Keynesian Folly And Irrational Apoplithorismosphobia

Tyler Durden's picture

Submitted by John Cochran, via the Ludwig von Mises Institute,

In his The General Theory of Employment Interest and Money, John M. Keynes criticized, without citing or mentioning him explicitly, Hayek’s (Austrian) primary policy recommendation: the best way to avoid a bust is prevention. Hayek knew that avoiding the credit-created boom prevents the associated malinvestments and over-consumption while boom-bust cycles will be avoided through prevention or significant reductions in credit creation. Keynes, however, thought differently:

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

A good interpretation of the Bernanke Fed monetary central planning since the end of the “Great Recession” with its near zero-interest rate policy coupled with multiple rounds of quantitative easing (QE) driven by apoplithorismosphobia, is that the Fed has been attempting to follow Keynes’s advice. The way to avoid a new slump is to keep interest rates low for as far as the eye can see as a way to overcome a lack of “animal sprits” and thus sustain a quasi-boom. As long as inflation is low, no harm, no foul. In fact, as the thinking goes, a little more inflation might be beneficial.

Comments by Peter Schiff in Reaction to the Federal Reserve Policy Statement “following the Fed’s announced limited tapering of QE III support this interpretation of Fed intentions.” Schiff points out, “There can be little doubt that today’s Fed announcement is an epic attempt at rhetorical audacity. The message they hope to convey is that they are tightening monetary policy by loosening it.” He then points out, “There is little evidence to suggest that the trends are self-sustainable. But seemingly strong data had made the arguments in favor of continued QE increasingly untenable. As they could no longer stay the course the Fed had to do something. Ultimately they decided to play it both ways.” Schiff then explains what is unstated, but between the lines — continued ease is the Fed’s intent:

But these “Open Mouth Operations” likely represent the full inventory of the Fed’s policy options. I suspect that when the economic data begins to disappoint, the Fed will quickly reverse course and increase the size of its monthly purchases. In fact, today’s Fed statement was careful to avoid any commitments to additional tapering in the future. It merely said that further changes in the amount of purchases will be dependent on the data. This means that QE could go in either direction.

If yields move much higher I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter.

Austrians long ago showed the folly in such policies. Hayek’s lead essay in Profits, Interest and Investment (1939) provides an early Austrian response to Keynes’s nonsense. In what is one of Hayek’s most difficult articles, Hayek explicitly argues that such a policy will ultimately not only fail to achieve its stated objective, but will lead to significant long-run harm to the economy. The policy might temporarily appear to increase employment, but the effect is an illusion. Credit creation and artificially low interest rates, even if applied to an economy with currently unused resources still misdirects production leading to boom-bust episodes and higher future unemployment. Adrián O. Ravier updates these arguments in his two excellent QJAE articles, “Rethinking Capital-Based Macroeconomics” and “Dynamic Monetary Theory and the Phillips Curve with a Positive Slope”. In the first, Ravier provides

an explanation of why expansionary monetary policies fail in the longer term to solve the unemployment problems associated with recessions. This extension provides a fresh perspective on the debates between Hayek and Keynes in the 1930s and over “quantitative easing” today.

In the second article, Ravier shows:

While it is true that after the boom and bust the economy returns to the natural rate of unemployment, the crucial point is that the “natural rate” at the end of the cycle is quite different from the one evident at the start. This requires an “Austrian” Phillips curve with a positive slope.

During an artificial boom, employment may initially decline. However after a return to “normalcy,” unemployment may actually be higher than what would have been the norm before the policy-induced boom.

Joe Salerno cautions that besides the long run risks discussed above, an artificial low interest rate environment based on deflation fears may actually be preventing a healthy recovery. Salerno points out:

For recovery to begin again, there needs to be a steep rise in the “real,” or inflation-adjusted, interest rate observed in financial markets. High interest rates do not stifle the recovery but are the sure sign that the readjustment of relative prices required to realign the production structure with economic reality is proceeding apace. The mislabeled “secondary deflation,” whether or not it is accompanied by an incidental monetary contraction, is thus an integral part of the adjustment process. It is the prerequisite for the renewal of entrepreneurial boldness and the restoration of confidence in monetary calculation. Decisions by banks and capitalist-entrepreneurs to temporarily hold rather than lend or invest a portion of accumulated savings in employing the factors of production and the corresponding rise of the loan and natural rates above some estimated “true” time preference rate does not impede but speeds up the recovery. This implies, of course, that any political attempt to arrest or reverse the decline in factor and asset prices through monetary manipulations or fiscal stimulus programs will retard or derail the recession-adjustment process.

