Guest Post: Misunderstanding Austerity, Stimulus and Demand

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Keynesian policy requires an expansionist Central State and Bank bent on imposing central planning on every level of the economy. Keynesians are natural partners with the neofeudal financial Aristocracy which benefits so enormously from Keynesian print-borrow-blow policies.

 
Here is the standard Keynesian cargo-cult analysis of our economic woes:
 
1. The problem is a lack of aggregate demand, i.e. people buying stuff and services.
2. As a result, the economy is running below capacity, i.e. economic output is below potential.
3. The solution is fiscal and monetary stimulus, i.e. the Central State borrowing and spending trillions on politically directed programs and the Federal Reserve printing and injecting trillions of "free money" dollars into the financial sector to boost borrowing and lending.
 
The cargo-cult program has failed for a number of fundamental reasons. Let's illuminate these reasons with a few thought experiments.
 
1. If we borrow or print $1 trillion and bury it in the ground, how much demand does it create? Answer: none, of course; it just sits there, utterly inactive. The Fed has printed around $2 trillion and made huge sums available to the financial sector at 0% interest. Most of the funds are sitting in the Fed as reserves, doing nothing except earning interest for the banks who borrowed it at 0%.
 
The velocity of this money is essentially zero: it goes nowhere and does nothing to stimulate demand. If we print $1 trillion and give it to the banks to lend to businesses and consumers, but nobody wants to borrow any money at any price, then it is a equivalent of burying the $1 trillion in a hole. The velocity of money is in a free-fall:
 
 
The Keynesians do not understand diminishing returns: the Fed could print another $1 trillion and that enormous sum wouldn't increase aggregate demand at all. Heck, make it $10 trillion; the mechanism is broken and increasing the sum of money available cannot fix it.
 
2. If we borrow and distribute $1 trillion to households who promptly buy $1 trillion of cheap junk from Asia, how much did that "increase in aggregate demand" do to boost the U.S. economy's capacity or output? Answer: very little. A relative handful of workers in the transport sector moved the goods from Long Beach Harbor to Walmarts and Targets around the nation, and the shippers and retail giants skimmed a thin margin of profit from the churn, but the capacity and output of the U.S. economy barely budged because the supply chain for this $1 trillion in "always low prices" low-quality junk lies elsewhere in the world.
 
If some sliver of the $1 trillion bought Apple products, then much of that money flows through the low-profit-margin Asian supply chain to Apple's Cupertino, CA headquarters. Corporate profits are nice for the top 5% who own the vast majority of stocks in the U.S., but once again they do little to boost capacity utilization.
 
How much of the Keynesian stimulus has trickled down to the employed bottom 90%? It looks like much of it flowed to the parasitic financial sector.
 
Keynesian policy requires an expansionist Central State and Bank bent on imposing central planning on every level of the economy. Keynesians are natural partners with the neofeudal financial Aristocracy which benefits so enormously from Keynesian print-borrow-blow policies.
 
Who handles all that Central State debt? The Wall Street broker-dealers, that's who. Who gets to borrow money at 0% interest from the Keynesian Central Bank? Wall Street banks, that's who (you and I don't get that perquisite). No wonder financial profits have soared under the Keynesian "stimulus" (The Keynesians have perfected an Orwellian lexicon).
 
 
Keynesians don't understand that their policies (deficit spending and low-interest easy money) create speculative debt bubbles. They also don't understand that post-bubble economies do not respond to more stimulus (diminishing returns again) because the economy is burdened by impaired debt and phantom collateral; it is a neofeudal debt-serf wasteland with few opportunities for business expansion.
 
No wonder small businesses are evaporating like ice cubes scattered on a Death Valley highway in July.
 
 
Employees are not faring any better under the Keynesian jackboot. Wage earners are earning less in the Keynesian regime:
 
 
Labor's share of the national income is in free-fall. Once again, the Keynesian policy is to inflate a speculative credit bubble and then after it bursts, "stimulate" the debt-serf economy by handing the financial sector $16 trillion in guarantees, backstops and subsidies and unlimited access to free money ay 0% interest.
 
