Andy Lees Kills The Argument Of Endless Debt-Funded Stimulus

Tyler Durden's picture

There are those who watch quietly from the sidelines as month after month, year after year, decade after decade, the Keynesians among us (especially those who only focus on the upswing in the business cycle and always ignore the downswing) announce that the only thing the economy needs to grow is a just a little more debt... more debt.... much more debt....  And for the most part it worked: for years every dollar in additional debt generated a little less than a dollar of economic growth, or GDP. Alas, slowly but surely, we have been pushed to the point where incremental debt generates no incremental growth: an event that if it were to be recognized for the debt-stimulus dead end it is, would put an end to years of flawed economic thought taught in the world's most prestigious universities. Yet there is more to it, and as always it goes to the age-old question of capital allocation efficiency, and specifically how with time, any centrally-planned attempt to allocate capital effectively always fails, usually accompanied by incurring insurmountable leverage. Probably one of the best and most succinct summary of this core quandary facing the entire developed world and the voodoo economics profession in general, was done by UBS's Andy Lees today, who in one note, deconstructed the primary flaws, and outright lies, at the base of the last ditch economic rescue effort planned by Obama, by the world's army of "fiscal stimulants" and by the western world in general.

On the fallacy of "GDP":

Economists and politicians tell us that if we try to cut the level of debt the economy will slow and it will become self-defeating; debt will rise relative to GDP. Whilst this is sounds fair enough, how does this fit in with the truism that if debt is rising relative to GDP then by definition we are allocating capital unproductively and therefore unsustainably?


The answer is simple definitions. Clearly over the last few years vast amounts of capital have been written off and yet we have not revised previous estimates of GDP. We have effectively ignored that some element of the economic activity was unproductive and unsustainable. If debt rises by 10% relative to GDP, then only 90% of the stated GDP is actually sustainable. The 10% balance is made up of non-jobs that are dependent on debt accumulation. They are either consuming down our productive balance sheet, and thereby borrowing from our future level of economic activity, or alternatively borrowing from another country’s either present consumption level or their productive balance sheet. Either way, unless we are going to default, we are again borrowing from our future level of economic activity. We are putting the balance sheet through the P&L account and accounting for that as profit or GDP but without an offsetting liability. 


Realistically therefore we should not look at debt-to-stated GDP, but rather debt-to-“sustainable” GDP. Taking the example where debt-to-stated GDP has risen over the course the last year from 190% to 200%, then we know that 10% of the factors of production are misallocated and unsustainable, and therefore sustainable GDP is just 90% of the stated level. This means that debt-to-sustainable GDP is not 200% but rather 222.2% (ie. 200/90). Imposing austerity simply recognises that fact, slowing the economy to the sustainable level of output and thereby recognising the level of debt against this truer measure of GDP. Take Greece for example; clearly the country has been living way beyond its means, and its sustainable level of GDP is significantly lower than the stated level. Recognising and accepting this reality is extremely difficult, but we cannot clear Greece’s debt without at the same time “clearing” the level of economic output to a true level.


If we allocate resources correctly, then debt-to-sustainable GDP will start to fall immediately. The confusion and the pain comes from having to recognise what that sustainable level is, ie to own up to what is our true economic worth. Taking the above example, we know that debt-to-sustainable GDP is not 200% as recorded but actually 222.2%, so if we allocate resources efficiently, all other things being equal, GDP will fall back to the sustainable 90% level and debt-to-sustainable GDP will remain at 222.2%. Given the painful acceptance that is necessary, if we make the adjustment over time, then the total debt will continue to rise in both absolute and relative terms, but by incrementally less each year relative to sustainable GDP.

On the toxic feedback loop of why ever more central planning (such as what is happening in the US and the entire developed world) means fiscal stimulus becomes self-defeating. The irony is that as those "planners" locked up in a room "plan" and issue more and more debt, all that debt goes for failed projects, until all of it ultimately serves non-productive purposes.

