China Joins The Broken "Keynesian Multiplier" Club

Tyler Durden's picture

A week ago we showed a chart from Charles Gave which does a terrific job at explaining why the modern economic "science", in conjunction with the Fed's negative rate environment, have failed at their ultimate stated mission - to stimulate growth. The reason: the Keynesian multiplier, which has tracked the nominal US GDP 7yr average change with a very high correlation, is now negative. From Gave: "shows that the marginal efficiency of public debt, at least in the US (public spending in emerging markets from a low base usually improves productivity) has been declining structurally since 1981. And it seems that this marginal efficiency has now reached a negative level."

The good news, at least over the past two decades, is that for all the failings of globalization, there were other developing countries and regions around the world, that had the credit capacity to inject debt momentum into their and, in an infinitely fungible world, the global economy. This is why China was so instrumental as a growth counterweight during the great financial crisis following the Lehman failure.

There is, however, a problem: as the chart below shows, China now has a Keynesian multiplier problem of its own. Even as the Chinese politburo and the PBOC have been injecting an ever increasing amount of credit into the private sector - the primary source of Chinese growth - the incremental GDP growth has been trending lower, and lower, and lower...

  • The good news: unlike in the US, the multiplier is not yet negative, as there still is some GDP reaction in response to every "credit impulse."
  • The bad news: each successive GDP response is weaker and weaker, even as the credit injection has no choice but to be larger and larger.

Which begs the question: is this why the PBOC has been so hesitant to ease once more, even as the inflation in the real estate market largely courtesy of foreign central bank liquidity injections by the Fed and BOJ which wash ashore on the mainland, well-aware such liquidity injections would have to be far greater than any before to achieve the same economic growth results?

And what happens to global inflation rates once China, which will ultimately have to ease to prevent the complete collapse of its banking sector, does proceed with proving that it is precisely the negative Keynesian multiplier that will be the great undoing of the Keynesian school of economics?

Luckily, once the BOJ's reflation experiment fails, and after China repeats the soaring inflation days of 2011 only to tighten all over again, there is still Europe. The only problem with Europe is that as we showed recently, credit creation is already record low and absent the ECB openly monetizing debt to inject reserves and boost stocks, there is little hope.

Finally, if Bernanke is indeed on the way out, which even more dovish ex-Goldmanite will replace Mario Draghi, as the onslaught for the final reflation attempt reaches its climax?

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idea_hamster's picture
Broken "Keynesian Multipler" 

Again, the departement of repeditive redundancy department strikes again!

mattdubz86's picture

bye bye gold, wave 4 correction from April 12 crash lows, wave 5 violent ride down to 1000.

NotApplicable's picture

You mean Keynes wasn't smart enough to put a zero boundary on the multiplier in order to define the negative potential out of existence?

Then again, it served him well within his own long run...

andrewp111's picture

End the Fed, and then what?? I guess Congress will just issue fiat dolars directly through the Treasury to self-finance Federal spending, and interest rates will remain at zero forever. I believe that system is called MMT.

patb's picture

keynes was a believer in fiscal stimulus.


this should be titled "Broken Friedman Multiplier".

the credit injections are now going to recycle bad debt.



kito's picture

i never surfed waves, but im fairly sure you are right..........but then again, its the paper price..................

El Viejo's picture

Chaos:  First comes diminishing returns then negative returns.

Groundhog Day's picture

Print away you fucking scumbags.  It will only destroy everything that much quicker

Gringo Viejo's picture

All Bloken!

This gives all "diverserites" an opportunity to express their righteous, childish outrage. Have at it!

CPL's picture

Like watching people play twister with vaseline on the circles.

Hughing's picture

Multi schmulti; just print and print again. TPTB will print till dead, guillotine, firebomb gunshot dead.

Yen Cross's picture

   That copper(and undisclosed other cheap plastic childrens toys) fiasco took China down a notch.

      I would take China over Europe >barf-barf. any day of the week right now. Z/H readers know how deep my love of 'Pole Smoking' CHINism is.

