The Keynesian Jabberwocky Gets Downright Dumb

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

Opining gravely, medieval theologian Thomas Aquinas asked, “Can several angels be in the same place?”

In only slightly modified terms, the Fed is now pre-occupied with a similarly unanswerable and fanciful question, according to Jon Hilsenrath’s pre-meeting missive on the Fed’s current monetary policy “debate”. Figuratively estimating the number of angels which can dance on the head of a pin, Fed officials and economists suppose they can specify the the appropriate money market rate down to the decimal place for virtually all time to come:

When Federal Reserve officials gather for their policy meeting Tuesday and Wednesday, the most challenging question won’t be where to push interest rates in the next few days, weeks or even months. It will be where rates belong years into the future.

So if you want to know why there are exceedingly dark clouds gathering on the economic horizon just consider some of their answers and the reasoning behind them. Until recently, a majority of our monetary plumbers in the Eccles Building believed that the ideal long-term Federal funds rate was around 4% in a “well balanced” macro economy where inflation is about 2% and unemployment is about “low” around 5.5%.

Of course, every one of these three magic numbers are perfectly arbitrary, academic and silly. Due to the structural failures of the US economy owing to decades of destructive Washington policies, the “unemployment rate” today is not remotely comparable to what was being measured in the 1950s and 1960s when today’s Keynesian theology with respect to the Phillips Curve, Okun’s Law and full-employment policy was being formulated.

Today there are 102 million adults not holding jobs, for example, but only 43 million of these are retired on OASI (social security) and just 11 million are counted as officially unemployed. At the same time, there are upwards of 40 million part-time job holders, which self-evidently represent additional unutilized potential labor hours.  So there are upwards of 100 million adults in America who represent a massive but latent labor supply that makes a mockery of the silly “U-3″ unemployment ratio that the Eccles Building theologians insist on counting down to the decimal points.

Stated differently, the BLS recently revealed that the private business sector of the US economy generated 194 billion labor hours in 2013—the exact same number as way back in 1998 and notwithstanding the massive growth of the adult population in the interim. Indeed, as recently as 2000, there were only 75 million adults (16-years and over) not holding jobs. Yet of the 27 million gain since then, only 7 million entered the OASI rolls. This means that during a 14 years period in which there was no growth of aggregate labor hours in the business economy, 20 million more adults ended up in the safety net, in mom and dad’s basement or on the streets.

These realities are not a mystery, and they do reflect a dangerous fiscal and social policy breakdown. But they are also thumping proof that monetary policy has exactly nothing to do with employment conditions and job creation. During the last 15 years, the Fed engaged in massive and nearly continuous Keynesian stimulus maneuvers, expanding it balance sheet 8X from $500 billion to $4.3 trillion.  Yet millions of employable adults and billions of available labor hours have been flushed out of the private economy, while measured hours worked have been absolutely frozen.

The excuse that counting decimal points on the head of the U-3 unemployment rate may sound medieval but that Humphrey-Hawkins makes them do it is just palaver.  The so-called dual mandate and minimum unemployment target is just a vague statutory aspiration; there is no quantitative target in the law and the current U-3 version of the endless alternative ways to measure the “unemployment rate” did not even exist when the statute was passed in the late 1970s.

Accordingly, when Bernanke previously, and Yellen now, appear before the Congress or press and piously intone about their full employment “mandate” being a license for perpetual money printing they are simply indulging in a self-serving lie.

The same foibles pertain to the 2% inflation target. Its not in the law; and until the last two decades, price stability was thought to mean an average of zero inflation over time. Certainly William McChesney Martin and most of the first generation of modern Fed policy-makers believed that. Even today, Paul Volcker properly asks why is 2% inflation forever so virtuous when it means that the purchasing power of the dollar will be cut in half every 30 years.

And that doesn’t even consider the total manipulation of the BLS inflation measures that happened beginning a decade after Humphrey-Hawkins was enacted. These manipulations include arbitrary hedonic adjustments for “quality”; continuous reweighting of the price basket based on substituting cheaper chicken for more expensive beef; the use of geometric means to eliminate items with extreme increases; and of course, the foolishness of excluding food and energy from the price index used to make Fed policy—-the so-called PCE deflator. Rational policy in a $17 trillion economy caught in vast global cross-currents cannot be made based on trends shorter than one year.  So on a running one-year basis there is no distortion due to food and energy price spasms, and these items are the foundation of every household budget.

