Why Keynesian Voodoo Doesn't Work?

Tyler Durden's picture

Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

Keynesian policy of manipulating economic “aggregates” through countercyclical macro-measures appeared to work when balance sheets were not stretched to the brink. As we wrote in “Goebbelnomics

“If collective exuberance and apathy is the sole cause of the business cycle, then it logically follows that human emotions need to be manipulated accordingly. Only by doing so can policymakers smooth out the ups and downs in economic activity. And what better way to do that then to change the money supplied to the general public.” 

While people called this the “most sickening article ever written” it is unfortunately what economics has come down to. Through fractional reserve banking and a central bank freed from the shackles of a barbarous relic, the money supply can be expanded without limit…or at least as long as the greater populace voluntarily will leverage up their balance sheets to buy stuff and simultaneously agree to their own servitude. Nothing more than collective manipulation on a scale that would make Goebbels himself envious.

The glaringly obvious result of such policies, gross capital consumption through malinvestments epitomized through a serial bubble economy, did not discourage our money masters. The best and brightest even suggest bubbles are the only remedy to what they believe is some sort of secular stagnation.

Just as drugs, the abuser must increase the dosage to feel the same high and spend accordingly.

However, as the first chart shows, the current recovery, albeit one of the longest on record, has also been the weakest.

Expansion_weak

Source: NBER, BEA, Bawerk.net

This obviously haunt our money masters as unprecedented amount of fiscal and monetary stimulus should have brought about a strong economy. The idea was always to condition debt addicted households to once more drool over available debt like secretion coming from Pavlov’s dogs on the mere sight of low interest rates and quantitative easing.

Empirically inclined pundits point to the pre-crisis period and do not understand why the economy does not behave similar today. All economic models tell the experts that low interest rates and a booming stock market boost the wealth effect through higher asset prices and hence lead to higher consumption and presto a booming economy. Per the latest flow of funds account US households has actually experienced a 42 per cent increase in their asset values since 2009, but still refuse to go on a spending spree.

In what was later dubbed the “jobless recovery,” whatever that may be, the noughties boom was to a large extent based on balance sheet expansion which flattered gross domestic production numbers and played conveniently into the great moderation bull-crap.

Our second chart show how household’s liabilities compare relative to their income over the business cycle. Unsurprisingly two cycles stand out; prior to the worst financial crisis since the 1930s US households went all bananas. Total leverage, above nominal income, rose more than 46 per cent. In other words, US households increased their liabilities from $7.3tr to $14.4tr, a 95 per cent increase while income on the other hand only rose along with nominal GDP, from $7.7tr to 10.7tr, a 39 per cent increase. In no circumstance have this happened before.

After the crisis US households were less inclined to spend frivolously even though Bernanke et al. told them to do so, for free. On the contrary, US households stopped the insanity and actually tried to realign income and debt at a more sustainable level.

chg household debt

Source: NBER, Federal Reserve (Z.1), Bawerk.net

As David Stockman never tires of telling us, and rightfully so, the US economy has reached peak debt and the law of diminishing marginal utility applies to debt as much as any consumer good.

Despite futile attempts to disprove it, higher debt levels does lead to lower growth and the reason is simple. Every added percentage point of debt – over GDP – must by definition be less productive than previously added debt. As more and more debt accumulates the economy must support debt that at some point subtract from production.

For example, going to Spain on your credit card to enjoy Costa del Sol and a drink or two does not add to the productive capacity of society, but must instead be repaid to society through work completely unrelated to the debt that funded the vacation. If society creates a financial system, and incentive system, which encourages such behaviour it is reasonable to expect a market correction. As a matter of fact the sooner unsustainable activities loose access to funding the better. That a construction company in Ireland cannot get funding to build more condos is not a bad thing, it is what makes a capitalistic society survive. Note, the Soviet Union experienced a Great Moderation and had only one recession in 70 years. Unfortunately for them, the 1990 recession was quite brutal.

As our last chart shows, peak debt has indeed reached the US (and Europe, and Japan, and China and Australia….) and every attempt to boost GDP, income and employment by increasing leverage even further is doomed and always was.

A deflation so severe that it brings total debt back to its long term average of around 150 per cent of GDP is the only thing that can lead to sustainable growth, free of bubbles and secular stagnation. That this is politically and socially unacceptable makes us wonder how we will solve this pickle. Still, only by doing so can we free ourselves from the circular logic baked into today’s economic theory;

increase leverage –> increase GDP –> make leverage sustainable –> increase leverage further

tot debt

Source: Historical Statistics of the United States; Colonial Times to 1970, Federal Reserve (Z.1). Note, we have used banks’ balance sheets as proxy to estimate private debt from 1834 to 1915.

