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“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch its currency….Lenin was certainly right. There is no subtler, no surer way 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.”1

Keynes does not provide a concrete source backing his words but deliberately used the phrase “is said to have declared.” For a good reason. As Frank W. Fetter (1899–1991) pointed out, there is no evidence at hand that Lenin actually said or wrote these words, and anyone quoting Lenin on inflation would be indeed be referring to Keynes’s opinion.2

Be that as it may, it is pretty obvious that Lenin had a good understanding of the evils of inflation caused by the issuance of large amounts of unbacked paper money. He writes:

There is another side to the problem of raising the fixed grain prices. This raising of prices involves a new chaotic increase in the issuing of paper money, a further increase in the cost of living, increased financial disorganisation and the approach of financial collapse. Everybody admits that the issuing of paper money constitutes the worst form of compulsory loan, that it most of all affects the conditions of the workers, of the poorest section of the population, and that it is the chief evil engendered by financial disorder.3

Indeed price inflation caused by the increase in the quantity of money does not only cause serious economic problems. It also brings severe sociopolitical problems. Inflation makes most people poorer, degrades their social status, destroys their dreams of a better life. People become desperate and open to radical political programs.

…click on the above link to read the rest of the article…

Why the New Economics Just Boils Down to Printing More Money

June 20, 2020

WHY THE NEW ECONOMICS JUST BOILS DOWN TO PRINTING MORE MONEY

[Editor’s Note: this article is adapted from a 2003 essay in the Quarterly Journal of Austrian Economics entitled “New Keynesian Monetary Views: A Comment.” As economists abandon theory in favor of makeshift plans to flood the economy with stimulus, Hülsmann here provides some helpful reminders of the fundamental problems behind the current economic consensus on money.]

The essential fallacy of John Maynard Keynes and his early disciples was to cultivate the monetary equivalent of alchemy. They believed that paper money was a suitable means to alleviate the fundamental economic problem of scarcity. The printing press was, at any rate, under certain plausible conditions of duress, a substitute for hard work, savings, and cutting prices (Hazlitt 1959, 1960).

The self-styled new Keynesians have not at all abandoned this fallacy, and they therefore do not differ in any essential respect from the old Keynesians, in spite of the pains they take to distinguish themselves from the latter. The new Keynesian recommendation for monetary policy is to “stabilize the growth of aggregate demand.” In plain language this means that the monetary authorities should never stop flooding the economy with paper money. This is recognizably the core tenet of the old Keynesian monetary program, which in itself had been nothing but even older fallacies clothed in the new language of aggregate analysis.

In many respects, new Keynesian views on monetary theory and policy seem to be even more fallacious than those of their predecessors. Whereas Keynes and his immediate followers were still trained in the old-fashioned art of economic reasoning, the new Keynesians are macroeconomic purebreds.1 Their expertise lies more or less exclusively in the field of modeling.

…click on the above link to read the rest of the article…

The Bank of England’s Governor Fears a Liquidity Trap

January 19, 2020

The Bank of England’s Governor Fears a Liquidity Trap

The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:

If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.

He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.

What Is a Liquidity Trap?

In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.

…click on the above link to read the rest of the article…

Helicopter Money Is No Panacea

January 15, 2020

Helicopter Money Is No Panacea

In recent decades, the Fed has engaged in a series of policy interventions and market manipulations that have paradoxically left it more powerful even as those interventions left a trail of crashes, collapses and calamities.

This contradiction between Fed omnipotence and Fed incompetence is coming to a head. The economy has been trapped in a prolonged period of subtrend growth. I’ve referred to it in the past as the “new depression.” And the Fed has been powerless to lift the economy out of it.

You may think of depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment. Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline. But that is not the definition of depression.

The best definition ever offered came from John Maynard Keynes in his 1936 classic, The General Theory of Employment, Interest and Money. Keynes said a depression is, “a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity. In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt. That is exactly what the U.S. is experiencing today.

Long-term growth is about 3%. From 1994 to 2000, the heart of the Clinton boom, growth in the U.S. economy averaged over 4% per year.

…click on the above link to read the rest of the article…

Can Expansionary Fiscal and Monetary Policies Counter Recessions?

April 8, 2019

CAN EXPANSIONARY FISCAL AND MONETARY POLICIES COUNTER RECESSIONS?

When signs of economic weakness emerge, most economics experts are quick to embrace the ideas of John Maynard Keynes.