              Europe is on the edge of catastrophy!

mattdubz86's picture

bye bye gold, wave 4 correction from April 12 crash lows, wave 5 violent ride down to 1000.

MarsInScorpio's picture



Did you post this again just in case we failed to notice your brilliant observation the first time?


orangegeek's picture

Hey MIS - your sarcasm may put you on the wrong side of the market - once wave 5 down completes, the retrace should return to current levels.


Yours to discover below

MilwaukeeMark's picture

This article assumes that the powers that be really cared since 1981 about what does or does not stimulate the economy, rather than spending to perpetuate their own glutteny at the public trough. 

El Viejo's picture

Thanx for the Diminishing Returns Heads Up. Beautiful. 

Dr. Engali's picture

Seems to be a lot of correlation with the hundred year anniversary of the FRN.

Bokkenrijder's picture

So much for all those gold bugs hoping that "China will be different and will some day issue a gold backed currency."

China only does what it does best: copy everything we do in the West which includes a fractional reserve banking and a fiat currency system!

jeff montanye's picture

you never know when a renaissance may hit.  they invented silk, gunpowder, paper, the compass and printing.  oh, and china. 

p.s they invented fiat too: The idea of a using durable light-weight substance as evidence of a promise to pay a bearer on demand originated in China during the Han Dynasty in 118 BC, and was made of leather.[2] The first known banknote was first developed in China during the Tang and Song dynasties, starting in the 7th century. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions.[3][4][5] During the Yuan Dynasty, banknotes were adopted by the Mongol Empire. (wikipedia)

bank guy in Brussels's picture

Not really sure that it is, as article suggests, the

« negative Keynesian multiplier that will be the great undoing of the Keynesian school of economics »

Richard Koo may yet be right

The point of debt in a balance sheet recession downturn, like we have now, is not so much to 'grow' GDP via that debt

But rather to keep the whole credit system and money velocity going, given that private credit creation has collapsed and is long-term traumatised

Koo has an excellent point that the savings sector of a society needs to be utilised for economic activity, and in a balance sheet recession, no one else except the government is going to do that

Koo's much-neglected essential background to this, which he himself does not emphasise enough, is that the important thing is that, like in Japan but unlike in the USA or Europe, the wages and income of the working classes need to be maintained as part of the plan

Japan's 23 years since their crash should be a positive lesson for everybody ... they avoided depression and trauma

In contrast, ZH tends to promote the liquidationist solution as positive or at least in any case inevitable

But it's important to note that even in an arguably successful national liquidation, like in Iceland, they actually increased welfare benefit sustenance for common people, to buffer the transition ... versus the 'shock therapy' approach that mauled Russia and Eastern Europe in the 1990s, and is mauling Southern Europe now, in an even more wicked way, as they have both the excess debt and the brutality

smartstrike's picture

Now you talking, putting aside your geo-political rants, you're one astute guy.

Tyler Durden's picture

That is a long way of saying that since the global wealth slice is contained in the equity tranche, which in the case of liquidations, would be wiped out, the only option is to reflate, i.e. inject more debt (a shotgun approach and one which leads to reserve creation and in a balance sheet recession - whatever this artificial construct is - to a stock market bubble). Of course, since liability creation needs an asset, the central banks are actively extracting collateral which otherwise could be used by private loan creation our of the system: i.e. one giant LBO by the monetary authority which is owned by private banks.

Have you looked at this chart and asked yourself why total commercial (private) loan creation is at lower levels now than it was when Lehman failed?

Of course, being shotgun, one simply has to sit back and pray that things work out. 

Here's the thing: this is a great equilibrium for 0.01%. Everyone else gets poorer, and even the welfare system is now breaking down. When it fully devolves, you get the revolution Schauble warned about, and most countries that have had an unprecedented social class bifurcation have experienced first hand.

sschu's picture

They decided to delay the day of reckoning because it has always worked in the past.  Inject free money, the consumer, after a brief respite, starts borrowing again, those cars start rolling off the assembly lines and all is good. 

Except this time it didn’t work, and that is why Bennie has no hair left.  They did not understand that this time it truly was different.  Their model does not work.

