Monthly Archives: December 2016

The Keynesians, the Pavlovians, and other tribes.

Staunch Austrian Economists argue that a known quote, attributed to Milton Friedman in 1965, was taken out of context. For most, he signed in for Keynesianism when he coined the phrase “We are all Keynesians now”. Well, maybe he did. But such enthusiasm does not jibe with the fact that, three years later, he felt the need to fine tune his views on the issue. He then stated that what he really meant was that “We all use the Keynesian language and apparatus; (but) … none of us any longer accepts the initial Keynesian conclusions.”

That goes a long way to prove that Keynesianism’s obsolescence has roots in the very distant past!  Fifty years ago, a key economist like Milton Friedman felt the urge to distance himself from the “Keynesian initial conclusions”. Not that he was a stand-alone dissenter. For that matter, Von Hayek had used much stronger words to underline the major economic shortcomings of Keynesianism. “Bon-Vivantism” or “Shortermism” might have been a more accurate depiction of the discipline’s content.

Unsurprisingly, it was only the initial, tweetable quote, that remained in the minds of the economists of the time. Fast forward to 1971, and Richard Nixon wasn’t in the mood for subtleties at the time. Reportedly talking off camera, he told an ABC news reporter “he had also become a Keynesian in economics”. Off camera, or not, he was just talking his book. He had no choice but to officially embrace Keynesianism, and the leeway provided by the indiscriminate use of monetary and fiscal indulgence it supported. Sure enough, six months later he suspended the USD convertibility into gold, effectively defaulting on the gold peg of the, from then on, reserve fiat currency of the global economy.

Regardless of the need to cut the peg short at the time (defaulting in full was the only other option), nobody in the Austrian School of Economics can pardon the fact that he failed to anchor the currency to some other alternative peg (I stand for a peg of the monetary base to “Gross Output”, with a 2% flexibility band on each side). From then on, money printing was to be unlimited in nature and relied exclusively on the collective decision of the FOMC, and that of the other Politburos.  Keynesianism provided a free entry into the wilderness of limitless public deficits, ever expanding debt levels, boundless CB balance sheets, and manipulated interest rates.

Taking his cue from that doctrine, Ben Bernanke pondered the merits of the modern technology called “printing press”, together with the use of helicopters to spread out the money. That infamous speech earned him the deserved nickname of “Heli-Ben” -and a long tenure as the chair of the Federal Reserve. From then on, the world has been run on the premise of full conversion to the Keynesian religion.

A couple of decades later, and we all ought to be enthusiastic Keynesian converts by now. If Nixon had no other choice at the time, just think about what our real options are, today! Even if we wished to abandon the Keynesian discipline we have long gone way past the point of no return. We are truly stuck.

  • Piles of debt effectively impede moving forward, or even backward, with fiscal or monetary recipes, for much longer.
  • Outrageous inequality has been enabled by financial repression (punishing savers to enrich investors in the top wealth tier), and fostered by the availability of ever cheaper debt, with the aim of subsidizing faltering aggregate demand. Obviously, technological change hasn’t helped either. Ditto for educational levels, nearly everywhere. Top chart with the daunting wealth pyramid, courtesy of Gordon Long.
  • Supply side neglect has rendered a substantial part of our goods and services produce, obsolete, or environmentally unsustainable.
  • Keynesian public spending has bloated government sectors to more than 50% of GDP in some countries. European Labor Unions think it is not enough!
  • Unlimited liquidity has generated bubbles and inefficient pricing in most markets.
  • Zero financial costs for borrowing has favored a gearing up of most non-financial conglomerates, and a desperate search for yield (read return) by most investors -at all costs.

Yet we keep switching from monetary to fiscal Keynesian policies, suggesting escape velocity came real close with QE, or, of late, suggesting that fiscal reflation would solve the previously described pathology of our global economy business model. An endless continuum of policy mistakes. For how long? Continue reading