Whilst differentiating economic output as either productive or unproductive may sound sterile and ignore hidden values from work that are not obviously measured in conventional GDP calculations, the reality is that these “externalities” are included in GDP as they feedback into the calculations indirectly in just the same way that loss-leaders do with corporates. There will be both productive and unproductive externalities, and the best measure of whether we are misallocating capital or not will be whether debt is rising relative to GDP or not. Pursuing a Keynesian stimulus can only make sense if the capital reallocation results in a reduced debt-to- sustainable GDP ratio. This does not factor in inter-temporal investments where the pay-off may not be immediate, but easy adjustments can be made for this.

And the interlinking continues: the biggest culprit for the failure of fiscal stimulus? Why the monetary stimulus authority itself, the Federal Reserve.

The only meaningful reduction in debt throughout this crisis has been the forced deleveraging of households in the US through foreclosure, and in Europe through job losses. Total debt has increased throughout the crisis as the public sector initially socialised the private sector debt, whilst running large fiscal deficits. The zero interest rate policy also continues to misallocate capital, supporting unsustainable consumption levels at the expense of productive investment. QE2 and the hotly anticipated QE3 will drive a speculative bubble in risk assets and give cheer to the financial markets but will not support or drive sustainable investment. As you can see below, the continued misallocation of capital in Japan from similar policies has not only lifted the debt to frightening levels, but has also raised the cost of servicing that debt as it strangles the productive assets, despite the zero rate policy. Far from lowering the cost of business, the printing of money by central banks sustains this misallocation of capital and thereby adds to the costs of business. Governments are simply crowding out the only part of the economy that can get us out of this mess, and thereby killing the overall economy with their supposed kindness

The toxic spiral then moves away from the sovereign state and its debt printing apparatus and migrates to every state that has a monetary authority: read a central bank.

The paper The real effects of debt –( – by Cecchetti, Mohanty and Zampolli highlights that debt is supposed to improve the efficiency of capital allocation across its various possible uses in the economy by shifting the risk to those most able to bear it, but of course that very statement reinforces what I am saying; if debt is causing a better allocation of capital, then debt will fall, not rise, relative to GDP. Modelling the stock of non-financial sector debt against GDP per capita for 18 OECD countries over the period 1980 – 2006, the authors found that every 10% increase in corporate debt resulted in a 20bpt reduction in growth per capita, and every 10% increase in household debt resulted in a 25bpt reduction in growth per capita. The authors found this somewhat surprising as they did not believe that debt was uniformly bad for growth, but of course during that period debt was rising relative to GDP. A second regression found that a 10% increase in the ratio of public debt to GDP is associated with a 17 – 18bpt reduction in subsequent average annual growth.


The paper concludes by saying that the clear implication of these results is that the debt problems facing advanced economies are even worse than we thought as the benefits that governments have promised to their ageing populations will not only sharply raise debt but will thereby  sharply lower GDP growth. As growth falls, debt rises even more, reinforcing the downward impact on already low growth. “The only possible conclusion is that the advanced countries with high debt must act quickly and decisively to address their looming fiscal problems. The longer they wait, the bigger the negative impact will be on growth, and the harder it will be to adjust”.

Andy's conclusion: the current approach to fixing problems is dead wrong. At this point issuing more debt merely compound the problems in an exponential fashion.

What return per unit of additional debt will we get today? The idea that we should slow austerity and grow our way out of this with further debt, or increase our ability to service our debt by taking on more, seems disingenuous at best. Why should the same cheap money policies used by central banks to avoid the occasional cleansing of debt via a recession, now succeed in allocating capital productively and sustainably when they have clearly failed in the past? Perhaps politicians and the press can be excused for taking a different view as their individual priorities are not necessarily aligned with the good of the economy as a whole, but what I don’t understand is why the wider economics profession also seems unable to come to a comprehensive conclusion; to establish data that presents the facts accurately and thereby establishes policy agreement. 