For most economists the Keynesian remedy is always viewed with positive benefits- if in doubt just push more money and boost government spending to resolve any possible economic crisis.

In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes a part of the earnings of another individual, and spending by another individual becomes a part of the first individual’s earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts their spending.

Following this logic, in order to prevent a recession from getting out of hand, the government and the central bank should step in and lift government outlays and monetary pumping, thereby filling the shortfall in the private sector spending.

Once the circular monetary flow is re-established, things should go back to normal and sound economic growth is re-established, so it is held.

Can government really grow an economy?

The whole idea that the government can grow an economy originates from the Keynesian multiplier. On this way of thinking an increase in government outlays gives rise to the economy’s output by a multiple of the initial government increase.

An example will illustrate how initial spending by the government raises the overall output by a multiple of this spending. Let us assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also, let us assume that consumers have increased their expenditure by $100million. Individuals now have more money to spend because of an increase in government outlays.

…click on the above link to read the rest of the article…

Keynes is Dead; This is the Long Run

March 16, 2019

KEYNES IS DEAD; THIS IS THE LONG RUN

“In the long run, we are all dead.”
–JOHN MAYNARD KEYNES

______________________________________________________________________________________________________________

INTRODUCTION

John Maynard Keynes, an English economist and author, has been held in high esteem for several decades thanks to his groundbreaking work in economics in the early 20th century. The theory he popularized in an attempt to better understand the Great Depression, aptly named Keynesian theory, revolutionized demand-side economic policy at the time.

For those who haven’t studied the riveting subject of macroeconomics since college – sarcasm, of course, for everyone out there that doesn’t live and breathe the subject like we do – Keynes advocated for increased government spending and lower taxes to stimulate economy activity, especially during times of economic hardship. Subsequently, long after his death, Keynes’ disciples proposed that optimal economic performance could be achieved through frequent “fine-tuning” by government monetary and fiscal policies (i.e. interest rates, relative to the former, and taxes/spending in the case of the latter).

Consequently, like so many well-intentioned policy initiatives meant to cope with emergency conditions, Keynes’ prescription has morphed into constant application even during mild cyclical downturns. Moreover, the other part of his master plan—to run surpluses during good times–has been almost totally ignored by election-driven politicians (are there any other kind?).

In the case of the global monetary mandarins following the financial crisis of 2007-2008, the slightest market turbulence or economic hiccup has caused them to resort to Keynesian remedies that were once reserved for true crises. As noted in prior EVAs, the net effect is a global addiction to stimulus, especially to ultra-low interest rate policies (ULIPs). But more on that in the next installment of Bubble 3.0…

…click on the above link to read the rest of the article…

Economic Theories & Debt Driven Realities

March 11, 2019

Economic Theories & Debt Driven Realities

One of the most highly debated topics over the past few months has been the rise of Modern Monetary Theory (MMT). The economic theory has been around for quite some time but was shoved into prominence recently by Congressional Representative Alexandria Ocasio-Cortez’s “New Green Deal” which is heavily dependent on massive levels of Government funding.

There is much debate on both sides of the argument but, as is the case with all economic theories, supporters tend to latch onto the ideas they like, ignore the parts they don’t, and aggressively attack those who disagree with them. However, what we should all want is a robust set of fiscal and monetary policies which drive long-term economic prosperity for all.

Here is the problem with all economic theories – they sound great in theory, but in practice, it has been a vastly different outcome. For example, when it comes to deficits, John Maynard Keynes contended that:

“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”

In other words, when there is a lack of demand from consumers due to high unemployment, then the contraction in demand would force producers to take defensive actions to reduce output. Such a confluence of actions would lead to a recession.

In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. 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.

…click on the above link to read the rest of the article…

Is an Increase in Demand Key for Economic Growth?

January 11, 2019

IS AN INCREASE IN DEMAND KEY FOR ECONOMIC GROWTH?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

…click on the above link to read the rest of the article…

Fiscal Stimulus and Economic Growth–Are They Related?

September 3, 2018

FISCAL STIMULUS AND ECONOMIC GROWTH – ARE THEY RELATED?

For most experts a key factor that policy makers should be watching is the gap between the actual real output and the potential real output. The potential output is the maximum output that the economy could attain if all the resources are used efficiently.

The gap is labelled as the output gap. In June this year the output gap – expressed in percentage terms – stood at 3.8% against 3.25% in March and 2.75% in June last year.