Current Fed policy is a policy of illusion, or better yet, of delusion.

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Vampyroteuthis infernalis's picture

It is simple. Pump lots of debt into an economy it ends up in the hands of the idle rich to be pissed away. Average Joe 6 pack is forgotten and real production is ignored. Only so many Ferraris can keep the economy going.

mickeyman's picture

It's like trying to prevent hangover by just staying drunk!

logicalman's picture

Staying drunk actually does work - until it doesn't

doctor10's picture

All of this -including the 64 dollar words-starts making a little more sense one realizes that while we all play on this board thinking its about economics, policy , commerce and business, the guys in NY and DC bear no such illusion.

They merely have granted themselves the "1% privlege" and have "re-invested" that in "homeland security".  That's all life in the USA has been about since 911.  They're daring the rest of us to do something about it.

Manthong's picture

Geezus… the more I learn the more I find out how much I don’t know.

darteaus's picture

Keynes only gets traction with politicians because it gives them the fig leaf of economic theory they need to strip mine the public.

Harbanger's picture

Debt based economic theory.  That's why in the end, Keynes will be remembered as a socialist bastard.

Hedgetard55's picture

IF Keynes really said what he is quoted as saying, all I can say is wow, what a shit for brains fool, a Keynesian clown.  :~)


"A permanent boom". Yea, right Alfred.


Fuck, he was merely a bankster tool even way back then!

steelhead23's picture

I am the lone down arrow, not so much because I think Keynes was brilliant, but because parts of his theory make sense.  His argument that during downturns in the economy, increasing government spending and lowering taxes and interest rates makes sense - it stimulates demand.  Where he goes off the rails is in that quote above.  Keeping interest rates low during a boom hides risk and generates asset bubbles, which, as we have seen, can cause cataclysmic credit collapses when asset prices decline, ever so slightly.  No, were we to play in the managed economy playground, the rational response to a boom would be to decrease government spending and raise interest rates and taxes to control inflation expectations.  The bigger question is - do we want to play on the managed economy field?  And if so, who is the manager and what's their objectives?  Currently, Keynesianism is a shield for protecting the elite and damned little of the money spent in our efforts to stave off deflation has gone into the hands of those most likely to increase demand (i.e. the working poor) but into the hands of the elite where it is being used to speculate.  My basic point is that aside from about $800 billion in poorly spent government stimulus, which may have had a net public benefit, the trillions spent or placed at risk by the Fed has done nothing but stimulate speculation and create asset bubbles, purportedly to shore up the financial system, but certainly increasing the risk of another credit crunch.

I'm tired of Keynesianism/socialism being blamed for this.  Its crony capitalism guys and the rich guys pulling the strings really love it when you spend your ire on their shield - the long dead Mr. Keynes.  The real criminals are alive and kicking down on Maiden Lane.

666's picture

I wish I could deflate those overbearing pompous politicians...

seek's picture

Policy of lies, not illusion. They already know they've destroyed the economy. They knew in 2008.

eddiebe's picture

Apop what? The fed isnt trying to follow Keynes anything. They are just fucking squeezing blood out of all of us turnips. Using big words and dropping names just confuses the issues. Can we please just keep it real here, we are getting enough bullshit from our bosses already.

rp1's picture

And now we have ZeroHedge word of the day.  Brought to you by the letters A and U?

lordbyroniv's picture

Jobs are a means, not the ends in themselves
People work to live better, to put food on the shelves
Real growth means production of what people demand
That's entrepreneurship, not your central plan


The question I ponder is: Who plans for whom?
Do I plan for myself, or leave it to you?
I want plans by the many, not by the few
Let's not repeat what created our troubles
I want real growth, not a series of bubbles
Stop bailing out losers
Let prices work
If we don't try to steer them
They won't go berserk


People aren't chess men you move on a board at Annotateyour whim
Their dreams and desires ignored
With political incentives, discretion's a joke
Those dials your twisting? Just mirrors and smoke
We need stable rules and real market prices
So prosperity emerges and cuts short the crisis


ebworthen's picture

It isn't fear of deflation but rather fear of impotence.

The only thing the FED does is give stock markets a boner.

