by regulations and money printing meant to re-establish and promote that very activity? It was those very actions, in that order which not only created The Great Depression, but perpetuated it. A nearly identical scenario has and is occuring this very moment.

To use a popular phrase, yes, we can blame the current administration all we desire. It was elected on the trumpeted premise of being not-Bush II, only to become Bush III on steroids. Both administrations did exactly the opposite of what they campaigned to achieve, both are equally and individually guilty entirely on their own merits.

Keynesianism and free markets are mutually exclusive. The existance of one precludes the other by definition. You espouse a talking point that it supposed to appeal to moderation and common wisdom, but it is naught but contradiction and intellectual poison.

Wed, 01/02/2013 - 19:19 | Link to Comment busted by the b...
busted by the bailout's picture

I think it is probably a waste of time to discuss this with you.  I believe you are a dyed in the wool Austrian or Libertarian, or both, and as such you probably see the world in absolute terms.   Completely free markets are right, and everything else is wrong.   There is no room for debate with such a worldview.  There is only exclaiming the rightness of your "system" and the wrongness of everyone else’s.

Most people do not recognize the vast majority of their statements are merely opinions, not facts.  They don’t accept that there is no right or wrong, only opinions derived by looking at the world through the lens of their particular economic and/or political philosophy.  Those on both the right and the left are guilty of this. 

 My position is there is no objective data to support most of what we spout-off about, yet people take firm positions and are ready to criticize others, name call, and even come to hatred and violence over their unproven opinions. 

You say my view is “intellectual poison”, yet many on the other side of the argument have similar views about Austrian economics and Libertarianism.  Both sides believe strongly that their view alone is right and the other’s is completely wrong, illogical, and intellectually weak.  I reject all ideological extremes / absolutes.

 This country has never had a completely free-market economy, so what evidence is there that it produces better results than Keynsianism or a mixed economy?

What country in the world has it?  Austria?  Germany?  Germany is the strongest economy in Europe.  Does it not have a mixed economy with extensive social programs?  How can that be the road to serfdom here, but not in Germany or Sweden?  Reports consistently show people in Scandinavian countries are happier than in the USA?  How can this be if socialism is so bad for a country?

 “I think Hitler beat Eisenhower in building highways. What tangible benefit did the massive investment of putting a man on the moon achieve over which equivalent coordination and resources could have been applied elsewhere? The internet wouldn't have developed in any other environment? The USA defeated the USSR only to become the USSA? I shouldn't have even addressed these items, as they are tangent.”

They are not a tangent, but my point is not that we built the first autobahn or that putting a man on the moon was an economically important achievement (although I do believe many technological advances sprang from that effort).  My point is that we, as a country, were successful enough and wealthy enough to do these great things under Keynesianism, with a mixed economy; laissez faire and free markets, with little or no government interference, was not needed to achieve our status as the “greatest nation on earth”.

 Keynesianism and free markets are mutually exclusive.”  OK, but my contention is the economy is not (and cannot be) black or white, not one extreme or the other.  There is a continuum of possibilities, of degrees of freedom and levels of regulation, social safety net, etc.  Your position is that it must be completely free for your system to work.  My opinion is that is impossible, and even if it was (as perhaps it would be in some anarchic state), it would be a miserable place to live. 

 The closest example I can think of is the early industrial age, before child labor laws were enacted, before labor unions, with 12 hour work days and 6 day work weeks, with horrible conditions, and in which most people lived lives that were nasty, brutish, and short.  It would be every man for himself, a degradation of society and civilization, IMO.  I’ll stick with a mixed economy that has reasonable proportions of both individual and corporate freedom AND governmental regulations and a healthy level of social programs.

Thank you for your responses and I wish you all the best in 2013.

Thu, 01/03/2013 - 00:24 | Link to Comment Mr. Magniloquent
Mr. Magniloquent's picture

I believe that the one thing we can agree on, is that we won't agree. Even how we regard history is completely opposite. For example, the early industrial age you refer to, I see as a golden age. The middle class was born, lifespans nearly doubled in a single generation, people had disposable incomes and free time as never before to buy goods which had never been more affordable. There were difficulties of urban life, but I attribute this to anything under rapid change. Even still, people still willingly fled the country-side of subsistence farming for these "brutal" cities--which is all of the evidence I need that they were preferable.

