Tag Archives: Keynesian economics

Central Banking is Socialism, by Ron Paul

Socialism has been alive and well in the US for over 100 years. From Ron Paul at ronpaulinstitute.org:

Last week, the Federal Reserve responded to Wall Street’s coronavirus panic with an “emergency” interest rate cut. This emergency cut failed to revive the stock market, leading to predictions that the Fed will again cut rates later this month.

More rate cuts would drive interest rates to near, or even below, zero. Lowering interest rates punishes people for saving, thus encouraging consumers and businesses to spend every penny they make. This may give the economy a short-term boost. But, it inhibits long-term economic growth by depleting the savings necessary for investments in businesses and jobs. The result of this policy will be more pressure on the Fed to indefinitely maintain low interest rates and on the Congress and president to create another explosion of government “stimulus” spending.

Boston Federal Reserve President Eric Rosengren has suggested that Congress allow the Federal Reserve to add assets of private companies to the Fed’s already large balance sheet. Allowing the central bank to buy assets of, and thus assume a partial ownership interest in, private companies would give the Federal Reserve even greater influence over the economy. It could also allow the Fed to advance a political agenda by, for example, favoring investment in “green energy” companies over other companies or refusing to purchase assets of retailers who sell firearms or tobacco products.

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Davos Man – Misbegotten Progeny of Keynesian Central Bankers, by David Stockman

The Davos men and women confabbing in Davos don’t have a clue as to what’s really going on in the world. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:

There are a reported 119 billionaires attending the Davos confab this year – plus (allegedly) the Donald, who took a day off from Impeachment to address this august gathering of the world’s movers and shakers.

There is also 1500 private jets crowding the surrounding airports – plus the notable train-traveling 17-year old expert on planetary climate science, Greta Thunberg.

Also, among the 10 billionaires in attendance from communist China is Ren Zhenfei, founder of Huawei and father of its CFO, Meng Wanzhou. Even as dad courts the rich and famous on the slopes, daughter languishes in a Canadian jail waiting extradition to the US because she had the audacity to do business with Iran against Washington’s instructions and Trump’s latest fatwa against the Tehran government.

These odd juxtapositions plus countless more got us to thinking about Davos Man himself and the ultimate juxtaposition of our times.

To wit, the combined net worth of the world’s billionaires in the year 2000 was $1 trillion, according to Forbes, but at this bublicious moment that number is reckoned at just under $10 trillion. So the 2,150 members of the Billionaires Club now have more net worth than 60% of the world’s population combined. That’s 4.6 billion people!

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The Burden Of Government Debt And James Buchanan’s Corrective, by Daniel J. Boudreaux

The article states some conclusions about debt that don’t require a PhD, or even a Bachelor’s, in economics to reach. From Daniel Boudreaux at aier.org:

Who bears the burden of government indebtedness? Prior to the Keynesian revolution in the mid-20th century, most economists understood that the burden of government (or “public”) debt falls on those citizens who, in the future, must repay the debt. The funds for such repayment can come in the future from higher taxes, from reduced government expenditures on programs other than debt servicing, or from some combination of the two.

But Keynesianism destroyed this consensus. According to what my late Nobel-laureate colleague James Buchanan called the “new orthodoxy” about government debt, all such debt that is owed to fellow citizens – that is, debt that “we owe to ourselves” – is no burden at all upon the generations who must service and repay it.

Three Prongs of the Keynesian Orthodoxy

There are three prongs to this Keynesian orthodoxy. The first prong is rooted in the Keynesian insistence that the main driver of economic activity is the volume of total spending, or what economists call “aggregate demand.” And so if American citizen Smith is taxed an extra $1,000 in order to retire a $1,000 U.S. government bond held by American citizen Jones, there’s no reason to believe that total spending in the American economy will change. While Smith’s spending will fall because his after-tax income falls by $1,000, Jones’s spending will rise upon his receipt of this $1,000. Retiring the debt, therefore, has no effect on economic activity as a whole.

