Classical vs. Keynesian Economics - Which is the popular belief on Wall St.?
At the risk of starting a debate on the classical vs. keynesian economic ideologies, I was wondering which system is more popular on the street? From almost everyone I've talked to, they all subscribe to the classical belief, but why?
If the government never stepped in to provide the demand that wasn't coming from consumers/investment, surely the credit crisis would have been more severe and longer-lasting. Even if the fiscal stimulus may not have been as effective as one wanted, the psychological factor alone helped ease the markets.
So, is the street really lopsided or are there some out there who believe in the Keynesian system?
One thing the average American favoring the tea party doesn't understand is what situation we would've been if we did not support the bailouts/ a rise in fiscal spending . Keynesian theory argues that national income is determined by AD and not by AS as the classical theory suggests. Trust me, had there been no attempt to stimulate AD in the short run, we would be in a completely different world right now. As much as people hate Obama, most people don't understand his policy and have never taken a basic macroeconomic analysis course in their life.
In before I'm bombarded by Obama haters who think austerity on the brink of a depression is a good idea.
But to your question, I'm not too sure since I'm not on the street. But my assumption would be the street would favor Keynesian views.
What do we have to show for the stimulus bill?
"a saved economy" is hogwash political rhetoric.
If you remember spending started with Bush and has plenty of time to show us what it can do.
Businesses are spending less. Banks are lending less.
We are creating jobs? but unemployment hasn't moved. Let the market recover on their own.
Pull up the stimulus and look up how much of it has been actually spent yet. Majority of the bill is tax cuts and aid to municipalities( which would have cut off thousands of more jobs had they not received the aid ) and support for the welfare system. and the rest of the spending that is left hasn't even kicked in yet...most people don't even know what the bill is and cry where are the jobs
they got 700bil ...i think they are keynes
We're all Keynesians now.
disclaimer: i'm not on the street now either. that said, i'm not sure if we're all keynesians or not...if you accept the classical assumptions that most are rational, self-interested utility maximizers then maybe in this case those on the street were keynesians (note the seeming paradox). I think by and large most on the street don't want washington getting involved in their shit...but keynes advocated stiimulus, and was less explicit in advocating regulation...so its a tough call. better to just know your stuff through and through, from both the keynesian and the classical perspectives...maybe it's good to do a little research on both the keynesian and classical views on QE2
"We're all Keynsian now" is a Milton Freidman quote that's pretty apt, but in all seriousness I think the bigger challenger to Keynes is Hayek.
Austrian economics are in vogue right now, especially with anyone with a right/Libertarian political viewpoint.
Why is the tea party brought into this? Why is politics in general brought into this discussion?
People on the street believe in a variety of things. One cannot point to the bail outs and say that without government intervention things would have failed and therefor government intervention is good. Maybe if the government did not intervene in the past the situation would not of been created that necessitated a bail out (this is just to illustrate that you need to look past the immediate).
Why is hating Obama = to thinking we need to reign in government spending?
The "stimulus" bill was a massive compilation of pork barrel spending. I am not saying that government never stimulates the economy, but I sure as hell think this stimulus could have been deployed more effectively.
Nik - Aren't you in undergrad? Not to discount your opinion, but it might be possible that you still only have a cursory understanding yourself.
Sorry for bringing the tea party into question, my hatred of them just gets the best of me sometime. The stimulus could have been deployed more effectively without a doubt.. Probably even more direct spending but the sad thing is majority discredit the stimulus without even understanding what it is.
And yes anthony I am in undergrad but I have learned a lot about economics and politics on my own time ( and stuff I probably wouldn't learn in school)
Austrian in boom times but Keynesian policy in busy times, think neo-classical economics is a load of bull as humans are not rational
I have zero problem with intelligent government spending. Problem is that far too many people think the government can fix all ills. The economy is going to muddle along until the private sector gets going. No amount of spending by Uncle Sam is going to fix this.
The economy is bad because
1) Home buying is a huge component and it is flat 2) Consumer spending is a huge component and it is flat 3) Private sector spending is a huge component and it is flat
Government spending is not going to fix any of these.
The private sector needs to know that a more business friendly White House is going to stay the course going forward. We should cut taxes for small businesses and give companies hiring incentives. Reduce or simplify corporate tax code. Stop the "big business is bad" rhetoric.
Corporate profits have been increasing. Efficiency is about maxes out. Eventually (sooner rather than later) companies will have to spend money. Once they start hiring and spending you will see consumers regain their confidence and deleverage at a fast pace. Once debt is sufficiently paid down you will see people be able to put money down for homes, invest, purchase, etc.
@Nil
To all those who hate the Tea Party, I provide you a link to a very left of center website:
http://www.huffingtonpost.com/michael-shaw/tea-party-demographics_b_540…
Here is Gallup:
http://www.gallup.com/poll/127181/tea-partiers-fairly-mainstream-demogr…
"Reading about the NYT poll on the makeup of the Tea Party, the most interesting data (beyond the anti-poor, anti-black sentiment) was that Tea Party members are wealthier and better educated than the general public. (The poll pegged their numbers at eighteen percent of the American public -- primarily Republican, white, male, married and over forty-five.)"
No I think "anti poor and anti black" are inflammatory and unwarranted.
What is important is these stats:
Wealthier, better educated, married, primarily Republican
Of course the Tea Party is going to be Republican. The Red party has had financial conservatism as their battle cry for a while now.
