If there is one thing that everyone should watch to understand just why every policy attempt to fix the ongoing depression is doomed, it is the following short clip from Niall Ferguson in which he deconstructs the primary fatal flaw of Keynesianism. Ferguson explains why those who push for Keynesian policies in a globalized world are doing nothing to stimulate the economy, but merely inflate ever more bubbles. Quote Ferguson: "I wonder if it's worth revisiting the now familiar debate about whether or not Keynes can save us. Because I have some doubts about this. Deep doubts." Zero Hedge has no doubts about this - we are confident that the confines of a theoretical Keynesian system have been the recipe for the disaster unfolding now before our eyes (which is not to say that Austrian economics is necessarily better, although intuitively they certainly make a far more compelling case, and would certainly not have led to the current pre-apocalyptic economic situation, which only the most addicted to Kool Aid pig lipstickers refuse to acknowledge). However, that is not news - we have always made our position on the false voodoo religion of economics well known. We are, however, happy that more and more of the "mainstream fold" are finally starting to question the key flawed premise of this fundamentalist doctrine.
Ferguson continues "Remember what Keynes wrote in the 1930s about stimulus and the way in which government could get an economic going again really applied to a post-globalization world in which trade and capital flows had largely broken down, and most economies were quite isolated units. That's something that Keynes made clear in the German edition of the General Theory when he said the theory applies better in a closed totalitarian economy." The conclusion - in a globalized world, such as that preached by the BRIC pundits whereby developing nations will bail everyone else out, or so the legend goes, additional stimulus will always and inevitably merely lead to bubbles - either commodity or emerging markets. And all we have is a bunch of idiot Ivy League Ph.D.s' wrong interpretation of Keynesianism to thank for destroying the economic system as we know it.
Niall on the direct effect of existing failed Keynsian policies in a globalized world:
Globalization has not broken down. In fact the US economy is more open than it has ever been. That means that stimulus, both monetary and fiscal if very prone to what is called leakage. We've had an enormous of stimulus in the US, it's the biggest fiscal stimulus in the world, and huge unprecedented monetary stimulus. What's been stimulated? Not jobs in Michigan. What's been stimulated has been commodity markets and emerging markets. Because the liquidity just leaks out, and that's why another round of stimulus would not stimulate in the promised way. It would stimulate the wrong things. And those things, commodity markets and emerging markets, are already overstimulated to the point of being nearly bubbles.
So simple, yet so incomprehensible by the cadre of false Keynesian prophets who will never admit to this most elegant of realizations. It also means that America can expect more such farces as double stimulus roadsigns, and oil back at $140 (or much higher) before even another job is created out of all the excess money sloshing around.
Must watch clip.
And for those who would rather work in the confines of these two mutually exclusive worlds (Keynesianism and Globalization), there is one thing we would like to share with you, and that is the following extract from an interview by Peter Cook of the last person standing in Obama's economic team Tim Geithner:
They're also letting their exchange rate move up. And they're doing that because it's in their interest. Makes no sense for China to have monetary policies set by the Federal Reserve. They're an independent country, large economy. They need the flexibility to run their policies in a way that makes sense for China. And that requires that their exchange rate move up over time, as they're now doing.
That our economic leaders are stupid enough to utter the bolded is sufficient validation that we are all doomed: not only is the world being guided by a flawed economic religion, but its priests are the most intellectually challenged individuals ever to enter "public" service.
And as an aside, those who wish to hedge bubbling emerging market exposure, SocGen's Dylan Grice had a great analysis of various cheap inflationary (compared to rich deflationary) EM hedges (link).
h/t Credit Trader