 
3. With 28% of Americans pulling money out of their 401K retirement accounts to get by and Baby Boomers desperately working past retirement to rebuild their stripmined net worth, who is left to borrow the money the Keynesians gave the banks at 0% interest? Answer: very few. The top 10% are shedding debt, even though they own the majority of the nation's stocks and bonds.
 
 
The majority of companies and households that are getting loans are those refinancing existing debt to lower their monthly payments. Refinancing might add a thin sliver of demand from reduced interest payments, but those reaping the modest increase in disposable income might decide to save that cash rather than squander it, as the Keynesians hoped. Saving and spending wisely is--horrors!--austerity.
 

It's difficult to retire on Keynesian promises of the speculative-bubble-bogus-prosperity fleet returning any day now. The cargo cult's chants and dances are getting as tiresome as their grandiose policy failures.

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Thu, 01/17/2013 - 15:52 | 3163519 francis_sawyer
francis_sawyer's picture

To Keynesians: How about we try this?... Stop stealing from people & see if the economy picks up...

~~~

Sincerely Yours, francis_sawyer

Thu, 01/17/2013 - 16:01 | 3163545 pvzh
pvzh's picture

That is a novel idea /sarcasm off

Thu, 01/17/2013 - 16:17 | 3163562 TruthInSunshine
TruthInSunshine's picture

Q & A session with Paul Krugman, Ph.D. -

 

Question from audience:  

Dear Dr. Krugman, how many licks does it take to get to the center of a Tootsie Roll Pop?

Answer from Dr. Paul Krugman:  

If the Tootsie Roll Pop represents "market failure," and "licks" represent the printing & distribution of fiat paper by central planners, it will quite literally require an infinite number of licks.

Question from audience:

Dear Dr. Krugman, what is the best, most efficient, and most direct mechanism to reduce the size and/or growth in the rate of increase of deficit spending and/or accumulated debt?

Answer from Dr. Paul Krugman:

The best, most efficient & most direct mechanism to to reduce the size and/or growth in the rate of increase of deficit spending and/or accumulated debt is to print and distribute more debt as quickly and in as great as volume as possible.

Moderator:

Thank you for attending this Q & A session with Nobel Laureate & Winner of the Alfred & Sally Sloan "Neo-Keynesian Unicornian & Unobtanium Futurist" Prize Winner, Dr. Paul Krugman, Ph.D.

Thu, 01/17/2013 - 16:22 | 3163618 economics9698
economics9698's picture

"Keynesians don't understand that their policies (deficit spending and low-interest easy money) create speculative debt bubbles. They also don't understand that post-bubble economies do not respond to more stimulus (diminishing returns again) because the economy is burdened by impaired debt and phantom collateral; it is a neofeudal debt-serf wasteland with few opportunities for business expansion."

 

Bull shit.  The top 0.01% want bubbles and wealth inequality.  It's who they are and what they do.

Thu, 01/17/2013 - 16:26 | 3163643 walküre
walküre's picture

And if they don't share and take care of the others, they will get chopped. It's who the others are and what they do.

The more things change the more they stay the same.

Thu, 01/17/2013 - 16:37 | 3163711 economics9698
economics9698's picture

How many times have the peasants risen up and killed the king?


How many times has the king ripped off the peasants for decades?  

You do the math, which side has more fun? 

We may fast be approaching a Mussolini moment but it did not arrive without 100 years of theft by the Federal Reserve and politicians.

 

Thu, 01/17/2013 - 17:21 | 3163889 walküre
walküre's picture

The cat was let out of the bag in 2008, the curtain pulled and the wizard exposed. That doesn't change no matter how rosy their propaganda might be. Banks, stock markets and the financial industry were regarded as near infalible institutions. How many people knew before SHTF that the banks are owned by a small group of elite families who have owned this gig for decades? Who had time or motivation to inquire what it is that the financial industry actually does on a daily basis and how they are able to pay billions in compensation to their staff and executives? Fractional reserve lending was not taught in my school and I doubt it's being taught anywhere today. But the information is out there and since the crash, many have tried to figure out what has happened and in their research have uncovered very simple truths about the entire system.

It's based on fraud, theft and propaganda. There is no light at the end of any tunnel for us because the premise of the entire system is wrong to begin with. Money doesn't even grow on trees, it gets merely created out of thin air.

When the broader population realizes that the elite is not productive and feeds of the productivity of the masses, then the masses will rise up eventually. Whether those leeches are sitting in Versailles or in a penthouse overlooking Central Park makes no difference. They're useless and parasitic. The paper wealth they've accumulated is by fraud. Some call it magic. Well, no.

