Keynesian Solutions# Stock
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Submitted by Jim Quinn Of The Burning Platform
Keynesian Solutions - After Total Failure -Try, Try Again
“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 at confidence in the equity of the
existing distribution of wealth.” – John Maynard Keynes – The Economic
Consequences of the Peace
While Barack Obama vacations on Martha’s Vineyard this week he’ll be
thinking about his grand vision to save America – again. There is one thing
you can say about Obama – he’s predictable. He promises to unveil his “
new” plan for America in early September. The White House said Obama will
give a speech after the September 5 Labor Day holiday to outline measures to
boost hiring and find budget savings that surpass the $1.5 trillion goal of
a new congressional deficit-cutting committee. It is heartening to see that
Barack has turned into a cost cutter extraordinaire. He should be an
inspiration to the Tea Party, except for one little problem. The plan he
unveils in a few weeks will increase spending now and fret about spending
cuts at some future unspecified date.
I can reveal his plan today because the White House has already leaked the
major aspects of his plan. He will call for an extension of the Social
Security payroll tax cut of 2% for all working Americans. This was supposed
to give a dramatic boost to GDP in 2011. Maybe it will work next time. He
will demand that extended unemployment benefits be renewed. Somehow
providing 99 weeks of unemployment benefits is supposed to create jobs. It’
s done wonders thus far. He will propose some semblance of an infrastructure
bank or tax cuts to spur infrastructure spending. It will include a
proposal for training and education to help unemployed people switch careers
. He will attempt to steal the thunder from the SUPER COMMITTEE of 12 by
coming up with $2 trillion of budget savings by insisting the Lear jet
flying rich fork over an extra $500 billion.
You may have noticed that followers of Keynesian dogma like Paul Krugman,
Larry Summers, Brad Delong, Richard Koo, John Galbraith, every Democrat in
Congress, and every liberal pundit and columnist have been shrieking about
the Tea Party terrorists and their ghastly budget cuts that are destroying
our economy. They contend the stock market is tanking and the economy is
heading into recession due to the brutal austerity measures being imposed by
the extremists in the Republican Party. There is just one small issue with
their argument. It is completely false. It is a bold faced lie. This is 2011
. The economy has been in freefall since January 1. No spending cuts have
occurred. Nada!!! As the CBO chart below reveals, the horrendous slashing of
government will amount to $21 billion in 2012 and $42 billion in 2013. Of
course, those aren’t even cuts in spending. They are reductions in the
projected increases in spending. Politicians must be very secure in the
knowledge that Americans are completely ignorant when it comes to anything
other than the details of Kim Kardashian’s wedding and who Snooki is
banging on Jersey Shore.
I’d like to remind the Harvard educated Keynesian economists that Federal
government spending is currently chiming in at $3.8 trillion per year.
Federal spending was $2.7 trillion in 2007 and $3.0 trillion in 2008.
Keynesians believe government spending fills the gap when private companies
are contracting. Obama has taken Keynesianism to a new level. Federal
spending will total $10.8 trillion in Obama’s 1st three years, versus $8.4
trillion in the previous three years. Even a Harvard economist can figure
out this is a 29% increase in Federal spending. What has it accomplished? We
are back in recession, unemployment is rising, forty six million Americans
are on food stamps, food and energy prices are soaring, and the middle class
is being annihilated. The standard Keynesian response is we would have lost
3 million more jobs, we were saved from a 2nd Great Depression and the
stimulus was too little. It would have worked if it had just been twice as
large.
The 2nd Great Depression was not avoided, it was delayed. Our two decade
long delusional credit boom could have been voluntarily abandoned in 2008.
The banks at fault could have been liquidated in an orderly bankruptcy with
stockholders and bondholders accepting the consequences of their foolishness
. Unemployment would have soared to 12%, GDP would have collapsed, and the
stock market would have fallen to 5,000. The bad debt would have been
flushed from the system. Instead our Wall Street beholden leaders chose to
save their banker friends, cover-up the bad debt, shift private debt to
taxpayer debt, print trillions of new dollars in an effort to inflate away
the debt, and implemented every wacky Keynesian stimulus idea Larry Summers
could dream up. These strokes of genius have failed miserably. Bernanke,
Paulson, Geithner and Obama have set in motion a series of events that will
ultimately lead to a catastrophic currency collapse. We have entered the 2nd
phase of the Greater Depression and there are no monetary or fiscal bullets
left in the gun. Further expansion of debt will lead to a hyperinflationary
collapse as the remaining confidence in the U.S. dollar is exhausted. We
are one failed Treasury auction away from a currency crisis.
John Maynard Keynes argued the solution to the Great Depression was to
stimulate the economy through some combination of two approaches: a
reduction in interest rates and government investment in infrastructure.
Investment by government injects income, which results in more spending in
the general economy, which in turn stimulates more production and investment
involving still more income and spending and so forth. The initial
stimulation starts a cascade of events, whose total increase in economic
activity is a multiple of the original investment.
It sounds so good in theory, but it didn’t work in the Depression and it
hasn’t worked today. It is a doctrine taught in every business school in
America with no actual results to support it. Who needs facts and actual
results when a good story believed and perpetuated by non-thinking pundits
will do? Every Keynesian play in the playbook has been used since 2008. The
American people were told by Obama and his Keynesian trained advisors that
if we implemented his $862 billion shovel ready stimulus package,
unemployment would peak at 7.9% and would decline to 6.5% by today. The
cascade of recovery was going to be jump started by a stimulus package that
equaled 27% of the previous year’s entire spending. Obama’s complete
package was implemented. The outcome was an eye opener. If you show a
Keynesian this chart, their response would be: “Imagine how bad it would
have been if we didn’t spend the $862 billion.”