Better educated, wealthier, married. Hmmmm, I wonder why these people could be anti tax and for a small government (smaller aka less expensive). Maybe it is because these are precisely the people who are paying the lion share of the taxes in this country.
I am getting extremely sick and tired of the uninformed Tea Party hate. These are the core issues for the TP from this site:
http://www.teaparty.org/about.php
Illegal Aliens Are Here illegally. Pro-Domestic Employment Is Indispensable. Stronger Military Is Essential. Special Interests Eliminated. Gun Ownership Is Sacred. Government Must Be Downsized. National Budget Must Be Balanced. Deficit Spending Will End. Bail-out And Stimulus Plans Are Illegal. Reduce Personal Income Taxes A Must. Reduce Business Income Taxes Is Mandatory. Political Offices Available To Average Citizens. Intrusive Government Stopped. English As Core Language Is Required. Traditional Family Values Are Encouraged.
Common Sense Constitutional Conservative Self-Governance
Most of those issues deal with government size and spending.
One issue deals with ILLEGAL IMMIGRATION, not LEGAL IMMIGRATION
I fail to see how radical the Tea Party is? This list is what Republicans used to be like.
Also, I do not support blaming poor people. Many are poor not because they are lazy, but for some other reason. What is completely bullshit is blaming people who are not poor. We have a government that spends all of our money like a drunken two year old.
I don't even expect the government to be 100% efficient. I just want an improvement towards efficiency. Is it really so radical to expect our tax dollars to be spent with some common sense?!
People bitch and moan about the TSA
People bitch and moan about the IRS, the Post Office, SSI, Dept of Veterans, the DoD, Homeland Security, etc.
People buy stuff online to avoid sales tax, maximize every deduction to avoid state and fed taxes, on and on.
A group of people form to do something about it and they are losers, wackos, and extremists.
Losing more and more faith in this country daily.
The reason why government is inefficient is because it is spending other people's money. The solution is to reduce government spending and regulation. People may feel all warm and cozy when there is a "special government task force" to protect consumers, but in reality, these programs and agencies limit the freedoms of Americans and place arbitrary judgments on ethical issues.
I am Harding, Hear me Roar: Keynesian Economics Fail (Originally Posted: 06/15/2012)
I am Harding, Hear me Roar: The 1920s and the Failure of Keynesian Economics
20th century America began with the decline of Classical liberalism, the natural rights, limited government, free market political and economic philosophy of the American founders. That perspective was replaced in the minds and hearts of the political and intellectual elite in America by progressive interventionism, the philosophy of government social engineering to cure alleged defects of the free society.
The first three presidents of the 20th century (not counting Garfield) were open progressives: Teddy Roosevelt, William Howard Taft, and Woodrow Wilson. They gave us a variety of interventionist legislation and government growth. And war. Lots of war, and conquest, fueled by progressive visions of American empire and US moral superiority.
There was an interlude, however, of nearly a decade, in which Americans had second thoughts and backed away from progressive ideas and policies.
Warren Harding became president early in 1921, in the midst of a far worse economic contraction than Barak Obama inherited in 2009. From January 1921 through the spring and summer of 1922, Gross National Product fell by nearly 24%. The unemployment rate rose from 5.2% in 1920 to 11.7% in1921.
Harding was not a man of progressive mindset. Indeed, he had been elected in public reaction against two decades of such policies. He continually decried high tax rates, government waste, and interference in the private sector.
He meant it. He appointed Andrew Mellon his Treasury secretary and with the help of Congress they began what became a series of large-scale reductions in both tax rates and spending. Federal expenditure declined from $6.3 billion in 1920 to $5 billion in 1921, then to $3.2 billion in 1922, an absolute decline of nearly 51% in just two years.
Harding’s Revenue Act of 1921 raised the personal income tax exemption for married couples and reduced all income tax rates. The top rate fell from 74% to 58%. Federal revenue collected fell from $6.6 billion in 1920 to $5.5 billion in 1921 (partly due to the contraction), and then down to $4 billion in 1922 (despite a rapid economic recovery).
That meant the federal budget ran a surplus of $300 million in 1920 (Wilson’s last year), $500 million in 1921, and $800 million in 1922. The surpluses were used to pay down federal debt.
What happened to the recession? It ended with an extremely rapid expansion in 1922. Real GNP rose by an astonishing 14.6%, reducing the unemployment rate to 6.3% that year. In 1923 Real GNP rose another 11.7%, reducing national unemployment to a mere 2.4%.
The Harding fiscal policies were not the only reason the huge 1920-21 contraction ended so quickly. The recession began with a discount rate increase and money supply contraction initiated by the Federal Reserve in January 1920. That reduced aggregate demand for goods and services, and prices began falling.
Harding’s crucial action here was inaction. He refused to interfere with the natural stabilizing mechanisms of the market (unlike both Hoover and Roosevelt in the 1930s).
Prices fell relative to wage rates, raising real wage rates to unemployable levels: thus the contraction. But then dollar wage rates fell relative to product prices, reducing the real wage back down to employable levels, bringing recovery.
In August of 1923 Harding died of pneumonia and his Vice President Calvin Coolidge became President. Like Harding, Coolidge was no man of the interventionist left. He retained Mellon as Treasury Secretary and, winning re-election by a large majority in 1924, they continued reducing tax rates, in 1924, 1926, and 1928.
