Keynesian Economics RIP

[eagleseven]

Bloomberg: Dollar Reaches Breaking Point as Banks Shift Reserves

Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

NYT: Still on the Job, but at Half the Pay

In recent decades, layoffs were the standard procedure for shrinking labor costs. Reducing the wages of those who remained on the job was considered demoralizing and risky: the best workers would jump to another employer. But now pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression.

State workers in Georgia are taking home smaller paychecks. So are the tens of thousands of employees in California’s public university system. The steel company Nucor and the technology giant Hewlett-Packard have embraced the practice. So have several airlines and many small businesses.

The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers, pilots among them, representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

“What this means,” said Thomas J. Nardone, an assistant commissioner at the bureau, “is that the amount of money people are paid has taken a big hit; not just those who have lost their jobs, but those who are still employed.”

We are just beginning to pay for the flaws in Keynes' theories. You cannot generate liquidity when there is no reserve without suffering grave consequences, as we are about to learn the hard way.

Further, entire industries can reduce wages in an effort to control unemployment, without government intervention.

 

[Maple]

Bloomberg: Dollar Reaches Breaking Point as Banks Shift Reserves

Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

NYT: Still on the Job, but at Half the Pay

In recent decades, layoffs were the standard procedure for shrinking labor costs. Reducing the wages of those who remained on the job was considered demoralizing and risky: the best workers would jump to another employer. But now pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression.

State workers in Georgia are taking home smaller paychecks. So are the tens of thousands of employees in California’s public university system. The steel company Nucor and the technology giant Hewlett-Packard have embraced the practice. So have several airlines and many small businesses.

The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers, pilots among them, representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

“What this means,” said Thomas J. Nardone, an assistant commissioner at the bureau, “is that the amount of money people are paid has taken a big hit; not just those who have lost their jobs, but those who are still employed.”

We are just beginning to pay for the flaws in Keynes' theories. You cannot generate liquidity when there is no reserve without suffering grave consequences, as we are about to learn the hard way.

Further, entire industries can reduce wages in an effort to control unemployment, without government intervention.

Excellent points, Keynes theories have been proven to be a disastor in the making but liberals still tout his theory as a success. You can not spend your way out of debt, and there is no proof that a tricle UP theory ever works. No one I know of has ever been hired by a POOR person. Government does not create jobs, the private sector does. Government depends on the private sector, ( taxes) to support Government, it is not the other way around. With the current state of this economy- revenues to the government through taxes are at an all time low, the longer this unemployment continues the more debt the nation incurs.

When Reagan passed across the board tax cuts, he created 20 million new jobs and REVENUE to the government INCREASED dramatically. Everyone was working, everyone was paying taxes. When you don't work you don't pay taxes, it's that simple.

These libs don't get that. They are not capable of running a neighborhood lemonade stand without bankrupting it.

 

[Diuretic]

Let me see if I have it right.

Where there's a lack of demand in the economy that's bad isn't it? So to stimulate demand governments begin spending. They may indeed go into deficit. The economy is maintained by government spending until it recovers and then government reduces its spending and the increased economic activity sees income for the government increase in the form of taxes and other levies.

That's my simplistic understanding of it. I'm not an economist nor educated in it. I'm still trying to get through the General Theory but it's slow going, it has too many numbers in it for me to be comfortable

 

[eagleseven]

In the sterilized world of mathematical theory, that is the idea. It makes some critically flawed assumptions, however:

1. Governments have practically unlimited credit lines.
2. Governments are capable of spending money in such a way as to spur demand.
3. Governments are capable of cutting spending once the recovery is underway.
4. Government-induced economic growth will outpace the interest on debt incurred.
5. Demand is down due to a market over-correction, not due to fundamental societal flaws (a broken system).

#1 is clearly untrue. #2 and #3 are not true for the modern American government. #4 is a crapshoot.

#5 is the most critically flawed assumption of them all. His theory assumes that whatever issues that caused the initial crash are self-correcting, with time. Any financial expert will tell you that our financial sector is as fragile today as it was this time a year ago.