John Maynard Obama got everything he asked for in January 2009. He had both
houses in Congress and did not need to consult Republicans to pass his
Keynesian $862 billion porkulus bill. It seems that $252 billion, or 29% of
the package was nothing more than transfer payments. Of course, according to
Keynesians, the $252 billion should have had a multiplier effect when it
was handed out. I think they were right. Obama was able to multiply the
number of people on food stamps in January 2009 from 32 million to the
current tally of 45.8 million. The monthly food stamp transfer payment has
gone from $3.6 billion to $6.1 billion. Keynesians should be thrilled by
this success story.
Obama’s Keynesian dream bill included:
$1 billion for Amtrak, the federal railroad that hasn’t turned a profit in
40 years.
$2 billion for child-care subsidies.
$50 million for that great engine of job creation, the National Endowment
for the Arts.
$400 million for global-warming research.
$2.4 billion for carbon-capture demonstration projects.
$650 million on top of the billions already doled out to pay for digital TV
conversion coupons.
$8 billion for renewable energy funding.
$6 billion for mass transit that had a low or negative return on investment.
$600 million more for the federal government to buy new cars. Uncle Sam
already spends $3 billion a year on its fleet of 600,000 vehicles.
Congress earmarked $7 billion for modernizing federal buildings and
facilities.
The Smithsonian received $150 million.
The Department of Education got $66 billion, more than the entire Education
Department spent a just 10 years ago. $6 billion of this subsidized
university building projects.
Obama declared in December 2008 there were shovel ready projects across the
land that would create immediate jobs. Too bad he didn’t tell the American
public only $30 billion of the $862 billion mountain of pork was earmarked
for highways and bridges. Obama declared his stimulus would create 3.5
million jobs, later changed to “create or save”. There were 144 million
Americans employed in January 2009. Today, there are 139 million Americans
employed. Obama gives the term “success story” a new meaning. The
Keynesians had their chance and now they want a do-over. Sorry, that isn’t
how it works in the real world. As Speaker Nancy Pelosi put it, “We won the
election. We wrote the bill.” No truer words have ever been spoken.
As we know, that was only the beginning of our Keynesian debt nightmare. Let
’s do some critical thinking and assess the results of Obama’s other
Keynesian solutions:
The Homebuyer Tax Credit cost taxpayers $27 billion or $43,000 per
additional house sold. The Keynesians handed 3.9 million people $7,000 to do
something they were going to do anyway. They lured first time home buyers
into the market. Since the credit expired, median home prices have fallen $
15,000 and continue to fall. This wonderful government program has created
more underwater homeowners and did nothing to stabilize the housing market
or home prices.
Cash for Clunkers cost taxpayers $3 billion. An incremental 125,000 cars
were sold at a cost of $24,000 per car. This Keynesian dream program lured
more people into debt and warped the used car market by destroying used cars
and driving up prices for poor people who couldn’t afford a new car. There
were no carryover benefits except for government controlled union car
makers.
Obama’s HAMP program allocated $11 billion to supposedly allow 4 million
homeowners to modify their mortgages, reduce their monthly mortgage payments
and avoid foreclosure. HAMP has proven a colossal failure that has done
more to harm than help debt-laden homeowners. It has achieved slightly more
than 500,000 permanent modifications, 40% of which the Treasury expects to
default. Far more borrowers have dropped out of the program than
successfully achieved permanent loan modification. These borrowers, along
with those who later default, will often be left with larger outstanding
debt, worse credit scores, and less home equity.
Obama even handed $30 billion to the largest homebuilder corporations in the
country, run by billionaires like Bob Toll, by allowing them to carry back
their losses and wipe out tax liabilities in prior years. This did wonders
for the housing market. It did stimulate bonus payments for the CEOs of
these companies.
Billions of tax revenue was lost by handing out $1,500 tax credits for
people to buy new windows, doors, and appliances they were going to buy
anyway. We are still waiting for that multiplier effect.
The usual suspects are now declaring that we can’t make the same mistakes
FDR made in 1937 resulting in a dramatic downturn in 1938. As usual, the
Keynesian storyline about the Great Depression is false.
Depression Keynesian Fallacy
One thing to remember is that while the depression that started in 1929 may
have come to a bottom in 1933, it took a long time to recover. There was a
cyclical recovery in 1937, and why was that? Roosevelt had the good luck to
have been elected dead flat at the bottom. So it wasn’t his policies that
cured the last depression, it was luck and good timing, combined with the
fact that they were creating a lot of money after Roosevelt took the dollar
off the gold standard. That resulted in a false recovery, from 1933 to 1937,
and it went downhill again. – Doug Casey
Keynes? theory suggested that active government policy could be effective in
managing the economy. Rather than seeing unbalanced government budgets as
wrong, Keynes advocated what has been called countercyclical fiscal policies
, that is, policies that acted against the tide of the business cycle:
deficit spending when a nation’s economy suffers from recession or when
recovery is long-delayed and unemployment is persistently high—and the
suppression of inflation in boom times by either increasing taxes or cutting
back on government outlays. He argued that governments should solve
problems in the short run rather than waiting for market forces to do it in
the long run. Keynes had too much faith in the wisdom of politicians and
Federal Reserve bankers. They mastered the art of deficit spending, but fell
a little short on paying off the debts during boom times. About $14.6
trillion short so far.