They also continued holding spending down, running budget surpluses and paying down federal debt every year. From $25.5 billion in 1919, the National Debt had been reduced to only $16.2 billion by 1930, a total reduction of nearly 36.5%. Per capita real output and income rose very rapidly over the whole of the 1920s despite two trivial recessions, in 1924 and 1827. The “Roaring Twenties” were well named.
Then came the great depression, initiated, like the 1921 contraction, by a deliberate Federal Reserve monetary contraction. In 1936, six years into the Depression, John Maynard Keynes published his General Theory of Employment, Interest and Money.
All that was original in Keynes’ theory boiled down to a proposition that a market economy was naturally unstable, but the government could manipulate total demand and stabilize the economy near full employment by simply altering the state of its budget.
If the economy had too little production and excess unemployment, the government could run a deficit, spending more than its revenue. That would raise aggregate expenditure, increasing output and employment. If inflationary pressures existed at full employment, the government could run a budget surplus, thus reducing aggregate demand until the inflationary pressures ended. Running a surplus at or below full employment, however, would contract output and employment further.
The entire decade of the 1920s was a refutation of Keynes’ claims before they were even made. If budget deficits are expansionary and surpluses are contractionary, then why did the 1920-1922 recession end when Harding not only ran federal surpluses, but increased their magnitude? And why was real output growth so rapid and unemployment rates so low thereafter though the government ran even larger surpluses?
A major difference between the roaring ‘20s and the depressed ‘30s was that the interventionist Hoover and Roosevelt administrations massively increased spending and ran sequential budget deficits as specific anti-depression policies. In1938, just two years after Keynes gave theoretical sanction to these policies, Henry Morganthau, Roosevelt’s own Treasury secretary, wrote the following in his diary. “We are spending more than we have ever spent before and it does not work . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt.”
Having failed to learn from history, we are, circa 2008-2012, repeating it.
Right... So we were doing awesome in the late 90s because the Clinton administration was running a surplus?
Or perhaps a credit-fueled tech boom (thank you Chairman Greenspan) brought in enough extra tax revenue to run a surplus which was eventually whittled away by the combination of lower tax rates and the bursting of the tech bubble.
The U.S. didn't climb out of recession and into furious growth in the 1920s thanks to Harding's policies or lack thereof. An insane expansion in credit it is what got the U.S. out of the recession and we all know how well that ended.
I'm a pretty big believer in letting the markets do their thing provided the appropriate macro-Prudential supervision is in place (more Volcker, less Greenspan/Bernanke please) but this argument is awful and doesn't debunk anything. There's a bigger picture here that you're failing too look at. 2008-2012 is very different from 1920-22 which was not a credit crisis but a typical cyclical contraction (regardless of its magnitude). The Fed's been pushing on a string for a while and if you're interested in seeing what happens when you try to cut your deficits, run a surplus in times like these, I would encourage you to take a look at Greece/Spain/Italy. Considering the Dollar is outperforming the Euro as it is, we'd be letting our pants down in the currency wars as well.
Cosign to everything in this post
According to international data from 1960-1994 a deficit of less than 5% of GDP corresponds to slightly less than 1% GDP growth. A balanced budget corresponds to ~ 2% GDP growth. A surplus corresponds to ~3% GDP growth.
Source: Figure 11.1, page 227. The Elusive Quest for Growth. William Easterly.
"high budget deficits create bad incentives for growth because....anticipation of future tax hikes to reduce deficit and service the public debt...possibility of inflation...lead to general macroeconomic instability which makes it hard to tell which projects are good and which firms should get loans."
Source: page 226. The Elusive Quest for Growth. William Easterly.
Excellent post. A silver banana for you.
I agree with your central premise, however; Harding did gamble away all of the fine china in the White House.
Before the end of Ronald Reagan's first term he reversed a trend of rising annual deficits/GDP that had begun when Kennedy became President. The Deficit/GDP ratio fell almost every year after that and we actually started running surpluses in 1997. Yes, GoodBread, that is part of the story of the good economy of the 1990s. I actually give more credit to the divided government (not Clinton). Beginning in 1995, both houses of Congress had Republican majorities. The republicans turned down all democratic big spending plans (like HillaryCare) and Clinton vetoed Republican big spending plans. Federal spending rose by less than GDP and the relative size of the federal government (total federal expenditure/GDP) fell by over 10% in the last half of the 1990s (down to 18% of GDP; it is about 26% of GDP now). That retrenchment of government released resources to the private sector for productive uses, and the economy grew rapidly. Also, the welfare reform of 1996, putting time limits on welfare collection and ending the free ride, also helped. Many people dropped off of the welfare rolls and simply went to work, producing real goods and services instead of simply consuming what others produced. That both added to real GDP and reduced necessary expenditures. As for Greece, Spain and Italy seriously reducing tax rates and backing away from their welfare states, I haven't seen that. They can't. They over committed themselves to income redistribution they to too many people for too long and don't dare seriously try. And now here we are with ObamaCare expenditures looming, having made massive 'stimulus' expenditures and deficits that have, by any valid measure, greatly slowed our recovery. Government size fell and we ran surpluses and we had a good economy in the nineties. We have massively increased the size of government and run deficits and had a lousy economy since then. Figure it out.