 

[Toro]

In the sterilized world of mathematical theory, that is the idea. It makes some critically flawed assumptions, however:

1. Governments have practically unlimited credit lines.
2. Governments are capable of spending money in such a way as to spur demand.
3. Governments are capable of cutting spending once the recovery is underway.
4. Government-induced economic growth will outpace the interest on debt incurred.
5. Demand is down due to a market over-correction, not due to fundamental societal flaws (a broken system).

#1 is clearly untrue. #2 and #3 are not true for the modern American government. #4 is a crapshoot.

#5 is the most critically flawed assumption of them all. His theory assumes that whatever issues that caused the initial crash are self-correcting, with time. Any financial expert will tell you that our financial sector is as fragile today as it was this time a year ago.

1. Keynes did not assume unlimited credit lines, nor did he assume unlimited borrowing capacity.
2. Governments do have the ability to increase demand. GDP is a function of monetary velocity. When velocity collapses, as it did last year, the government can increase spending, which increases monetary velocity and GDP.
3. Absolutely. It is the biggest problem with getting the government involved. Keynes said that once the economy began growing again, government should cut spending. This is often ignored by modern-day adherents to Keynes.
4. Hard to say. This is probably true in a normal environment and a normal recession, but when GDP is substantially less than 0, then any government spending with a multiplier of 1 or greater, or even slightly less, will generate growth that will be above the private market.
5. Your interpretation is completely opposite of what Keynes said. Keynes said that when the system is broken is when the government should act. It is when demand has collapsed for reasons other than a standard inventory-liquidation recession that government should ramp up spending.

This is a good explanation from Nomura Securities of what happens in a debt deflation, and why it is important for government to support the economy.

Revisiting the Age of Balance Sheet Recessions

 

[Elutherian]

Keynes' ideas ain't dead yet. Bernanke and Paulson are still in power and still printing out the paper.

We're coming along though. Austrian Economics gonna win out in the end.

 

[eagleseven]

1. Keynes did not assume unlimited credit lines, nor did he assume unlimited borrowing capacity.

Keynes himself wrote of the devastation of inflation...and thus his stimulus relies upon the presumption that government will explicitly not print money. This means that any stimuli will be entirely funded by government reserves and debt.

2. Governments do have the ability to increase demand. GDP is a function of monetary velocity. When velocity collapses, as it did last year, the government can increase spending, which increases monetary velocity and GDP.

I don't doubt that a generic government can, in theory, do this. I seriously doubt that the current American government, with our current crop of politicians, know how to invest money so as to stimulate growth.

Look at where the stimulus is being spent, and you'll see what I mean.

3. Absolutely. It is the biggest problem with getting the government involved. Keynes said that once the economy began growing again, government should cut spending. This is often ignored by modern-day adherents to Keynes.

Indeed. Once our government gets its hands into a sector, it never wants to leave...

4. Hard to say. This is probably true in a normal environment and a normal recession, but when GDP is substantially less than 0, then any government spending with a multiplier of 1 or greater, or even slightly less, will generate growth that will be above the private market.

It's the multiplier that's anyone guess, yes. This really depends upon the circumstances, and the efficacy of the government in question. In this respect, Washington does not inspire confidence.

5. Your interpretation is completely opposite of what Keynes said. Keynes said that when the system is broken is when the government should act. It is when demand has collapsed for reasons other than a standard inventory-liquidation recession that government should ramp up spending.

Yes, but he assumed that pumping liquidity into the broken system will fix it. A one-size-fits-all solution for many potential problems.

I'll argue, and I'm supported by the current state of our financial system, that increasing liquidity cannot spur long-term growth if the underlying political-economic mechanics are broken. For instance, you can pour billions of dollars into a crackpot dictatorship in Africa, and still see virtually no economic growth, because the political-economic system is fundamentally broken.

This is what I mean when I say "broken."

This is a good explanation from Nomura Securities of what happens in a debt deflation, and why it is important for government to support the economy.

Revisiting the Age of Balance Sheet Recessions

The presentation makes a good point, but dramatically understates the risks involved with capital injection and a pro-inflation policy. Even Keynes realized the risks of the course he was taking, and wrote as much, though this part of his counsel was conveniently ignored, by both FDR, and now Obama.

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.

