Military Keynesianism: Keynes Prescribed War to Solve US Unemployment Problem in 1939

For vulgar Keynesians, the essence of economics is all about spending...even if it leads to widespread death and destruction.

In 1939, John Maynard Keynes prescribed war as solution to the Great Depression.

Writes the prolific Carmen Elena Dorobăț at the Mises Blog:

On the eve of World War II, Keynes delivered the following chilling address on the BBC, talking about the "great experiment" of curing unemployment through war expenditure:

Two years later to the day, in a lecture delivered shortly after his arrival in the U.S., Mises described how the great experiment really looked like:

We are witnesses to the most frightful and phenomenal occurrence in human history: the decay of Western civilization. London, one of the centers of this civilization... is almost completely destroyed. The buildings of the Parliament of Westminster are in ruins; the House of Commons holds its assemblies in the catacombs. [...] The theater of war is spreading, and the day seems not distant when peace will have lost its last refuge. It is a moral and material collapse without precedent.

Quote of the Day: Why Global Defense Spending Will Be a Drag on the Global Economy

Australian author, financial analyst and former banker, Satyajit Das at the Marketwatch debunks the (Keynesian) myth of economic prosperity from the war economy (bold mine)

First, there is pressure to increase spending on defense and national security in the U.S., Europe and the U.K. Some economists have argued that this spending could boost economic activity. However, any rise will be artificial and short-lived — money expended on defense could otherwise have been put to more productive use, generating greater wealth. Moreover, defense spending will place additional stress on already fragile public finances in many countries.

Second, dislocations may affect normal trading and financial activities.

For example, between 2010 and 2014, Western investors invested over $300 billion in Russian stocks and bonds. Western sanctions on Russia now make it difficult for a number of heavily indebted companies to refinance existing foreign currency borrowing or raise new capital internationally. Western sanctions on Russia are also costly for European economies, especially Germany. Around 350,000 German jobs directly depend on German-Russian trade, with roughly 8%-10% threatened by sanctions.

Third, rising security concerns and political risk reduce the attractiveness of global supply chains and deter foreign investment. An uncertain geopolitical and global security environment may reinforce the trend to close economies, with capital controls and trade restrictions. For instance, China is moving to domestically source previously imported critical defense and infrastructure components to ensure self-sufficiency.

Fourth, actual conflict increases the cost dramatically. There is the direct cost of dealing with the issue. There is also the indirect cost by way of disruptions, restrictions on normal commercial and personal life, and the loss of confidence which impinges on economic activity. Even minor conflicts can disrupt critical resource supplies, such as oil or crucial minerals, and trade routes. It can displace large numbers of people, resulting in large numbers of refugees.

Fifth, even if the conflict is internal to a country or relatively small in scale, the collateral effects are significant. The Syrian civil war illustrates the tremendous humanitarian cost and the economic expense of dealing with the crisis. Germany has estimated the cost of integrating refugees fleeing the conflict may cost up to 900 billion euro over the long-term. The need to reintroduce border patrols within the EU may reduce GDP by 0.8% or around 100 billion euro, in direct costs as well as the effects on trade and tourism.

Combating and controlling failed states, resulting from conflict, such as those in the Middle East, Africa and central Asia, requires commitment of vast resources, by way of manpower and treasure.

Sixth, asymmetric warfare, cyber-attacks or isolated terrorist attacks, are costly to economies. Increased security measures designed to prevent or minimize the effects of such attacks are expensive. The large and rising homeland security costs in the U.S. and elsewhere is a large and unproductive expense.

In addition to the well-known economic problems of low growth, deflation, demographics, slowing productivity, and environmental issues, reversal of the peace dividend now weighs heavily on the prospects for the global economy.

Quote of the Day: The Phrase “Consumption-Based Economy” as Commonly Interpreted is Bass-ackwards

Professor Don Boudreaux at the Cafe Hayek debunks a populist myth used to justify state interventionism: 

The phrase “consumption-based economy” as commonly interpreted is bass-ackwards. Consumption in an economy no more fuels that economy than does success at driving a car fuel that car. Just as success at driving a car is the result of a working engine that is properly fueled with gasoline and accurately steered by a driver, success at consumption is the result of a working economy properly fueled by competition and accurately steered by market prices.

Put differently, ability to consume as lavishly as we Americans consume is the result rather than the cause of our prosperity. The economy must enable and encourage us first to produce things before we can consume things. Trying to consume greater quantities simply by increasing spending does no more to create the economic wherewithal to produce these greater quantities than does trying to travel further in a car simply by pressing harder on the accelerator create the fuel necessary for the longer journey.