Alas, the world will be engulfed in mushroom clouds before economic Nobel peace prize winners finally admit their lunacy and that the false cause they have spent their lives defending, has been a lie. In the meantime, everyone else will continue to suffer. That is the only thing that is guaranteed: after all, it is the definition of insanity. And those in the status quo doing all they can to preserve their, well, status, are now all insane.

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TruthInSunshine's picture

Paul Krugman begins stalking Andy Lees.

Get a personal protection order and a Glock, Andy.

phyuckyiu's picture

OMG Michelle Obama went OFF calling some people WHITEY? WTF!!?

franzpick's picture

And after owebama's earlier "you guys" remark and his renewed class warfare economic strategy, it's only a matter of time until we hear him make the fatal slip addressing wealthry taxpayers or other groups as "You People".

hambone's picture

Andy explains why the world shouldn't do what it's gonna do.

MillionDollarBonus_'s picture

As usual, Andy Lees completely fails to understand the key principles of Keynesian economics. Firstly, it is fallacious to criticise the policies Keynesian economists when they themselves admit that the government's fiscal stimulus programs have been insufficient at best and cowardly at worst. Following each fiscal stimulus package there has inevitably been a boost in GDP. The fall only comes when the stimulus is withdrawn. From this pattern we can infer that the economy performs better under a centrally planned environment than a chaotic anarchic environment. And of course this is what you would expert, given that in a centrally planned economy a higher proportion of the capital is allocated by educated connoisseurs of elite intelligence, rather than people who would rather be watching reality TV or monster truck racing.

flacon's picture

I find it ironic that the paper fiat money proponents who believe in more stimulus the Keynesian way often will dismiss gold as a viable reserve currency because they say that "there isn't enough gold to go around". Well if they really stopped to think about it, the reason we are almost at the end of their system is precicely that: "There isn't enough paper money to go around - because if there was we will all be living in Zimbabwe."

Pure Evil's picture

Yep, those centrally planned government economies work out just well.

How's the centrally planned government of Cuba working out, or the one in the Soviet Union, oh that's right, it imploded. And, if you really love a centrally planned economy, head on over to China, it's about to implode both fiscally, and politically.

And, let's don't forget Solyandra is about to roll over into a grave taking over $500 million with it.

Here we are with our centrally planned economy chugging out a deficit of $1.5 trillion a year and over $14 trillion in public debt with no way to pay it all back even if we taxed everyone and everything at 100%. And don't forget that's just the Federal government racking up debt, and we haven't even started considering how deep the states are indebted.

captcorona's picture

I find it interesting that the "Anti_Gold" people think that math doesn't work in two directions. The result of a stagnation in Gold Production would be an increase in Gold Purchasing power...Which in return would reward savers, sounds good to me! Reward those who are productive and have Capital Creation. What a concept!

mayhem_korner's picture

<< Methman reincarnate?

<< Huff-post shill?

phyuckyiu's picture

I dunno he is a different one :)

sasebo's picture

How about the growth aftert WWII? Was that centrally planned? Of course not. And what did the keynesians predict would happen after the war? Wrong!!!!!!! You conveniently forgot about that huh?

fonestar's picture

I will take the anarchic movements of the free market any day.  The free market as in, that created and funded by engineers, leaders and business, inventors, innovators and people producing good and services while saving capital.  Not the couch potatos and definitely not your central planners!

BetterOffDead's picture

Yeah, man, don't you know all that spending is going to ignite the animal spirits? Don't ask me to quantify those, though...

fxrxexexdxoxmx's picture

MDB kicks ass again. You are my idol. You are the bestest. You make Obama teleprompter reading somewhat bearable because we know he has no fucking clue what he is saying.

Harlequin001's picture

MillionDollarBonus, these 'educated connoisseurs of elite intelligence', perhaps you could point me in the direction of one of them?