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Macroeconomics Has Lost Its Way, by Alasdair Macleod

Macroeconomics took an ill-advised detour into Keynesianism and has never found its way back. From Alasdair Macleod at goldmoney.com:

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

To this day, his followers argue that macroeconomics is different from individual actions, and the factors that determine the behaviour of individuals are not the same as those that determine the wider economy. This article explains why it cannot be true, why modern macroeconomic beliefs are fundamentally flawed, and why interventionism has not only failed to produce overall benefits for the wider public, but has been at an unnecessary economic cost.

The basic fallacy

Last week, Martin Wolf (the FT’s chief associate editor and chief economic commentator) presented a programme entitled Economics 101 on BBC Radio 4, in which he raised the question as to whether a democracy can function when voters have little idea of how the economy works and why there has been so little effort to teach economics in schools.[i] The independent economists interviewed, Larry Summers and Joseph Stiglitz, and Wolf himself are strongly pro-Keynesian, and the programme made no mention of the fact that there are different schools of economic thought. The question as to what information should be given to the public and crammed into the minds of schoolchildren was never addressed, and it was clearly to be the Keynesian view.

Wolf is probably the most senior economic commentator in the British media, and one can therefore understand why the BBC, a state-owned broadcaster whose specific mandate is to be unbiased in matters of opinion, thought that by getting such a senior figure to present the programme, and for him to invite well-known economists to be interviewed, that there was no bias. The vast majority of listeners were similarly likely to be unaware of any bias. Furthermore, Wolf himself, being Keynesian, probably thinks that any other economic theory is simply wrong.

To continue reading: Macroeconomics Has Lost Its Way

Lessons from Japan: Decades of Decay, Unavoidable Collapse, by Charles Hugh Smith

In the long run, as John Maynard Keynes so infamously observed, we are indeed all dead. And in the long run, moronic economics, like those promoted by Mr. Keynes (with apologies to morons, not that any read SLL), lead to collapse. From Charles Hugh Smith at oftwominds.com:

Japan has proven that decay can be stretched into decades, but it has yet to prove that gravity can be revoked by central bank monetary games.

Japan’s fiscal and monetary extremes are in the news again: this time it’s the Bank of Japan’s extraordinarily large ownership of Japanese stocks, a policy intended to boost “investor sentiment” and prop up sagging equity valuations:

The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.

The core failure of Japan’s central bank and state is they have attempted to substitute monetary games for desperately needed social, political and economic reforms. This is the Keynesian ideology and project in a single sentence:
Keynesian policy holds that expansionary monetary and fiscal policy can be substituted for structural social, political and economic reforms, enabling the status quo to retain its power and privileges without disruption.

In effect, Japan has pursued a vast monetization campaign for 26 years. The Bank of Japan creates money out of thin air and uses the free money to buy government bonds, funding the state’s enormous fiscal deficits (also known as monetizing government debt). The BoJ has extended this monetization to corporate bonds and the stock market– effectively propping up government debt, corporate debt and the stock market with newly created money.

That these were once private-sector markets has been set aside, as the only thing that matters now is keeping them propped up, regardless of the cost. As I note in my new book Why Our Status Quo Failed and Is Beyond Reform, when emergency measures become permanent policies, you know the status quo is on life support.

To continue reading: Lessons from Japan: Decades of Decay, Unavoidable Collapse

 

Oil Economics, Part 2, by Robert Gore

Monday’s post, “Oil Ushers in the Depression,” was one of the most read, commented on, and controversial posts on SLL. Here is an amplification, and a doubling down on the prediction in that piece:

The sharp drop in oil will support U.S. growth by boosting spending, two top Federal Reserve officials said, playing down the risk that plunging energy costs could push inflation further below the Fed’s goal.

Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, speaking at separate events today in New York, both stressed the positive impact on the U.S. economy from the steepest decline in oil prices for five years.(Bloomberg, “Fed’s Dudley Says Oil Price Decline Will Strengthen U.S. Economic Recovery,” 12/1/14)

If that sounds eerily like Benjamin Bernanke’s infamous assurance that “…the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” it should (testimony before the Joint Economic Committee, U.S. Congress, 3/28/07). However, Fischer and Dudley go Bernanke one better. Bernanke at least acknowledged a problem, although he woefully underestimated its impact. The dynamic duo sees nothing but blue skies after oil’s precipitous fall. Their Panglossian visions reveal the rotten-to-the-core premise of Keynesian economics and complete ignorance of the towering debt skyscraper of cards their policies have helped erect.