Rationally, I find moderation to be the best in nearly all things of this life. Extremes are generally equivalent prisons of different designs. My exception is regarded for morality, which Austrian economics is highly influenced by. Furthermore, I find the empirical evidence to suggest that the less of a State exists, the better off humanity is. I feel that compromises between The State and Capitalism are a false choice, and are ultimately born from a lack of understanding or logical consistency.

Regardless, I return the appreciation in a civil and thoughtful exchange. May your fields be fertile, and your enemies fall before you.

Thu, 01/03/2013 - 13:25 | Link to Comment busted by the b...
busted by the bailout's picture

I am curious about your statement that Austrian economics is highly influenced by morality.  That also is a guiding principle in my world view, so I will check it out further, somehow. 

I have always thought of laissez faire capitalism as immoral because I see it as enabling the exploitation of the poor leading to their suffering.  But I am open to other ideas, provided I see them as logically valid.

Also, your observation that people migrated to cities is compelling, but while that migration implies a desire for both jobs and a different lifestyle, it does not prove factories were moral in their treatment of workers, IMO.  That the standard of living improved is obvious, but an improved spiritual and emotional life does not necessarily follow and is harder to know / see, IMO.

Thanks again for the intelligent and insightful discourse.

Wed, 01/02/2013 - 13:13 | Link to Comment Joseph Jones
Joseph Jones's picture

No "recession" during Bush's term, during which debt doubled.  How do you Keynsians justify that?  My analogy: giving snake anti-venon to someone who lives in the Antarctic.  

Debtor is slave to the lender.  You love slavery, admit it.   

Wed, 01/02/2013 - 13:31 | Link to Comment busted by the b...
busted by the bailout's picture

"No "recession" during Bush's term"  This is missing a verb, so I'm not sure what you are saying.  Are you saying there was no recession during Bush?  If so, what about 2001 and financial crisis / great recession of 2007?

Or are you saying those two recessions were caused by the doubling of government debt?  If so, how can you prove that?  Correlation does not prove causation.  I blame excessive private sector debt caused by the elimination of Glass-Steagall and other regulations as well as a neglect of oversight by government (in order to allow a more free-market to thrive).

 P.S.  I am not a Keynesian.  “I’ve got spots;  I’ve got stripes too.”  And I hate slavery.  Individual liberty and personal responsibility are the ideals we should always strive for, to the extent possible in a large and complex society.

 

Wed, 01/02/2013 - 18:01 | Link to Comment Joseph Jones
Joseph Jones's picture

I stand corrected.  We apparently did have two recessions during Bush.  Now look at the overall GDP curve during Bush and I'd like to know how such curve justifies doubling of national debt.  If the height and width of the bubble/spike (as compared to the two small dips) justifies doubling of debt, what type economy justifies paying down debt? 

We just had this argument in the last election in Utah.  The Keynsians entering Utah (with its fairly good economy, we have surplus now) from surrounding sewer states like California, gave every justification in the world for us to not put away surplus from (sorry I forgot the source, energy sales possibly).  To such persons, no reason in the world exists to do as Joseph advised the King, to save in time of surplus.  All they know is they have persons to whom they desire to give away wealth for future favors (migrant third world types flooding here because of so much money flowing in).

Thank God Utahans flushed their screwy ideas and we voted to save a predetermined quantity of the surplus. 

I can't wait for us to secede.  How/why should hard working Utahans finance the profligacy of sewer states like CA, IL, etc?  You want to see insanity?  Go visit Maine Housing Authority's web page.  I think I counted a dozen foreign language links and about 30+ available programs.  Inmates took over long time ago. 

Wed, 01/02/2013 - 20:18 | Link to Comment busted by the b...
busted by the bailout's picture

I know things are bad and we have got to reduce spending and get a handle on the debt.  I'm just not as fanatical as some on the issue.  We had to spend more to ease the Great Recession, IMO but now it's time to stop.  