Thus, the 2% inflation target is just more monetary Thomas Aquinas. And this is especially the case with respect to the lame proposition that the inflation target is being missed from below. As shown in the graph, there has never been a sustained period since the 1990s in which there was a shortfall of inflation from below. The entire notion of inflation targeting, in fact, is just self-serving Keynesian nonsense that provides yet another excuse to keep the printing presses going at full tilt.

What deflation? 16 years of creeping CPI.

But the most egregious of the three magic numbers is the target for Federal funds. The entire discussion as reflected in the Hilsenrath notes is that it is the “control variable” which has no other purpose than to be manipulated by the  twelve allegedly wise men and women who comprise the FOMC. Yet that is the heart of the anti-capitalist folly that constitutes current monetary policy.

In fact, the money market rate is the most important single price that exists—its the price of leveraged financial speculation and the carry trades. It needs to be set by honest price discovery in independent markets for genuine private savings and business driven short-term borrowings. Rather than being a pure creature of Fed manipulation—–its determination should never happen within a country mile of the Eccles Building.

Once upon a time the founders of the Fed understood this, and provided that the nation’s new central bank would operate as a “bankers bank”, passively providing liquidity against real bank loans and discounts at a penalty rate above a floating or mobile discount rate set by the market. The virtue of that pre-Keynesian model is that is guaranteed honest two way markets and thereby built-in checks and balances on speculators on Wall Street. And it did not pretend that this mobilized discount rate was a tool to manipulate the entire GDP, the unemployment rate, the CPI, housing starts or consumer spending. Instead, these were to be outcomes on the free market, not orchestrations from Washington.

In short, the pre-Keynesian Fed would not be counting decimal places on the head of the Federal funds rate, nor would it be listening to the likes of William Dudley gumming about immeasurable things like “headwinds” or Larry Summers arriving at a 3% Federal funds target on the preposterous grounds that the world is suffering from a flood of excess “savings”!

This simply illustrative the massive intellectual confusion of the Keynesian model. The world’s central banks have created a tsunami of credit, but there is no balance sheet in the Keynesian model, only quarter-by-quarter flows.  So Professor Summers makes the lunatic argument that since the Federal deficits has declined for several quarters, that means there is too much savings.

Mr. Summers, in an email exchange, said a broader set of factors will hold down rates in the years ahead. Around the world, households (especially wealthy ones and older ones), businesses and governments are saving more, piling resources into bonds and driving down interest rates in the process.


“I suspect unless circumstances change fed funds rates may well average less than 3[%] over the next decade,” Mr. Summers said…..


They suggested that once these headwinds recede, rates can go back toward their long-run averages. But more recently, some Fed officials have acknowledged the possibility of a lingering weight on rates.


A 4% fed funds rate would be “much too high in the current economic environment in which headwinds persist, and somewhat too high even when these headwinds fully dissipate,” New York Fed President William Dudley said in a speech last month.

Read more here

Thomas Aquinas would be proud.

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DeadFred's picture

42 angels can dance on the head of a pin. Learned that from the Hitchhiker's Guide

AdvancingTime's picture

A million years ago my biology teacher in junior-high tried to tell me a hen can lay about nine eggs a day. Careful in believing all they tell you.

firstdivision's picture

Japanese traders sure love equities this evening.

knukles's picture

Fukushittinme stocks.  Glow wrong

29.5 hours's picture



The fact that the Fed bureaucrats see a funds rate of 4% as too high in both the present (with its "headwinds") and even in an un-headwindy future, indicates that they are well aware of the fix they are in. They just don't have any solution other than to go on doing what they have been doing until it stops working. They are stuck and they know it.

Now they have to lie and lie and lie some more. Well...and pray. Stockman was right to bring up the miraculous religious thinking angle.



puskin's picture

Indeed, and Summers says it's the excess savings and investment in bonds by wealthy households that's keeping the rate low. 

He doesn't mention Uncle Ben and Aunt Janet's printing press.

DavidC's picture

I don't know why Summers is considered such an intellectual heavyweight. Whenever I see him (and, indeed, Aunt Janet) on TV he always makes me think that the eyes are open but the brain is closed.


NoDebt's picture

Agree completely.  Said that same thing almost word-for-word on here many times.  Even the Fed can't be stupid enough not to see they're in a pickle.  They'll never admit it and they'll keep acting like they're on top of things.  But they know.  They know.