Yet in a very important sense our economy is – and should be – consumption-based. It is and should be consumption-based in the sense that it is geared to satisfy the demands of consumers rather than the interests of producers. As Adam Smith said, “[c]onsumption is the sole end and purpose of all production; and the interests of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”* It follows that Mr. Trump and others who would forcibly obstruct consumers’ ability to trade with foreigners are enemies of the consumption-based economy, properly understood, and, hence, enemies also of the widespread prosperity that respect for such consumer sovereignty generates. 

* Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), Book IV, Chapter 8, para. 49.

Infographics: Keynesian Economics 101

If one should wonder why the scourge of boom busts cycles and its attendant crises (economic, financial, currency and debt), as well as accounts of hyperinflation, continually afflicts society, then look no further than to the economic dogma that has provided justification for their existence.

The Austrian Insider (hat tip Mises Blog and Zero Hedge) on the 4 Simple Lessons of Keynesian economics

Since Keynesian economics has reined supreme among mainstream economists for decades, you might want to know some of the basics. If this is confusing to you though, don’t worry about it! There are people in charge who have it all under control.

The great Austrian economist F.A. Hayek on Keynesian economics (from page 349 of Hayek’s The Trend of Economic Thinking, which is Vol. 3 in The Collected Works of F.A. Hayek hat tip Cafe Hayek) [bold added]

It is characteristic of much of recent economics that by ever new arguments it has tried to vindicate those very prejudices which are so attractive because the maxims that follow from them are so pleasant or convenient: spending is a good thing, and saving is bad; waste benefits and economy harms the mass of the people; money will do more good in the hands of the government than in those of the people; it is the duty of government to see that everybody gets what he deserves; and so on.)

Why Keynesian economics have popular with politicians and why it signifies as societal disease. From Austrian economist Peter Boettke (bold added)  

Keynesianism is not a panacea because Keynesianism has dominated public policy making for half a century and has left us in such a state of public debt. Keynesianism broke the old time fiscal religion of balanced budgets and fiscal responsibility, and changed not only attitudes of economists and policy makers, but also eroded whatever institutional constraints existed on public spending that had existed. Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems. Keynesianism provided an illusion of short term prosperity, but the reality of long term stagnation. Of course, the revealing of the illusion can be put off, as I have pointed out before, if there is the discovery of new opportunities for gains from trade, and/or gains from innovation.

But the governmental habit of spending is still there and the bill has to be paid as some point. Keynesianism is a disease on the body politic because it caters to the natural propensity of politicians to focus on short run, and to concentrate benefits and disperse costs.

Quote of the Day: Why not use spoons instead of shovels?

Milton Friedman was traveling in a developing Asian nation when his host took him to visit an excavation project that was part of a public works program. Instead of using earth-moving equipment, the workers were using shovels. Friedman asked why. His host told him the aim of the program was to employ as many workers as possible. Friedman quipped: "Why not use spoons instead of shovels?"

This is from financial journalist and author Caroline Baum in an article published at economics21.org

Economic Myth Busted: In the US, Savings from Lower Gas Prices was Spent on even More Gas!

Remember the popular mantra/incantation “low oil prices equals more consumer spending”? (this applies not only to the US but elsewhere including Philippines too)

Well, in the US, a study debunks the popular myth: savings from lower gas prices was spent on even more gas!

And bizarrely, media and ‘experts’ blame such unexpected course of development on human irrationality!

From the New York Times  (bold mine)

When gas prices fall, Americans reliably do two things that don’t make much sense.

They spend more of the windfall on gasoline than they would if the money came from somewhere else.

And they don’t just buy more gasoline. They switch from regular gas to high-octane.

A new report by the JPMorgan Chase Institute, looking at the impact of lower gas prices on consumer spending, finds the same pattern as earlier studies. The average American would have saved about $41 a month last winter by buying the same gallons and grades. Instead, Americans took home roughly $22 a month. People, in other words, used almost half of the windfall to buy more and fancier gas.

This is not rational behavior. Americans spent about 4 percent of pretax income on gas in 2014. One might expect them to spend about the same share of any windfall at the pump — maybe a little more because gas got cheaper. Instead they spent almost half.

Americans, in short, have not been behaving like the characters in economics textbooks…

The study, based on the spending patterns of about one million JPMorgan customers, does not track the kind of gas consumers purchased. It shows that people bought more gas as prices fell, and that the increase in consumption is not sufficient to explain the entirety of the increase in spending on gas.

Here is what the law of demand says “all else being equal…as the price of a product decreases, quantity demanded increases.” 

"People bought more gas as prices fell..."

Have consumers not been “behaving like the characters in economics textbooks”? Really? Or have consumers not been behaving in accordance to the fictitious outcomes generated from econometric models?

Of course, such econometric models have been constructed principally on the assumptions that humans DO NOT act based on ever changing preferences and values, in the face of an equally dynamic complex environment, that shapes incentives and consequently their actions. Or in short, for the math pedagogues, humans are NOT humans but automatons or robots whose actions are programmed.

