Saturday, March 01, 2014

The Economy Is Building a Resistance to Keynesianism

Like bacteria can build up a resistance to antibiotics, or an alcoholic can build up his tolerance for alcohol, so too can an economy build up a resistance to Keynesianism.  We are now in our 5th year of Obama's Keynesian wet dream (13th if you want to be fiscally technical) and unlike Bush Jr's economic growth, Obama's growth figures are "paltry" at best.  Even taking out the recession Obama has only managed to grow the economy by 2% per year, not enough to increase standards of living with a growing population.  And if you wanted to compare "stimulus" vs. "economic growth" a chart showing the ratio of GDP growth to deficit spending as a percent of GDP shows government spending is having the least amount of effect on growth in history.

Why is happening?  Why isn't Keynesianism working?  And why is Paul Krugman in the fetal position, crying and sucking his thumb?

Let a real economist answer.

First you have to understand that while most Americans aren't smart, let alone savvy on economics, there is SMART MONEY.  People who have money and are smart about it.  These are your entrepreneurs, investors, businessmen, industrialists, etc.  These people are, and always have been, the people that make or break an economy.  Without these people you are just left with workers (who are honorable and good) and parasites (government workers, freeloaders, etc.), both of which rely on the "smart money people" for their jobs, and in the case of parasites, taxes, economic growth, and money.

Sadly for Keynesians, the smart money is reading the writing on the wall.  And while a little bit of Keynesian stimulus might be OK, when you have so much of it, it threatens the fiscal stability of the nation, then they get worried.  Additionally, even if these "smart money" people believe in Keynesianism, when the majority of the money gets handed out for political purposes instead of genuine investments, you start to see a kleptocracy instead of on overly concerned, but well-intentioned government.  This further deters investments and moots the effectiveness of Keynesian stimulus.

Second, there is always a "message" attached to Keynesian stimulus.  This "message" is important because it tells investors, businessmen, entrepreneuers, and employers what the intentions are of the government.  And there can be no starker contrast between the two presidents who have ran up the largest deficits since WWII:

Barack Obama and

President Reagan

Both presidents ran deficits that would make Keynes giggle - Reagan around 4.7% and Obama around 8%.  However, the message between the two presidents could not be more stark:

Reagan's message was:


Obama's message was/is:

Anti-American (yes, yes it is)
Class warfare
Fair outcomes/equalization of income

In short Reagan wanted to invest in the future of America while Obama hates nothing more than America and wants to redistribute wealth.

Criticize the above if you must, but the "smart money" doesn't care about your opinion.  It's already spoken.  Gold alone shows the difference to how receptive the smart money people are to the two presidents.  Even with dangerous levels of deficit spending, people had enough faith in Reagan that they pulled their money out of gold and invested it in America.  Obama, it's the opposite - people went screaming for gold.

Unemployment is another metric you can use.  After Reagan took office, unemployment tanked primarily because jobs were being created.  Obama has relied on people leaving the work force to lower unemployment, and even then unemployment is stubbornly high.

And revisiting the original purpose of this post, economic growth under Reagan was more positive and responsive to deficit spending than under Obama:

Ultimately what the above shows is that economists have got to get over themselves thinking economics is a science and that they are somehow smart.  That people are somehow their little playthings and lab rats.  That the idea that the government should somehow "intervene" to "help" is the most arrogant and cocky thing to think because it implies professors, policy wonks, and politicians know what's best for people more than the people themselves.  But what's worse is when the intention of Keynesian spending goes from "noble" to "political."  And your buddy Obama has gotten rid of all pretenses about using Keynesian economic policies to "boost the economy" as he blatantly abuses it to steal from the productive to bribe his parasitic constituents.

And you all wonder why economy isn't growing.


SM777 said...

Correct me if I am wrong, but from what I understand the US economy is actually collapsing. Few if any notice this due to hyperinflation via the issuance of FRN's. Would you know the ratio of FRN's existing between now and the year 2000? I thought it was in the range of 5.5 to 1 but I'm not sure. Also, when the current hyperinflation is factored in, isn't the GNP actually shrinking? Measured in FRN's exclusively it's not. An obvious example is the Dow Jones fraud. The MSM yells, "wow! Look at the numbers going towards 20,000!!". Yet they will never state the real reason why. As the FRN dollar becomes worth less, it takes more of them to buy a share of stock. Also, I have noticed that the MSM either ignores or badmouths gold of which the "official" (fraud) price is just over $1,300. Yet, there are several foreign mints buying 1 ounce gold coins for approx. $1,450 (as of 2 weeks ago) and selling them for $1,650. The really smart money was buying gold at $300 per ounce 10 years ago.

RobertW said...

You are right. All the pretenses have been dropped. I'm not sure what that signals: (a) they know the house of cards will collapse and they are trying to "get theirs" before it does, (b) they are so confident in their consolidation of power that they really don't care what anyone thinks, or (c) they really are incompetent boobs. Although (c) does not preclude the first two. Your thoughts?

SM777 said...

I'm thinking selections (a) and (b). They are evil, arrogant and malevolent, but not incompetent.

From a Christian viewpoint, it is a spiritual issue. devil-spiritual.

Anonymous said...

We're going to need INVENTORS to get ourselves out of this one.

