Contrary to what you delusional psychopaths prefer to pretend, John Maynard Keynes only ever advocated mass printing of fiat currency such as we have witnessed over the last 4-5 years under one situation; the singularity where price contraction leads to demand destruction. This development is inherently dangerous as it destabilizes trade and makes it virtually impossible for debt, the lifeblood of modern capitalism, to be serviced. (Keynes did suggest that printing could be used to work around the need for salary cuts without creating social uprising, but this suggestion in todays environment is impractical; everybody knows what money printing is and how it affects them. Thus the suggestion is moot.)
In 2009, we witnessed exactly such an environment. Global trade froze. Factory utilization idled. Transactions melted to a crawl. And things looked pretty bleak.
But the beauty of this singularity, where demand completely collapses, is that it is EASY AS HELL TO SPOT.
The first signal is PANIC. The second signal is mass unemployment, production collapsing to near zero, and basically life halting to a stand still.
Does this sound like where we are now?
There are two reasons why I detest Keynes and Keynesians. The first is that, besides being able to identify some very extreme solutions to a complex network which generally hold true (such as the Liquidity Trap), Keynes’ notion of solvable macroeconomics and the offshoot of those concepts, econometrics, have been shot in the face so many times to be laughable.
Keynes’ models were basically differential equations. Differential equations are linear. Linear behavior governs things like physics; your car, your computer, your house, … anywhere normal statistics can be substituted and provide reasonable outcomes consistently, or where you can whip out a ruler or thermometer, take some measurements, and start predicting outcomes to within .01% error.
Markets are not linear systems.
Markets are non-linear, like Lotka-Volterra predator-prey systems, or the competition of two species for a finite resource. They are defined by interactions, which are so random as to be almost truly indescribable, and with very radical, polar outcomes from seemingly tiny, innocuous decisions made.
Interestingly, when extreme circumstances like those Keynes wrote about; demand destruction and liquidity traps and all that fun; when those things occur, non-linear systems get reduced to linear systems. So Keynes looks like he was a master of the economy, rather than the servant to people and their whims that he most certainly was.
Keynes’ models, outside of extrema, predict ABSOLUTELY NOTHING.
Which brings me to the second reason I hate Keynes and Keynesians. Keynes, being a smart guy, probably knew that his models were worthless 99% of the time. But by being so God-damned popular, he unintentionally created a following of rejects who don’t understand half of what he was talking about, and who are inherently zealots hell bent on punching their way through brick walls, AT ANY COST. Now, these zealots have popularized Keynes to the extent that economics doesn’t even present the mathematical models that Keynes originally formulated, because math is, quote, “hard”. And so the assumptions and limitations of Keynes and what he taught have been lost, for worse.
Printing more money right now is a terrible idea. Demand is stable, and production is humming along. Yet we’ll probably do so anyway. And what we will experience for this is further manufacturing contraction, destabilizing price swings, dangerous overpricing of a dwindling pool of resources, and yes, the periodic market crash coupled with unsubstantiated rebound.
All this suffering, because we cannot accept that those bad investments are not going to magically correct themselves. Well, that’s life, isn’t it?
But this system is non-linear. And that’s why claims that the Fed is going to somehow “target” 2% inflation for nominal GDP growth and all that nonsense is so pathetic to be hysterical. You do not target anything in a non-linear system. A non-linear system does pretty much whatever it wants.
You can influence. You can affect. You can encourage. But you do not “target”. You don’t aim. You correct, and you hope. Because tiny adjustments on your part are totally unpredictable when applied. Hence, even inaction on the Fed’s part have led to, until recently, a monumental commodity cycle. And at the first sign of more easing, you can bet that super cycle would return, with added intensity, as the market first reacts and then eventually overcompensates for the action, easily offsetting any benefit that would be expected by linear modeling.
It’s only when things get very extreme that you move big. But they have to be allowed to get extreme.
Based on market expectations right now, you’d think we’re counting a monetary policy to make precision cuts in a stain glass window, when the only tool central bankers are holding is a stick of dynamite. That’s why I’m betting more QE isn’t come. That’s why I think we’re going to get a big sell off. And that’s why if I’m wrong and we do get more printing, I’m going to be much more concerned for what’s coming than if I’m right…
If you enjoy the content at iBankCoin, please follow us on Twitter
I see you got inspired. Well written my friend. I will not contradict your macro position regarding printing money. The one thing I will say to the contrary is that markets can correct by moving in a sideways, chop fashion as they did in the second half of 2011. As such, 2011 was a relatively flat year despite some economic growth data such as higher retail sales and lower unemployment. Those type of markets are more difficult to trade than an elevator down, but worth considering that even if we need to correct, this is how we might do it.
You are absolutely right. People will do what they want to.
seems this guy is always on the right side of a trade, even if it destroys
http://news.yahoo.com/_xhr/mtf/panel/
sounds like you described krugman. that guy thinks he cut from the same cloth.too bad they both suck,never mind that they are seemingly intelligent folks.
great piece
Great post!
I think Keynes is rolling over in his grave though at all the “experts” evoking his name as justification for profligate GOVT spending policies.
Regarding the whole multiplier effect, there are some pretty astute studies showing that if GOV is already running a budget deficit and attempts to prop up aggregate demand by further increasing spending the multiplier is actually less than 1. I think most of us know this intuitively as GOV spending is never productive and therefore impedes true recovery. I am pretty sure Keynes himself stipulated this and recognized it only works when GOV is starting from a balanced budget position. He certainly did not prescribe this as a long term solution as it seems our politicians have come to understand it.
I think Keynes underestimated the willingness of politicians to print money.
“there seems to be only two choices: more insanity or the black abyss of waking to your own insanity.”
This is a superbly written piece, sir. I lurk often, post rarely, but this is surely one of your finest.
Nicely done. Very Nicely done and well spoken.
The question still remains though, what is the alternative?
Very well said Cain.
I think a lot of the problems arise from a mis-understanding regarding the power the Fed wields. The Fed could announce they are going to peg 30 year rates to 1.5% and it would happen in an instant, probably without the Fed initially doing anything, because no one would question their ability to do so in the short term. Could they keep a peg long term? I don’t know, depends on your definition of long term. That is an enormous amount of power to have at ones disposal. And because these tools are so powerful and are being used to influence more complicated aspects of the economy (inflation), I think it is assumed that the Fed has much more control over things they are trying to influence than they actually do. It’s only logical to assume that if you have the potential to control the entire yield curve, you must be able to actually do something with it.
Anyone interested in understanding just some of the foolishness behind these policy decisions, research the Lucas Critique.
This was a paper by Robert Lucas in the 70’s, who detailed the impact that incentives have on determining outcomes, and how policy details crafted from economic measurements often overlook incentivization entirely.