FedUpUSA

Archive for the ‘Keynesian economics’ Category

The facsimile of U.S. “growth” now depends entirely on Central State manipulation and stimulus of risk trades and financial slight-of-hand.

The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of “growth.” Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.

There are a number of factors at work, but let’s start with two: the ratchet effect, and the Keynesian Project.

In the ratchet effect, increases are easy and resistance-free: it’s incredibly easy to hire more employees in bureaucracies, for example. But once the ratchet has advanced, it is nearly impossible to return to the previous tooth in the gear.

So for a city government to expand payroll from 10,000 to 20,000 employees was effortless, to reduce a 20,000 person payroll back to 10,000 is exceedingly painful.

The ratchet effect is a key feature of addiction. When one beer no longer creates a “buzz,” then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.

The U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve credit creation and manipulation. Let’s set aside the fact that America’s Central State has by some calculations guaranteed some $13 trillion in private financial assets via TARP, AIG’s backstop, the takeover of Fannie Mae and Freddie Mac, etc.–roughly the size of the entire GDP of the nation.

Let’s focus instead on the fact that the Federal government must borrow and spend 11% of GDP ($1.5+ trillion) every year, and the Fed must buy $1 trillion in impaired private assets or new Treasury debt annually (another 7% of GDP) just to create an illusory GDP growth of 2.5% a year. So we’re spending/injecting 18% of the GDP to conjure a “growth” of 2.5%.

That means we’re spending/injecting $7 to create $1 of “growth” in GDP. And thanks to the ratchet effect, there’s no going back now without systemic disruption. Does anyone seriously believe spending $7 to birth $1 of “growth” is sustainable? If so, then let’s eliminate that $1.5 trillion deficit spending and the Fed’s $1 trillion-a-year purchases of impaired debt and Treasury bonds, and see if GDP “grows” via organic demand and production.

Everybody knows what would happen: the wheels would fall off the illusory “recovery.” The “recovery” is precisely analogous to an alcoholic who claims to be sobering up but who is actually drinking seven beers a day to get a buzz when a few years ago he only quaffed two or three a day.

Here is the Keynesian Project in a nutshell. Unfettered Capitalism works in straightforward cycles: the organic business cycle of expansion, overcapacity and overleverege inevitably leads to a credit bust in which those whose borrowing exceeds their ability to service their debt go broke, and the dominoes of overcapacity and credit expansion topple as losses mount and consumption based on increasing debt falls.

Bad debt gets wiped out, along with “pyramid-scheme” type assets (mortgaged assets are leveraged to buy more mortgaged assets) and excess capacity. As production declines, workers are laid off and consumption declines, further pressuring impaired financial assets.

As Marx had foreseen, these cycles increase in depth and severity. Though Marx invoked dialectical theory and history rather than the ratchet effect, the basic idea is the same: Capitalism becomes increasingly dependent on financial capital, and the resultant crises eventually become severe enough to take down Capitalism as a sustainable productive system.

Keynes’ proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of “animal spirits” (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).

But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.

As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which “saves” the organic economy by taking control of its income streams, credit creation and financial assets.

That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicans became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and “growth” alive.

State and local governments became casinos, dependent on skimming the profits from asset bubbles and financial fraud. Where did New York City’s and New York State’s rising revenues come from? By playing dealer on Wall Street’s scam tables, skimming a steady share of the profits.

Where did California’s bloated state revenues come from? The skimming of capital gains from the Ponzi-scheme real estate bubble.

The stock market rally circa 2003-2008 was merely Travesty of a Mockery of a Sham Phase I. In those glory years of the Central State/Cartel-Capital manipulation, it only required $2 of stimulus and credit expansion to blow $1 in asset bubble “growth.”

But alas, the growth was bogus, illusory, a simulacrum of organic growth, a house of credit cards and fraud that toppled when one card’s overleveraged precariousness was inadvertently exposed.

Now we are in Travesty of a Mockery of a Sham Phase II. As Marx had foreseen, the crises are ratcheting up: now it’s taking $7 of State/Plutocracy intervention to conjure up a pathetic $1 in “growth.” Both are now totally dependent on the substitution of bubbles and fraud for real productive growth.

What Marx failed to foresee was the Central State’s rescue of Cartel-Capital via a partnership: the Central State is now as dependent on financial capital’s maximization of fraud and credit expansion as the Financial Plutocracy is dependent on the Central State to mask and enable its expansion of income and control.