I think you are missing the point, however. I never credited Clinton with helping the U.S. run a budget surplus. There were far more powerful macro forces at play thanks to monetary policy (ultra-low rates) and credit expansion over the 1982-2006 period. That major credit cycle is now over and monetary policy levers are now useless. Furthermore, as much as the current administration is spending, it can't do all that much in the face of massive debt deleveraging. However, government spending is indeed a part of the equation for GDP and should the government drastically cut back, GDP will fall. The private sector has no plan on spending as consumers are still nursing their wounds and a cash buffer is awfully convenient considering the lack of credit availability and equity volatility in the markets at the moment.
Your argument is interesting but it completely disregards monetary forces which were far stronger than Harding's austerity measures. As such, while it is pointless to dabble in counterfactuals, I would be willing to bet that if the U.S. were to drastically cut spending this year, growth would suffer significantly in the short-to-medium term and unemployment would trend far higher.
Whitecollerands: I hadn't heard about Harding and the White House China. That's funny. Thanks. And thanks to you eokpar02 for the banana.
As an uninformed individual, it seems both sides of arguments theoretically make sense. I can't wait to see which side was more insightful with regards to Today's economy in 5-10 years down the road.
GoodBread: Your statement that "Ronald Reagan presided over the largest rise in US debt/GDP since WWII is (a) perfectly correct and (b) no refutation (in fact, it is an actual implication) of what I said. In all of US history there is no series of rising deficits/GDP such as that which began the first year of Kennedy's Presidency. That ratio had an increasing trend (got larger) for the next twenty-three years, the last three of which were Reagan years. The deficit in any year is the addition to the debt. So yes, the deficits as a fraction of GDP were the largest (with therefore the largest additions to the debt) of the series during the first three Reagan years. But those deficits were a result of incentives imbedded in Congress by two decades of Keynesian and welfare-statist thought that he (Reagan) could not instantly reverse, and the Reagan 1st term deficits were not off that former trend. Nevertheless, near the end of his first term the deficit/GDP ratio started getting smaller, and that 23 year trend was completely reversed, with sequentially smaller deficit/GDP ratios until the budget was brought into balance, and then a short series of surpluses was produced starting in 1997. I have calculated the whole series of deficits since 1960 myself, using data from time series in The Economic Report of the President (various years). I think I know what the data says. Reagan completely changed the culture of spending, though Bush the Younger and Obama have now changed it back, big time.
Next, it is hard to get away with claiming that monetary policy was expansive, or money growth particularly rapid in the 1920s, when the price level rose in only three years of that decade, and actually declined slightly in the others after 1922. If you want to see the actual money growth numbers for the twenties, see Milton Friedman and Anna Jacobson Schwartz' Monetary History of the US. It is also hard to make the case for excessively rapid money growth in the nineties when the inflation rate was stable at around 2%.
As for what would happen if the deficit was reduced now, it would depend on whether it was reduced by large tax increases or by major expenditure reductions (or, as I would prefer, by a combination of tax reductions and even larger expenditure reductions, as Harding and Coolidge did). The first method would send us back into recession in a big way. The second would cause a major expansion (and the third, an even larger expansion).
Fair enough on the latter years of Reagan being better in terms of deficits however I think you are very much underestimating the impact the wider economy had on these deficits. Debt/GDP started rising again fairly quickly under Bush I when the 80s recovery hit a rough patch into the early 90s.
I think you're confusing correlation with causation here. If the economy is performing well, the government should spend less and there will of course be far less automatic stabilizers which account for a great deal of Obama's deficit spending. Looking at money growth and inflation is completely irrelevant. The 1980s-2000s were considered to be the "great moderation" as inflation remained low for the most part and the economy saw an incredible boom. But as is now evident, that boom was fueled by extremely cheap credit which found itself employed in increasingly misguided vechicles (from ridiculous tech startups to CDOs) and crashed spectacularly, not all too differently from the 1920s.
Of course large tax increases would send us back into recession. But so would large spending cuts. The only fiscal stimulus you are proposing is tax cuts and I do agree that those would stimulate the economy, even though the numerator on our debt/GDP would probably climb.
At what level of debt/gdp does it become important to end/reduce deficit spending?
A government spending cut of X dollars will only increase GDP if X dollars are returned to the taxpayer. If those X dollars were gained from debt, instead of taxation, we reduce today's GDP for tomorrow's lower debt level (which, in the long run, would positively impact GDP).
Personally, I think, the fact that the US has been undergoing various forms of stimulus spending for the past four years, indicates we need a change from the recent model of stimulus. Stimulus spending has done relatively little (if the goal of stimulus is to increase investor confidence and increase lending) at a relatively high cost. Stimulus spending (actually, any government spending) should focus on creating long-term economic gains, instead of delivering a short-term solution that could negatively impact the country in the future (not just long term debt, but bailout obligations for banks and major industries).
Yes, GoodBread, the first Gulf War recession did temporarily interrupt the trend of declining deficits that eventually led the federal budget to surplus. Temporarily.
As for your assertion that the rapid economic growth of the 1990s was fueled by massive credit expansion, I cannot remotely agree. Federal reserve policy was highly constrained over the whole period. Average annual real GDP growth was 3.19% over 1990-1999, while the average annual growth of M2 (currency plus demand deposits) was only 3.9%. That is a very low level of money and credit growth by historic comparison (all these numbers are from the Economic Report of the President for 2011, tables B-2, B-3, and B-69). The average annual inflation rate was just 1.76%, so real cash balances only grew annually by 2.14% (3.9 - 1.76), which is less than enough to finance the additional transactions necessitated by the real output growth. Apparently the demand for real money balances actually fell marginally due to increased availability of ATMs, rising use of credit and debit cards, and other developing efficiencies of the payments system. But they merely filled the gap.
