[Daniel_Plainview]

Eric Sprott: "We Are Now Paying For The Funeral Of Keynesian Theory"

...Government debt is an intrinsically important part of the financial landscape. It is the bellwether by which we measure risk, and we believe we have entered a new era where traditional "risk-free" assets are undergoing a tremendous shift in quality.

In studying the government debt market, we have inadvertently been led to question the economic theory that most fervently justified recent government spending programs: that of Keynesian economics. The so called "beautiful theory" of Keynesian economics is arguably the most influential economic theory of the 20th Century, shaping the way Western democracies approached the balance between free market capitalism and government initiatives. Like many beautiful theories, however, Keynesianism has ultimately succumbed to the ugly facts. We firmly believe the Keynesian miracle is dead. The stimulus programs are simply not producing their desired results, and the future debt costs associated with funding these programs may cause far greater strife in the future than the problems the stimulus was originally designed to address.

... Stated simply, ‘borrowing to stimulate’ has never worked as planned because the cost of paying back the borrowed funds surpassed the immediate benefits of the stimulus. ... Harald Uhlig estimated that an approximate $3.40 of output is lost for every dollar spent on stimulus. Another study on the same subject by C’ordoba and Kehoe (2009) went so far as to say that, "massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression."

...If the conclusions of these studies are even close to being correct, we are now in quite a predicament – not just in the US, but across the Western world. Remember that the 2007-08 meltdown was only two years ago, and as we highlighted in April 2009 in "The Elephant in the Room", the US government has spent more on stimulus and bailouts, in percentage of GDP terms, than it did in the Gulf War, Operation Iraqi Freedom, the Vietnam War, the Korean War and World War I combined.5 All that spending was justified by the understanding that it would generate sustainable underlying growth. If it turns out that that assumption was wrong, have the governments made a fatal mistake?

... Our own findings [suggest that] one current deficit dollar resulted in an increase in current dollar GDP of a mere 10 cents. Again - no miracle Keynesian multiplier here. If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the "Keynesian endpoint", where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???



... In the end, Keynesian stimulus ultimately fooled us all. It roped in the politicians of the richest countries and set them on an unsustainable course of debt issuance. ... Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally.

[Tanada]

Funny how the 'experts' were fooled when as a college student taking Economics in 1986 I could see the fallacy of something for nothing, which is the whole premise of Keynesian economics. Any 'multiplier' based on taxes is inherently less than promised, usually by a very large margin.

[efarmer]

Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century, commenting that; "His radical idea that governments should spend money they don't have may have saved capitalism".

Saved from what and for how long?


Keynes theory was only adopted after WWII started so we had a name to apply to betting our nation and it's natural resources on winning a war.

[crude_intentions]

Well as Keynes said "In the long run, we're all dead"

To be honest what is called Keynesian economics today is nothing but people like Paul Krugman pissing on his grave. Little of what Keynes believed actually survives in what is called Keynesian economics the majority of it is the product of people that came after his death. For example Keynes never advocated LONG TERM structural deficits on the contrary he believed that deficit spending needed to be cyclical and temporary.
Poor Keynes is being setup as the fall guy when people realize that modern economics has run us into a ditch.

[Sixstrings]

Likewise now. We were dragged into this The Greatest Depression Ever by office automation and unemployment. There is nothing after the consumer market thanks to peak oil. peak everything.

Nice to see at least one person besides me understands the automation / over-efficiency factor in this current depression. That's why there's no easy answer -- it's not all the fault of offshoring and the service economy, because even in services, thanks to productivity tech, people are so darn efficient that we'll never have enough jobs for everyone.

As for Keynesianism, it's my opinion that if the economy is in obvious deflation then stimulus should be use proactively -- to create new jobs, new infrastructure, new industries. But it's folly to bail anyone out. Failed businesses MUST be allowed to fail. If everyone is out of work, then government should step in and help build something new -- that's the key here, something has to change you can't dig your way out by just rewarding failure.

As for the last Great Depression, it was the full employment necessitated by WWII that got us into recovery. Another important factor is that the war destroyed the industrial infrastructure of just about everyone except for the US. So it's no surprised that boom times followed, not hard to compete when you're the only shop left on the block.

[sparky]

.
Some misunderstanding on Keynesian theory ,
I presuppose state intervention to act as a shock absorber , but that is a bit moot if the economic vehicle is jumping off a cliff ,
the government stimulus can be used at the start to sustain activity , it work if it's a shallow dip
or it can be used when the bottom is reached to avoid staying there and stimulating recovery .
all things being equal , this stimulus has to be paid for by higher state debt ,
the whole point is that government sovereign debt is cheap and long term ,
so far so good , the theory work .
it has worked so much that any government since sixty years has been using it non stop .
The result is a huge pile of sovereign debt funded by , you guessed it , stimulus .
If the world economy was a horse race
This horse has been on the juice so much for so long , it now can only manage a feeble trot
and risk an heart attack any second
The plan of the feds is to give it a REAL stimulus shock ,
but head trainer Bernanke is somewhat worried

[Oakley]

The price being paid is as much for the privilege granted to the banking system to create money out of thin air and loan it into circulation.

The M2 money supply was roughly $30 billion in 1933. Today it is $8,600 billion. This is all bank debt owed to individuals, businesses and governments in the form of paper currency, checking accounts and savings accounts. Offsetting these debts on the asset side of the books of banks are the many loans owed to the banks by individuals, businesses and governments. The increase since 1933 came out of thin air by bookkeeping entry, and to a much lesser degree, the printing press. The reason for this monetary system is first, so banks can earn huge amounts of interest on this debt money they create and loan out, and second so that the federal government can have easy access to new money when they spend more than they tax.

It is not only in violation the Constitutional authority granted to Congress to coin money and regulate the value thereof, and the prohibition against the states emitting bills of credit or making anything but gold and silver coins legal tender, but it is also a predatory, unstable, unsustainable system. It was an accident waiting to happen, and the wait is over.

We are in a slowly unfolding collapse in which much of this debt will default on both sides of the balance sheets of banks. This means that they will suffer huge losses from unpaid loans, making them insolvent. And when they are insolvent, this means that they cannot repay what they owe, your checking account and savings account, for example. This is what financial collapse means, just like in the 1930's, the only difference being that in the 1930's the currency component of the money supply was gold and silver coins or the equivalent bullion in the US Treasury to back the paper bills against it. This time the currency is Federal Reserve Notes, redeemable in nothing, backed by nothing.

You have been royally fleeced by collusion between the federal government and the banks with the assistance of those economists giving the system the illusion of credibility from the sidelines; what people won't do for money! The madness likely will unfold first with the deflationary collapse of money, liquidity, and credit. If the federal government survives, then there will be an attempt to change the monetary system to one where the federal government spends new greenback money into existence, bypassing the banks and creating a hyperinflation.

I really don't expect the federal government to survive. Hopefully they will give up like the USSR did and allow the States to take over in their respective territories, but if they fight to maintain power, then civil war is inevitable, right on the timetable predicted by the authors of "The Fourth Turning", before 2020.

Have a nice day.