Dear Keynesians: Your Sad Devotion To A Failed Religion Hasn't Conjured Up A Recovery; Here's Why

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

That any schoolkid could predict eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn't register with the Keynesian Cargo Cult.

The Keynesian Cargo Cult's ability to print and squander money is insignificant next to the power of Diminishing Returns. By now we all know two things about the Keynesian Cargo Cult's religion:

1. It has failed to conjure up the recovery its sadly devoted believers insist is "just around the corner if we only borrow and squander more money" because...

2. Its main tenet--that the problem is "lack of aggregate demand," i.e. people will buy more stuff made in China and corporations will open more stores to sell the stuff made in China--if only it was dirt-cheap to borrow more money--is completely, utterly, painfully false.

The central premise of the Keynesian Cargo Cult is that this mechanism of making it cheap and easy to borrow money will work a kind of magic that can only be manifested by dancing around a fire at night waving dead chickens and chanting "humba-humba." The Keynesian cargo Cult calls this magic "animal spirits."

Unfortunately, waving dead chickens while dancing around a fire doesn't do anything in the real world, and neither does making it cheap and easy to borrow more money. It turns out that prudent people have no interest in borrowing more money, even at low rates of interest, and imprudent people are happy to do so but will stop paying the loan as soon as something untoward occurs in their finances. The cheap, easy-to-get loans default and either the banks who made the loans collapse or the taxpayers have to bail out the banks who foolishly lent money to imprudent borrowers at super-low rates of interest.

Corporations, meanwhile, look at the real risks of expanding business in a debt-saturated economy distorted by Keynesian Cargo Cult policies and realize that gambling capital on the possibility that waving dead chickens and chanting "humba-humba" will actually increase profits is a truly stupid bet, so they borrow the nearly-free money and invest it in various carry trades overseas that return a virtually risk-free return, thanks to the nearly-free cost of borrowing mountains of money from the Cargo Cult.

The Keynesian Cargo Cult is stubbornly blind to the two key dynamics of the real-world economy: diminishing returns and the S-Curve. Diminishing returns result when a system's ability to produce an economically valuable output declines.

Higher education is a good example: tuition has soared $1,100% while the output (value of a college degree) has declined precipitously. A recent major study, Academically Adrift: Limited Learning on College Campuses, concluded that "American higher education is characterized by limited or no learning for a large proportion of students."

'Academically Adrift': The News Gets Worse and Worse (The Chronicle of Higher Education)

Meanwhile, student loans exceed $1 trillion, only 37% of freshmen at four-year colleges graduate in four years (58% finally graduate in six years), and 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college--retail clerks, waiting tables, etc.

The Keynesian Cargo Cult solution to the diminishing returns is to provide more debt to students, making them into debt-serfs for life. The cruel stupidity and immorality of the Keynesian Cargo Cult knows no bounds because they refuse to accept the reality that diminishing returns cannot be fixed by more debt and more squandering of good money after bad.

The truth is the failed cartel of higher education has to be leapfrogged and left in the dustbin of history: here's a model that lowers costs by 90% and aligns the output with the real economy: The Nearly Free University and The Emerging Economy.

The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013)

The Keynesian Cargo Cult's solution allows no feedback from the real world, and allows no mechanism to discipline the imprudent borrower/speculator. If imprudent borrowers take on too much debt, the Keynesian Cargo Cult's solution is to offer them more credit at rates they can afford--near-0% if necessary.

If a speculator borrows money and loses it in a high-risk gamble, the Keynesian Cargo Cult's solution is to force the taxpayer to make good the gambler's losses and then give the speculator more nearly-free money to continue gambling.

This "solution" works the first time around, less well the second time around, and triggers a collapse the third time around. This lifecycle is called the S-Curve:

The Keynesian Cargo Cult inflated one credit bubble in the 1990s, another in the 2000s, and by an extraordinary expansion of credit and lowering interest rates to near-zero has managed to Beat the Devil and inflate a third credit bubble in the 2010s.