A strong positive output gap can be of concern because according to experts it can set in motion inflationary pressures. To prevent the possible escalation of inflation, experts tend to recommend tighter monetary and fiscal policies.

Their preferential outcome would be to soften the aggregate demand, which is considered as the key driving factor behind the positive output gap.

However, of greater concern to most experts is a negative output gap, which is associated with a severe recession.

The output gap was in the negative area between November 2008 and June 2013. Note that in June 2009 it had plunged to minus 3.34% (see chart).

Most commentators are of the view that with the emergence of a negative output gap the most effective policy to erase this gap is aggressive fiscal stimulus i.e. the lowering of taxes and increasing government outlays – a policy of large government deficit.

This way of thinking follows the ideas of John Maynard Keynes.

Briefly, Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free the market economy could lead to self-destruction.

Hence, there is the need for governments and central banks to manage the economy.

Successful management in the Keynesian framework can be achieved by influencing the overall spending in an economy.

…click on the above link to read the rest of the article…

Chicago Hopes To “Solve” Record Pension Deficit With Creative Solution: More Debt

August 23, 2018

Chicago Hopes To “Solve” Record Pension Deficit With Creative Solution: More Debt

John Maynard Keynes would be thrilled to hear about the brilliant solution Chicago has come up with to help solve its pension deficit: issue a $10 billion bond and take on more debt.

Chicago’s pension deficit has been a problem that we’ve been covering at length. The stunning funding gap, which comes in at about $28 billion, is an issue that Chicago Mayor Rahm Emanuel campaigned on fixing, along with the rest of the city’s finances. “It’ll be a big test for sure,” said Vikram Rai, head of municipal strategy at Citigroup Inc. “But if it works it’ll set a good precedent for the other cities and states that have pension problems.”

It won’t work.

Absent dramatic haircuts to pension promises, it’s simply impossible to resolve the third largest US city’s pension crisis: as we noted last month when looking at the broader pension problems faced by Illinois, in 1987, pension promises made to active workers and retirees in the state’s five state-run pension plans totaled just $18 billion. By 2016, they had ballooned to $208 billion. That’s a cumulative 1,067 percent increase.

Contrast that to the state’s budget (general fund revenues) which was up just 236 percent over the same time period. Or household incomes, which were up just 127 percent. Or inflation, up just 111 percent. Promised pension benefits have blown past any ability of the state, the economy or taxpayers to pay for them.

Which leaves only debt as the “solution”, one which reportedly came after Chicago leaders gave up on actual long-term economic solutions such as budget cuts, reductions in benefits and tax increases. With those pesky old “traditional” ways to shore up in the city’s finances seemingly causing too much austerity for America’s third largest city, they have instead embraced the new school of economics in the form of considering a $10 billion bond issuance, one which would push pension obligation bond issuance in Chicago to a 15 year high.

…click on the above link to read the rest of the article…

Macroeconomics Has Lost Its Way

August 9, 2018

MACROECONOMICS HAS LOST ITS WAY

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

To this day, his followers argue that macroeconomics is different from individual actions, and the factors that determine the behaviour of individuals are not the same as those that determine the wider economy. This article explains why it cannot be true, why modern macroeconomic beliefs are fundamentally flawed, and why interventionism has not only failed to produce overall benefits for the wider public, but has been at an unnecessary economic cost.

The basic fallacy

Last week, Martin Wolf (the FT’s chief associate editor and chief economic commentator) presented a programme entitled Economics 101 on BBC Radio 4, in which he raised the question as to whether a democracy can function when voters have little idea of how the economy works and why there has been so little effort to teach economics in schools.^[i] The independent economists interviewed, Larry Summers and Joseph Stiglitz, and Wolf himself are strongly pro-Keynesian, and the programme made no mention of the fact that there are different schools of economic thought. The question as to what information should be given to the public and crammed into the minds of schoolchildren was never addressed, and it was clearly to be the Keynesian view.

…click on the above link to read the rest of the article…

Macroeconomics Has Lost Its Way

August 4, 2018

Macroeconomics Has Lost Its Way

The basic fallacy

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World Bank Solution for Lack of Jobs: Cut Worker Protections

July 6, 2018

World Bank Solution for Lack of Jobs: Cut Worker Protections

The World Bank is in the process of completing its “World Development Report 2019: The Changing Nature of Work” and, surprisingly, the latest draft version opens with quotes from Karl Marx and John Maynard Keynes. Has the World Bank suddenly lost sight of its purpose and will now take up the cause of working people?