The Great Depression had the same origins as our current Greater Depression.
The three Republican administrations of the 1920s practiced laissez-faire
economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-
intervention into business and banking became government policy. These
policies led to overconfidence on the part of investors and a classic credit
-induced speculative boom. Gambling in the markets by the wealthy increased.
While the haves got richer, millions of have-nots lived below the household
poverty line of $2,000 per year. The rip roaring party came to an abrupt
end in October 1929, with the Great Stock Market Crash.
Between 1929 and 1932, the market fell 89% from its high. The Keynesian
storyline is that Herbert Hoover’s administration did nothing to try and
revive the economy. It took Franklin Delano Roosevelt and his New Deal
Keynesian policies to save the country. It’s a nice story, but entirely
phony. Between 1929 and 1933 the Hoover administration increased real per-
capita federal expenditures by 88%, not exactly the austerity measures
described in fantasy stories concocted by the mainstream media.
Bureau of Economic Analysis National Income and Product Accounts Table
Table 1.1.6A. Real Gross Domestic Product, Chained (1937) Dollars [Billions
of chained (1937) dollars]
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
1939
Gross domestic product 87.3 79.8 74.6 64.9 64.0 71.0 77.3 87.4 91.9 88.7 95.
9
Personal consumption expenditures 63.1 59.7 57.8 52.6 51.5 55.1 58.5 64.5 66
.8 65.8 69.4
Gross private domestic investment 12.2 8.1 5.1 1.5 2.3 4.1 7.6 9.7 12.2 8.0
10.3
Net exports of goods and services 0.8 0.4 0.2 0.0 -0.1 0.2 -0.5 -0.3 0.1 0.9
1.0
Government consumption expenditures and gross investment 9.2 10.2 10.6 10.2
9.9 11.1 11.5 13.4 12.8 13.8 15.0
The Great Depression officially lasted from 1929 until 1940. What is not
well known is that real GDP was at the same level in 1936 as it had been in
1929. In no small part because real GDP soared by 37% between 1933 and 1936.
The unemployment rate in 1929 was 5%. In 1936, even after real GDP had
recovered to pre-depression levels, the unemployment rate was still 15%. It
spiked back to 18% in 1938 and stayed above 15% until World War II.
Tellingly, in 1936, private domestic investment was 21% below the level of
1929.
By contrast, government expenditures surged by 46% between 1929 and 1936.
With the government creating new agencies and employing people in make-work
projects, private industry was crowded out. The extensive governmental
economic planning and intervention that began during the Hoover
administration swelled drastically under Roosevelt. The bolstering of wage
rates and prices, expansion of credit, propping up of weak firms, and
increased government spending on public works prolonged the Great Depression.
The facts powerfully contradict the notion endorsed by Krugman and other
Keynesian devotees that the supposed 1937-38 Depression within the Great
Depression was caused by Roosevelt slashing spending. In fact, real GDP only
dropped by 3.5% in 1938 and rebounded by 8.1% in 1939. What actually
collapsed in 1938 was private investment, which fell 34%. By contrast,
government spending declined by only 4.5% in 1938, proving that Roosevelt
did not drastically cut spending. To the extent that he eased up on the
accelerator, it was by cutting back on useless jobs programs like those
provided by the Works Progress Administration and the Public Works
Administration. Austerity did not derail the recovery.
The reason private investment collapsed in 1938 was Roosevelt’s anti-
business crusade. He denounced big business as the cause of the Depression.
In March 1938, FDR appointed Yale University law professor Thurman Arnold to
head the antitrust division of the Justice Department. Arnold soon hired
some 300 lawyers to file antitrust lawsuits against businesses. Arnold
launched cases against entire industries, with lawsuits against the milk,
oil, tobacco, shoe machinery, tires, fertilizer, railroad, pharmaceuticals,
school supplies, billboards, fire insurance, liquor, typewriter, and movie
industries.
Paul Krugman’s recent veiled yearning for a war or staged crisis to revive
the economy through spending to fight the war is another Keynesian fallacy
perpetuated by the mainstream media. These mindless non-critical thinking
talking heads actually believe World War II ended the Great Depression. Doug
Casey obliterates their fantasy:
“People say that World War II cured the Depression, but in fact, it made it
worse. As bad as things were in the ‘30s, they were worse during the war
in the ‘40s. You couldn’t get shoes. You couldn’t get gasoline. You
couldn’t get tires. You couldn’t get just about anything that was being
used for the war. The war prolonged and deepened the Depression. The thing
that ended the Depression was not the war but the fact that since people
could not consume, they were forced to save. That delayed consumption
resulted in a huge amount of savings, and that’s what caused the recovery
in the late 1940s.”
The fact that the entire world was left in smoldering ruins after World War
II, except for the United States, may have contributed slightly to our
recovery from the Great Depression.