But one may retort, they shifted from “regular gas to high-octane gas”.

So why not? Perhaps high octane gas could have been seen as more "energy efficient" (more fuel savings or longer driving mileage). If so then this reinforces, the law of demand.

But refuting the mythological gas-savings-equal-to-consumption-binge meme goes beyond the statistical technicalities.

Yet as I have noted here and many times elsewhere: the economics of spending is MAINLY a derivative of INCOME conditions—secondarily the utilization of savings and of credit—and NOT from the changes in spending patterns or the redistribution of spending from static income.

And as for the perspective of economic punditry versus real world phenomenon, the great Ludwig von Mises warned (Misapprehended Darwinism, Refutation of Fallacies, Omnipotent Government p.120)

Nothing could be more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems. In the realm of nature we cannot know anything about final causes, by reference to which events can be explained. But in the field of human actions there is the finality of acting men. Men make choices. They aim at certain ends and they apply means in order to attain the ends sought.

Now whose behavior have not been rational…acting humans or ‘experts’ whose views have been shaped by rigid econometric models?

Hong Kong is Doomed for its Anti-Keynesian Model: Budget Surplus, Leaving Cash to the Public by Lowering Taxes

Sovereign Man’s prolific Simon Black explains why Hong Kong is doomed—in the eyes of the Keynesian consensus! (bold mine)

The government committee was clear—if nothing was to be done, the government’s finances would be doomed in as little as seven years.

The Finance Secretary had some tough decisions to make. Raising more revenue for the government over the next few years is crucial.

He was also being targeted and mocked because his ministry’s predictions for economic performance and taxes raised have been consistently wrong every year since 2007.

This is common for government agencies in pretty much every country, but Hong Kong is possibly the worst—they continually underestimate the numbers.

The government will finish the fiscal year ending next month, for example, with a surplus of at least HK$60 billion (probably more, given how horrible they are at forecasting), which is six times more than the finance ministry projected. 

A surplus! Who does that anymore??

Couldn’t they find something else to spend money on? Armored vehicles and combat gear for the police (they did face a massive uprising just a few months ago after all)? Welfare? Crony subsidies? Drones? New government committees and agencies? Surveillance?

At least build a bridge, dammit! What are you going to do with all that extra money now??

I’ll tell you what they’re going to do. The Hong Kong government is so foolish that they’ll… I’m utterly disgusted saying this… they’ll -gulp- give it back to the people…

They’ll institute measures like a salary tax rebate of about HK$10,000, a waiver on property rates, and a PERMANENT increase in the tax allowance for parents from HK$70,000 to HK$80,000 per child—which is a second increase in child tax allowance in three years already!

One of the officials said: “There is a need to stimulate the city’s domestic consumption by introducing measures to leave more cash in the hands of the public.”

What are you talking about, man? Everyone knows that you stimulate the economy by increasing government spending, not reducing it and just leaving the people to decide what they’re going to spend it on. It’s insane.

Reducing already low taxes because you’re running budget surpluses? And you’re only taxing people and companies on the money they earn within Hong Kong? Really? You’ve got much to learn…

Even though following this practice has transformed the once barren island at the mouth of the Pearl River Delta into a global financial and trading center with one of the highest standards of living in the world, this clearly unsustainable bubble of a free market economy, minimal government, and fiscal prudence is bound to end in disaster.

ECB Mario Draghi’s Keynesian Fallacies

At the Mises Canada blog, Austrian economist Patrick Barron censures ECB’s Mario Draghi’s justification for launching QE (italics mine)

From today’s Open Europe news summary:

Draghi: ECB ready to initiate QE to counter low inflation

In an interview with Handelsblatt, ECB President Mario Draghi warned that persistently low inflation in the Eurozone meant that “the risk that we do not fulfill our mandate of price stability is higher than six months ago”. Draghi reiterated that the ECB was ready to step in with a programme of Quantitative Easing, noting that “We are in technical preparations to adjust the scope, speed and composition of our measures for early 2015.”

Handelsblatt Reuters Telegraph

ECB President Mario Draghi’s latest statement is full of Keynesian fallacies, to wit:

1. That price stability is a worthy goal. No, monetary stability is essential, so that prices may reflect the true preferences and productive limitations of the market in order to allocate scarce resources to their most important purposes as dictated by the market.

2. That low inflation or even deflation is harmful. No, in a economy with increasing productivity prices will fall, benefiting all of society. Preventing prices from falling or, as ECB President Draghi desires, encouraging price inflation, causes the Cantillon Effect, whereby early receivers of the new money benefit at the expense of later receivers. Continuing monetary expansion will cause the Austrian Business Cycle.