Well, you already know the answer to that question, didn’t you?

Only a few paragraphs down we begin to see where this paper is heading. After a bit of perfunctory hand-wringing over disruptions caused by robotics, we read the problem is “domestic bias towards state-owned or politically connected firms, the slow pace of technology adoption, or stifling regulation.” And although some jobs are disappearing, fear not because “the rise in the manufacturing sector in China has more than compensated for this loss.”

Oh, so we should all move to China to get new jobs.

Never mind that the highest minimum wage for Chinese workers, that mandated in Shanghai, is $382 per month. In some places the minimum wage is half that, if workers are fortunate enough to be paid regularly. And that millions of rural Chinese are being driven into cities to become sweatshop workers, so for now there won’t be enough work for the rest of the world. Then again, letting bosses have the upper hand is what the World Bank has in mind. No, its economists haven’t forgotten what the institution’s purpose is nor why it exists.

So what to do? The World Bank report does suggest not allowing corporations to dodge taxes to the degree that they do. Very well, but even if taxes were collected at the statutory rates, that would still leave corporations vastly under-taxed.

…click on the above link to read the rest of the article…

The Growing Pool of Real Savings Permits the Illusion That Central Bank Can Cause Economic Growth

June 28, 2018

THE GROWING POOL OF REAL SAVINGS PERMITS THE ILLUSION THAT CENTRAL BANK CAN CAUSE ECONOMIC GROWTH

Many commentators are of the view that the US central bank should pursue policies that will prevent the possible decline of the economy into a liquidity trap hole. What is this all about?

In the popular framework of thinking that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people have become less confident about the future, they will cut back their outlays and hoard more money. Therefore, once an individual spends less, this will worsen the situation of some other individual, who in turn also cuts his spending.

A vicious circle sets in – the decline in people’s confidence causes them to spend less and to hoard more money, and this lowers economic activity further, thereby causing people to hoard more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of money supply and aggressively lower interest rates.

Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, thereby re-establishing the circular flow of money, so it is held.

In his writings however, Keynes suggested that a situation could emerge when an aggressive lowering of interest rates by the central bank would bring rates to a level from which they would not fall further. As a result, the central bank will not be able to revive the economy.

…click on the above link to read the rest of the article…

Why Mainstream Economics Consistently Fails to Explain the Occurrence of Recessions?

March 26, 2018

WHY MAINSTREAM ECONOMICS CONSISTENTLY FAILS TO EXPLAIN THE OCCURRENCE OF RECESSIONS?

In his article released on March 21 2018 – Economics failed us before the global crisis – Martin Wolf the economics editor of The Financial Times expressed some misgivings about macroeconomics.

Economics is, like medicine (and unlike, say, cosmology), a practical discipline. Its goal is to make the world a better place. This is particularly true of macroeconomics, which was invented by John Maynard Keynes in response to the Great Depression. The tests of this discipline are whether its adepts understand what might go wrong in the economy and how to put it right. When the financial crisis that hit in 2007 caught the profession almost completely unawares, it failed the first of these tests. It did better on the second. Nevertheless, it needs rebuilding.

Martin Wolf argues that a situation could emerge when the economy might end up in self-reinforcing bad states. In this possibility, it is vital to respond to crises forcefully.

It seems that regardless of our understanding of the key causes behind the crises authorities should always administer strong fiscal and monetary policies holds Martin Wolf. On this way of thinking, strong fiscal and monetary policies somehow will fix things.

A big question is not only whether we know how to respond to a crisis, but whether we did so. In his contribution, the Nobel laureate Paul Krugman argues, to my mind persuasively, that the basic Keynesian remedies — a strong fiscal and monetary response — remain right.

Whilst agreeing with Krugman, Martin Wolf holds the view that, we remain ignorant to how economy works. Having expressed this, curiously Martin Wolf still holds the view that Keynesian policies could help during an economic crisis.

For Martin Wolf as for most mainstream economists the Keynesian remedy is always viewed with positive benefits- if in doubt just push more money and boost government spending to resolve any possible economic crisis. It did not occur to our writer that without understanding the causes of a crisis, administering Keynesian remedies could make things much worse.

The proponents for strong government outlays and easy money policy when the economy falls into a crisis hold that stronger outlays by the government coupled with increases in money supply will strengthen monetary flow and this in turn will strengthen the economy. What is the reason behind this way of thinking?

…click on the above link to read the rest of the article…

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