According to Murray Rothbard, in his book America’s Great Depression, the
artificial meddling in the economy was a disaster prior to the Great
Depression, and government efforts to prop up the economy after the crash of
1929 only made things far worse. Government intrusion delayed the market’s
correction and made the road to complete recovery more difficult. Today’s
myopic politicians, captured monetary authorities and Harvard trained
Keynesian economists have learned the wrong lessons from the Great
Depression. The upshot will be a second Greater Depression and further
impoverishment of the dwindling middle class. The implications of more
wasteful government stimulus programs, more quantitative easing and more
debt are: further debasement of the currency and ultimately a
hyperinflationary collapse. The great economist John Maynard Keynes
understood currency debasement:
“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.”
How to Cut Spending While Actually Increasing Spending
“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.” – John Maynard Keynes – The Economic Consequences
of the Peace
Obama’s plan to revive America will be announced with great fanfare in two
weeks. We know for sure he will propose these two brilliant ideas:
Extending unemployment compensation again at a total 2012 cost of $65
billion. Because we know that paying people to not work creates millions of
jobs. The multiplier effect is off the charts. Why work when you can watch
The View and chow down on cheese doodles purchased with your SNAP card for
99 weeks?
Extending the payroll tax cut at a total 2012 cost of $100 billion. This was
supposed to give a dramatic boost to the economy in FY11. Have you noticed
any boost? A Keynesian will argue, “Imagine if we hadn’t done it.” A
critical thinker might ask: Is it prudent to increase the unfunded Social
Security liability by another $100 billion and hand the bill to future
unborn generations, so we can buy a new IPod 2 today?
It is a certainty that Obama will announce an infrastructure bank or some
variation to spur investment in our national infrastructure that is
crumbling by the day. Top Keynesian, and architect of the Obama stimulus
plan, Larry Summers has been blathering about this for months. Even though
the first stimulus plan was sold as an infrastructure plan, they mean it
this time. As usual, the storyline is false. You can’t drive anywhere in
this country and not be inconvenienced by road widening, bridge building,
and repaving projects. The Keynesians act like infrastructure projects are
highly unusual and need new Federal dollars to jump start the engine. The
fact is that every Federal, State and municipal government has a capital
fund that is budgeted every year. Most of the projects have multiple year
lead times. They require planning and coordination. The reason we have 160,
000 structurally deficient or obsolete bridges and thousands of miles of
crumbling underground pipes is because politicians decided to spend their
budgets on something more useful like train museums, murals, turtle
crossings, and studies on the mating habits of ferrets.
The country has lost approximately seven million jobs since 2007. Five
million of the jobs were lost in sales industries and manufacturing
industries. There are 139 million jobs in America today and only seven
million, or 5% of all jobs, in the construction industry. How do Keynesians
expect to revive the job market with an infrastructure bank that will
benefit, at most, 5% of the U.S. workforce? Let me guess. They will propose
billions of new spending on education so they can retrain sales clerks from
Wal-Mart into architects for designing 160,000 new bridges.
Barack Obama will stand in front of the American people and lie. He is a
born again cost cutter, who will propose new spending. As anyone with a
calculator can figure out, the two guaranteed proposals from his upcoming
speech will increase spending by $165 million in 2012. If you go back to the
handy dandy chart from the CBO showing the “horrific spending cuts” from
the recent debt ceiling deal you will see these “cuts” total $122 billion
between 2012 and 2014. Barack will wipe out all of the supposed savings
through mid 2015 with his new Keynesian plan. But don’t worry. His plan
will have huge spending cuts in 2017 after his hoped for 2nd term is
finished. Keynesians always promise to cut spending once their current
emergency ends.
The Keynesians had their chance. They controlled the Presidency and both
houses of Congress. A Keynesian runs the Federal Reserve. They implemented
everything they proposed. The $862 billion porkulus program, the $700
billion TARP program, home buyer tax credits, energy efficiency credits,
loan modification programs, zero interest rates, QE1 and QE2. They increased
social welfare transfers for Social Security, Unemployment Compensation,
food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a
35% increase in four years. No one has foiled their plans. The Tea Party
didn’t really exist until 2010. They didn’t lose the House until November
2010. They cannot blame the Tea Party extremists, but they do.
The Keynesians have successfully increased Federal spending by $1.1 trillion
, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they
call the Tea Party extremists. Domestic investment is still 9% below 2008
levels as the Federal government has crowded out the small businesses that
create the jobs in this country. And now the Keynesians declare we need more
stimulus, more programs, more debt, more quantitative easing and lower
interest rates. It just wasn’t enough the first time. You have to give the
Keynesians credit. Despite the utter absolute failure of every scheme they
have implemented, they will worship their models and theories until they
successfully collapse our economic system. Then they’ll blame the Tea Party
terrorists who foiled their plans.
None of the Keynesian solutions worked during this crisis, just as they didn
’t work during the Great Depression. The solution was simple, yet painful.
The banking system needed to be saved, not the banks. The bad debt needed to
be purged from the system. Wall Street criminals needed to be prosecuted.
Bondholders and stockholders needed bear the losses from their foolish
investments. Saving and investment in the country needed to be encouraged,
while borrowing and consuming needed to be discouraged. Our leaders have
failed to lead. The American people have failed to accept the consequences
of their actions. And now we are going to pay a heavy price as Ludwig von
Mises predicted:
“There is no means of avoiding the final collapse of a boom brought about
by credit (debt) expansion. The alternative is only whether the crisis
should come sooner as the result of a voluntary abandonment of further
credit (debt) expansion, or later as a final and total catastrophe of the
currency system involved.”