I think we do still have time to turn things around, but I also think we currently lack the political will to do it.  That must change, and I am hopeful it will soon.

Good luck.

Wed, 01/02/2013 - 14:09 | Link to Comment Mr. Magniloquent
Mr. Magniloquent's picture

1. "Prove it.  It IS working; the economy has been improving, not getting worse."
Unemployement is still higher than ever,
debt & leverage are still increasing, inflation continues to destroy any attempt at savings, harm anyone not politically connected, and raise the costs with anything involving commodities, food, and energy. I could elaborate further, but that would be exhastive. What metric are you using to claim the world economy has improved--heavily politicized and massaged government figures?

2. "Markets have been “broken” by the Fed’s money creation.  Did Keynes’s advocate for that?"
Yes, no? Keynes advocated The State spending money on the economy when private participants ceased to either from structual imbalances and/or lack of return (malinvestment). Whether this money comes from central bank inflation or savings is poorly articulated by Keynes.

3. "Nonsense.  There is no opportunity cost when business refuses to invest in new productive investments.  The G is spending to replace the reduced private sector investment that came first.  At ZIRP and with corporations holding high levels of cash (even increasing dividends) there is no shortage of cash to invest."
Being flush with excess capital yet not investing it is more indicitive of a lack of productive investment opportunities or presence of prohibitive risk. If The State continuing to spending when & where private entities will not is considered benefitial, or at least benign, why shouldn't it be spending 300x its current levels?

4. "Same as previous."
Likewise.

5. "I think they know it, but accept it as necessary to stave off the deeper depression and deflation that might have ensued without it."  But I agree it needs to stop, and TBTF needs to end.
Can you clarify your position? This statement agrees that the activities of The Central Planners are malignant, and should cease; however, this would contradict your refutations in almost all other points.

6. "Same as previous, plus the economy has not died yet.  Your hyperbole sounds good, but can’t be substantiated."
The economy will never die until there is nobody left to bury the last undertaker. You essentially make no argument. Cheap, easy money does destroys the premium on savings by its very definition. Devaluing money changes the manner in which it is spent and invested. If you disagree, I would like to buy any pre-1965 US Quarters ($0.25) for 1 paper USD each--your selling opportunity of a lifetime!

7. "They know it, and I assume they fear it, but feel they have no choice but to pursue this path.  The hope is the economy will be storng enough to withstand slowly rising rates....Wrong;, inflation is another possible endgame.  You can call that default if you like, but most people will not see it that way, especially if it happens gradually over several years."
Again, you appear to be in general agreement with the arguments you are attempt to counter. Is your claim that these actions are immoral, incorrect, yet necessary? Or rather, are you just arguing semantics? Are you claiming that hyperinflation is a superior alternative to a classic default, or that the results are meaningfully distinguishable?

8. " And Austrians and Supply-siders are blind to the diminishing returns that can be achieved from cutting taxes and adding to productive capacity.  It worked great in the Reagan era, but not in the more recent Bush era.  Supply side economics was/is maxxed out, but they don’t see it."
Wrong. Austrians regard all prices and their influence on economic activity, including that of money. The Keynesian failure is to understand what money is, its role(s), its associated costs, and ramifications on economic activity. If you cannot understand that more money does equate prosperity, then move to Zimbabwe.

Wed, 01/02/2013 - 14:51 | Link to Comment busted by the b...
busted by the bailout's picture

Hi, I'd like to respond to some of your questions and comments, but don't have time now.  I'll try to post something later, if you want to check back this evening.

Wed, 01/02/2013 - 20:10 | Link to Comment busted by the b...
busted by the bailout's picture

 

 

1. "Prove it.  It IS working; the economy has been improving, not getting worse."
Unemployement is still higher than ever, debt & leverage are still increasing, inflation continues to destroy any attempt at savings, harm anyone not politically connected, and raise the costs with anything involving commodities, food, and energy. I could elaborate further, but that would be exhastive. What metric are you using to claim the world economy has improved--heavily politicized and massaged government figures?