So here we are, the Fed has increased their balance sheet by nearly $3T and we have nothing to show for it except a tenuous and fake stock market rally.  Of course who could forget that the price of oil is at $96+ and food staples are insuring the poor stay or get poorer.

Many of us were saying to take our medicine and reset in 2008, 18 months of pain would have ensued, but we would have been long done by now.  They chose the 1932 model instead of the 1922 model.  We will have to take the medicine eventually of course, trillions poorer before we start however.

The question that needs to be resolved is who has all this new money?  These are the folks that just might end up on the gallows.


newworldorder's picture

RE: bank guy in brussels, +1 to your comments

As someone who has worked a lifetime for US based manufacturing organizations, I have come to have a deep appreciation that most human economic growth comes from manufacturing things that people want to buy. A large portion of economic value add, comes from the conversion of labor into economic units (money) that average people can earn, invest or save for their future. Somehow many in the West have forgotten what that means relative to the fair and equitable earning power that ALL labor can contribute to economic growth and activity, especially if this can be maintained over a number of generations.

Under the "there is a free lunch" theory as practiced by many governments, central banks, and other financial entities, the movement of money created in a fractional reserve banking system, has replaced the value o of human economic activity, as the primary driver of what we call the "economy."

This is a dangerous belief system advocated by most high priests of voodoo economics. Instead of striving for equitable policies regarding labor, Western Financial and Capital management has adopted an exploitative, lowest labor denominator approach to economic activity. We have as a result, replaced viable production enterprises and systems with manipulative financial market operations that only the privileged SIFI institutions can participate in. Governments and Central banks have taken economic activity out of the hands of labor and invested capital and placed into the hands financial predators, who can pillage at will what was previously functioning economic activity.

The stakes are high, as our economic hubris will have a devastating impact on a majority of the population. In the mean time however, LETS ALL PARTY HARDY.


Fix-ItSilly's picture

All this theoretical, numbered stuff is nice.  But let's get real.  The Western World has for 6 decades sought off balance sheet contract manufacturers.  First Japan, then S. Korea, Thailand, Malaysia, Taiwan, etc.  Now the music is stopping as the Western World cuts loose its contract manufacturers - baby boomers entering retirement don't need "stuff".  Who gets the layoff notices first?  - contract manufacturers and then their suppliers (BRICS).

El Viejo's picture

like China then the Aussies.

newworldorder's picture

Boomers may not need stuff, but there are billions of young people who need jobs and a way to be productive in society. We are practicing Life as a Zero sum game, in most societies on this planer.

smartstrike's picture

How do you begin to explain that GaveKal is an outfit run by idiots! In 2006 GaveKal passionately argued that US was richer way beyond anything that was reported because there was so much 'sweat equity" in housing that was simply not counted. If one was to figure out the aggregate value of this "sweat equity"(home improvements for non Phd types), there was so much wealth unaccounted for in housing that US need not worry about its future.

Now this Keynesian multiplier? Well if you spend on NSA, MIC or super rich, you ain't going to have any multiplier effect, that money is hoarded and NOT spend into the economy. One can draw charts out of wazoo, if debt does not go to the people that'll spend it, one's charts are useless.

Incidentally consider that 'famous' chart that purportedly showed negative money velocity multiplier as debt rose, what the money velocity chart  REALLY showed was the effect of 'wealth accumulation." Weath accumulation is the other side of same coin,  debt-money.

Quinvarius's picture

The bankers are sitting on almost all the money that has been printed.  It has not helped the economy at all because it is hoarded.  So when the Socialism finally starts kicking in to "save" the public economy with printing, the bankers will freak and try to get ahead of it.  Their deposits at the Fed are like an unstable snow formation waiting to become an avalanche.  The Fed needs to stop being stupid and start charging those idiots interest instead of giving them interest.  The bankers need to earn their way in the free market before the Government does something really stupid to fix the Fed's mess.

Nue's picture

Could you imagine if all that horded money was to hit the economy at once though? Forget about a  massacre the FED would need a  Saturday night holocaust to absorb the inflation shock.