Submitted by Jim Quinn Of The Burning Platform
Keynesian Solutions - After Total Failure -Try, Try Again
“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 at confidence in the equity of the
existing distribution of wealth.” – John Maynard Keynes – The Economic
Consequences of the Peace
While Barack Obama vacations on Martha’s Vineyard this week he’ll be
thinking about his grand vision to save America – again. There is one thing
you can say about Obama – he’s predictable. He promises to unveil his “
new” plan for America in early September. The White House said Obama will
give a speech after the September 5 Labor Day holiday to outline measures to
boost hiring and find budget savings that surpass the $1.5 trillion goal of
a new congressional deficit-cutting committee. It is heartening to see that
Barack has turned into a cost cutter extraordinaire. He should be an
inspiration to the Tea Party, except for one little problem. The plan he
unveils in a few weeks will increase spending now and fret about spending
cuts at some future unspecified date.
I can reveal his plan today because the White House has already leaked the
major aspects of his plan. He will call for an extension of the Social
Security payroll tax cut of 2% for all working Americans. This was supposed
to give a dramatic boost to GDP in 2011. Maybe it will work next time. He
will demand that extended unemployment benefits be renewed. Somehow
providing 99 weeks of unemployment benefits is supposed to create jobs. It’
s done wonders thus far. He will propose some semblance of an infrastructure
bank or tax cuts to spur infrastructure spending. It will include a
proposal for training and education to help unemployed people switch careers
. He will attempt to steal the thunder from the SUPER COMMITTEE of 12 by
coming up with $2 trillion of budget savings by insisting the Lear jet
flying rich fork over an extra $500 billion.
You may have noticed that followers of Keynesian dogma like Paul Krugman,
Larry Summers, Brad Delong, Richard Koo, John Galbraith, every Democrat in
Congress, and every liberal pundit and columnist have been shrieking about
the Tea Party terrorists and their ghastly budget cuts that are destroying
our economy. They contend the stock market is tanking and the economy is
heading into recession due to the brutal austerity measures being imposed by
the extremists in the Republican Party. There is just one small issue with
their argument. It is completely false. It is a bold faced lie. This is 2011
. The economy has been in freefall since January 1. No spending cuts have
occurred. Nada!!! As the CBO chart below reveals, the horrendous slashing of
government will amount to $21 billion in 2012 and $42 billion in 2013. Of
course, those aren’t even cuts in spending. They are reductions in the
projected increases in spending. Politicians must be very secure in the
knowledge that Americans are completely ignorant when it comes to anything
other than the details of Kim Kardashian’s wedding and who Snooki is
banging on Jersey Shore.
I’d like to remind the Harvard educated Keynesian economists that Federal
government spending is currently chiming in at $3.8 trillion per year.
Federal spending was $2.7 trillion in 2007 and $3.0 trillion in 2008.
Keynesians believe government spending fills the gap when private companies
are contracting. Obama has taken Keynesianism to a new level. Federal
spending will total $10.8 trillion in Obama’s 1st three years, versus $8.4
trillion in the previous three years. Even a Harvard economist can figure
out this is a 29% increase in Federal spending. What has it accomplished? We
are back in recession, unemployment is rising, forty six million Americans
are on food stamps, food and energy prices are soaring, and the middle class
is being annihilated. The standard Keynesian response is we would have lost
3 million more jobs, we were saved from a 2nd Great Depression and the
stimulus was too little. It would have worked if it had just been twice as
large.
The 2nd Great Depression was not avoided, it was delayed. Our two decade
long delusional credit boom could have been voluntarily abandoned in 2008.
The banks at fault could have been liquidated in an orderly bankruptcy with
stockholders and bondholders accepting the consequences of their foolishness
. Unemployment would have soared to 12%, GDP would have collapsed, and the
stock market would have fallen to 5,000. The bad debt would have been
flushed from the system. Instead our Wall Street beholden leaders chose to
save their banker friends, cover-up the bad debt, shift private debt to
taxpayer debt, print trillions of new dollars in an effort to inflate away
the debt, and implemented every wacky Keynesian stimulus idea Larry Summers
could dream up. These strokes of genius have failed miserably. Bernanke,
Paulson, Geithner and Obama have set in motion a series of events that will
ultimately lead to a catastrophic currency collapse. We have entered the 2nd
phase of the Greater Depression and there are no monetary or fiscal bullets
left in the gun. Further expansion of debt will lead to a hyperinflationary
collapse as the remaining confidence in the U.S. dollar is exhausted. We
are one failed Treasury auction away from a currency crisis.
John Maynard Keynes argued the solution to the Great Depression was to
stimulate the economy through some combination of two approaches: a
reduction in interest rates and government investment in infrastructure.
Investment by government injects income, which results in more spending in
the general economy, which in turn stimulates more production and investment
involving still more income and spending and so forth. The initial
stimulation starts a cascade of events, whose total increase in economic
activity is a multiple of the original investment.
It sounds so good in theory, but it didn’t work in the Depression and it
hasn’t worked today. It is a doctrine taught in every business school in
America with no actual results to support it. Who needs facts and actual
results when a good story believed and perpetuated by non-thinking pundits
will do? Every Keynesian play in the playbook has been used since 2008. The
American people were told by Obama and his Keynesian trained advisors that
if we implemented his $862 billion shovel ready stimulus package,
unemployment would peak at 7.9% and would decline to 6.5% by today. The
cascade of recovery was going to be jump started by a stimulus package that
equaled 27% of the previous year’s entire spending. Obama’s complete
package was implemented. The outcome was an eye opener. If you show a
Keynesian this chart, their response would be: “Imagine how bad it would
have been if we didn’t spend the $862 billion.”