As for interest rates being low, credit expansion can lower interest rates only temporarily, before market forces restore them to the natural rate. In this case, interest rates fell for the same reason they had fallen over most of the 1980s: disinflation. Declining inflation rate expectations reduced the inflation component in those rates (the Fisher Effect). Clearly, this was a supply side driven expansion, not a Federal Reserve money and credit fueled one. Low tax rates (beginning with ERTA in 1981) and expenditure constraint causing the relative size of the government (total expenditure/GDP) to fall and release resources to the private sector for productive uses did it.
Since you have twice mentioned the tech stock boom and bust as indicative of excess credit expansion (you sound almost Austrian in this, but I would not want to accuse you falsely), I should say I regard that as a side show, not central in any way to the overall economic expansion. When an economy is growing well, there are always some sectors doing better and others doing worse, and markets have to do their job of allocating and reallocating resources in accord with relative price changes. Some sectors will even rise more rapidly than the average, then fall. That was the dot-com bubble and crash.
21 Lives, your question is deep. For over 140 years of our history the federal government followed a balanced budget policy, only running sequential deficits during wartime, then running sequential surpluses immediately following the war to pay down the debt, before returning to small, random surpluses and deficits during peacetime. I prefer that policy, which was driven by an ingrained protestant cultural ethic of hard work and household frugality (living within one's means) applied to government.
If what you are asking, though, is what level of Debt/GDP becomes a severe burden threatening economic and social collapse, that starts when debt payments (interest and principle) themselves become a large enough part of the budget that they start crowding out other expenditures (mostly for income redistribution and social insurance) near and dear to the politician's and their client group's hearts, so that they are faced with unpleasant options. So I would look at the debt/GDP ratios of Greece, where the very hint of reducing subsidies is causing riots, and say to myself "We better stop long before that point". Sorry I can't be more precise.
I can't get a clear fix on your middle paragraph, so I'll let that go.
Everything you say in your third paragraph strikes me as exactly correct. Thanks for commenting.
The Slow Boat to Keynesian Hell... or How the BoJ learned to stop caring and join the party (Originally Posted: 09/14/2010)
Well, we have now started to board the slow boat to Keynesian hell, courtesy of the Bank of Japan. In a stunning move, they have decided to intervene in the currency markets, something they have not done since 2004. To those following the farce that is the Fed and their continued decisions to prop up the market, this should not come as a shock that the BoJ gave in and this has finally happened.
http://www.bloomberg.com/news/2010-09-15/japan-intervenes-for-first-tim…
According to Bloomberg:
Clearly, the decision to let the USDJPY pair jump 150 points and see the Nikkei gain 250 points was not influenced by Bernanke, The ECB, the SNB, and The Fed's actions over the last two years. Just to clarify, the USDJPY jump means its time to short the Yen and go long the dollar. My suspicion is that this will not just be the first sale, but part of a continued stream to weaken the yen.
Honestly, this is more of a symbolic capitulation, if you ask me, than anything else, as the BoJ has been the last to hold out on any sort of active manipulation of the markets. Now that everyone is going to manipulate their currency to prop up this system, there is no real reason to believe that Keynes is right any more. It doesn't matter how much money we throw at the problem, we're just going down the rabbit hole.
So, for those that aren't used to hearing me rant, what does this mean? Well, the long and short is that we're on the slow ride to Keynesian hell. Now, from here, what do we really look forward to.
1) Continued "Quantitative Easing" by every major central bank in the form of currency manipulation, open swap lines and increased debt issuance.
2) Sovereign Debt may default. It's not a good thing when you consider how much debt outstanding the US has, and is still issuing. Couple this with Europe's inability to implement austerity measures for their own debt and the fiat currency system we have in place, and we will see XXX-flation. Whatever kind of XXX-flation we see, it will not be good. Either we decouple from deflation and enter the debt spiral from hell or we get a hyperinflation induced case of extreme stagflation. Either way, I don't have much faith in our ability to really combat this problem.
3) Can we just call a spade a spade, and admit that the last two years of QE and Stimuli have been far worse than just taking the hit then and there? We've basically tried to delay the inevitable and are continuing to fail at it.
There was a great post on Zero Hedge, written by Mark McHugh of Across the Street, about the failure of our ability to understand math from an interest rate perspective. The link is below, but I wanted to provide a good quote about what will happen:
The link to the article on Across the Street: http://acrossthestreetnet.wordpress.com/2010/09/13/%E2%80%9Cshut-up-and…
As always, comments and discussion are welcome.
~Frieds
Oh we've been sailing on it for more than a while now.
The BoJ has intervened quite a few times since 2004.
Midas,
That's a given, but this was more of a chance for people to read this and hopefully comment and start to ask questions. While I am no Edmundo, Jorge, IP or even you, I would rather try and educate than I would comment otherwise.
You know, we started sailing on this path back in early part of the decade without realizing it. I admit I was in High School at the time, but I have made it a point to learn more than my fair share about whatever I could get my hands on while in college, so I tried to make up for my lack of knowledge early on. Now, while I was in high school, there was a young economist by the name of Phil Krugman who said we should build a bubble around real estate in lieu of taking the 2000 recession and accepting it and letting whatever necessary resolution occur from it. Now, here we are, in 2010, and at the same place we were when the tech bubble crashed, except we now have nowhere to go with a ZIRP, an incompetent government that supports crony capitalism and blind faith in a fiat currency and are saddled with increased debt load, a significantly higher rate of unemployment and the inability to find a way to rectify this situation.