In their Keynesian world, demand and consumption are the center of the solar system around which all other economic factors revolve. Reality, on the other hand, dictates that something must be produced before it is consumed, so we’ll stick with reality-based economics. Fischer and Dudley don’t even acknowledge that the falling price of oil might harm producers.

The Saudis are the world’s low cost producer. It is much cheaper to pump oil out of the desert than it is to frack it, extract it from tar sands or shale, or pump it from under the ocean, which is how oil is produced in much of the rest of the world. The Saudis amortized the costs of their petroleum industry long ago; the relevant cost to them is their marginal cost.They have decided to pump sufficient oil to drive its price low enough to make it uneconomic for many higher-cost producers to produce.

Their decision has political and economic motivations. The Saudis have been mightily displeased by the course of events in Syria. The Sunni Saudis don’t like Shiite Bashar Assad, Syria’s despot. They thought President Obama would fight their war for them when Assad crossed his red line. They were furious when Vladimir Putin gave Obama a face-saving out, not just because of Obama’s inconstancy, but also because Putin had thwarted a potential US attack against his ally, Assad. The U.S.’s half-hearted response to the Islamic State—its reluctance to put those all important boots on the ground—has further inflamed the Saudis, who view the campaign against the Islamic State as the perfect pretext for getting rid of Assad.

What better way to punish both the US and Russia (and perpetual enemy Shiite Iran), and reestablish dominance in oil, than by glutting the market? As a business plan, taking on debt at junk bond rates to fund oil production, as many US and Canadian producers have done, or basing government budgets and economic projections on a high price of oil, as Russia and many other oil-producing nations’ governments have done, leaves something to be desired when the lowest-cost producer can lay waste to your plan at any time.

The subprime fiasco offers the perfect analogy. Just as everything “worked” as long as house prices kept going up, the dreams in the oil patch seemed plausible when its price was high. As soon as oil’s price headed in the undesired direction in this highly leveraged market, the dreams evaporated, just as they did in the highly leveraged housing market. The debt of the most indebted producers, now losing money, is worth less than face value. Their creditors will eventually recognize losses. As previously noted, the one wrinkle is that so many producers are governments. They have not, in most cases, explicitly backed their debt with oil revenues, but they had assumed those revenues and based their future spending plans on them. Call it “soft” debt.

The dilemma is the same for both private and government producers. They can go on producing at an economic loss, for the cash flow, adding to the glut and the downward pressure on prices, or they can curtail production and their own revenues. The former is a short-term palliative only; the latter means immediate pain. Either way, total revenues accruing to uneconomic oil producers decline. Those producers will consume less—just as homeowners significantly curtailed their spending when house prices crashed, which is contractive and deflationary.

As the oil price drop leads to losses for producers, their suppliers, and creditors, assets will be sold, production curtailed, orders cancelled, and workers laid off. Eventually the price of oil will stabilize, but producers, especially government producers, may well continue to add to the glut due to short-term cash flow needs—it’s better than people taking to the streets. Even the House of Saud has committed much of its huge revenues to bribing their disaffected off the streets and keeping itself on the most kleptocratic and lucrative throne on the planet.

Dudley and Fischer refuse to acknowledge the debt daisy chain for which they and their fellow central bankers around the world are largely responsible, just as Greenspan and Bernanke have never fessed up to their mortgage-debt-and-securitization daisy chains. When oil-based debt implodes, it will stay as “contained” as the subprime implosion; daisy chains are daisy chains. However, given the much higher level of world debt now, the fallout from this conflagration compared to last time will be akin to the difference in fallout between hydrogen and atomic bombs.

IT’S THAT GOOD. LOOKING FOR THE BOOK THAT SOME READERS READ IN A DAY,  AND MOST WITHIN A WEEK?

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