John Maynard Obama got everything he asked for in January 2009. He had both
houses in Congress and did not need to consult Republicans to pass his
Keynesian $862 billion porkulus bill. It seems that $252 billion, or 29% of
the package was nothing more than transfer payments. Of course, according to
Keynesians, the $252 billion should have had a multiplier effect when it
was handed out. I think they were right. Obama was able to multiply the
number of people on food stamps in January 2009 from 32 million to the
current tally of 45.8 million. The monthly food stamp transfer payment has
gone from $3.6 billion to $6.1 billion. Keynesians should be thrilled by
this success story.
Obama’s Keynesian dream bill included:
$1 billion for Amtrak, the federal railroad that hasn’t turned a profit in
40 years.
$2 billion for child-care subsidies.
$50 million for that great engine of job creation, the National Endowment
for the Arts.
$400 million for global-warming research.
$2.4 billion for carbon-capture demonstration projects.
$650 million on top of the billions already doled out to pay for digital TV
conversion coupons.
$8 billion for renewable energy funding.
$6 billion for mass transit that had a low or negative return on investment.
$600 million more for the federal government to buy new cars. Uncle Sam
already spends $3 billion a year on its fleet of 600,000 vehicles.
Congress earmarked $7 billion for modernizing federal buildings and
facilities.
The Smithsonian received $150 million.
The Department of Education got $66 billion, more than the entire Education
Department spent a just 10 years ago. $6 billion of this subsidized
university building projects.
Obama declared in December 2008 there were shovel ready projects across the
land that would create immediate jobs. Too bad he didn’t tell the American
public only $30 billion of the $862 billion mountain of pork was earmarked
for highways and bridges. Obama declared his stimulus would create 3.5
million jobs, later changed to “create or save”. There were 144 million
Americans employed in January 2009. Today, there are 139 million Americans
employed. Obama gives the term “success story” a new meaning. The
Keynesians had their chance and now they want a do-over. Sorry, that isn’t
how it works in the real world. As Speaker Nancy Pelosi put it, “We won the
election. We wrote the bill.” No truer words have ever been spoken.
As we know, that was only the beginning of our Keynesian debt nightmare. Let
’s do some critical thinking and assess the results of Obama’s other
Keynesian solutions:
The Homebuyer Tax Credit cost taxpayers $27 billion or $43,000 per
additional house sold. The Keynesians handed 3.9 million people $7,000 to do
something they were going to do anyway. They lured first time home buyers
into the market. Since the credit expired, median home prices have fallen $
15,000 and continue to fall. This wonderful government program has created
more underwater homeowners and did nothing to stabilize the housing market
or home prices.
Cash for Clunkers cost taxpayers $3 billion. An incremental 125,000 cars
were sold at a cost of $24,000 per car. This Keynesian dream program lured
more people into debt and warped the used car market by destroying used cars
and driving up prices for poor people who couldn’t afford a new car. There
were no carryover benefits except for government controlled union car
makers.
Obama’s HAMP program allocated $11 billion to supposedly allow 4 million
homeowners to modify their mortgages, reduce their monthly mortgage payments
and avoid foreclosure. HAMP has proven a colossal failure that has done
more to harm than help debt-laden homeowners. It has achieved slightly more
than 500,000 permanent modifications, 40% of which the Treasury expects to
default. Far more borrowers have dropped out of the program than
successfully achieved permanent loan modification. These borrowers, along
with those who later default, will often be left with larger outstanding
debt, worse credit scores, and less home equity.
Obama even handed $30 billion to the largest homebuilder corporations in the
country, run by billionaires like Bob Toll, by allowing them to carry back
their losses and wipe out tax liabilities in prior years. This did wonders
for the housing market. It did stimulate bonus payments for the CEOs of
these companies.
Billions of tax revenue was lost by handing out $1,500 tax credits for
people to buy new windows, doors, and appliances they were going to buy
anyway. We are still waiting for that multiplier effect.
The usual suspects are now declaring that we can’t make the same mistakes
FDR made in 1937 resulting in a dramatic downturn in 1938. As usual, the
Keynesian storyline about the Great Depression is false.
Depression Keynesian Fallacy
One thing to remember is that while the depression that started in 1929 may
have come to a bottom in 1933, it took a long time to recover. There was a
cyclical recovery in 1937, and why was that? Roosevelt had the good luck to
have been elected dead flat at the bottom. So it wasn’t his policies that
cured the last depression, it was luck and good timing, combined with the
fact that they were creating a lot of money after Roosevelt took the dollar
off the gold standard. That resulted in a false recovery, from 1933 to 1937,
and it went downhill again. – Doug Casey
Keynes? theory suggested that active government policy could be effective in
managing the economy. Rather than seeing unbalanced government budgets as
wrong, Keynes advocated what has been called countercyclical fiscal policies
, that is, policies that acted against the tide of the business cycle:
deficit spending when a nation’s economy suffers from recession or when
recovery is long-delayed and unemployment is persistently high—and the
suppression of inflation in boom times by either increasing taxes or cutting
back on government outlays. He argued that governments should solve
problems in the short run rather than waiting for market forces to do it in
the long run. Keynes had too much faith in the wisdom of politicians and
Federal Reserve bankers. They mastered the art of deficit spending, but fell
a little short on paying off the debts during boom times. About $14.6
trillion short so far.