3. That GDP is a good measure of an economy’s success. if this were the case, then Zimbabwe would be a huge success story. GDP simply adds up the monetary prices of goods sold, so higher prices on the same or even slightly lower volume of sales necessarily will be interpreted by Keynesian economists as success.

4. That monetary expansion can spur an economy to greater prosperity. If this were the case, then counterfeiters would be doing all of us a big favor. Monetary expansion distorts the structure of production, sending more resources to the expansion of enterprises further removed from final consumption. This malinvestment eventually will be revealed by losses in these industries. The current collapse of commodity prices and anticipated bankruptcies in commodity production industries are a good illustration of this process and are attributable to massive monetary expansion by central banks since the 2008 great recession.

Let me add J M Keynes quote on inflation: (bold mine)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

There can be no general prosperity on policies of “legal plunder” channeled through money manipulation. Since there is no such thing as free lunch, central banking’s invisible confiscatory policies eventually unravel. Real time market crashes have been symptoms of these.

Quote of the Day: Conspicuous consumption should not be the goal of a prosperous society

Someone once said that the wealth of nations comes not from what we spend but from what we sow (actually, I wrote that several years ago). Like the farmer, a nation has to plant seeds in the spring to reap a good harvest in the fall, which is how Chauncey Gardiner, the fictional hero of Jerzy Kozinski's Being There, might have put it. For the rest of us, it's called investing in the future.

Just imagine if mom and dad, grams and gramps, doubled up on their holiday spending on toys and other tchotchkes for the kids. Spending would go up, GDP would go up, and toymakers would have to increase production to replenish their inventory. They might even hire a few new workers. The increased demand for toys would trickle down to suppliers, including manufacturers of plastics and other materials.

Then what? Tomorrow's growth is a function of what we invest today. It is investment in plants and equipment that expands productive capacity, increases efficiency, lowers prices, leads to higher real wages and enables the economy to expand at a faster rate in the future. There is no free lunch, but productivity growth is about as close as it gets.

So unless you think Barbie holds the key to a higher standard of living, conspicuous consumption—as it was known when Americans were being encouraged to save—should not be the goal of a prosperous society.

Consumer spending does send an important signal to producers as to how to best allocate scarce resources. Not that entrepreneurs are listening. Alexander Graham Bell didn't need consumer demand to encourage him to invent a piece of equipment that would transmit speech electrically. Nor did Steve Jobs wait for iPhone demand before creating Apple's incredibly popular smart phone. Entrepreneurs invent things because they anticipate a market for, and profit from, their product. If they change the world in the process, so be it. They don't need encouragement or validation—seed capital will suffice—before they create something the public didn't know it wanted or needed.

This is from former Bloomberg columnist Caroline Baum at the Economics21.org

Why there is no such thing as deficiency of demand

The ever eloquent Austrian economist Dr. Frank Shostak debunks the pervasive and populist myth that has pillared today's aggregate demand policies (from the Cobden Center):[bold mine]

There is no such thing as deficiency of demand that causes economic difficulties. The heart of economic growth is the process of real wealth generation.

The stronger this process is the more real wealth can be generated and the stronger so-called economic growth becomes. What drives this process is infrastructure, or tools and machinery. With better infrastructure more and a better quality of goods and services i.e. real wealth, can be generated.

Take for instance a baker who has produced ten loaves of bread. Out of this he consumes one loaf and the other nine he saves.

He can exchange the saved bread for the services of a technician who will enhance the oven. With an improved oven the baker can now produce twenty loaves of bread. Now he can save more and use the larger savings pool to further invest in his infrastructure such as buying other tools that will lift the production and the quality of the bread.

Observe that the key for wealth generation is the ability to generate real wealth. This in turn is dependent on the allocation of the part of wealth towards the buildup and the enhancement of the infrastructure.

Also, note that if the baker were to decide to consume his entire production i.e. keeping his demand strong, then he would not be able to expand the production of bread (real wealth).

As time goes by his infrastructure would have likely deteriorated and his production would have actually declined.

The belief that an increase in the demand for bread without a corresponding increase in the infrastructure will do the trick is wishful thinking.

We suggest that there is no such thing as a scarce demand. Most individuals have unlimited desires for goods and services.

For instance, most individuals would prefer to live in nice houses rather than in small apartments.

Most people would like to have luxuries cars and be able to dine in good quality restaurants. What prevents them in achieving these various desires is the scarcity of means.

In fact as things stand most individuals have plenty of desires i.e. goals, but not enough means.

Unfortunately means cannot be generated by boosting demand. This will only increase goals but not means.

Contrary to the popular way of thinking we can conclude that demand doesn’t create supply but the other way around.

As we have seen by producing something useful i.e. bread, the baker can exchange it for the services of a technician and boost his infrastructure.

By means of the enhanced infrastructure the baker can generate more bread i.e. more means that will enable him to attain various other goals that previously were not reachable by him.