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CaptainAmerika's picture
CaptainAmerika (not verified) Jun 13, 2015 11:57 AM

Too many people think that economics is this subject that should wait until the university level. But it can't wait that long.
http://philiacband.com/propaganda.html

junction's picture

This commentary on economics is one reason I am glad I don't have to go to college now.  Much more interesting is a Wall Street Journal article on the hacked federal personnel files, which includes the following info: 

"The Standard Form 86 background-check document is a 127-page form that includes details about highly personal information, including foreign travel, any mental-health conditions, police record, history of drug use and bankruptcy filings."

That form 86 contains potential blackmail information, not only about police records but also about sexual proclivities, obtained by government investigators, some of whom no doubt have access to NSA snoop files.  How long will it take for this sensitive information to land on the Internet, for all to see?  Any of you out there have federal jobs?

Joke: I am a police reporter. (Pause) I  report to the police once a week.

Atomizer's picture

If you don't comply with our new rules & regulations, we'll fuck up your life as a government prole. We have shit on you bitchez. Wait until the DHS and NSA get hacked. Once the water supply is turned off, baked server information and a narrow window to cherry pick files. It won't be me. Just telling you.

This rat gutter president is setting up another crisis. Many of us can see it plain as daylight. Beware. 

Oh regional Indian's picture

Because Friedmanite Voodoo does not work either...

Adam Smith was a clown and ole hero of the libtardarians, Mises was a Rockerfeller fundee....

Whatchoogonnadooo?

The great eCONomic hustle.

Actually what works is a simple back to the basics approach....do we want to live in a demand side world (like nature) or do we want to live in Supply side world?

We are currently dying as a race of the disease of too much supply (a nice fractal equivalent is the drug trade if you ponder it)...

Here, if called, is a drive though my city, commentary by me.... see the world...a certain oversupply is evident ;-)

https://www.youtube.com/watch?v=nR69S4_-Xvs

 

disabledvet's picture

The only lesson I have learned in all my years is the the dollar is a bad ass mother fucker. Yeah...sure, "the debt" matters. So does bowling dollars in the form of huge and stupid spending like Nancy "I'm from fucking Baltimore!" Pelosi.

Italians and blacks...yeah, there's a good combination.

Meanwhile back in the real world "we're praying to Allah fifty times a day and calling it winning."

600 billion ("plus the secret 200 billion for the Ohio Missile Class that's a secret!") sounds about right to me as far as "Big Money" goes.

Now let's go light up a police station and see who shows up to watch!

Fun Facts's picture

The universe is a bubble.

On a long enough timeline.

Atomizer's picture

Green computer ink generated charts with a hockey stick promotes uprise. Adjusted growth charts uses Indian Red Crayons to predict growth projection speculations. 

/fucking with this negro is a fine art. 

PoasterToaster's picture
PoasterToaster (not verified) Jun 13, 2015 12:11 PM

"Economics" makes no sense when there is no scarcity.  We are living in a post scarcity (and therefore post economic) world, and it will be a great thing once we shed the control freak past.

q99x2's picture

No it works. Look at how much wealth they've stolen so far.

hooligan2009's picture

perhaps, just perhaps, most debt these days, represents future retained capital losses (todays present value of acknowledged bad behavior for poor "economic" reasons) for the simple (and mirror) reason that an accumulation of capital represents retained profits (todays present value of good behavior for good "economic" reasons).

After all you either need debt to expand and factor up a winning strategy/discount known future cash flows to gain use of cash sales now or you should not need any debt at all because you are making profits /creating money

q/e that creates money does not create profit and belittles those wiho sweat to make profit with scant regard and disdain. 

borrowing money to crystallize known future losses with lenders supporting this abhorrent behavior is the road to ruin and poverty; it can never be a solution.

we need a policy that rewards good behavior and does not facilitate bad behavior via fiscal deficits funded by q/e

Marco's picture

Is living on land rents good behaviour?

MEFOBILLS's picture

Rent theory came from French Physiocrats, as they observed Landed Gentry parasitizing the population.

Land is unique in that it is supply limited, and people need access to it to live.  It is a gift of nature.

All economics are earth+machine+labor = wealth.

Earth cannot be monopolized as that is a rent scheme, to then harvest the producer. 

Credit money systems bid up the value of earth, and the excess is pledged to banker.  For example, two will bid on an apartment complex, and winning bidder is the one who gets biggest loan.  They then pass on the costs to their renters.  This causes general price increase and inflation.

So, land ownership is a unique case.  Also, credit aimed at land causes this upward bidding process, causing a bubble to then harvest people.

 

Today, the cost of land in New York alone exceeds all industry in the U.S.

Atomizer's picture

Did any of you liberal cunt licks ever connect the dots to closing down coke plants, promoting green coal, and reading Obama's Copenhagen Accord? 

http://www.c2es.org/international/negotiations/cop-15/summary

I really hope you fucking lazy Americans get fleeced for every dime of your income. I won't be effected. We told you, your entitlements were far more important. 