The Great Depression had the same origins as our current Greater Depression.
The three Republican administrations of the 1920s practiced laissez-faire
economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-
intervention into business and banking became government policy. These
policies led to overconfidence on the part of investors and a classic credit
-induced speculative boom. Gambling in the markets by the wealthy increased.
While the haves got richer, millions of have-nots lived below the household
poverty line of $2,000 per year. The rip roaring party came to an abrupt
end in October 1929, with the Great Stock Market Crash.
Between 1929 and 1932, the market fell 89% from its high. The Keynesian
storyline is that Herbert Hoover’s administration did nothing to try and
revive the economy. It took Franklin Delano Roosevelt and his New Deal
Keynesian policies to save the country. It’s a nice story, but entirely
phony. Between 1929 and 1933 the Hoover administration increased real per-
capita federal expenditures by 88%, not exactly the austerity measures
described in fantasy stories concocted by the mainstream media.
Bureau of Economic Analysis National Income and Product Accounts Table
Table 1.1.6A. Real Gross Domestic Product, Chained (1937) Dollars [Billions
of chained (1937) dollars]
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938
1939
Gross domestic product 87.3 79.8 74.6 64.9 64.0 71.0 77.3 87.4 91.9 88.7 95.
9
Personal consumption expenditures 63.1 59.7 57.8 52.6 51.5 55.1 58.5 64.5 66
.8 65.8 69.4
Gross private domestic investment 12.2 8.1 5.1 1.5 2.3 4.1 7.6 9.7 12.2 8.0
10.3
Net exports of goods and services 0.8 0.4 0.2 0.0 -0.1 0.2 -0.5 -0.3 0.1 0.9
1.0
Government consumption expenditures and gross investment 9.2 10.2 10.6 10.2
9.9 11.1 11.5 13.4 12.8 13.8 15.0
The Great Depression officially lasted from 1929 until 1940. What is not
well known is that real GDP was at the same level in 1936 as it had been in
1929. In no small part because real GDP soared by 37% between 1933 and 1936.
The unemployment rate in 1929 was 5%. In 1936, even after real GDP had
recovered to pre-depression levels, the unemployment rate was still 15%. It
spiked back to 18% in 1938 and stayed above 15% until World War II.
Tellingly, in 1936, private domestic investment was 21% below the level of
1929.
By contrast, government expenditures surged by 46% between 1929 and 1936.
With the government creating new agencies and employing people in make-work
projects, private industry was crowded out. The extensive governmental
economic planning and intervention that began during the Hoover
administration swelled drastically under Roosevelt. The bolstering of wage
rates and prices, expansion of credit, propping up of weak firms, and
increased government spending on public works prolonged the Great Depression.
The facts powerfully contradict the notion endorsed by Krugman and other
Keynesian devotees that the supposed 1937-38 Depression within the Great
Depression was caused by Roosevelt slashing spending. In fact, real GDP only
dropped by 3.5% in 1938 and rebounded by 8.1% in 1939. What actually
collapsed in 1938 was private investment, which fell 34%. By contrast,
government spending declined by only 4.5% in 1938, proving that Roosevelt
did not drastically cut spending. To the extent that he eased up on the
accelerator, it was by cutting back on useless jobs programs like those
provided by the Works Progress Administration and the Public Works
Administration. Austerity did not derail the recovery.
The reason private investment collapsed in 1938 was Roosevelt’s anti-
business crusade. He denounced big business as the cause of the Depression.
In March 1938, FDR appointed Yale University law professor Thurman Arnold to
head the antitrust division of the Justice Department. Arnold soon hired
some 300 lawyers to file antitrust lawsuits against businesses. Arnold
launched cases against entire industries, with lawsuits against the milk,
oil, tobacco, shoe machinery, tires, fertilizer, railroad, pharmaceuticals,
school supplies, billboards, fire insurance, liquor, typewriter, and movie
industries.
Paul Krugman’s recent veiled yearning for a war or staged crisis to revive
the economy through spending to fight the war is another Keynesian fallacy
perpetuated by the mainstream media. These mindless non-critical thinking
talking heads actually believe World War II ended the Great Depression. Doug
Casey obliterates their fantasy:
“People say that World War II cured the Depression, but in fact, it made it
worse. As bad as things were in the ‘30s, they were worse during the war
in the ‘40s. You couldn’t get shoes. You couldn’t get gasoline. You
couldn’t get tires. You couldn’t get just about anything that was being
used for the war. The war prolonged and deepened the Depression. The thing
that ended the Depression was not the war but the fact that since people
could not consume, they were forced to save. That delayed consumption
resulted in a huge amount of savings, and that’s what caused the recovery
in the late 1940s.”
The fact that the entire world was left in smoldering ruins after World War
II, except for the United States, may have contributed slightly to our
recovery from the Great Depression.