The current economic difficulties are the outcome of past and present reckless monetary and fiscal policies of central banks and governments.

Read the rest  here

The European Central Bank Goes Nuclear: Cuts Rates, Announces QE

The ECB’s Keynesian “euthanasia of rentier” has gone nuclear. Aside from the negative deposit rates last June, the latest announcement includes a surprise paring down of interest rates by .1% to .05%, as well as, a QE based on Asset Backed Securities (ABS).

From the Wall Street Journal: (bold mine)

The European Central Bank surprised financial markets with a cut in interest rates and new stimulus plans despite opposition from Germany's powerful central bank, underscoring its urgency in keeping too-low inflation from derailing the eurozone's weak economy….

The ECB lowered its main lending rate by 0.10 percentage point to 0.05%. It cut a separate rate on bank deposits deeper into negative territory, to -0.2% from -0.1%. In June, the ECB became the largest central bank to experiment with a negative rate on bank deposits, a measure aimed at encouraging banks to lend surplus to other financial institutions rather than paying to park them at the ECB.

The central bank also announced it will purchase covered bank bonds and bundled loans known as asset-backed securities and said additional details will be released in October. Mr. Draghi didn't indicate a size for the program, but said the ECB's aim was to get its balance sheet, currently around €2 trillion, back to its size at the beginning of 2012, when it was €2.7 trillion.

A previous covered-bond program in 2011 didn't generate much interest from banks, but reviving it—with the new ABS program—sends a signal of the ECB's resolve to deploy its balance sheet to head off the threat of too-low inflation.

Deflation or “low inflation” amidst weak growth  has been made the bogeyman to justify such measures. The reality is that the Eurozone’s problem has been one of impaired household and institutional balance sheets, therefore the inability to expand credit. In short, the Eurozone needs to clean their finances for them to borrow again. Forcing people to borrow will only add to their existing woes.

Yet the other major obstacles in the real economy such as crushing taxes, various forms of interventions and welfarism have been disregarded. All these represent cumulative symptoms of government interventions. 

The Eurozone has already an amazing record low bond yields. Despite this, the much politically desired (debt financed) spending hasn’t emerged.

What all these interventions has done has been to muddy the investment climate.

Thus the capital investment has been flagging. Companies instead has been returning cash to investors. (chart from FT Alphaville)

And the natural consequence from low investments has been to diminish trading activities as evidenced by dwindling intra-EU trade.(chart from Zero Hedge). 

Reduced trade activities simply extrapolates to low economic growth.

Of course not everything has been bad. Zero bound and negative rates has signified a subsidy to government activities.

Political spending in the region has mostly increased (chart from Dan Mitchell).

And given the low growth environment, these has ballooned government debt-to gdp (Zero Hedge).

Government debt according to the Eurostat as of July has been at 93.9% of GDP

So subsidies via financial repression has not only kept government debt levels afloat, they have encouraged even more unproductive debt accumulation. Yet whatever government resources consumes means resources taken away from the private sector, hence the low investments and low economic growth environment

And there’s more. Because Keynesian dogma of the “euthanasia of rentier” have been designed to promote debt, companies have taken in on risk debt from capital markets to record levels. Here’s the Wall Street Journal: The prospect of quantitative easing in Europe is reviving the market for risky bank debt, with two European lenders testing the waters on so-called contingent capital, or CoCo, bonds after a monthslong drought. CoCos—which can convert to equity or be wiped out if the issuer's capital levels drop below a threshold—had a booming start to the year as banks took advantage of record low rates to bolster their balance sheets ahead of a banking-system health check this fall. Issuance surged to a record €33.6 billion ($44 billion) in the first half of the year, before the market ground to a halt in July when financial difficulties at Portugal's Banco Espírito Santo and U.S. Federal Reserve Chairwoman Janet Yellen's warning about the high price of risky debt prompted investors to pull back

And aside from the US Federal Reserve providing bridge finance to Eurozone companies via Overnight Interest Rate on Reserves, much of these borrowed money may have most likely been powering financial asset speculation. The Stoxx 600, a composite benchmark of 600 companies, has been levitating at multi-year highs. 

So the Eurozone has been experiencing a fantastic parallel universe; listless economic activities in the face of a financial asset markets boom

And with the Euro being clobbered, the likelihood is for the currency to be used as funding currency in potential carry trades which may further provide fuel to the amplification of global asset speculation orgy. And this is why many drool over the ECB's recent actions.

Meanwhile, a weak euro may spawn a reversal in the bond rallies in Eurozone's periphery economies as money flows elsewhere in search of higher returns.

At  the end of the day, the ECB’s euthanasia of rentier only adds to the imbalances to the Eurozone’s fragile economy which may spillover to the global economy via a global bubble cycle.