OpenThePodBayDoorHAL's picture

The priests in Galileo's day came up with ever-more contrived formulas on precisely WHY the Earth and sun moved the way they do. It was OBVIOUS the sun rotates around the Earth. Especially if you really BELIEVE

ebworthen's picture

"But they are also thumping proof that monetary policy has exactly nothing to do with employment conditions and job creation."

Stockman does it again - a scathing indictment of the utterly corrupt FED - punishing savers and 99% of the citizenry while robbing the public treasury to benefit private banks. 

And he gave me a new word:  palaver - a prolonged and idle discussion.

End the FED!!!

GoldenTool's picture

Palaver only works with pirates and traders but you probably knew that as I see you fly the bones.

Seasmoke's picture

Keynes and Ponzi. Both must be spinning in their graves. About what has been done to their names.

DavidC's picture

I'm no fan of Keynes but what is being done now is NOT Keynesianism.


I Write Code's picture

I'll take 3% that's much better than ZIRP, then we can talk again.

max2205's picture






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Skateboarder's picture

It looks like a middle finger sliced off, suspended in the air, frozen in time.

MrTouchdown's picture

But the Eccles building Mathmagicians are the best in the land! Verily, yon Merry Barry the Golfer hath shown the sand wedge of approval.

toadold's picture

Just my uninformed opinion, but it looks like to me that the idea that a government controlled central bank can tweak things to keep a government's economy on an even keel has failed.  There are too many factors and things change too fast because of the two edged sword of fast communications and out of country factors.  It looks like it would work better if all banking was privatized to fit local conditions.  About the only government regulation I could see would be a requirement that a bank have a silver and/or gold exchange rate posted for their notes. 

Stockmonger's picture

there is no balance sheet in the Keynesian model, only quarter-by-quarter flows. 

Stockman hits home run after home run in his writings.

Jack of All Trades's picture

There are 17 trillion reasons why the Fed cannot and will not raise rates.

lasvegaspersona's picture

America made a deal with the devil when it became the reserve currency. As Triffin clearly saw in 1960 if the USA was to get it's bonds and currency out into the world for the world to use as reserves it would have to become a net importer nation. It would have the 'exorbitant privelege' as deGaul called it, it could import without the pain of work. The price would be the sacrifice of American industry.

It has been a good ride, mostly for the government which got to spend ungodly sums of money but to some extent for the people who lived a good life on cheaper imports.

Now the devil is impatiently waiting to be paid. The time has come for the ultimate price to be paid. The currency must die. We have spent all the world is willing to lend us. The world clearly sees that all this saving in American paper is now worthless. All the things David Stockman sees are just the death throes of the dollar. The actions of the Fed make as much sense as the last words of a guy bleeding to death. 

I remember a scene from MASH. They get a soldier on the operating table and he says to Hawkeye...'I smell bread' and then dies. What the Fed says makes no more sense than that. They have tried to control every variable. They have silenced all the alarms. They control every previously reliable index and statistic. When it hits us we won't see or hear it coming. But it is coming.

orangegeek's picture

the CPI and PPI calculations have been "adjusted" for years to show up


volatility is toast, volume is toast


nice markets Yellen

DavidC's picture

The CPI could be 100% year on year and the percent CHANGE per year would be 0%.

“The greatest shortcoming of the human race is our inability to understand the exponential function.” Albert Bartlett.


Racer's picture

'spend money to save from going bankrupt' (Biden) sums up the sheer idiocy of the tools in gobmint and their snake oil pals, the bwanksters

AdvancingTime's picture

Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems.

While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter accept in the manipulated land of MMT. Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. More on this subject in the article below.

OpenThePodBayDoorHAL's picture

Of course you can always "muddle forward" by printing endless sums of money. The question is when and how inflation shows up because then the game is up. There are powerful deflationary forces right now: the internet, wireless communications, globalization of the labor pool, automation, so far these have negated the effect of rampant inflation (plus of course all of the tricks to game the actual inflation numbers). What remains to be seen is what happens when it all finally gets priced in...and then spills over into real sustained double digit inflation. The great shame of course is that we should all be living like the Jetsons by now, a leisure society getting wealthy due to progress. Instead we get a rat race treadmill to keep up with rising prices.