Suck it up plantation slaves. Twelve other countries are going to replace your cotton picking job or scanning a inventory retail check out line. 

 

 

VWAndy's picture

Turns out corruption does not scale well past a point.

Billy the Poet's picture

And as a bad tree can only bring forth bad fruit it never should have been expected to scale well. Government is the corruption of the rights of individuals from the get-go and it just gets worse from there.

ebworthen's picture

A Central Bank can't create prosperity using debt anymore than an individual or family can.

Atomizer's picture

The other calamity, alternative infrastructure is not present to support electric cars in US. Elon Musk needs the electric grid to get compromised so the deep pockets of America can fund charging stations over terrorist attack. 

Elon, I have been to the LEEDS shows. Your fucking crew of saving the planet is about government subsidized initiative. 

Once something in the is US under terrorism, you'll become a prime suspect. If you cannot afford the infrastructure to service your POS automobile. You should of gotten out of the business. 

Create a terrorist situation, spend the rest of your life in a jail cell. Be forwarned. 

MEFOBILLS's picture

Why do we need a debt money system where elites hold debt instruments?  Creditors are usually over debtors, and to loan is to own.  These elites are those who own the money supply, and today the money supply is 97% bank credit; credit is issued by a banking corporation from thin air.  Central banks tie all of these private banking corporations together into a monolithic whole, giving pyramidal power to unelected money masters.

This credit has a very small relationship to labor’s ability to produce and create.  This article says nothing about the nature of money, only that debts should be reduced to 150 percent.  This is no solution.  The money supply remains as private credit, where issuers of bank credit remain in driver’s seat.

Debt/Credit relations between people should be as honest as possible, without one party or the other trying to take advantage.  Money should not be debt based, but instead wealth based.  Wealth in turn relates to a country and its people, and their ability. 

The better form of money is volume controlled debt free floating money, maybe 70 percent of the supply.  Some sovereign credit is necessary to account for typical elasticity needs.  For example, all economies have a S shaped curve, especially if economy has a lot of agriculture.  When the crops come in, new credit needs to be available to discharge the goods, and then the credit needs to disappear as the food is consumed.  Sovereign debt should be aimed like a rifle at dealing with the elasticity problem, and not fund parasitism, hence it must be legal.

The debt free component of money supply (maybe 70%) will become savings of individuals, and they will loan their “wealth” money to their neighbors.  So, in this case, debt instruments are mutually held amongst citizens, not pyramidal elites.  For example, when you pay interest on your house, it pays a retiree who loaned you their life savings.  Today, with private bank credit, when you pay interest on your house, the usury/interest funnels into the finance banking system.  Why does private finance deserve your life energy simply for making keyboard entries?  Yet, those who actually spent their life energy working are disabled from loaning wealth money as savings, as debt money system short circuits this sort of virtuous cycle.

It is much more than just the word “debts,” it is the type of money and how it channels.  Humans will always have debt/creditor relations with each other, but these relations need to be moral and fair, not parasitic and rent seeking.

  Private banking pyramid power is funded through rent taking (stealing of labor value); this loss of income from debtor then usuriously funds banking creditor.  This usury path then finds its way to create hypnosis through paid-off press, and pyramids money power into elitist control. 

BRICS are using the same “western” credit money system to consolidate power and markets; don’t be fooled.  It may be competing Western/Eastern Oligarchies; or maybe they are working together as a dialectic, but neither side is honest.  For example, it would have been simple to make new money to fund Greece, or haircut debts, so all of the smoke and mirrors we are witnessing is money power dialectic to herd and control the cattle.  In the course of herding and control, the parasites will swap debts for formerly paid for public domain, and former commons e.g. roads/ports/bridges into rental toll booths.

As anybody who has read my posts know, I advocate for sovereign money (sovereignmoney.eu).  But, really what matters is Federalism, or small centers of power where people can freely associate with other like people of their choosing.  If local money can do that, then fine.  People are tribal in nature, and countries should be sovereign.  Globalist elites desire homogenization and parasitic control; elites use debt money as main weapon to fund their designs.  Whenever one sees a “creditor as parasite” system, it is a globalist centralizing “pyramidal” slave control mechanism.   Whenever one sees “gold” as dialectic, never mentioned will be some sort of hidden private credit scheme, with credit riding on top of metal.  Gold systems so far maintain private creditor as parasite, contrary to popular hypnosis that it equals freedom. Most likely current buildup of gold in China/Russia will be swapped for SDR’s - when that new system comes on line.