Sadly, all the "smart" money are too risk aversive to support inventors in developing technologies to get us out of this mess.

In the end, "smart" or dumb, it will not matter. We're all in this together, wether you want to admit it or not.

guru_4_hire said...

Even Keynes stipulated that the virtuous cycle was premised on changing expectations. That if it didn't change expectations it would not be useful. That's a big if. Enter the ricardo barro effect.

My thinking is: There is a trade off between the virtuous cycle and the ricardo barro effect, based upon how far out the ill effects of spending are. The future is always discounted, and when the discounted suck (either through proximity or scale) is greater than the value created by increased government spending, than the market tilts more towards ricardo than keynes. I think there is a certain ratio of debt to economic activity that can be carried indefinitely, and as long as we are perpetually growing this is fine and dandy, but when you go well beyond that, people start expecting more negative changes than positive changes.

Anonymous said...

Keynesian is like a useful drug, say Morphine. You are in pain, you get a shot and life improves.

But if you keep taking it because it makes you feel good then you eventually need greater and greater doses and after ruining your life it kills you.

Our undisciplined leadership class has been dosing the economy like a pusher since wwII.


JoeAmerica said...

Thorfinnsson said...

The number one reason Keynesian stimulus is commonly ignored. It was ignored in this otherwise good post.

Trade policy.

The Reagan Administration was the most protectionist Administration since Hoover. Reagan himself was a free trade zealot, but he bowed to domestic political pressure.

Protectionist measures were implemented against imports of automobiles, steel, and machine tools. The Dollar was devalued against other G6 currencies due to the Plaza Accord of 1986. In fact, in the early 1990s the trade deficit nearly disappeared.

Today protectionism has evolved into a sort of secular sin, and the FED's quantitative easing has been matched by competitive devaluations around the world. Keynesian stimulus largely does not stimulate domestic production anymore.

Another thing to remember is that mainland China was not much of a factor in global trade in those days. In the past 30 years PR China's economy has been multiplied by eight, and it's foreign trade far more so.

The early 1980s was a time of transportation deregulation, and the late 1980s was a time of falling prices for oil and gas.

Blaximus said...

Without picking sides, you casually didn't mention that the lion's share of Gov't stimulus went to banks... never to be seen or heard from again. Also to FED's insane quantitative easing debacle only benefits the wealthier folks in the short run, but it is killing us in the long run.

You also don't mention how gold prices are being artificially manipulated by central/world banks dumping gold in the market when prices get too high. Can't have too much competition for our ( worthless, magical ) fiat currency now, could you?

Investors, captain's of industry and all the other supposed " smart money " are just gathering and sitting on capital. record amounts of capital.OUR capital. " transfer of wealth " in effect.

Maybe they are skeptical. Maybe the supposed " messages " scare them. Maybe.

My take is that the trend is to amass as much capital as possible and just sit on it. It's all the rage now. The ledgers are overflowing. Dying companies look like titans according to the books.

But this is the stategy that will kill us in the long run. the fed with it's super-low interest rates, and corporations and banks soaking up as much as they can and not allowing it back into the broader economy.

In the end, there's absolutely nothing " smart " about that at all.

V10 said...

"In the long run, we're all dead" Keynes wrote in 1923.

Welcome to the long run.

Anonymous said...

I don't know Aaron, mixing politics with economics is a winding path full of rabbit-holes and tenuous correlations.

Credit pulls productivity forward. Since the dot-com bust credit, in the form of interest rate price fixing (suppression), has fueled a housing and personal spending boom that led to total-debt levels >300/GDP, not seen since 1929. Student loans and credit cards were also maxed. All of these credit mechanisms created a false economy that's being painfully revealed. Credit is reaching it's limits and asset quality or the ability to repay is being called into question.

Productivity artificially pulled forward by credit portends a slack period to follow. Excess spending by means of credit implies a period of thrift following as the debt is serviced and payed back. Choosing not to pay back or fixing interest rates does not invalidate the underlying forces at work, it merely delays or changes the pain.

Politics encouraged credit spending. It's politically favorable to resist reducing paying down the principle (kicking the can) but sooner or later the math catches up. The Fed is now one of the largest purchaser/holder of US Treasuries in a perverse game akin to paying the Visa off with a Mastercard.

Would Reagan have rejected calls for stimulus in 2001? Would he have pulled the plug on the 2002-2007 recovery or rejected theories that we would "grow our way out"? I doubt it. I think you're giving presidential leadership too much credit.

People and politicians want to spend. They do not want to pay back. Credit lets them do it and it feels so good....till the hangover. I doubt any President would stand in the way.

SM777 said...

"You also don't mention how gold prices are being artificially manipulated by central/world banks dumping gold in the market when prices get too high."

Hello Blaximus,

What you are seeing is the dumping of "paper gold" into the market, not physical or actual gold. In other words, banks will sell you an IOU for a certain quantity of gold which they do not have. When you ask for delivery of the physical product later on, they will simply give you the cash value, but no physical gold.

So, where was the gold to begin with? Did they actually have it?

Ask the Germans that question.

Blaximus said...

Yeah, I heard about the German thing recently. There's just so much shadiness with the FED and Central/world bank. Nothing is what it seems, mechanisms don't function as people think they do.