Yes, plus my on observations in my community; what data can you cite to support your claims?

 2. "Markets have been “broken” by the Fed’s money creation.  Did Keynes’s advocate for that?"
Yes, no? Keynes advocated The State spending money on the economy when private participants ceased to either from structual imbalances and/or lack of return (malinvestment). Whether this money comes from central bank inflation or savings is poorly articulated by Keynes.

I don’t know; I was asking the question, but doubted that he would have advocated for QE and $100S of billions in money creation by the Fed that went on for years.  But I might be wrong on that, and he is not here to tell us.

3. "Nonsense.  There is no opportunity cost when business refuses to invest in new productive investments.  The G is spending to replace the reduced private sector investment that came first.  At ZIRP and with corporations holding high levels of cash (even increasing dividends) there is no shortage of cash to invest."
Being flush with excess capital yet not investing it is more indicitive of a lack of productive investment opportunities or presence of prohibitive risk. If The State continuing to spending when & where private entities will not is considered benefitial, or at least benign, why shouldn't it be spending 300x its current levels?

I think it is indicative of insufficient aggregate demand and excess capacity. 

300 X current levels would greatly exacerbate inflation, don’t you think?

5. "I think they know it, but accept it as necessary to stave off the deeper depression and deflation that might have ensued without it."  But I agree it needs to stop, and TBTF needs to end.
Can you clarify your position? This statement agrees that the activities of The Central Planners are malignant, and should cease; however, this would contradict your refutations in almost all other points.

It was an emergency.  I believe the system was on the verge of collapse that would have resulted in another GD, not just a Great Recession. They did what they needed to do to ameliorate the collapse.  I lost a great deal of money as a result of their bailout actions, because I had concluded they could not / would not do all that they did.  But, in retrospect, I believe it was probably the best course for the country, THEN.  Now, four years later, IMO, it is long past time to begin to unwind those actions, to allow the economy to seek its own level, to let those that should fail, fail, and to break up those that are “too big to fail”.

7. "They know it, and I assume they fear it, but feel they have no choice but to pursue this path.  The hope is the economy will be storng enough to withstand slowly rising rates....Wrong;, inflation is another possible endgame.  You can call that default if you like, but most people will not see it that way, especially if it happens gradually over several years."
Again, you appear to be in general agreement with the arguments you are attempt to counter. Is your claim that these actions are immoral, incorrect, yet necessary? Or rather, are you just arguing semantics? Are you claiming that hyperinflation is a superior alternative to a classic default, or that the results are meaningfully distinguishable?

I mean that the Fed and G realize higher rates would be devastating, but, I believe, their hope is to be able to “muddle through”, to pump up the economy sufficiently (and create moderate inflation) to allow rates to rise slowly, and then there will be sufficient tax revenue in that stronger economy to enable the G to carry the debt, and eventually reduce it.  It is a gamble for sure, but I don’t think they had choice.  Complete collapse, default and deflation would have been to painful and too destabilizing for our society.  As my father (who lived through the GD said, “people these days wouldn’t put with another depression”.  I think he meant there would be riots and much civil unrest.  They have prevented that too, so far, although it may come in the end anyway, if their gambit fails.

Which is worse hyperinflation or deflation?  I think I would choose moderate deflation over hyperinflation, but I have not lived under either, so I can’t really say.  I believe “they” are trying to create moderate inflation, but it is yet to be seen if they can control it.  I also think they have concluded deflation is more painful for society than moderate inflation. 

8. " And Austrians and Supply-siders are blind to the diminishing returns that can be achieved from cutting taxes and adding to productive capacity.  It worked great in the Reagan era, but not in the more recent Bush era.  Supply side economics was/is maxxed out, but they don’t see it."
Wrong. Austrians regard all prices and their influence on economic activity, including that of money. The Keynesian failure is to understand what money is, its role(s), its associated costs, and ramifications on economic activity. If you cannot understand that more money does equate prosperity, then move to Zimbabwe.