There is only one solution to end the imbalances. The elite needs to erase at least half the debt (wealth) and allow all assets including productive labor to increase 100%. Then allow for very strict regulations on the distribution of loans and limits to compensation from banking activities. Unless such a reset (or similar) is allowed to happen, the system will fail and the masses will take what is righfully theirs.

Thu, 01/17/2013 - 18:14 | 3164004 Wakanda
Wakanda's picture

The cat left the bag when high speed internet became available to the masses in the early 200Xs.  Us humans have yet to really understand what the explosion of information/disinformaion does to institutions that for centuries have depended upon secrecy.  9/11/2001 and the crash of 2008 might have been more successfully swept under the rug were it not for the internet.  These failures hang like rotting carcasses above today's institutions, still available for every joe six pack to consider and question.

The Second American Revolution, flowing through the pipes to a screen in front of you.

Thu, 01/17/2013 - 18:42 | 3164212 e-recep
e-recep's picture

damn right. i for one didn't know that central bankers and certain capital owners belonged to some sort of a masonic cult, having a secret bond among each other or that all this central banking shit started out with the rothschild bank of england. heck, i didn't know about the fractional reserve lending crap either.

Fri, 01/18/2013 - 10:52 | 3166028 TruthDetector
Thu, 01/17/2013 - 16:29 | 3163668 lairdminor
lairdminor's picture

Fair enough, but most of the Keynsians (or perhaps "neo-Keynsians" is a better term) aren't in the 0.01%. They are the ones who propagate the Keynsian mythology (economics professors, newspaper columnists, etc.) and implement its idiocies (government and central bank bureaucrats). The 0.01% are undoubtedly urging them on behind the scenes, but those implementers and facilitators don't understand the ramifications of their policies.

Thu, 01/17/2013 - 16:41 | 3163729 Nothing To See Here
Nothing To See Here's picture

+1 to you, but I would rather expose things like this :

The State wants science to support what it does, thus infects academia with keynesians and purges everyone else from teaching ranks. This is done through research financing, grants, controlled publications, influence peddling, etc.

Academia being turned into a monopolistic keynesian think-tank, the keynesian mythology spreads everywhere.

The 0,01% are merely the accidental beneficiaries of the results of keynesian methods, as desired by the State.

Thu, 01/17/2013 - 16:50 | 3163740 economics9698
economics9698's picture

laird,

Some Keynesians understand, most I think are believers.  The vast majority like the government paycheck and will, to the best of their ability, pass on this gibberish to students and the public.  They like the hours and the fact that they do not have to work for a living.

This started in the 1900s when the Fed founders pushed into academia and the universities for propaganda points and papers.  The top 0.01%, Walberg, Morgan, Rothchild, Rockefeller, all set up the system of spoils for academia.

It is only because of a few hell raisers, myself included in that group, of Austrians who show the propaganda and lies to the public and students that the economics profession has any credibility at all. 

Most of the public condemn economist as snake oil salesmen and they are correct in this assessment.

I may not have a big audience but I expose these frauds whenever and wherever I can.

 

Thu, 01/17/2013 - 17:32 | 3163925 Joe moneybags
Joe moneybags's picture

"It is only because of a few hell raisers, myself included in that group, of Austrians....."

I'm very impressed with your English, since it not your native tongue.

Thu, 01/17/2013 - 20:05 | 3164515 scrappy
scrappy's picture

"I may not have a big audience but I expose these frauds whenever and wherever I can."

Me too.

 Mises, Marx, and Keynes is the false left/right paradigm of banker fascism. The Georgist school of political economy considers Mises, Marx, and Keynes to be the main schools of neo-classical economics...

https://libertyrevival.wordpress.com/documents/economic-conspiracy/

https://libertyrevival.wordpress.com/2011/01/09/ending-poverty-and-polit...

 

 

 

Thu, 01/17/2013 - 23:29 | 3165118 economics9698
economics9698's picture

I left a message on your web site.

Thu, 01/17/2013 - 17:09 | 3163843 LawsofPhysics
LawsofPhysics's picture

Please, most engineers and scientists are no were near the fucking business pricks.  Probably for good reason.

Thu, 01/17/2013 - 20:53 | 3164681 Xanadu_doo
Xanadu_doo's picture

hapless pawns.

but they should still hang with the rest, imho,

Thu, 01/17/2013 - 18:01 | 3164010 sessinpo
sessinpo's picture

economics9698:   "Bull shit. The top 0.01% want bubbles and wealth inequality. It's who they are and what they do."

 

As devil's advocate, are you suggesting that if there weren't bubbles, the top 1% wouldn't have such a larger portion of wealth?  Explain and provide facts.

 