That would be like buying a new suite, TV and lounge furniture on your credit card and then sitting back thinking 'Yes, I've made it. Haven't I done well?'

The problem as always is paying for it...

outsidertrader's picture

Errr. You are being sarcastic right?


spiral_eyes's picture

Another crucial aspect is that debt-funded stimulus parasitises the real job creators — entrepreneurs and small business — to give to big business. 

WSP's picture

Precisely, but that is exactly what the elites want to do----completely eliminate small business because they cannot control small business.  The elites of New York want all money to flow through them, and they want a cut.   Just as the mob used to visit each local store to get their cut, the New York "mob" knows that by wiping out small businesses and eliminating any "local" investment opportunities, they get to control everything.  Their strategy is brilliant if you are a sociopath which of course we know they are.

Regarldess of how things turn out, small business is dead and won't come back.  The large conglomerates have successfully carried out their coup d'etat' on small businesses and the middle class and at this point all the population has to look forward to is the "scraps" that the banking oligarch and corporatists do not want to wipe their A$$ with.

Toma Haja's picture

Free enterprise, capitalism, whatever one calls it, seeks positive economic returns.  Over time, companies buy out others to achieve economies of scale and/or greater market share.  Some companies fail.  Other companies start up.  Ease of entry and barriers to entry are key factors in a healthy economy and determine the level of competition and, to a large extent, the overall price levels.  As taxes and other costs of doing business rise; as capital is sucked up by the government; as more and more regulations burden the only productive sector of the economy in order to promote the non-productive sector, the small businessmen face greater and greater barriers to not only entering into business but maintaining their toehold in a shrinking economy. 

Small business is not dead, just choking in a very hostile environment.  We need to clean up the economic environment.

flacon's picture


Must watch:



Systemic collapse is 100% certain and unavoidable.


Jumbotron's picture



captcorona's picture

I am not shocked, but that video seems a bit old. Anyone know when it's from?


covert's picture

the whole thing is simpler than it looks. atlas is shrugging and "we the people" are atlas.


SWRichmond's picture

The paper The real effects of debt –( – by Cecchetti, Mohanty and Zampolli highlights that debt is supposed to improve the efficiency of capital allocation across its various possible uses in the economy by shifting the risk to those most able to bear it, but of course that very statement reinforces what I am saying; if debt is causing a better allocation of capital, then debt will fall, not rise, relative to GDP.

This is just another way of describing the marginal productivity of debt.  If borrowed capital is applied productively, then wealth will rise faster than debt. 

kahunabear's picture

Risk on Babay! Greek can kicked, Bernanke and Co. will not disappoint and cause the market to fall.

LeonardoFibonacci's picture

Sorry dude market is recovering, no doomsday today!

Jumbotron's picture

That's what everyone said the day before 9/11

the day before Katrina

the day before the Japan Quake and Fukashima

the day before Pompeii

Little John's picture

I don't want tp sound mean spirited but I hope j m keynes is in Hell - cleaning stalin's toilet.

porrannor's picture

Do you understand the concept of Gulag or purges or Lubianka? Heve you ever faced slow death by starvation? No? So, shut the hell up... There are some things that should not be disrespected and disrespecting those who lived through it or died by it is one of them.

andybev01's picture

...being Stalin's toilet.


Fixed that for ya.

Nick Jihad's picture

You know, just because we refer to it as "Keynesian", does not mean that Keynes would have approved.  I think Keynes would be amazed to see the policies being promoted in his name.


SWRichmond's picture

Keynesianism is embraced by politicians not because it is correct but because he told them what they wanted to hear: they have a right and an obligation to manage the economy and to spend spend spend to keep it going.  Imagine telling politicians they are smarter than the average person and that they should spend as much money as it takes; do you think a politician can come up with spending schemes that also just happen to get him or her re-elected?

tempo's picture

IMO, there can always be an infinite supply of debt/money as long as the US/EU/China/India/Japan cooperate. Thats 80%+ of world GDP, the rich world families love it, the alternative is a depression/war and its all monopoly fake money anyway not backed by anything but giant military powers. Anyone who tries to stop this way of life will be shocked by the response. Literally!