They either don't realize it and live on pride or know it and live on lies.

eddiebe's picture

It's impossible for me to believe that they are stupid. Except of course that they don't believe in the supreme law of karma. They don't realize that the person they are fucking is nobody but their own self.

ArkansasAngie's picture

That's a sociopath for you.  They don't give a rats arse about what happens to you and yours.

riphowardkatz's picture

could someone please explain to enviro-nuts that the politicians they support are wreaking utter havoc on the environment by forcing people to consume MORE and MORE

Fix It Again Timmy's picture

Yeah, give an alcoholic a bushel basket of whiskey - that'll certainly help him get on his feet and be productive....

Goldilocks's picture

Worlds Smallest Violin (0:12)

World's saddest song, played in world's smallest violin (0:35)

verbot's picture

I feel smarter just reading the title... verbot...activate icing mode due to high level of intelligence. ...too high...cant breathe...

Musashi Miyamoto's picture

Long word; had to look it up.

Apoplithorismosphobia - he fear of deflation.

"Even more puzzling is the fact that deflation, per se, is highly favorable to low-income groups and economists—despite their claims of scientific objectivity—are in general biased in favor of low-income groups and against high-income groups, capitalists, and entrepreneurs. An economy that is experiencing deflation or falling prices tends to be favorable to low-income groups because low-income individuals tend to spend a high proportion of their income on goods. Wage earners also benefit because wage rates tend to be relatively stable, increasing in real terms and thus providing greater purchasing power over time in a deflationary economy. Workers and business-owners do not fear declining prices, they fear unemployment and recession, and these phenomena are not systematically related to deflation (Bordo and Redish 2003).

Let me point out here that deflation is bad for those who owe money, i.e. the lower class.

Pareto's picture



Nice reference on price delfation - as usually being a silver lining during a depression (contraction)/correction/....

Do you have a specific title and citation to the Bordo and Redish reference of 2003?

Thanking you in advance.

Herdee's picture

"Quasi-Boom ?"I don't see it in Detroit.

StychoKiller's picture

Did ya look in the Church bell tower(s)?

logicalman's picture

So many 'isms' to choose from....

all but one not worth the aforementioned rat's arse.


caShOnlY's picture

Raves is correct but has the timing wrong: applying to QE is too late.   You would have had to apply it to Greenspan's second helping of credit expansion (circa 2001) and avoided the housing bubble.  Bernanke and now Yellen are just deferring the final collapse to a later date. :

Mises:  "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

Anyone else notice all the:  credit card apps?, vehicle loans reaching past 8 years?, lower the FICO scores to give loans? 5% percent as well as NO MONEY down mortgages?  If you can see the "furthering credit expansion" then you certainly know whats coming.  There is no way out now.  



Kuanyeah's picture

Peasants need jobs to satisfy three basic needs ie shelters, food and clothes. QE hardly creates much more jobs, do not help in raising real wage, but definitely drive up the prices of shelters, food and clothes. WTF

therearetoomanyidiots's picture

The biggest problem I have with this article is the lack of even slightest reference to the idea that in a vacuum, yes this is true.

But in a 'system' where every noticeable measure of what is happening in 'the economy' is manipulated or more likely, fabricated - and where propaganda is used to subdue a TeeVee opiated populace - Keynes is 'right'.

moneybots's picture

"Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."


Another model proven wrong.


moneybots's picture

"Apoplithorismosphobia - the fear of deflation"


If they have a fear of deflation, they shouldn't have inflated so much.  Inflation causes deflation.

moneybots's picture

"Let me point out here that deflation is bad for those who owe money, i.e. the lower class."

It isn't good for those who are owed money, either, i.e. the upper class.



RMolineaux's picture

We should keep in mind that the opinions of Keynes vs the Austrians were formed as a result of the great depression experience.  While there were attempts to export unemployment during the 30's, these efforts pale by comparison to the shifting of labor source by the transnational corporations to low cost areas in recent years.  These later programs have driven down the real wages in the US and other developed economies to a level where they cannot maintain their market participation without ever-expanding credit.  This phenonenon insures continued under consumption as minimum wage workers are unable to raise their living standard, while higher remunerated participants experience saturation of their consumption desires.  The result: continued underperformance of the economy, punctuated by periodic credit busts. 

Other negative results of the current low-interest rate policies are the unavailability of savings for capital investment and replacement, notwithstanding the fact that savings are available, as well as the postponement of retirement by interest-starved older workers, thereby denying employment to younger workers.