The problem is, of course, that the system cannot support borrowing and spending $7 to create $1 of “growth” for long: eventually, as in all business cycles, the cost of borrowing will exceed the ability of the borrower to service that debt. That’s what Keynes failed to foresee: the way in which the partnership of Central State and Cartel-Capital requires ever greater credit and State debt expansion just to keep the system afloat, never mind growing.

If I loan you $1 trillion at zero interest, with no principal payments, then the cost of servicing that $1 trillion loan is zero. Pretty easy to service zero, isn’t it? That’s the core strategy of the Federal Reserve and the U.S. Treasury.

That’s been Japan’s “secret” for 20 years: as long as the lenders (the Japanese citizenry and life insurance companies, etc.) accepted near-zero interest, then the cost of borrowing additional trillions has been bearable.

But as soon as that $1 trillion requires a serious interest payment, then the ratchet-effect game ends. We are not there yet, but the endgame is no longer over the horizon.

What will TMS Phase III require? $10 in Central State stimulus for $1 in nominal GDP “growth”? Or will it be $20 for every $1 of bogus “growth”?

The stock market is a reflection of this ratcheting up of Central State/Monopoly Capital intervention and manipulation. The stock market took off in the mid-1990s in the “easy money” era, and that led to the Phase I bust of 2000-2001.

That required TMS Phase II, which led to the next asset bubble in 2007-08, and that orgy of fraud and credit/leverage expansion led to an even more severe Phase II bust 2008-09.

If the partnership attempts Travesty of a Mockery of a Sham Phase III, then the consequent bust should return the stock market to pre-Phase I levels: The Dow around 4,000 and the SPX around 400.

Neither the public nor the Standard-Issue Punditry (SIP) understand the addiction-like dynamics of the Central State/Cartel-Capital partnership’s increasingly ineffective interventions on behalf of a facsimile of normalcy and “growth.” Like the addicted junkie, the Central State/Cartel-Capital partnership is approaching the point where their “high” requires ever higher doses of smack.

Nobody knows when the higher doses finally become lethal, but we do know there is such a point.

Live debate on deflation/hyperinflation, February 10, 9 p.m. EST . Most of you are already familiar with bloggers Stoneleigh of The Automatic Earth and Gonzolo Lira. Both are well-informed, articulate and persuasive, so the exchange on a topic of importance to us all (deflation vs. hyperinflation) is sure to be compelling.

Of Two Minds

A Center for Freedom and Prosperity Foundation “Economics 101″ Video Exposes Keynesian Consumer Spending Fallacy.

“Keynesian stimulus schemes failed under Bush and now they are failing under Obama” said CF&P Foundation President Andrew Quinlan. “This new video hopefully will prevent similar mistakes in the future by helping people understand the importance of growth rather than redistribution.”

“Keynesian policy is based on the fallacy that you can become richer by taking money out of one pocket and putting it another pocket, but this is a zero-sum game that appeals to statists and other redistributionists,” added Dan Mitchell of the Cato Institute. “Real economic growth occurs when we figure out ways to increase national income, which is why good policy means reducing the burden of government.”

Video Summary

Politicians and journalists who fixate on consumer spending are putting the cart before the horse. Consumer spending generally is a consequence of growth, not the cause of growth. This Center for Freedom and Prosperity video helps explain how to achieve more prosperity by looking at the differences between gross domestic product and gross domestic income.

This new video is part of CF&P’s Economics 101 video series, which is designed to explain free market concepts, with particular emphasis on reaching students and young people. This is the tenth video in the series.

Other Econ 101 Videos

• Indexing the Capital Gains Tax to Protect Taxpayers from Inflation,
• Repealing Obamacare and Restoring a Free Market in Healthcare,
• The Job-Killing Impact of Minimum Wage Laws;
• Deficits, Debts and Unfunded Liabilities;
• Cost of the Internal Revenue Code;
• Lessons Learned From Sweden; Government Monopolies; Moral Hazard;
• Don’t Copy Europe’s Mistakes.

Mini-Documentaries

• Tax Competition Primer,
• VAT-Hidden Tax,
• Global Flat Tax Revolution,
• Cutting the U.S. Corporate Income Tax,
• Promoting Prosperity,
• Obama’s So-Called Stimulus,
• Obama’s Deferral Proposal,
• Case Against Class-Warfare Tax Policy,
• President Obama’s Dishonest Demagoguery on Tax Havens,
• Six Reasons Why the Capital Gains Tax Should Be Abolished,
• Benefits of Tax Havens
• Laffer Curve.