As the great Austrian economist Ludwig von Mises presciently warned: (bold mine)

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy…Many governments, universities, and institutes of economic research lavishly subsidize publications whose main purpose is to praise the blessings of unbridled credit expansion and to slander all opponents as ill intentioned advocates of the selfish interests of usurers.

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

All these reckless experimentation for the sake of protecting the interests of politicians, bureaucrats and their cronies.

Yet the massive misallocation of resources from manipulation of interest rates paves way for a depression (soon).

Why Asia is in Trouble: Corporate Savings Under Assault

For the government and the mainstream, the only thing that matters for the political economy is spend, spend, spend to infinity and beyond, regardless of the quality and financing of such activities.

So they endorse almost any policies that assails on savings--which is seen as a scourge.

This Keynesian myth has practically been embraced by Asian governments to the point that some of have directly imposed penalties on corporate cash hoard.

From the Wall Street Journal Real Times Economics Blog

Investors have long criticized many of Asia’s corporate giants for hoarding billions of dollars. Now those cash piles are under attack from governments that want them put to better use driving economic growth.

Last month, Korea announced that as part of a $40 billion economic stimulus package, it would impose a tax on companies that keep piling up savings instead of paying them out to workers or shareholders.

In Japan, Prime Minister Shinzo Abe has pushed companies to raise payouts to shareholders and workers, and Beijing has ordered state-owned behemoths to boost their dividends to the government to help pay for expanded social-welfare programs.

The International Monetary Fund took aim at the issue this month in its latest report on Japan, calling on Friday for better corporate governance to help “unstash Japan’s corporate cash.” The IMF estimates Japanese companies are sitting on record amounts of cash, equivalent to more than 9% of gross domestic product.

The idea is that by unleashing these corporate cash lodes onto shareholders and employees, they will either invest it more profitably in other parts of the economy, or simply spend it – either of which is better for growth than having it sit in the bank.

While such policies may temporarily be a boost to shareholders and employees these will have nasty side effects over the long run that has been unseen or neglected by the consensus. 

[Note: I exclude China's State Owned Enterprises in the discussion below]

One major reason why corporations hold cash is due to “uncertainty” (perhaps in reaction to social policies, to changes in the risk environment or to changes in profit opportunities) and or in relation this, the possible waiting for the right opportunities to deploy these surplus reserves. 

Yet by forcing companies to spend, such incentivize companies to wade into or speculate on unproductive ventures that risks financial losses. This would hardly be a boost to shareholders and employees. 

In addition, if many companies engage in politically induced 'forced' speculation such will lead to massive mis-allocation of capital, thus poses as a systemic risk. Combined with easy money policies, such will compound on bubble formation.

By forcing companies to pay employees more than what the company sees as their marginal productivity contribution to the company’s product/s, such increases business costs (decreases productivity) that could lead to a scrimp in profits or even to financial losses.

By forcing companies to shell out dividends, the opportunity cost of such actions will be investment opportunities when they emerge. These companies won’t have the resources to invest without recourse to debt. Subsequently, this also means that forcing companies to reduce cash reserves would increase balance sheet risks via debt accumulation.

This obsession with the crucifixion of savings and spending as panacea signals trouble ahead. 

As Austrian economist Gerald Jackson recently wrote: (bold mine)

Unfortunately economic thinking has now deteriorated to the point that one of the major economic fallacies the classical economists refuted is now presented on a daily basis in universities, colleges and the media as an irrefutable fact. The result is that governments the world over are implementing policies that direct economic activity to increased consumption at the expense of gross investment. As the Austrians are forever pointing out, it is gross investment, expenditure on all future-goods factors, that maintain the capital structure: not net investment or consumer spending

We are thus left with the conclusion that fighting a recession by encouraging consumption will prolong and perhaps even deepen it. One thing is certain from an Austrian perspective: if the critical point is reached where increased consumption spending continues to drive down gross investment then real wages must eventually fall if the phenomenon of permanent widespread unemployment is to be avoided.

Overall, the spending nostrum is all about temporary gratification at the expense of the future. This signifies what politics has been all about: Get votes today, voters be damned after.

Quote of the Day: Why GDP is an Enron-Style Accounting Fiction

First up, it’s worth it to address the number’s origins. Though attempts to measure country economic growth go back to at least the 17th century, Coyle writes that what we know as GDP today “is one of the many inventions of World War II.” War is the health of the state as Randolph Bourne correctly uttered long before WWII, so it wouldn’t surprise him that a number explicitly designed to increase the size of government reached full flower during the last global war.

Where it gets interesting is that prewar measures of economic growth explicitly showed “the economy shrinking if private output available for consumption declined, even if government spending required for the war effort was expanding output elsewhere in the economy.” Of course those numbers did. Though it would be folly on the best day for number crunchers to divine economic growth, there was at least some honesty in the numbers: government spending correctly subtracted from growth. 