According to Murray Rothbard, in his book America’s Great Depression, the
artificial meddling in the economy was a disaster prior to the Great
Depression, and government efforts to prop up the economy after the crash of
1929 only made things far worse. Government intrusion delayed the market’s
correction and made the road to complete recovery more difficult. Today’s
myopic politicians, captured monetary authorities and Harvard trained
Keynesian economists have learned the wrong lessons from the Great
Depression. The upshot will be a second Greater Depression and further
impoverishment of the dwindling middle class. The implications of more
wasteful government stimulus programs, more quantitative easing and more
debt are: further debasement of the currency and ultimately a
hyperinflationary collapse. The great economist John Maynard Keynes
understood currency debasement:
“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.”
How to Cut Spending While Actually Increasing Spending
“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.” – John Maynard Keynes – The Economic Consequences
of the Peace
Obama’s plan to revive America will be announced with great fanfare in two
weeks. We know for sure he will propose these two brilliant ideas:
Extending unemployment compensation again at a total 2012 cost of $65
billion. Because we know that paying people to not work creates millions of
jobs. The multiplier effect is off the charts. Why work when you can watch
The View and chow down on cheese doodles purchased with your SNAP card for
99 weeks?
Extending the payroll tax cut at a total 2012 cost of $100 billion. This was
supposed to give a dramatic boost to the economy in FY11. Have you noticed
any boost? A Keynesian will argue, “Imagine if we hadn’t done it.” A
critical thinker might ask: Is it prudent to increase the unfunded Social
Security liability by another $100 billion and hand the bill to future
unborn generations, so we can buy a new IPod 2 today?
It is a certainty that Obama will announce an infrastructure bank or some
variation to spur investment in our national infrastructure that is
crumbling by the day. Top Keynesian, and architect of the Obama stimulus
plan, Larry Summers has been blathering about this for months. Even though
the first stimulus plan was sold as an infrastructure plan, they mean it
this time. As usual, the storyline is false. You can’t drive anywhere in
this country and not be inconvenienced by road widening, bridge building,
and repaving projects. The Keynesians act like infrastructure projects are
highly unusual and need new Federal dollars to jump start the engine. The
fact is that every Federal, State and municipal government has a capital
fund that is budgeted every year. Most of the projects have multiple year
lead times. They require planning and coordination. The reason we have 160,
000 structurally deficient or obsolete bridges and thousands of miles of
crumbling underground pipes is because politicians decided to spend their
budgets on something more useful like train museums, murals, turtle
crossings, and studies on the mating habits of ferrets.
The country has lost approximately seven million jobs since 2007. Five
million of the jobs were lost in sales industries and manufacturing
industries. There are 139 million jobs in America today and only seven
million, or 5% of all jobs, in the construction industry. How do Keynesians
expect to revive the job market with an infrastructure bank that will
benefit, at most, 5% of the U.S. workforce? Let me guess. They will propose
billions of new spending on education so they can retrain sales clerks from
Wal-Mart into architects for designing 160,000 new bridges.
Barack Obama will stand in front of the American people and lie. He is a
born again cost cutter, who will propose new spending. As anyone with a
calculator can figure out, the two guaranteed proposals from his upcoming
speech will increase spending by $165 million in 2012. If you go back to the
handy dandy chart from the CBO showing the “horrific spending cuts” from
the recent debt ceiling deal you will see these “cuts” total $122 billion
between 2012 and 2014. Barack will wipe out all of the supposed savings
through mid 2015 with his new Keynesian plan. But don’t worry. His plan
will have huge spending cuts in 2017 after his hoped for 2nd term is
finished. Keynesians always promise to cut spending once their current
emergency ends.
The Keynesians had their chance. They controlled the Presidency and both
houses of Congress. A Keynesian runs the Federal Reserve. They implemented
everything they proposed. The $862 billion porkulus program, the $700
billion TARP program, home buyer tax credits, energy efficiency credits,
loan modification programs, zero interest rates, QE1 and QE2. They increased
social welfare transfers for Social Security, Unemployment Compensation,
food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a
35% increase in four years. No one has foiled their plans. The Tea Party
didn’t really exist until 2010. They didn’t lose the House until November
2010. They cannot blame the Tea Party extremists, but they do.
The Keynesians have successfully increased Federal spending by $1.1 trillion
, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they
call the Tea Party extremists. Domestic investment is still 9% below 2008
levels as the Federal government has crowded out the small businesses that
create the jobs in this country. And now the Keynesians declare we need more
stimulus, more programs, more debt, more quantitative easing and lower
interest rates. It just wasn’t enough the first time. You have to give the
Keynesians credit. Despite the utter absolute failure of every scheme they
have implemented, they will worship their models and theories until they
successfully collapse our economic system. Then they’ll blame the Tea Party
terrorists who foiled their plans.
None of the Keynesian solutions worked during this crisis, just as they didn
’t work during the Great Depression. The solution was simple, yet painful.
The banking system needed to be saved, not the banks. The bad debt needed to
be purged from the system. Wall Street criminals needed to be prosecuted.
Bondholders and stockholders needed bear the losses from their foolish
investments. Saving and investment in the country needed to be encouraged,
while borrowing and consuming needed to be discouraged. Our leaders have
failed to lead. The American people have failed to accept the consequences
of their actions. And now we are going to pay a heavy price as Ludwig von
Mises predicted:
“There is no means of avoiding the final collapse of a boom brought about
by credit (debt) expansion. The alternative is only whether the crisis
should come sooner as the result of a voluntary abandonment of further
credit (debt) expansion, or later as a final and total catastrophe of the
currency system involved.”