As I said, The Keynes Is Dead! Long Live The Keynes!
All good, but as much as I hate Keynes and any government intrusions it is worth it to bare in mind that bubble reflation is just standard operating procedure on the carousel of incompetence. Shovel from one spot into the next, rinse, repeat. Once the idiots get bitch slapped by reality it is automatic shutdown mode and that's where the Keynesian reversion comes from. Good that you're trying to spread the word. Keep it up.
FX,
I made sure to double check on that, but as far as I can tell through about a half hour or so of research between the article being posted and my post here, and I admit that is not enough time to thoroughly vet information, the BoJ has never made a significant direct intervention of its currency market since 2004. Every major central bank makes a point to intervene accordingly, but when it's done on this scale, it makes headlines or is noted by more than just currency traders. The SNB moves over the course of the last 12 months have been noticed by FX traders and some of the smarter minds on the street. Obviously, the Fed and ECB moves have been pretty much telegraphed, but a move of this magnitude is not a common occurrence.
I would count the intervention last year around Thanksgiving when the Nakheel restructuring issues came about as significant. The USDJPY hit 86 before the BoJ intervened in overnight trading. It eventually reached 95 (almost on the dot) in May, so in the short term it was successful (open for debate).
Either way, I think we are at that point where CB intervention doesn't mean shit anymore. This only provides me an opportunity to short the EURJPY at friendlier levels. Hopefully this will take some bull sentiment with it and crowd out the "risk on trade" so I can go back to shorting Eastern Europe.
And Frieds, you have a PM.
Totally agree. The SNB gave it a shot and they are now the laughing stock of central banks for their losses. I don't think this will work for BoJ either because they don't have the support from US Treasury or The Fed.
In the long run, the Yen sucks. Its a country whose ageing population is quickly passing away, and it cannot keep up with its slow birth rate. Not to mention, it has virtually no immigration. Since so much of the countries debt is owned by its citizens, it will have to find a place to dump this debt as they start to die off (or cut back on spending, good luck with that)
What trades are you doing? HUF?
FX,
I don't know how much of the Nakheel move was truly intervention and not moved by an immediate risk aversion followed by the slow realization that as soon as funding was secured, this became a business as usual situation. I was more interested in the Nakheel situation from a default perspective, trumping my interest in the FX markets without any hindrance at all, which of course, is one of the issues with Sovereign Debt, and where our next major crisis will be. I can't agree more when it comes to any CB intervention, as we have become so desensitized by it, the only people trading on the news will be the machines.
AS to the PM, I will read it and respond tomorrow.
Midas,
Glad that you and I are on the same page. Now if only more people will open their eyes to the fault that is the voodoo king, Keynes, and his followers. Truth is, before I even knew about Keynes and his economic policy, I knew that you couldn't throw money at a problem to fix it. I grew up following NJ politics, and the constant pandering the state government made the public unions and the teachers union. The NJEA (Teacher's Union) was inherently the reason why I could never believe in Keynes, as throwing money to fix the failed system without any sort of willingness by all parties involved to overhaul the system would never lead to the reform necessary to remedy the problem. We're just seeing it now on a federal and global level instead of at the state level. It takes more than just two guys with a soapbox to spread the word man.
You know, I honestly want Eddie, Anthony and IP to comment as well, just because it will turn this into a major discussion and hopefully start to get more people into realizing that the world is not just The Street 4 Lyfe. If we can actually get people to start looking at the economic state of the world beyond the immediate trader perspective and put it in language the bankers can understand, we'll be able to inform and educate, which is the best resource for a place like WSO.
Obviously, any change requires educating the young. The whole Keynesian nightmare is a multiple-generation phenomenon, so it won't be remedied quickly. That said, coming to understand the exact nature of the problem is paramount if the younger generations are going to turn things around over the next 100 years (assuming the U.S. remains in existence as a viable state for the next 100 years).
Perhaps the best and easiest to read book on the subject of fiat currency, especially as it pertains to the United States, is The Creature from Jekyll Island. Until the younger generation learns what it is really up against, they'll be powerless to change it. My generation has been a complete failure in this regard, as we've held social experimentation above nearly all else.
Now that the Baby Boomers are going quietly into that good night, my generation is poised to make things even worse. I wish it wasn't so, but I'm hopeful that your generation will recognize our folly and change course.
China - stimulus, worked. Ireland - austerity, fail.
Germany - slight stimulus, worked. UK - austerity, still in progress.
US - Nov QE2, we'll see.
AUD, INR, NOK.
Germany's export-based economy is very contingent on the rest of the world, so if global recession fears were to slip back into people's minds then they might be in trouble. PIGS aside. So I don't know how much of the success can be credited directly to stimulus.
Undergraduate Macroeconomics, Keynesian Economics, and Stimulus Spending (Originally Posted: 03/17/2011)
Since a lot of you guys seem to enjoy your undergraduate macroeconomics courses, I wanted to recommend this short blog post, as it'll show you one of the flaws in what they're likely teaching you: http://www.coordinationproblem.org/2011/03/stimulus-spending-and-jigsaw…
thanks for the post
Interesting post, but I hated Macro so much!!