Commanding Heights : Keynes on Inflation | on PBS

 

[Toro]

Keynes himself wrote of the devastation of inflation...and thus his stimulus relies upon the presumption that government will explicitly not print money. This means that any stimuli will be entirely funded by government reserves and debt.

Monetary policy is not fiscal policy. The government spending money when demand has collapsed is not inflationary because of the inherent excess capacity in the system. Also, when everyone saves at the same time- the Paradox of Thrift - economic activity stops and Keynes argued that when this occurs, the government must spend. The government raising debt when the private market is contracting debt is not, by definition, inflationary.

It's the multiplier that's anyone guess, yes. This really depends upon the circumstances, and the efficacy of the government in question. In this respect, Washington does not inspire confidence.

It does depend on the circumstances, and today's circumstances warrant it. It does not always but in a deflationary collapse, it does.

Government spending is better than tax cuts in this situation because most tax cuts are being saved, not being circulated in the economy. When this happens, the multiplier effect for government spending is greater than for tax cuts.

Yes, but he assumed that pumping liquidity into the broken system will fix it. A one-size-fits-all solution for many potential problems.

He argued that when demand collapsed, the government should step in and increase demand. When underlying demand is not a problem, then government spending is a waste. This is why not all recessions should be met with stimulus spending. But we are in the worst situation since the 1930s, and today's recession are closer to the Great Depression. Keynes wrote for the Great Depression.

I'll argue, and I'm supported by the current state of our financial system, that increasing liquidity cannot spur long-term growth if the underlying political-economic mechanics are broken. For instance, you can pour billions of dollars into a crackpot dictatorship in Africa, and still see virtually no economic growth, because the political-economic system is fundamentally broken.

Liquidity is not designed to spur long-term growth. Liquidity is designed to save the financial system and avoid a deflationary collapse. It is being used to re-equitize the banking system. Once the financial system is fixed, the liquidity will be withdrawn.

It is a fair criticism that the government will not do this correctly. Central banking has been very poor the past two decades in this country, and I am betting that another bubble is in the making, which is why I own a lot of gold. But consumer price inflation is far, far off.

 

[Paulie]

Let me see if I have it right.

Where there's a lack of demand in the economy that's bad isn't it? So to stimulate demand governments begin spending. They may indeed go into deficit. The economy is maintained by government spending until it recovers and then government reduces its spending and the increased economic activity sees income for the government increase in the form of taxes and other levies.

That's my simplistic understanding of it. I'm not an economist nor educated in it. I'm still trying to get through the General Theory but it's slow going, it has too many numbers in it for me to be comfortable

Why should the government dictate demand for me, though? What if the majority of the market doesn't want new bridges, or doesn't want new roadways?

The government contrives demand for the sake of spending money to keep an economy moving against its natural will. Something is wrong with that.

When the market decides the time is right to spend again, then so be it.

Nothing makes more sense than to save up a position of wealth to use for discretionary, and even necessary, spending. To dictate policy that in all essence FORCES me to spend my money because it's more fruitful to do so than to save it for future use, is wrong.

Purchases should be made from an amount of liquidity in saved reserve. No income is perpetually guaranteed. Why should we continue to be punished for saving our cash?

The government HATES when we save. They flat out DESPISE it.

The downturn caused by saving and deleveraging is HEALTHY. We weather that storm until the collective balance sheet dictates a proper time to allot liquidity for more purchases again.

The government didn't even give us a CHANCE to see if we could handle the downturn on our own. They threw a trillion dollars at the situation on day fucking 1. That says a lot about what they think of us as people.

 

[Diuretic]

Let me see if I have it right.

Where there's a lack of demand in the economy that's bad isn't it? So to stimulate demand governments begin spending. They may indeed go into deficit. The economy is maintained by government spending until it recovers and then government reduces its spending and the increased economic activity sees income for the government increase in the form of taxes and other levies.

That's my simplistic understanding of it. I'm not an economist nor educated in it. I'm still trying to get through the General Theory but it's slow going, it has too many numbers in it for me to be comfortable

Why should the government dictate demand for me, though? What if the majority of the market doesn't want new bridges, or doesn't want new roadways?

The government contrives demand for the sake of spending money to keep an economy moving against its natural will. Something is wrong with that.