I would suggest the following. The wealthy are wealthy and have much more disposable income because you only need so much for basics to live your life. Let my explain this way.

Let's say, to cover living expenses for a person is $15K for minimal food, rent, utilities, etc. The person working for wages earning only $16k only has $1k left over.

However, the wealthy person that has various income (usually investment income) earns much more - let's say $50k (to keep it simple). That means the wealthier person has an additonal $35k as disposable income for additional investment or, if they choose, expenditures on goods such as cars, etc. The lower wealth person does not, only having $1k in this example.

 

My point is, regardless of bubbles or not, the top 1% already have an economic advantage. THEY DON'T NEED BUBBLES. Even if bubbles didn't exist, a billionaire would still be able to sit on their ass and collect interest income that all of us would be envious of, all without type of bubble.

 

Take the emotion and jealousy out of your post.

 

What I do have a problem with is that the wealthy also have power that makes the playing field uneven so that more of us in the lower income brackets aren't able to reach higher incomes and wealth. That is often corruption with the co-conspirator, government - fascism.

 

No matter what economic system you use, their has always been the top 1%. We could have a revolution and hang all the bankers and politicians but you know what? There will still be a top 1%. Think about it.

Thu, 01/17/2013 - 20:03 | 3164495 economics9698
economics9698's picture

Thank you for the critique.

The banking elite have understood bubbles for centuries.  It’s basic banking 101.  If you have the central bank you expand the money supply, raising prices of whatever the hot thing of the day is, tulips, Nasdaq, housing, stocks, and then you deflate the bubble, because you can.

You make money (not the central bank but the private banks who know the con game) going up and down.

The classic example I use for students is the 1918-22 boom in food and farm prices for WWI monetary expansion.  The farmers out in the Midwest got all loaned up on expensive prices for their crops, got loans based on those prices, banks loaned up, and the Fed pulled the rug out from under them by contracting the money supply allowing assets to be gobbled up as a fraction of the cost.

Also the banks that made the loans went under and the favored banks in the east were able to grab more market share, the primary goal of the Fed.

Look at the link and change the years to 1918 to 24 or so.  What do you see?

These bankers have been doing this game for centuries.

 http://research.stlouisfed.org/fred2/graph/?s[1][id]=AMBNS

 

Thu, 01/17/2013 - 15:54 | 3163527 PUD
PUD's picture

"Demand" or better, exponential demand, fueled by exponential money (debt) creation on a finite planet is a doomed philosophy. Period..end of story

Thu, 01/17/2013 - 15:54 | 3163528 sotto
Thu, 01/17/2013 - 15:56 | 3163533 IamtheREALmario
IamtheREALmario's picture

Yes, but what if the primary assumption is wrong? What if the Keynsians actually do understand the EXACT effects of their programs???? What then?

It changes the picture a little bit does it not?

Thu, 01/17/2013 - 16:03 | 3163552 hooligan2009
hooligan2009's picture

NO

Thu, 01/17/2013 - 15:56 | 3163537 Flakmeister
Flakmeister's picture

My fuck, did the "smartest guys in the room" really think that there was no limit to pulling forward demand through the alchemy of financialization????

Thu, 01/17/2013 - 16:13 | 3163574 francis_sawyer
francis_sawyer's picture

It was all just a 'thought experiment' [by them] to draw folks like you out into the open [from being wallflowers] so that masses of other folks could celebrate your insight & worship you as their next hero... I've found that the LESS [to the point] you are & the MORE you beat around the bush, the more enhanced your 'GENIE' status becomes...

Thu, 01/17/2013 - 16:28 | 3163665 francis_sawyer
francis_sawyer's picture

Yo indeed!

Thu, 01/17/2013 - 15:57 | 3163538 New_Meat
New_Meat's picture

"Most of the funds are sitting in the Fed as reserves, doing nothing except earning interest for the banks who borrowed it at 0%."

Still filling up those balance sheet black holes from 9/08 fiasco.  Many "bank holding companies" still on the .gov tit.  Not outta there yet.

- Ned

Thu, 01/17/2013 - 15:58 | 3163542 Kreditanstalt
Kreditanstalt's picture

Gold, people! G-O-L-D.  Save in something in limited supply that they can't manipulate...

Thu, 01/17/2013 - 16:05 | 3163557 bigdumbnugly
bigdumbnugly's picture

come again?

Thu, 01/17/2013 - 16:20 | 3163606 nope-1004
nope-1004's picture

I think he meant "physically multiply" at will.

 

 

Thu, 01/17/2013 - 16:16 | 3163595 Yardfarmer
Yardfarmer's picture

Ammo, People! A-M-M-O. Save in something in limited supply that they can't manipulate...(at least for the meantime)

Thu, 01/17/2013 - 16:32 | 3163678 francis_sawyer
francis_sawyer's picture

Quick!... Buy at ALL TIME HIGH PRICES!