Not sure I get your meaning.  I see money as a store of value, nothing more.  Printing/creating money is normally bad, IMO.  Moderate inflation, such as we had in the 70s is a real pain, but we did survive it.  I think Austrians fear hyperinflation, but we are far from that now, so I don’t see it as a real threat in the near future.  I see the threat as rising interest rates that makes carrying the debt load impossible.  Ben is holding it down now, artificially, but he can’t do that forever.  If the economy doesn’t heat up this year, I think we are in big trouble. If it does take off, Ben can take his foot off the accelerator, and we just might be able to muddle through, after all.  I’ve been betting against it for four years, but am close to changing my mind.

Thanks again for the dialogue.

Wed, 01/02/2013 - 12:04 | Link to Comment therearetoomany...
therearetoomanyidiots's picture

This argument is becoming stale and old and boring.   James Burnham discussed in 1946 exactly what is going on NOW.   Here's a great link...

http://www.k-1.com/Orwell/site/work/essays/burnham.html

From the article:

Capitalism is disappearing, but Socialism is not replacing it. What is now arising is a new kind of planned, centralized society which will be neither capitalist nor, in any accepted sense of the word, democratic. The rulers of this new society will be the people who effectively control the means of production: that is, business executives, technicians, bureaucrats and soldiers, lumped together by Burnham under the name of ‘managers’. These people will eliminate the old capitalist class, crush the working class, and so organize society that all power and economic privilege remain in their own hands. Private property rights will be abolished, but common ownership will not be established. The new ‘managerial’ societies will not consist of a patchwork of small, independent states, but of great super-states grouped round the main industrial centres in Europe, Asia, and America. These super-states will fight among themselves for possession of the remaining uncaptured portions of the earth, but will probably be unable to conquer one another completely. Internally, each society will be hierarchical, with an aristocracy of talent at the top and a mass of semi-slaves at the bottom.

To the left:  Wake Up, Obama is not your savior, nor does the democratic party have ANY concern about your well-being.

To the right:  Wake Up, the republicans are feeble at best and don't give a shit about your freedom.  

It's no longer about Hayek and Keynes, it's about elites vs. everyone else.    There are some (very few) exceptions that prove the rule (Paul). 

Logical next step for Americans?   You decide...

Wed, 01/02/2013 - 12:09 | Link to Comment swmnguy
swmnguy's picture

It's Feudalism.  Again.  In slightly different clothes.

Wed, 01/02/2013 - 12:49 | Link to Comment DaveyJones
DaveyJones's picture

and lighter beer

Wed, 01/02/2013 - 12:53 | Link to Comment therearetoomany...
therearetoomanyidiots's picture

Ironically enough being led by ADOLPH Coors Light...

Wed, 01/02/2013 - 12:08 | Link to Comment swmnguy
swmnguy's picture

I like Charles' stuff.  I'm enjoying his recent book.  But the problem with his reasoning is that he isn't starting from Square 1.  He thinks he is, but he isn't. 

There's nothing natural about a financial system that requires infinite resources, markets and money.  There's nothing natural about a system in which money is debt and vice versa, and both can be bought and sold as abstractions, with leverage.  Therefore, to point out the failings of the Keynesians is irrelevant.  It's like arguing over which parts of a Star Trek episode are "unrealistic."  The Austrians (or "Misesians", if you prefer) aren't any better.  Why do we value gold?  Sure, I have some, but if we were to actually go back to a hunter-gatherer existence, I'd rather have a cow, and by then nobody would give a cow in exchange for all the gold in the world.

They're all starting from an already-abstracted position.

Bernanke and the Fed are not "institutionalizing moral hazard."  Moral Hazard IS the institution.  They're just buffing the edges.  They are the cart, not the horse.  The horse is the misplaced concreteness of the entire abstract system.

Wed, 01/02/2013 - 12:51 | Link to Comment shovelhead
shovelhead's picture

You might want to season CHS with a little bit of monetary history and give some thought to the hierarchy of needs and a value you place on them.

Gold & silver evolved to become a tranferable marker of value for those needs.

You may be correct if you own the only cow in the universe, but that seems only likely in a Star Trek episode.