If the reason why government spending reduced growth isn’t apparent, it’s important to remind readers that governments have no resources. This is true no matter one’s ideology. They’re only able to spend what they tax or borrow from the private economy first. In that case, for government spending to be counted as economic growth would be for those attempting to measure economic activity to engage in fraudulent double counting. The growth already took place; that’s why there were resources for government to consume in the first place. Thinking about this further, while WWII will be discussed in greater detail in a little bit, readers ought to think about the popular view inside the economics profession about WWII “ending” the Great Depression with all of this in mind.

For now, what’s important here is Coyle’s acknowledgment that for the longest time “’the economy’ was the private sector.” (my emphasis). Government couldn’t add to economic growth through spending simply because government spending very definitely was the process whereby government shrank the real economy through political consumption of capital extracted from the private sector. The money that politicians spend must come from somewhere, so for every dollar spent by politicians, that’s one less dollar for the private sector to allocate toward consumption, investment, or both.

To state the obvious, GDP was and is perfect for the political class simply because the false accounting that has defined it from day one promotes the obvious fiction that government spending adds to economic growth. Coyle is clear about the latter, that there was substantial resistance to what GDP became precisely because it was so blatantly false in its accounting, but she’s also clear about what informs its modern definition: “GDP was constructed around Keynes’s model of how the economy works,” and the Keynes model was one that said government could use “both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy.”

In short, Keynesianism is the ultimate economic fantasy, which helps explain why it’s so popular with the deluded types who enter politics, not to mention academic economists shielded from the real-world implications of their droolings. Wouldn’t it be nice if government spending could boost growth during troubled times, but by definition it can only reduce it. If readers feel otherwise, they must explain how it is that Barack Obama, Mitch McConnell, Harry Reid, Nancy Pelosi, and John Boehner can allocate capital better than you, Amazon’s Jeff Bezos, FedEx founder Fred Smith, Paul Tudor Jones, Warren Buffett, and Ken Fisher. This isn’t about ideology. Politicians simply can’t allocate capital more skillfully first because they’re arguably not suited to it, but most important because they lack the market signals that happily starve the bad ideas of Bezos, Smith, Jones, Buffett and Fisher.

Some will reply that government must consume when the citizenry is not consuming, but this form of thinking is every bit as silly as the thought process that says political allocation of capital is the path to future Microsofts, Intels and Cisco Systems. Lest we forget, short of stuffing money under a mattress, money saved does not lay idle. Banks don’t take in deposits in order to stare lovingly at the cash; rather they pay for deposits (liabilities) by immediately turning those liabilities into assets. Money saved is immediately lent to those with near-term consumptive needs, or it’s lent to entrepreneurs and businesses eager to grow. Keynesianism presumes a world that has never existed in which banks warehouse deposits, and that is defined by politicians who are more expert than the private sector at investing funds extracted from the private sector.

That’s what’s so interesting about Coyle’s faux evenhandedness about whether or not the comical notion of a “fiscal multiplier” is real. She writes as though sometimes it multiplies growth and sometimes it doesn’t, but whatever government spending does to the false measure that is GDP, it can’t boost real economic growth. It can’t unless Coyle and her fellow astrologers really can say with a straight face that Sens. Ted Cruz and Chuck Schumer are better allocators of capital than are Cliff Asness and Tom Steyer. Not very likely. And if they believe it, it’s time for this debate to take place.

Considering the calculation of GDP, expenditure is the most common approach; and it’s one that reveals the Enron-fiction that is GDP in living color. Once again, government spending adds to growth despite it plainly subtracting from it, and then if we import more than we export, GDP actually declines. In short, that which reduces the size of the private sector boosts economic growth in the deluded GDP sense, while that which plainly reveals a growing private sector (imports which reflect increased production stateside, and increased foreign investment in the U.S.) actually reduces the economy’s size per GDP.

(bold mine)

This is from a critical review by John Tammy at the Forbes.com on Diana Doyle’s new book GDP: A Brief But Affectionate History. 

The whole article is a recommended read

Graphic of the Day: The Militarization of the US Local Police

From the New York Times: (bold mine)

During the Obama administration, according to Pentagon data, police departments have received tens of thousands of machine guns; nearly 200,000 ammunition magazines; thousands of pieces of camouflage and night-vision equipment; and hundreds of silencers, armored cars and aircraft.

The equipment has been added to the armories of police departments that already look and act like military units. Police SWAT teams are now deployed tens of thousands of times each year, increasingly for routine jobs.Masked, heavily armed police officers in Louisiana raided a nightclub in 2006 as part of a liquor inspection. In Florida in 2010, officers in SWAT gear and with guns drawn carried out raids on barbershops that mostly led only to charges of “barbering without a license.”