When the market decides the time is right to spend again, then so be it.

Nothing makes more sense than to save up a position of wealth to use for discretionary, and even necessary, spending. To dictate policy that in all essence FORCES me to spend my money because it's more fruitful to do so than to save it for future use, is wrong.

Purchases should be made from an amount of liquidity in saved reserve. No income is perpetually guaranteed. Why should we continue to be punished for saving our cash?

The government HATES when we save. They flat out DESPISE it.

The downturn caused by saving and deleveraging is HEALTHY. We weather that storm until the collective balance sheet dictates a proper time to allot liquidity for more purchases again.

The government didn't even give us a CHANCE to see if we could handle the downturn on our own. They threw a trillion dollars at the situation on day fucking 1. That says a lot about what they think of us as people.

Why should the government dictate demand for me, though? What if the majority of the market doesn't want new bridges, or doesn't want new roadways?

It seems to me that the government doesn't dictate demand so much as look to improving the public good. I agree that smashing a perfectly good bridge and then building another one is stupid and a waste. But I think it's beneficial to the public good to replace or fix crappy ones. Government stimulus spending should be on the public good, not just for its own sake.


The government contrives demand for the sake of spending money to keep an economy moving against its natural will. Something is wrong with that.

You portray “the economy” as something which has will. It doesn't. The economy is the sum of thinking of a nation of individuals as regards economic choices and decisions. There's no “natural will”.


When the market decides the time is right to spend again, then so be it.

Too bad if the national economy has collapsed in the meantime.


Nothing makes more sense than to save up a position of wealth to use for discretionary, and even necessary, spending. To dictate policy that in all essence FORCES me to spend my money because it's more fruitful to do so than to save it for future use, is wrong.

I don't think the idea is to force individuals to spend money. I think the idea is to create demand for goods and services so individuals will want to spend money.

Purchases should be made from an amount of liquidity in saved reserve. No income is perpetually guaranteed. Why should we continue to be punished for saving our cash?

No-one should be punished for saving, it's a prudent thing to do. But saving is a cause of economic contraction, the money isn't in circulation and isn't doing anything except sitting there.


The government HATES when we save. They flat out DESPISE it.

Not all the time. Saving is good in times of expansion and bad in times of contraction I think. The government would be pleased that when a contraction happens people who have savings would use them, it saves government from providing goods and services if people can pay for them and the spending helps the economy. The problem is when we freak out in a contraction and stop spending and start saving just in case.




The downturn caused by saving and deleveraging is HEALTHY. We weather that storm until the collective balance sheet dictates a proper time to allot liquidity for more purchases again.


Saving leads to contraction in the economy as I said before. It's dead money. It's not being invested, just held back. Surely that is bad for an economy already in contraction?


The government didn't even give us a CHANCE to see if we could handle the downturn on our own. They threw a trillion dollars at the situation on day fucking 1. That says a lot about what they think of us as people.


The downturn wasn't a downturn, it was a crisis. It could have destroyed the US and the world economy. They had to do something.

 

[eagleseven]

Saving leads to contraction in the economy as I said before. It's dead money. It's not being invested, just held back. Surely that is bad for an economy already in contraction?

That's where you are wrong.

100 years ago, in Keynes' time, when people saved by stuffing money under their mattresses and hiding it in walls, it truly was dead money. Today, this is no longer the case.

People "save" money by putting it into banks, or the stock market, or bonds. Saving your money in the bank increases liquidity by enabling the bank to give out more loans. Saving your money in corporate bonds directly increases their operational capital, enabling growth. Putting money into the stock market has a similar stimulatory effect.

Thus, by discouraging private savings, we are limiting the growth of businesses and endangering our banks.


A dollar saved is indeed alive, forming the lifeblood of our economy.

 

[Diuretic]

Saving leads to contraction in the economy as I said before. It's dead money. It's not being invested, just held back. Surely that is bad for an economy already in contraction?

That's where you are wrong.

100 years ago, in Keynes' time, when people saved by stuffing money under their mattresses and hiding it in walls, it truly was dead money. Today, this is no longer the case.