Shell Game's picture

And yet TPTB do not bask in this confidence because it's not just about fiat, it's also about oil.  The world IOU holders fear being the first to cash an IOU, but are terrified of being the last to.  The Ponzi unravels and there is not a thing they can do about it.

Soul Train's picture

Insane and elitists they are.

GeneMarchbanks's picture

Mushroom Cloud ... biatchez

mayhem_korner's picture



T. Chong:  Hey does he get (that debt) to fly?

Cheech M.: You know man, with the magic dust, man!  A little for the (debt)...a little for Santa Clause...a little more for Santa Clause...a little more for Santa Clause...

TruthInSunshine's picture

Gee, who to listen to? Who has more credibility? Volcker or Bernank?; Volcker or Bernank?

Wow, I'm conflicted. One has a successful track record, and the other is a blithering, incompetent failure of an economist, prognosticator and human being.



A Little Inflation Can Be a Dangerous Thing -


Published: September 18, 2011

IN all the commentary about Ben S. Bernanke’s recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words:


in a context of price stability.”


Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery...

...What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate.


It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy.


At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.


It is that conviction that underlies Mr. Bernanke’s six words. Let’s not forget them.

President Obama has now set out new proposals to support economic growth. I hope he will be able to work with a responsible Congress to find the common ground that is urgently needed to deal with the economic challenges before us, restoring a healthy economy “in a context of price stability.” I also hope they will reach agreement early next year on a strong program to deal responsibly with our huge budget deficit over the years ahead.

*Paul A. Volcker was chairman of the Federal Reserve from 1979 to 1987.

GottaBKiddn's picture

Now you know why Volker was replaced.



ElTerco's picture

 Great comment.  Yes... he was way too competent to be chosen to work in a position of authority within our government.

Socratic Dog's picture

Pardon this poor illiterate bastard, but is not Volcker supporting Bernanke?  Saying he is too responsible to unleash inflation (ahem), and thus will stop the printing?  No more stimulus?


That would be a pleasant surprise.  Maybe not to the market....

mkkby's picture

Believe it or not, to Volcker that milqutoast editorial was fighting words.  He's criticising Bernanke:

"Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate."

BruntFCA's picture

Slight problem with all this. He assumes that in some ideal system GDP can always raise to meet the increased debt load - what he calls the "Systainable GDP".

However, in our debt based, compound interest based money system, this means that GDP must rise...*forever*. So there we have it continual exponential growth on a finite planet. What he proposes is simply less insane than the malivestment, centrally planned model we currently have, but still insane.

Jumbotron's picture

BruntFCA said......"Slight problem with all this. He assumes that in some ideal system GDP can always raise to meet the increased debt load - what he calls the "Systainable GDP".

However, in our debt based, compound interest based money system, this means that GDP must rise...*forever*. So there we have it continual exponential growth on a finite planet. What he proposes is simply less insane than the malivestment, centrally planned model we currently have, but still insane."

BINGO !!!!

Give that man an infinite supply of gold stars.

So...really after all the reasonable sounding language and the facts that are the end Andy Lee is just slightly less insane than the other nutters running this asylum.

Another theorotician decrying the fact that the other theoroticians simply went to the logical extreme of debt based wealth creation.

What else would corruptable humans do with what seems like the discovery and perfection of financial based alchemy?

We can transmute base metals into gold.  Only you have to dispense with the gold and simply transmute faith in a sovereign entity into base metals.....and paper.

We are so cosmically screwed if it's a battle between these two camps.

HoardeBilly's picture

Modern day alchemy:

Turning a lead fiatsco into gold in hand. 

Take advantage while this magic still works!