That any schoolkid could predict waving dead chickens and eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn't register with the Keynesian Cargo Cult. But since the Keynesian Cargo Cult is headed by a Nobel Prize academic economist, the Cargo Cult members effusively praise the Emperor's fine (and nonexistent) robe.

You poor, dumb, deluded fools. You've destroyed our economy, our values and our ability to deal with reality. Your faith is as boundless and disconnected from the real world as your policies.

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Headbanger's picture

Don't encourage them!

They're gonna start live sacrifices next!

stant's picture

looks like to me they already are

maskone909's picture

Keynesianism: communism 2.0

Common sense communism

Vampyroteuthis infernalis's picture

What the author probably realizes, but fails to mention is the easy money does bouy the economy using non-asset backed credit. To those who will not think the issue through, it appears as if they really are growing the economy. Appearance over a short period of time is all they need to get the political classes to back them. Of course it just collapses in the long run due to a lack of true assets and a flood of fiat money.

maskone909's picture

Record amount of food stamps. It doesnt even help the economy

Manthong's picture

Well, I think that as the ritual plays out, the animal spirits will eventually be taking it you-know-where by the invisible fist of economic reality.. right in front of the campfire .

knukles's picture

That's razzzizt, you know....

"dancing around a fire at night waving dead chickens and chanting "humba-humba."

lordylord's picture

You're all assuming that Keynesian economic policies are failing.  I am here to tell you that they are working to perfection.  More government control and power has always been the goal.  Not economic growth and stability.

daveO's picture

Right, see Student Loan takeover by government.

Kayman's picture

You little people just don't understand.  The Fed must increase its Balance Sheet to $14 Trillion, interest rates need to go negative and Unicorns must be trained to fart.

Trust me....

Paul Krugman

Dollarmedes's picture

It hasn't given them clairvoyance, either.

SilverDoctors's picture

Live sacrifices?  Like JPM's top commercial bankruptcy lawyer being run down by a minivan Saturday in a hit and run?

McMolotov's picture

Another dead banker? When will it end? My face is stained from shedding so many tears.*


*of joy

Jafo's picture

Somebody somewhere is crying crocodile tears.  Seriously though, a dead lawyer is the best kind of lawyer.  What better way to postpone a bank induced insolvency than killing the lawyer running the application in the courts.

RacerX's picture

so technically this was an "assisted suicide"?

DavidC's picture

Nah, it's a conspiracy theory (like so many of those others on ZH that appear NOT to be after a couple of years!).


NotApplicable's picture

This guy was an avid cyclist, so it stands a good chance of not being an assist.



McMolotov's picture

Right now, Darth Krugtard is trying to use the Force to choke Mr. Hugh-Smith.

Leopold B. Scotch's picture

Gotta love that Krazy Krugster!

Dude!  It's the Krugmeister!

El Vaquero's picture

And when that fails, he's going to go break a window and jack off on some poor person's windowsill. 

autofixer's picture

Aren't they almost doing that in the U.K.? 

booboo's picture

Tough to find virgin bankers to throw in the fire. Maybe Abbey Joseph Cohen is a virgin, Yellin, yea, definitly.

SmackDaddy's picture

No no no.  Everything will be fine.  My school district just announced it's buying ipads for every kid.  If they did that everywhere, that will solve all the world's problems!

LFMayor's picture

It's just like RIF:  Reading is Fundamental. Remember that one?  Except now it's electronic.  And a little more expensive.  Same GREAT results, though!

daveO's picture

Never try to teach a pig to sing, it's a waste of time and annoys the pig.