Inquiring minds will want to check out some of those videos.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Courtesy of Lew Rockwell

Some top Federal Reserve officials have come up with a really bizarre proposal for stimulating the U.S. economy.  As unbelievable as it sounds, what they actually propose to do is to purposely raise the rate of inflation so that Americans will stop saving so much money and will start spending wildly again.  The idea behind it is that if inflation rises a couple of percentage points, but consumers are only earning half a percent (or less) on their savings accounts, then there will be an incentive for consumers to spend that money as the value of it deteriorates sitting in the bank.  Yes, that is how bizarre things have gotten.  It is not as if U.S. consumers are even saving that much money.  Several decades ago, Americans typically saved between 8 and 12 percent of their incomes, but over this past decade the personal saving rate got down near zero a number of times as Americans were living far beyond their means.  Once the recession hit, Americans very wisely started saving more money, and so now the personal saving rate has been hovering around the 5 to 7 percent range.  This is well below historical levels, but the folks at the Fed apparently are eager for Americans to pull that money out and start spending it again.

In an article entitled ”Fed Officials Mull Inflation as a Fix“, Wall Street Journal columnist Sudeep Reddy described this bizarre new economic approach that some over at the Federal Reserve are now advocating….   

“But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.”

Does increasing inflation as a way to stimulate the economy sound like a good idea to any of you?

These are supposed to be some of the brightest economic minds that our nation has produced.

Unfortunately, it is becoming increasingly apparent that the folks running the Federal Reserve do not have a clue about sound economic policy.

Anyone who lived through the “stagflation” days of the 1970s should know that inflation does not spur economic growth.

But now some of the most prominent Fed officials are publicly proposing that we should purposely generate more inflation so that “real interest rates” (interest rates with inflation factored in) will go down.

For example, during a recent interview the president of the Federal Reserve Bank of Chicago, Charles Evans, made the following statement….

“It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy.”

If you truly grasp what Evans is proposing here, your jaw should be dropping.

He is basically coming right out and saying, “Hey, let’s go out and crank up the inflation rate so that American consumers will start recklessly spending their money again.”

So are Americans really saving too much money?

Of course not.

Just take a look at the chart below.

Americans are actually still saving far, far less than they used to.  As you can see from the chart, in the 1960s and 1970s Americans would usually save somewhere between 8 to 12 percent of their incomes.

Today, we are still well below that level.  But we have made some progress from the reckless days of five to ten years ago when Americans were living far, far, far beyond their means and basically saving next to nothing….

So now some top Fed officials want to undo all that.  They apparently want Americans to grab their credit cards and to run out to the stores and spend wildly like they did a few years ago.

But spending recklessly is not going to repair our economy.  In order to have a healthy, balanced economy you need to have a healthy personal saving rate.  Encouraging Americans to spend every last nickel they have may boost economic figures in the short-term, but it will make our long-term problems even worse.

But it is not just Federal Reserve officials that are advocating this kind of nonsense.  Just a few months ago, IMF chief economist Olivier Blanchard suggested that it might be a good thing if western nations doubled their inflation targets from two percent to four percent. 

It seems like almost everyone is in an inflationary mood these days.

The Federal Reserve keep dropping hints that it is ready to print lots more money and unleash another huge round of quantitative easing.

Just this past week, the Bank of Japan shocked world financial markets by cutting interest rates even closer to zero and by setting up a 5 trillion yen quantitative easing fund.

In fact, nations all over the world have become increasingly eager to devalue their national currencies in an attempt to gain an edge in international trade.

So after years of relatively low inflation, it looks like our leaders are almost eager to tangle with the inflation tiger once again.

But it might not be so easy to tame the next time.

Once a really bad inflation spiral gets going it is really hard to stop.

But in the end, it is not going to be Barack Obama or the U.S. Congress that is going to decide if we pursue these inflationary policies or not. 

Ultimately, these decisions are in the hands of the unelected, unaccountable Federal Reserve.

If you don’t like it, too bad.  When was the last time a U.S. president or the U.S. Congress really stood up to the Federal Reserve?  It just doesn’t seem to happen.

The Federal Reserve is going to do what the Federal Reserve wants to do, and the rest of us are going to have to live with it.

Of course we could all try to elect candidates who would demand more accountability from the Federal Reserve this fall, but unfortunately those kind of candidates are few and far between.

The sad reality is that at this point, the Federal Reserve is pretty much completely and totally out of control.  The U.S. dollar has already lost over 95 percent of its value since 1913, and now the Federal Reserve is giving every indication that inflation is going to get even worse in the years to come.

But flooding the system with more paper money is not going to solve anything.  Instead, it is just going to make it even harder for average American families to buy milk and bread and to put gas in the car.

Inflation is a hidden tax on every single dollar that we already own.  It is a destroyer of wealth and a wrecker of currencies. 