Obama Is Not A Keynesian, He's An American! (Originally Posted: 04/06/2012)
To be fair if you have no idea about economics theory then it's an easy fail. Hilarious regardless.
oh c'mon hardly anyone who hasn't studied economics will know what a keynesian is.
But everyone should have a pretty good idea how to spell Kenyan.
Oh man, this is fantastic. Most entertaining thing I have seen today...but really econ should be a required course in high school. It blows my mind that people vote, oftentimes on economic/tax policy, without knowing what a supply/demand graph looks like.
Off topic, but it reminds me of:
http://www.youtube.com/embed/yi3erdgVVTw
Most people who've studied economics don't know what a Keynesian is either.
bullshit guys...there is no way people should not know who keynes is. i don't buy into people's complete ignorance of history.
i don't expect everyone to his theories however
cause you've heard of Keynes in soooo many of your history classes, right?
These are the same people that show up at OWS
That was pretty funny.
Oh god I'm sitting in office and trying really hard not to burst out laughing when she said Kenyan...
Yeah, there are a lot of topics that I'd be completely oblivious to just because I've either never been introduced to them or I learned them way before or I simply don't care. My ex was a science major (bio and shit) and every once in a while I'd say things that in her mind are basic common sense biology.
Agree with EngBanker
Watching this video I get exactly the same feeling that my significant other, who is a professional ecologist, gets when she listens to popular debates about the theory of evolution. If I had a dime for every time someone asked her, "If we evolved from monkeys, then why do monkeys still exist?", then I'd be a rich man. I have no idea how she has the patience to humor people who have apparently never learned even the most basic biological concepts.
Ha ha thats too funny LOL!!!
Keynesian Economics a hoax? (Originally Posted: 08/08/2011)
from Real Time w/ Bill Maher (Aug 5)
Maher:
and then the response by Christina Romer- Econ Professor at UC Berkely, (former chair of economic advisors to obama):
So monkeys,why are people doubting Keynesian Economics?
ps, funny quote by bill in the opening monologue: "moodys downgraded the us from AAA" to "WTF"
I would assume they're doubting it becuase the recent stimulus bills we've had don't seem to have done much. The counter arguments are (A) things would be worse without them and (B) they were weighted towards sectors like healthcare that would have grown anyway. The stimulus needs to be directed towards manufacturing that is bleeding jobs that won't come back.
The problem with Keynes is that he assumed governments would act responsibly. He also did not account for the value-destroying effects of sustaining malinvestment in the business cycle.
Keynesian doctrine is popular in the prestige schools though because they give license to the government to do what they want to do: splurge, borrow and inflate.
Indeed, in the long run, we are all dead. With Keynes' poisonous ideas, we are dead in the short run.
We're coming out of a bubble crash.....any twit that thinks the economy will be roaring any time soon is retarded. Post collapse periods are typically slow and the WORST thing that anyone could do is to overheat the economy again. Keynesian economics are only part of the picture, the reality is that we live in a mixed economy.
I do agree that the entire economic and political landscape is changing in ways that are obviously significant but not very clear at the current time. I'm struggling daily to wrap my head around the emerging long term trends. I've noticed two changes, but can't really explain what's driving them: A. Increased centralization, and increasing power of centralized financial, cultural, and political hubs. B. Increasingly fractured localities: people identifying with their town/state/region/country more intensely.
My guess is that we're entering the initial phases of a truly global civilization, but everyone is fighting it.
Keynes views have been hijacked...
Keynes gets a bad rap because his theories are seen as justifying excessive spending. That being said, you can't deny that increased government spending and tax cuts stimulate GDP growth. Funding either of those requires taking on increased debt if there isn't a corresponding increase in revenues.
The major schools of economic thought don't necessarily contradict each other. Friedman's monetarism focuses on interest rates whereas Keynes has much more to say on fiscal policy. There are limits to the policy prescriptions in every school. Monetarism under Greenspan and now Bernanke has done well at containing inflation but has a spotty track record of stimulating growth during contractions. The ultra-low rates of the early 2000s set the stage for the development of the subprime mortgage derivative complex and the collapse of 2007-2008. QE2 did basically nothing for our economy but inflate asset prices and those are being wound down as we speak.
Bottom line, there are lessons to learn from all economic schools of thought and anyone who dismisses Keynes or Friedman out of hand for ideological reasons is a moron.
One day, we will have a President who declares "We are all Austrians now."
That'll be President Arnold Schwarzenegger
^ A modified version of Austrian economics is close with Behavioral Economics. Quantifying peoples behavior is always tricky.
I have always heard people joke about K-economics. It is like waking up after a night of heavy drinking and then rationalizing drinking another 6 shots in the morning to rid yourself of the previous hangover. This creates a increasingly volatile cycle which ends in some type of collapse. The current government seem to be addicted to this drug. They have had relapses and overdoses but whenever they finally wake up again the cycle restarts. Politicians love this because they can use the theory to support ever increasing spending.
"I would say our government spends money like drunk sailors but even drunk sailors stop drinking when they run out of money."
Some variation of austrian economics has always seemed like the more rational theory but politicians will hate it because they will have to admit that what we did for multiple decades was not only wrong but irresponsible.
k-economics actually advocated digging holes and filling them up as a way of creating jobs and jump start the economy
http://www.businessweek.com/blogs/money_politics/archives/2009/02/stimu…
Evidently, you guys don't really get the point. Keynes advocates counter-cyclical spending. The "getting drunk" off pro-cyclical measures (ie. Bush tax cuts, increased defense spending) was a terrible misapplication of Keynes' theories. A better analogy would be a heroin addict. You don't just go cold turkey, you slowly decrease the dosage to wean them off.