People "save" money by putting it into banks, or the stock market, or bonds. Saving your money in the bank increases liquidity by enabling the bank to give out more loans. Saving your money in corporate bonds directly increases their operational capital, enabling growth. Putting money into the stock market has a similar stimulatory effect.

Thus, by discouraging private savings, we are limiting the growth of businesses and endangering our banks.


A dollar saved is indeed alive, forming the lifeblood of our economy.

You got me on the mattresses.

But if there's no demand in the economy how are the banks going to lend?

 

[eagleseven]

You got me on the mattresses.

But if there's no demand in the economy how are the banks going to lend?

It works its way back towards equilibrium. If there isn't enough demand, and people have lots of savings in the bank, the banks will loan money to bright young entrepreneurs.

Those entrepreneurs then use the money to develop products people may want to buy. If the products are good enough, the consumers sitting on a pile of savings will start buying the new products. Thus starts the beginning of a technological boom.

This is known as the Entrepreneurial Economy, as opposed to Keynes Managed Economy.

This also is why we've seen such an explosion of technology over the past 20 years. Entrepreneurial economies produce far more technological discoveries and breakthroughs, than do traditional managed economies.

Entrepreneurial economics is much newer then Keynesian economics, and frankly, is the economy of the future. If not in the US, most definitely in the developing world.

 

[Diuretic]

Okay but in a time of recession or depression isn't the public mood a bit gloomy?
What tides the economy over until the recession/depression finishes and the entrepreneurs can get going again?

 

[eagleseven]

Okay but in a time of recession or depression isn't the public mood a bit gloomy?
What tides the economy over until the recession/depression finishes and the entrepreneurs can get going again?

Unemployment insurance.
Savings.
Soup kitchens.
Temp work.

In short, people "make do" with what they have, until the economy recovers. Yes, it is unpleasant, but we've survived recessions before without massive government interventions. And recession is always followed by a boom.

Necessity is the mother of invention, or so they say.

 

[Diuretic]

Okay but in a time of recession or depression isn't the public mood a bit gloomy?
What tides the economy over until the recession/depression finishes and the entrepreneurs can get going again?

Unemployment insurance.
Savings.
Soup kitchens.
Temp work.

In short, people "make do" with what they have, until the economy recovers. Yes, it is unpleasant, but we've survived recessions before without massive government interventions. And recession is always followed by a boom.

Necessity is the mother of invention, or so they say.

Okay but given all that - the misery - don't you think the present economic system is flawed? I mean, if you were designing an economic system would you want in the specs that every few years it had to fail?

 

[eagleseven]

Okay but given all that - the misery - don't you think the present economic system is flawed? I mean, if you were designing an economic system would you want in the specs that every few years it had to fail?

You are presuming that this system is designed. Rather, it is what naturally occurs when human beings are left to their own devices. The dynamics behind the business cycle can even be observed in tribal societies, causing migrations.

Further, if properly prepared for, recession is not failure. Investors and companies that plan for recessions often do very well. Recessions hurt because people tend to believe the good times will never end.


That said, every effort to socially engineer a better system has failed miserably. It has proven incredibly difficult to control the behavior of over 300 million human beings.

 

[editec]

ALL government spending is Kensian economics, folks.

I don't remember any of you fiscal conservatives complaiing when Bush was borrowing trillions for the war in Iraq.

Why is that?

Did you just recetly become fiscal conservatives?

Or are you only interested in the whining budget when a Dem is in charge of it?

 

[JW Frogen]

Necessity is the mother of invention, or so they say.

It is the fucking mother of mothers too.

Evolution.

God is not dead, he is just an asshole gambler.

 

[8236]

This also is why we've seen such an explosion of technology over the past 20 years. Entrepreneurial economies produce far more technological discoveries and breakthroughs, than do traditional managed economies.

Debatable. I would argue the opposite. Entrepreneurial economies are very good at refining existing technologies, but not so great at generating new ones, which requires vast R&D input which only governments and in particular managed economies can sustain. IMHO the period 1900-1950 saw the greatest technological breakthroughs: Very frequently driven by war (Nazi Germany, Soviet Union and the UK and US governments in WWII when the latter two were definately centrally planned), or such government sponsored programmes like the space race and arms races.