~~~

By the time the zombies make it out the compound, all you'll have to do is give them a butt on the head with your pistol... Save your GOOD ammo for the deer, bear, & wild hogs...

Thu, 01/17/2013 - 16:03 | 3163549 cxl9
cxl9's picture

If you (the consumer) don't wish to borrow, then the government will borrow on your behalf. And your children's and your grandchildren's behalf, too. The government will find a way to push this printed money into the system one way or another. Maybe they just borrow another few trillion dollars and double every Federal employee's salary. That will push some inflation into the system, as those employees spend spend spend on products, services, and investments. That is essentially part of what they've been doing for the last five years, and it's why government employees are paid so much more than their counterparts in the private sector. Well, that, and because they are so much more important than us lowly peasants that pay taxes.

Thu, 01/17/2013 - 16:16 | 3163588 MillionDollarBoner_
MillionDollarBoner_'s picture

Hey...that could work!!!

So, we turn up at the Govt employee's house to clean it on a Monday, at minimum wage...

Then we turn up at their offices on the Tuesday to find out what happened to our local services...and they tell us to "fuck off, you insignificant worm!"

Works for me ;o)

Thu, 01/17/2013 - 17:20 | 3163884 Kreditanstalt
Kreditanstalt's picture

You should only use their "money" to pay for the essentials of life.  You sure as hell don't SAVE in dollars.  Save in gold.

As an officially "low income" individual, my gov't. entitlement checks per year amount to about equal to their own property taxes.  I spend very little of my savings per year, only on food, energy, very limited utilities (have woodstove heating) and misc. other small taxes.   No income tax, no "pay deductions" (no pay!).

You can do amazing things with some savings and frugality.

Thu, 01/17/2013 - 16:04 | 3163555 Snakeeyes
Snakeeyes's picture

And the M1 Money Multiplier is also crashing. Cheers!

http://confoundedinterest.wordpress.com/2013/01/04/housing-angst-u6-unem...

Thu, 01/17/2013 - 16:08 | 3163568 luckylongshot
luckylongshot's picture

Looks like fraud and a ponzi scheme, smells like fraud and a ponzi scheme and tastes like fraud and a ponzi scheme....so what is it?

Thu, 01/17/2013 - 16:18 | 3163600 MillionDollarBoner_
MillionDollarBoner_'s picture

A duck?

Thu, 01/17/2013 - 16:43 | 3163736 RopeADope
RopeADope's picture

RICO violations.