The digging holes and filling them up illustrates where our economy is at perfectly. Deleveraging has hit companies and consumers alike and there is little incentive for companies to hire or consumers to spend. In this case, the govt could be an employer of last resort, even if it just means digging holes and filling them up, in order to break the paralysis. Evidently, there are actually more productive uses of the government's resources avalaibles to us, such as updating our nation's decrepit infrastructure.
There's a time and a place for everything, and now isn't the time to be an Austerian, however fashionable it may be.
Three’s a Crowd: The Failure of Keynesian Economics, Part 2 (Originally Posted: 06/21/2012)
Here are two amazing facts. The first is that Herbert Hoover, President from 1929-1933, was not, at the time, the staunch advocate and supporter of free enterprise and limited government he later portrayed himself to be. He cultivated that reputation in his later years, perhaps in shame at the interventionist policies he actually followed. Those policies turned the 1929-1930 downturn into The Great Contraction, in which, by 1933, real GDP had fallen by over 31%, and the unemployment rate had reached nearly 20%.
Hoover’s policies were not the initiating factor. The Federal Reserve, by raising the discount rate and contracting the money supply in 1928 and early 1929 in panic over rising equity prices, did that. Hoover made everything much worse, though, by promising to sign the Hawley-Smoot tariff as soon as he was in office (which he did), and by numerous other interventions.
Here is the second amazing fact. Running against the interventionist Hoover in 1929, Franklin Roosevelt was elected on repeated promises to cut federal spending and balance the budget again, essentially returning to the Harding/Coolidge policies. Look it up. Of course once in office he did exactly the opposite, initiating massive interventions, enormous expenditure, and chronic deficits. I need not remind anyone of the results. Why did Roosevelt’s huge stimulus spending fail to end unemployment and restore a healthy level of production, just as they are failing to do so now? Three explanations for such Keynesian fiscal policy failures have emerged over the years.
In elaborating them, let us assume a normal level of money growth that does not change. Keynes had nothing original to say about monetary policy except to claim that it didn’t work. His whole claim to originality was that fiscal policy was an effective alternative for raising total demand, output, and employment in a recession.
A central failure in Keynes’ thought becomes obvious when you ask yourself this simple question: where does the government get the additional money to spend in excess of its tax revenue? Deficit spending must be financed. Government bonds must be sold to acquire the money.
There are two options here: the debt can be sold to the federal reserve which pays with base money it creates at zero cost, causing money stock expansion through the banking system. That’s a monetary policy, however, and we must analytically preclude a change in that in order to evaluate pure Keynesian fiscal policy.
So instead, suppose the government sells the bonds to financial transactors and other private citizens. The government now has more money to spend, but those private parties now have less to spend. Why should current expenditure rise?
It probably doesn’t, due in part to simple credit rationing. When the government enters the financial markets to borrow hundreds of billions of dollars it has to sell its bonds at low enough prices and high enough yields to find buyers. In short, it raises bond interest rates (yields), causing other rates to rise by arbitrage. Now it can spend the money it acquired.
There are two offsets, however. First, at the higher interest rates, private sector borrowers will borrow and spend less than they would at the lower rates. Government borrowing thus ‘crowds out’ some private investment spending. Second, at the higher interest rate people increase their private saving (since savings now earn more), reducing their consumption spending to do so.
So, yes, government spending goes up, but private consumption and investment spending decline equivalently. No meaningful increase in aggregate demand, output, or employment occurs. Worse, the decline in private investment likely reduces capital formation, productivity growth, and hence economic growth in the long-run.
In objection to this argument, Keynesians noted that domestic interest rates did not reliably correlate with government borrowing in the way classical credit rationing theory implied. Admitting that fact, economist Robert Barro responded that, when the government borrows to finance additional deficit spending, citizens may correctly anticipate the additional future taxation they will have to bear to pay off interest and principle on the added public debt.
In response, such rational taxpayers would increase their present saving – reducing their current consumer spending - so they could pay those future taxes. The effect of increased current government spending on total expenditure would again be offset.
Though Barro’s argument was powerful, most economists have doubted that crowding out through rational tax discounting would be complete. There is a third mechanism to consider, however. Crowding out can also occur through international transactions.
In an age of globalization, international financial markets are integrated. The world credit market is huge. The federal government may be able to borrow very large amounts of money to finance deficit spending by selling much of its added debt to foreigners, without domestic interest rates rising materially.
Exporting federal debt causes the U.S. to run a capital account surplus. However, in a flexible exchange rate regime such as we have had since the collapse of the Bretton Woods system, exchange rates will adjust to an equilibrium value making our overall balance of payments zero.
That means that the US would also run a current account deficit, importing a larger value of goods and services from foreigners than we sell to them, as those foreigners use the dollars thus acquired to buy our government debt instead of our goods and services. Again, increased government spending and debt will fail to raise domestic total expenditure, output, or employment.
These three ‘crowding out’ processes have been understood for decades. Yet never once did the phrase “crowding out” even pass the lips of President Obama’s initial economic advisers as they formulated fiscal stimulus policy to deal with the recession. Is it any wonder that all of them quit before the failure of that policy became obvious?
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