Froman's picture

Yeah, our school district did that (iPads for all) except the "do-gooders" did not expect that kids being kids would use them as frisbees, impromptu hammers, or expiriment with them to see just how much force it takes to shatter an iPad screen or what an iPad would look like if run over by a school bus (these are probably the same iPads that are now showing up as "refurbs" in the Apple store).   Memo to Apple for a new iPad release; the tough book version of the iPad Air made of a titanium case, encased in two inch vulcanized rubber with a shatter proof screen.  Weight for this new iPad should come in just under 5lbs. Apple should be able to develop this new iPad with a joint DoD/NSA grant with the rationale that soldiers need a combat ready iPad that they can control drones from the field of battle with while sexting their fellow troops...the NSA portion of the grant will provide funding for imbeding not only an upgraded keystroke monitor and trojan horse spyware into the iOS of each new iPad (as is currently done) but also to develop a 44 hi-def megapixel camera that can be remotely operated by the NSA to provide them with video and audio of the users comings and goings in addition to web surfing history, e-mail and text content. Apple in the true spirit of Steve Jobs can charge the school districts $5k a piece under the "educator rate" for these new tough iPads. They will be available to the general public at retail price of $7,500 for 16gb and $8,000 for 16gb + 4G.

marathonman's picture

You are onto something now Mr. Froman.  Excellent work.

Smiley's picture

GOOD!  Let them eat themselves.  Avoid clumps of people (The Stoopids LOVE to clump) and you will be fine. 

Ghordius's picture

eh. it works. as long as it works, that is...

though in defense of Lord Keynes: his theory was about spending in bad times, and the opposite in good times

SmackDaddy's picture

who needs "bad times".  we can start a war whenver we want

Ghordius's picture

the funny or unfunny part is that not that long ago, war was bad times, and peace was good times


btw/OT: Dear Mr. Obama, we europeans don't want nor need moar defence spending

falak pema's picture

Blame the symptom not the cause..

Blame the serf not the Patrician for Fiat bunga bunga.

The God of war and the God of hubris always spawn a race of arrogant  liars who expect life to be served on a plate by the slaves of Empire thanks to the sweat of their brows.

XitSam's picture

Keynesianism is like a variant of Zeno's Paradox.  

Emergency Ward's picture

All times are bad times to these conjurers.....

Ghostdog's picture

It worked great for Japan......

pound the vix's picture

Truth Hurts.  But they will never give up without complete disaster and even then they will blame "Auserity"

lasvegaspersona's picture

You MUST use the right chickens...everyone knows that.

daveO's picture

Like the Banty Rooster in the WH?  

Itchy and Scratchy's picture

Modern day alchemy! Nothing new here!

cougar_w's picture

Normalcy bias. It is all really new, crazy untested theory, right off the edge of the chalkboard it is. You think it's business as usual because you aren't thinking very hard about how many hundreds of centuries we did things a very different way.

daveO's picture

Modern day 'coin clipping'.

cougar_w's picture

Give me a break. This episode compares to coin clipping the way the detonation of an atomic bomb compares to a pidgeon farting.

Think of the scale, man. Think of the amount of wealth tied up in all this. Think of the span of history it took to get here and how much of that is now set to evaporate in one single grinding episode of miscalculation and regret.

Stunning. Absolutely.

PlusTic's picture

The perfectly designed monetary theory to destroy any independent nation takes less than 100 yrs. to destory one

cougar_w's picture

That's giving them waaaaay too much credit. Nope they got ahead of themselves, started believing their own hype, and as a direct result just fucked it all completely up. Simple answer is best.

Jason T's picture

Undergrad tuition at Cornell up $10k in last 5 years to $60k a year ....


All under the 0% interest rate policy.


ejmoosa's picture

One often has to hit rock bottom before getting the message.

They haven't gotten the message yet, I assure you.


madcows's picture

Eventually you have to pay the loan or they write off the debt. 

And, debt is neither money, nor is it economic growth.

Reality is a bitch, ain't it, Krugman.

cougar_w's picture

As a parallel reality it worked -- exactly as long as nobody ever defaulted on a loan.

There was no actual Plan B because there could not be a Plan B.

Who comes up with this crazy shit? "Seemed like a good idea at the time" will be carved into the collective gravemarker of Western civilization.

We'll be back to trading my eggs for your bacon at par, and hauling dirty laundry down to the river in a wooden push cart.

Damn ... things must be pretty bad ... cuz that sounds just fine to me.

Jafo's picture

Just want to clarify something here.  It is only a loan if it is repayed.  If it isn't repayed then it was just money that was given away.