Thu, 01/17/2013 - 16:14 | 3163583 LawsofPhysics
LawsofPhysics's picture

So, when you reward fraud and other forms of bad behavior, people eventually take their capital and go home.

Gee, who would have guessed?

End the Fucking Fed already.

Thu, 01/17/2013 - 16:18 | 3163594 NidStyles
NidStyles's picture

The Government has no incentive to end it. They can just blame the Fed or frame the discussion to make it seem like the Fed is at fault while running more bonds off at the Treasury.

 

The problem is twofold, the Fed is guilt of behaving like criminals, and the Government is guilty of not following it's on made up rules. The laws of nature and economics will fix them both given time.

Thu, 01/17/2013 - 16:14 | 3163585 NidStyles
NidStyles's picture

Demand should drive supply, unfortunately the Keynesians think that Supply can drive Demand. It works great for the governments involved because they never have to run out of Fiat bux, until they comes to pay back the debt that is. Not like they care, they will be out of office, or just act like a tyrant then.

Thu, 01/17/2013 - 16:20 | 3163610 ebear
ebear's picture

The essence of Keynesian logic:

http://www.youtube.com/watch?v=yp_l5ntikaU

Thu, 01/17/2013 - 18:15 | 3164088 shovelhead
shovelhead's picture

Ha,

Looks exactly like the Occupy crowd. Railing against income disparity by promoting the policies that created it in the first place, ie. putting the nose on the witch.

Thu, 01/17/2013 - 16:21 | 3163614 Yardfarmer
Yardfarmer's picture

I always suspected that the pervasive failure of economic policy was somehow related to moral depravity.http://chasvoice.blogspot.com/2011/08/john-maynard-keynes-lavender-bolsh...

Thu, 01/17/2013 - 16:33 | 3163682 economics9698
economics9698's picture

The game Krugman is playing is as the rodeo clown out in the arena with the sole intention of diverting the bull’s attention away from the cause of his upset, some cowboy sticking a set of spurs in the bull’s belly riding on his back.

 http://usa-wethepeople.com/2012/11/paul-krugman-wants-a-91-top-tax-rate/

Thu, 01/17/2013 - 16:23 | 3163626 DR
DR's picture

Keynes was also a big advocate of public work projects as a form of fiscal stimulus. If we would have spend the trillion+ on upgrading US infrastructure instead of bailing out the bloated finance sector we would be way ahead of the current employment numbers and have a 1st infrastructure system to show for it.

Thu, 01/17/2013 - 16:27 | 3163652 NidStyles
NidStyles's picture

He was also a 'public employee' his entire life.

Thu, 01/17/2013 - 18:31 | 3164153 JR
JR's picture

Spending government money like it was “so much bilge,” journalist Albert Jay Nock described FDR’s New Deal spending during the Great Depression as “a nation-wide, State-managed mobilization of inane buffoonery and aimless commotion.”

Some of the haphazard jobs created by Roosevelt’s Civil Works Administration - the CWA had evolved into the Works Progress Administration by 1935 or into the “We Piddle Around” as some tagged the WPA – included hiring actors to give free shows (the nation’s actors’ union claimed 4,500 members  but the agency managed to hire 6,000) and, according to Lawrence W. Reed in Great Myths of the Great Depression, paid librarians to catalog archives,  “hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, put men on the public payroll to chase tumbleweeds on windy days,” and engaged workers to catalog the many ways of cooking spinach, among other things.

Also, “hundreds of WPA workers were used to collect campaign contributions for Democratic Party candidates.”

Says Reed, “By 1941, only 59 percent of the WPA budget went to paying workers anything at all; the rest was sucked up in administration and overhead.”

The WPA gave rise to the term ‘boondoggle,’” says Reed, “because it ‘produced’ a lot more than the 77,000 bridges and 116,000 buildings to which its advocates love to point as evidence of its efficacy.”

What people fail to realize, he writes, is that it was Roosevelt’s tinkering with the economy that prolonged the Depression….that it was ”the stupefying roster of wasteful spending” that diverted “valuable resources to politically motivated and economically counterproductive purposes.”

It’s a warning, he says, that we should heed today.

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