 

Never will it be mentioned that money should flux by Law, and be in volume relation to goods/services.  Never will it be mentioned that money should be a wealth utility that people use to transact at low cost, and also have loanable savings that are not destroyed through inflation/deflation.

farmerunder's picture

great post, what was wrong with saving? now there is risk everywhere

Oh regional Indian's picture

Second that. MEOFBills is ine of my favourite commentators...always lucid and well thought out perspectives...

Escrava Isaura's picture

 

 

MEFOBILLS, Hedgers,

 

Good morning.

 

Wonder if you could comment on SDR’s?

 

The way I see, oversimplified to keep this post short, is the collapse of the dollar—America life standard—while US and Euro financial system will be living large and larger.

 

And the global pillage of diminishing resources by the US financial and NATO will go into overdrive, leading, at the best case, proxy-wars; and the worse, nuking each other.

 

Looking forward hearing your take. As well as from any other Hedger that would understanding SDR’s ‘hidden’ plan.  

 

 

moneybots's picture

"A deflation so severe..."

honestann's picture

When ANY ways exist to increase wealth by means other than production, humans will chose those ways (because they are easier, quicker, cheaper and usually have huge potential via leverage and consequences shifting).

The corollary is... ONLY when no fiat, fake, fraud, fiction, fantasy, fractional-reserve leveraged ways to acquire wealth without production will humans turn to productive activity.

This makes perfect sense from the perspective of any but the most exceptional individual, because production involves considerable time, effort, resources and risk compared to scams, theft and leveraged schemes.

And so, whenever ANY system exists that provides artificial ways to shift consequences and shift wealth... the vast majority of humans take advantage of that system.

And the absolutely unavoidable consequence?  Efficiency drops.  This cannot be avoided.  The more time and attention spent on endeavors other than production, the less production.  The more resources spent on things other production, the less production.  Less production, same number of humans to share the produced goods and goodies.  And so, lower standard of living.

Today the system is so corrupt that nobody in their right mind would invest their time, effort, attention and resources on new productive activities.  Those who already have a working business might continue to run it, but with decreasing interest given the mistreatment.

Of course the incentives are great to create new scams, and enlarge existing scams, to shift all positive consequences of human activity to self, and shift all negative consequences of human activity to others.

And so, predators rule earth.

-----

Worst of all, there is no way out of this mess as long as the ever dwindling number of basically honest, ethical, productive, benevolent human beings continue to accept the abuse, continue to produce and allow others to grab the vast majority of the positive consequences of their time, effort, labor and resources off the top by means of the system that permits and now encourages this kind of behavior.

The only possible solution... that those basically honest, ethical, productive, benevolent human beings fully and clearly come to understand they are nothing but abused prey, make a firm decision to not accept that abuse, and then refuse to allow themselves to be manipulate and stolen from, then lock, load and exterminate all who continue to attempt to manipulate, fleece and scam them.

But... that's not the MO of basically honest, ethical, productive, benevolent human beings.  They are infinitely too meek.  They suck it up and keep producing, and thereby keep the corrupt system operating.

And so, humans are finished.

Everyone works to keep the system going.

The predators operate the system.
The parasites encourage the predators.
The producers keep accepting their role as prey.

NOBODY refuses.

NOBODY says "NO MORE".

NOBODY takes actions against the predators.

And so, no hope for humans as a species exists.  In the long run, a few may survive one way or other, though that's unlikely given the domination of modern technology by predators-that-be.  At best, a few might escape earth, where the current sort of system cannot prevail because that environment does not favor predators like earth does.  But the likelihood of this are also very questionable.

And so, flush it down.

Humans attempted a new experiment... to produce the goods and goodies they need to survive and want to enjoy life, rather than grab whatever meager berries and scurrying animals they can find via predators MO.

Humans failed.  The producers failed because they allowed human predators to dominate them.  They failed because they refused to defend themselves against human predators.  And so... game over.

Humans are a failed species.

Humans are finished.

Their own fault.

-----

PS:  One could easily argue the entire fault lies with basically honest, ethical, productive, benevolent humans... not predators.  Why?  Because predators are just being predators.  Predators are simply acting consistent with their MO (which is "do whatever you want if you think you can get away with it).  And therefore, it is up to producers to defend themselves, which means exterminate predators that attack.

That producers are deluded into believing they must treat predators in the same way they would treat producers is another reason producers are screwed.  Discussion, persuasion, reason and civil behavior do not work with predators... the predators just laugh and eat up fools who attempt such behavior.  That producers go ask other predators (government, corporation, authority, lawyer, etc) to help them with problems with other predators is so absurd that... one has to at least wonder whether these producers are so stupid they deserve what they get.  They don't of course, but stupidity does have its consequences.

Umh's picture

They say "one dollar spent in fiscal stimulus eventually creates more than one dollar in growth" while this may be true paying someone to do unneeded work is a way to get the least amount possible out of the deal. This is the problem with "make work" projects. As I continue to see some of the slowest construction projects in the history of man drag on and on.