"Set phasers to medium-rare, Mr.Sulu."

 

 

Wed, 01/02/2013 - 13:13 | Link to Comment GMadScientist
GMadScientist's picture

Marginal beef.

Wed, 01/02/2013 - 14:01 | Link to Comment swmnguy
swmnguy's picture

Good point.  I was merely suggesting CHS (and the Austrians) exercise a little more caution when pointing out flaws in conceptual notions that are abstract in the first place.  I certainly appreciate the roles silver and gold have historically played.  That's why I own some (physical).  But if we are to start from basic, physical needs, gold and silver don't meet any of them.  I'm not suggesting, though some do, that we need to start any discussion of economics or finance at that most basic starting point.  I'm just saying that I have a hard time with some of CHS's points when he uses abstract and easily changeable tenets as a reference point to critiicize the abstract and easily changeable assumptions of others.  I think he's right about the Keynesians, or those who call themselves Keynesians, but as opposed to what?

My perspective is colored by the fact that I grew up on a farm in an area where the weather can kill you.  When you go into the ditch during a blizzard, all the money in the world won't keep you from freezing to death.  Of course, if you had had some money and had used it to have a shovel, heat source, food, blankets, rope, a tow strap etc. in the trunk, you'd be in pretty good shape.  But it's the things you packed that save you, however you got them; not the money itself.  Sometimes I think CHS and others get focused in too closely and miss that point.

Wed, 01/02/2013 - 12:12 | Link to Comment From Germany Wi...
From Germany With Love's picture

War is great. If all you care about is having something, just anything to do, aka a job.

Wed, 01/02/2013 - 13:15 | Link to Comment GMadScientist
GMadScientist's picture

Only if you're among those who don't have to fight.

Wed, 01/02/2013 - 12:17 | Link to Comment ReptilianSlaveMaster
ReptilianSlaveMaster's picture

Don't fight the trend. Go on benefits, get free money and free drugs and have a good time - this is a time to unite with government to make life easier

Wed, 01/02/2013 - 12:21 | Link to Comment liszt
liszt's picture

While your model of course hasn't any blindspot !

Wed, 01/02/2013 - 12:23 | Link to Comment q99x2
q99x2's picture

As that crook Dalio said at the CFR...they have to keep the GDP between 1 and 2 percent or the whole thing implodes. So anyway you look at it all the countries are going to average between 1 and 2 percent. Whatever it takes. Once they can consistantly falsify that number all will be well.

Wed, 01/02/2013 - 12:31 | Link to Comment Bullwinkle Moose
Bullwinkle Moose's picture

One more thing to consider, after WW2, the majority industry left on the globe was in the United States. A great deal of the world's factories, oil refineries, ports, rail systems, and much more had been destroyed because of war. Therefore, most things that had to be manufactured could only be found and exported from the United States.

Since then the whole world paradigm has changed dramatically. Now, the entire world is awash with over capacity in manufacturing. The United States has lost a great portion of it's manufacturing base. A great amount of capital has moved, and continues to migrate, to the east.

How world events will flush out in the future is very difficult to predict. One thing for sure, there are many drastic changes coming our way, and they will be coming our way at an accelerating rate much sooner that we care to think about.

Wed, 01/02/2013 - 12:57 | Link to Comment Tombstone
Tombstone's picture

All the central planning and stimulus since 2007 has not helped production or wealth creation to increase.  Most of those trillions of dollars have been wasted on welfare and palm greasing.  The only thing left is fewer new resources to create wealth and jobs along with a heap of new debt.  Good job, Marxists, you have fooled the majority of voters into thinking you are not destroying America, brick by brick.

Wed, 01/02/2013 - 12:59 | Link to Comment sangell
sangell's picture

I think one aspect of modern liberal economic thinking might actually be correct and work it if were applied more ruthlessly. Progressivity in the tax code. To the extent that income is increased by more or better quality work taking the income produce by these people forces them to do more work to achieve the same standard of living. OTOH the unskilled and non talented can't produce much no matter how hard they work and can actually interfere with the production of wealth where they do participate it makes sense to pay them to stay out of the labor force or at least allow them to only participate in harmless ways.