(from Mark Perry)

Why are the local police massively arming?

Congress created the military-transfer program in the early 1990s, when violent crime plagued America’s cities and the police felt outgunned by drug gangs. Today, crime has fallen to its lowest levels in a generation, the wars have wound down, and despite current fears, the number of domestic terrorist attacks has declined sharply from the 1960s and 1970s. 

Police departments, though, are adding more firepower and military gear than ever. Some, especially in larger cities, have used federal grant money to buy armored cars and other tactical gear. And the free surplus program remains a favorite of many police chiefs who say they could otherwise not afford such equipment. Chief Wilkinson said he expects the police to use the new truck rarely, when the department’s SWAT team faces an armed standoff or serves a warrant on someone believed to be dangerous…

Pentagon data suggest how the police are arming themselves for such worst-case scenarios. Since 2006, the police in six states have received magazines that carry 100 rounds of M-16 ammunition, allowing officers to fire continuously for three times longer than normal. Twenty-two states obtained equipment to detect buried land mines.

Worst case scenarios? Hmmm. If incidences of crime and terrorist attack has been falling, then what possible worst scenarios can there be?   

Has the US local police been preparing for a real life RED DAWN (pick your version 2012 or 1984)? 

Or could they be expecting an invasion from Martians ala Mars Attacks (1996) or from other aliens like the War of the Worlds (2005)? 

Or has the US government merely embraced Paul Krugman's prescription to fix the economy through fiscal spending based on an imaginary "alien invasion"?

Or has local police authorities been preparing for war against the citizenry? 

Or could all these be part of a gradualist scheme to impose a police state?

Don’t worry be happy, stock markets are at record highs!

Interesting…

The ECB Takes Keynesianism to the Limits via Negative Deposit rates

I find it quite ridiculous for the mainstream to claim that the Eurozone has been experiencing a ‘recovery’ when the financial-banking industry continues to push the European Central Bank (ECB) to further ease.

Apparently, as previously noted, recent record setting stock markets in developed economies has largely been in anticipation of the ECB and Mario Draghi’s accommodation to such pressures.

Today the ECB obliged.

From Bloomberg:

The European Central Bank cut its deposit rate below zero and said it would announce further measures later today as policy makers try to counter the prospect of deflation in the world’s second-largest economy.

ECB President Mario Draghi reduced the deposit rate to minus 0.10 percent from zero, making the institution the world’s first major central bank to use a negative rate.

Notice that central banks have all been pushing monetary policies—from intensifying use of QE, ZIRP and now Negative Interest Rates—to the limits.

They have waged an all out war against savings via the abolishment of interest rates as advocated by the high priest of inflationism, John Maynard Keynes (bold mine)

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

In short, the euthanasia of the rentier lowers interest rate with the aim that no one will find savings profitable such that everyone will simply spend. Mario Draghi and the ECB would make JM Keynes proud.

Yet this is really a camouflage for perpetual debt accumulation.

Aside from Negative Deposit Rates, the ECB has placed in the pipeline more on easing measures. From the Zero Hedge (bold original)

The much anticipated additional measures have been revealed:

-DRAGHI UNVEILS PACKAGE OF TARGETED LTROS, WORK TO PREPARE QE

-DRAGHI SAYS INITIAL SIZE OF TARGETED LTRO PLAN IS 400BLN EUROS

-ECB EXTENDS FIXED RATE FULL ALLOTMENT, SUSPENDS SMP STERILIZING

-DRAGHI SAYS PACKAGE INCLUDES PREPARATIONS FOR ABS PURCHASES

In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.

All these represent no more than subsidies, as I previously commented: 

governments around the world have been forcing a 'reverse Robin Hood' redistribution of plundering the Main Street in favor of the Wall Streets of the world through a variety of financial repression policies such as blowing bubbles, bank deposit haircut, negative deposit rates and more…  

Yet there is no such thing as a free lunch. Every action has a consequence. Unproductive spending and malinvestments will backfire. As the great Austrian economist Ludwig von Mises presciently warned (bold mine)

The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy. As has been mentioned already, the British Government has asserted that credit expansion has performed "the miracle...of turning a stone into bread." A Chairman of the Federal Reserve Bank of New York has declared that "final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity." Many governments, universities, and institutes of economic research lavishly subsidize publications whose main purpose is to praise the blessings of unbridled credit expansion and to slander all opponents as illintentioned advocates of the selfish interests of usurers.

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

It is sad to see that that the average citizens of the world have been treated like guinea pigs by monetary authorities, for an age old experiment that not only transfers resources from society to the the political class and their cronies but importantly has been DESTINED for failure: quasi booms morph into horrific busts.

When real savings have been substantially diminished relative to misallocated capital, then expect and prepare for a global economic depression in a not so distant future.