But now some of the top officials at the Fed see inflation as a key tool in creating “economic growth”. 

With such a clueless collection of idiots running our economy (and the Federal Reserve does run our economy) do any of you actually believe that there is hope for the U.S. economic system in the long run?

The Economic Collapse

Krugman has “explained” why deflation is “bad”.  Well, he’s tried.  But in fact he’s made the case for deflation, especially following insane bouts of INflation.

His idiocy requires a response….

Ok, point-by-point:

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.

Why is this bad?  Real capital formation comes from savings.  Indeed, it is the essence of capital formation of all sorts.  You can’t lend except from excess capital (production ex required spending, that is, surplus) so being less willing to borrow or spend is a net public good over time.

Yes, it makes the Madison Avenue people go nuts, and it particularly makes those people nuts who want to blow bubbles with borrowed money (which always ends in a bust with a huge number of people going bankrupt) but in terms of public policy saving of surplus and thus capital formation should be encouraged, not punished.

A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts.

GOOD!

It’s supposed to be expensive to borrow.

Again, there are three sorts of borrowing:

• Productive borrowing.  That is, borrowing for the purpose of purchasing the means of production, where the reasonably-expected outcome is that the productive means purchased will return more than the amortized principal and interest on the loan.  An example of this sort of borrowing is taking out a line of credit to buy a CNC machine which, along with raw materials, electricity, tools and labor turns out precision aircraft parts.  This sort of borrowing is of net benefit to society as a whole, as it generates employment and net increases in GDP after the fully-amortized cost of the loan.

• Consumptive borrowing. This serves only to pull forward demand.  That is, it is borrowing to buy today what one cannot afford until tomorrow.  This produces a temporary distortion in the supply:demand curve.  Since the signal it sends to the economy is false, in that the demand proffered cannot be maintained indefinitely without an ever-increasing amount of debt being taken on (by definition a Ponzi Scheme) it is thus of negative value to society and as a matter of policy should be discouraged.

• Speculative borrowing.  This is borrowing to place a bet that whatever is purchased will sell for a higher price tomorrow than it does today – not for utility value or consumption itself.  This is the most-destructive form of borrowing of all, since it is both inherently a Ponzi scheme and provides for no positive consumption boost whatsoever, as the item(s) purchased are not bought for the purpose of consumption in the first place.  That is, this is not “pulled forward” demand (that would otherwise exist tomorrow) it is entirely false demand that but for speculative borrowing would not exist at all, at any price.  Policy should thus always discourage such borrowing.

Now the right of free action says that there will always be some mix of these three forms of borrowing in the economy.  That is, absent draconian (and unconstitutional) acts one cannot prevent someone from borrowing to speculate, or to pull forward demand.

But the public interest makes clear that society should not provide incentives to borrow for purposes that are against the public interest.  It is for this reason above all others that “zero interest rates” and other similar policy pronouncements, along with inflation, are CORROSIVE and DESTRUCTIVE to long-term economic stability and growth – they DESTROY the incentive to form capital, and it is from capital formation that all legitimate and productive new business interests spring.

Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.

Oh, so the cure for wages that are above the economic value of the work performed is to keep paying people for work they don’t do, like, for example, government workers who make $250,000 pensions as SCHOOL ADMINISTRATORS?  Exactly where’s the money supposed to come from Paul?

Remember folks:

All borrowing must inherently come from surplus capital – that is, production less the cost of production and sustenance.  IT CANNOT BE OTHERWISE since one cannot manufacture CAPITAL out of thin air – one must PRODUCE it.

There is an underlying problem with people like Krugman: They hate private capital formation and private self-determination with a passion. 

They can’t deal with the idea that government doesn’t have all the answers, even when government is demonstrated to be the problem and blows serial bubbles on purpose, driving policies that offshore tens of millions of jobs.

Then when the bubble bursts they refuse to see the basic math of exponents, and proclaim that we must continue to spend more than we make – even though such policies are mathematically impossible to continue forever, just as all such exponents are into any physical environment bounded by actual fixed size.

Since the Earth is a rock of fixed size, it is thus inherently impossible for such “prescriptions” to work in the intermediate and long term.

Krugman claims to have an advanced degree.  I presume that having such means he passed basic algebra, in which class he would learn how exponents work.

I therefore must presume that the garbage that comes from his mouth is knowingly falsely spewed, and not argued from ignorance.

The only solution to be found in a free market to such idiocy is to lead a boycott of those “media institutions” that give people like him a voice, along with their advertisers.

It’s time folks.

The Market-Ticker

By Fred Douglass