Wed, 01/02/2013 - 13:27 | Link to Comment Right Wing Nut Job
Right Wing Nut Job's picture

That may very well be the stupidest thing I've ever heard

Wed, 01/02/2013 - 14:04 | Link to Comment swmnguy
swmnguy's picture

Would you elaborate?  If your handle isn't ironic, I can imagine what you might say, but I'm curious.

Wed, 01/02/2013 - 13:09 | Link to Comment GMadScientist
GMadScientist's picture

The dangerous blindspot of Austrians: not everyone that disagrees with you is a "Keynesian".

Wed, 01/02/2013 - 14:09 | Link to Comment BruntFCA
BruntFCA's picture

One thing that's missed in the article. WW2 was *not* good for the UK despite all the borrowing. I can see how people in the US could try to make a case for building and sinking of ships, but don't forget the huge capital transfers from Europe and the UK to the US in terms of lend lease and borrowing.

If you're the global lender/manufacturer, then sure the war *can* potentially be good for you. Europe transferred huge sums of capital over the the USA while concurrently destroying their own capital.

Wed, 01/02/2013 - 14:15 | Link to Comment malek
malek's picture

 unless the central Bank buys essentially all newly issued Treasury debt

That statement is slightly misleading, as "new" also includes all rolled-over debt (while technicall replacing maturing debt can also be called "new" debt, few people understand maturing debt needs to be counted here too.)

Wed, 01/02/2013 - 15:24 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

Richard Millhouse Nixon - "I want to make one thing perfectly clear... I had nothing to do with it. I am not a crook!"

Wed, 01/02/2013 - 14:39 | Link to Comment Liberty2012
Liberty2012's picture

You are wrong about the dishonesty being a modest fault. It is the single root cause, the inherent flaw in fractional reserve banking, that drives all the other problems. It allows the stealing of work, choice, and freedom. It is the essence of the rake a take. Money is work traded for work - one to one ratio - one person to another - and all the choices that entails. Anything else is stealing. Manipulation / force is evil. Honesty / free will is good. All the rest is distraction.

Wed, 01/02/2013 - 16:13 | Link to Comment falak pema
falak pema's picture

I think that we tend to privilege theoretical modelling to explain reality amongst ZH contributors. That is dangerous inductive thinking.

The issue isn't IMO what model of economic theory are you using TO RUN THE WORLD?

THat is NOT what runs the world.

What runs the world is the mindset of the TPTB.  In the current power construct, since Pax Americana, the #1 team in global town, morphed into hegemonial hubris, its their ONE and ONLY private Bohemian club game and they have got fat and corrupted beyond recognition playing it like the sun never sets on their haloed "happy few" status of Olympians.

And that is not a question of the club to which the powerful belong : the Borgias, the Medicis or the Jesuits. Or the Jacobins or the Guy Fawkes mob, or the Bohemians, Bilderburgers, Trilateralists, now become the Davos mob.

Its about malfeasance based on hubris at a scale that would make Caesar's palace of antiquity blush with envy.

The latter day "spin doctors" are just there to provide the "rational" justification in front of the people, to paper over the unavowable shenanigans behind the curtain of greed gone viral. Just like Carl Rove does it in dirty manipulated plays, like a real life model of the Joker working for Big Boss man oligarchy. 

That way when the deals get cut; we have a rationale which summarises the skewed play as : "they used the wrong economic model", being sold by the PAtsy media. 

And the sheeple buy it : blame it all on Keynes; long dead.

But his legacy is used to excuse every orgy of of left handed play now officially baptised "Keynesianism gone wrong". Usual suspect gets burnt at the stake. 

Nobody likes to really look behind the curtain apart for a bunch of honest Joes, latter day heretics, who belong to minority blogsites like ZH. 

Can you really believe that Draghi, Ben and Lagarde play this game based on theoretical models?

They play it 'cos they are part of a team and its 'Cosa Nostra' of current Oligarchy! 

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