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.

 
Nikhiln25:
One thing the average American favoring the tea party doesn't understand is what bsituation we would've been if we did not support the bailouts[/b]/ 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.

 
Therightcoast:
Nikhiln25:
One thing the average American favoring the tea party doesn't understand is what bsituation we would've been if we did not support the bailouts[/b]/ 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

 

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.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

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.

 
Anthony .:
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)

 

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.

 

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.

 
GoodBread:
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.

My WSO Blog "Unbelievably Believable" -- RG3
 

I agree with your central premise, however; Harding did gamble away all of the fine china in the White House.

"Some things are believed because they are demonstrably true. But many other things are believed simply because they have been asserted repeatedly—and repetition has been accepted as a substitute for evidence." - Thomas Sowell
 

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.

Chaos2Order = JRE, Ph.D. View my WSO Blog
 
Chaos2Order:
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.
Categorically untrue. Regan presided over the largest rise in US Debt/GDP since WWII. I'm not sure where you get your data but all govt data on the matter proves you wrong and a simple trip to Wikipedia could be instructive (http://en.wikipedia.org/wiki/US_deficit).

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.

 

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).

Chaos2Order = JRE, Ph.D. View my WSO Blog
 

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).

My WSO Blog "Unbelievably Believable" -- RG3
 

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.

Chaos2Order = JRE, Ph.D. View my WSO Blog
 

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.

Chaos2Order = JRE, Ph.D. View my WSO Blog
 

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!

 
Frieds:
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.

 
FXTrading:
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)

looking for that pick-me-up to power through an all-nighter?
 
FXTrading:
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.

What trades are you doing? HUF?

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 

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.

Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard. -30 Rock
 

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

 
solb22:
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?

If your dreams don't scare you, then they are not big enough. "There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.
 
solb22:
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

Lol Aspie. Sorry all your friends are azn nerds.
 

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!!!

If you ain't gettin money dat mean you done somethin wrong. " If you have built castles in the air , your work need not be lost; that is where they should be . Now put the foundations under them." - Henry David Thoreau
 

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.

Get busy living
 

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.

 
GoodBread:
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.
^ THIS
Get busy living
 

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.

 

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.

 

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Valor is of no service, chance rules all, and the bravest often fall by the hands of cowards. - Tacitus Dr. Nick Riviera: Hey, don't worry. You don't have to make up stories here. Save that for court!
 

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