The Death of Modern Economics.


On Reuters, we read:

The euro was deep in the red on Friday, having suffered its steepest fall in three years after the European Central Bank stunned markets by cutting interest rates and embarking on a trillion-euro asset-buying binge.

The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher-yielding assets elsewhere.

The European Central Bank (ECB) has been saying for the past few weeks that they would reignite inflation. Usually, Central Banks obfuscate matters and do not make clear declarations. Not so, in this case: the ECB was totally forthright in their intentions to inflate. When a Central Bank outright declares a course of action, you can be sure they will pursue that action for at least a little while.

Investors should’ve started dumping the Euro weeks ago.

The ECB, headed by Mario Draghi, has declared another cut in lending rates. This is supposed to stimulate borrowing and investment in order to goose the economy. Here’s the real kicker, though: Draghi has cut rates from a measly 0.15%, to a measly 0.05%. How much a difference does that make? None! This means that the cost of a loan to an average borrower would drop by some trivial amount, like $1 per month. This has no bearing on regular people. Nobody is rushing out to take advantage of loans that are $1 cheaper. This rate cut does not benefit the average European in any way. The average European is still buried under debt, taxation, and a burdensome regulatory state; that’s what’s preventing a recovery in Europe.

For the ECB to think that a lending rate of 0.15% is too high, and to blame for the anemic “recovery”, is in my opinion proof of something significant: that modern Keynesian economic theory is unequivocally dead.

A rate cut from 0.15% to 0.05% is nothing. Yet the ECB is convinced that this is what is necessary to precipitate a recovery. News Flash: if low interest rates were all that was necessary to precipitate a recovery, then it would’ve already happened. A rate cute of 0.10% is nothing. It’s peanuts. Zilch. No businesses are expanding operations because they can snag a few more measly bucks out of a loan. No individuals are opening up entrepreneurial ventures out of rates that are a tiny fraction lower. The only people who are really able to benefit from such a cut are on Europe’s equivalent of Wall Street. That’s it.

This is what mainstream Keynesian theory has come to. The popular saying that has been going around is this: “When all the ECB has is a hammer, everything in Europe looks like a nail.” And if it isn’t a nail, then the ECB will pretend it is anyway, because all they have is a hammer. What the ECB is doing is 100% brainless: driving the cost of money as low as possible. To establishment Keynesians, it’s always about the next rate cut. The next rate cut, we are told, will finally engender lasting prosperity. It never happens.

Central Banks worldwide have trapped themselves. They are buying more and more government debt. But they can’t force the public to borrow and take on more debt, which is what they want. Total debt-to-GDP rations around the world are rising; but in most countries, the private debt-to-GDP ratios are not increasing, and even falling. The general public has had enough of debt. They are swimming in it. The general public will not take on any more debt. This does not stop governments from running increased deficits and monetizing their debt.

If the world could get richer just by monetizing government debt, then we’d all be veritable Scrooge McDucks in terms of wealth. That’s not the case. Monetizing government debt does not make the general public richer. The only thing that can enrich the general public is innovation and entrepreneurship funded by private sources exposed to risk; in other words, Capitalism. This is what generates profit and wealth for society. This is the “tide that floats all boats”. But it is precisely what world government are actively retarding. They want to believe that they, the great politicians and intellectuals of the State, can create wealth out of their own clever genius, as opposed to the baseless and greedy profit-seeking mentality of the masses.

The solution for Keynesian economists is always the same: more government spending and debt. Since the recession of 2008, the refrain from establishment Keynesian economists has been the same: “More federal debt, please!” This, of course, is not based on innovation or entrepreneurship; this is based on some politician or bureaucrat clumsily spending money in an area where it will be frivolously wasted. This is brainless work. This is what governments love doing. But it’s not the tide that floats all boats. Since 2008, the US government has been running the largest deficits in peacetime history, and the have expanded the monetary base to it’s largest point in American history. But this is not producing an upward expansion in the net worth of average Americans.

We keep hearing about an economic recovery from talking heads in Washington DC and in the mainstream media. But us regular folks know that there has not been much of a recovery at all. This is why Congressional approval rates are so low. This is why Obama’s approval rate is so low. Regular people are still suffering. Money is still tight. Good employment is still scarce.

The Keynesians have shot their wad. They’ve got nothing left to offer except more of the same: more government spending, more deficit expansion, and more inflation. All of the “emergency measures” put in place at the end of 2008 to stimulate a recovery have become the new normal. Let me ask you this: What will the Keynesians do in the next recession? The deficit and monetary base are already at all-time highs. Rates are near all-time lows. When the next recession hits, what will they do? How big will the deficits have to get? How inflated will the dollar have to become? What has happened over the past few years will look like child’s play compared to what the Federal Reserve will want to do in the next recession, you can be sure of that.

Keynesian economic theory was, from the beginning, an incoherent mess of contradictions and bad ideas. Keynes’ 1936 “masterpiece”, The General Theory, is one of the most incomprehensible books you might ever try to read. But the key was that Keynes baptized what governments already wanted to do. Governments across the world were already inflating their currencies and increasing spending, but to the chagrin and public outrage of the economic establishments. Keynes was the first major economist to baptize what world governments already wanted to do. For that, they elevated his status above all others.

Keynesian theory may still be lurching onward and eating brains, but it is intellectually dead. As my favorite economist Murray Rothbard used to say, “Keynesian theory is dead from the neck up.” This is an accurate description.

For further background and explanation on Keynesian economics in modern times, read my article “Understanding Modern Economics in the USA.”

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