Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Keynesians, Fiat Currency, Until Debt Does Them Part

Economics / US Debt Aug 06, 2010 - 06:20 AM GMT

By: Brady_Willett

Economics

Diamond Rated - Best Financial Markets Analysis ArticleBen Bernanke’s machinations since the financial crisis began are widely celebrated as having saved the financial markets from complete ruin.  Question is, was preventing the ruin of an over-leveraged, non-transparent, and bubble-driven financial system really the best path?  For that matter, did the actions of Bernanke and company simply delay the day of reckoning and/or ensure that this day will be even more severe?  Efforts to divine an enigmatic yesteryear notwithstanding, the reality is that as policy makers veer down one path we are precluded from knowing what the terrain would have been like down the other, with all of the ‘could have’ and ‘would have’ impediments limiting what can be said with conviction…



What can be said is that it is customary for those who view history with a predetermined bias to evoke the path not travelled to substantiate their point of view.  Case in point, while citing the popular Blinder/Zandi report Treasury Secretary Tim Geithner recently noted that, “the combined actions since the fall of 2007 of the Federal Reserve, the White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5 percent relative to what would have happened had we done nothing [bolds added].” To begin with, not only is it absurd to theorize “what would have happened” if policy makers did nothing, it is even more absurd to point to today’s dismal economic recovery and contend that things have improved when weighed against _______. To turn this asinine dollop of speculation around: just as the stock market and subsequent housing market bubbles previously disguised tragic policy decisions (or lack thereof) Into a strong economic upturn, the supposedly laudable actions of policy makers during the recent crisis have actually set in motion the destruction of the U.S. financial system and U.S. dollar.  Thus, of what utility is saving jobs and enhancing GDP in the short-run if the means by which these feats are achieved causes irreparable long-term harm to the economy and currency? 

Suffice to say, the concept of paths taken, and not taken, is worth bearing in mind when discussing tomorrow’s policy choices. In the case of the U.S., policy makers are likely to continue to spend, enslaved as they are to the idea that until U.S. interest rates skyrocket and/or the dollar is destroyed there is always more room to borrow and print. As for the conclusion from Austrians (or Auesterians) that deficit spending/money printing today will only make matters worse tomorrow, U.S. policy makers are unlikely to pay attention to the austerity cries.  After all, the market has made it clear that austerity is a strategy undertaken only by the weak.*

This debt/austerity debate, which has gone viral in recent months, has sparked an energetic tête-à-tête among economists.  And while it may appear of limited utility for the average investor to wade into this debate, the reality is that most asset classes have, and will likely continue, to feast or famine on the choices of global policy makers. To summon Shakespeare, ‘to deficit spend or enact austerity? – this is the question!’  A question that lends itself to many contradicting answers and can be based not only upon individual country-by-country situations but, perhaps also, perceptions…

“You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all...It's just an illusion. Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless." Ben Bernanke. The Onion

The Apostles of Keynes

Paul Krugman is the ring leader when it comes to idolizing Keynes. In his June 27, 2010 article, entitled “The Third Depression”, Krugman noted, “this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.” Other notables latching on to similar themes include De Long, Stiglitz, and John Makin.  Mr. Makin, scaring even Krugman, recently noted “By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe…” and “because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise.”

Ironically, even those not usually known for waving their Keynesian pom-poms tend to agree that austerity is not the short-term answer.  For example, the level-headed Jeremy Grantham says, “You don’t have to be a passionate follower of Keynes to realize that to rapidly reduce deficits at this point is at least to flirt with a severe economic decline….I recognize that in this I agree with Krugman, but I can live with that once in a while.”

Last, but definitely not least, are U.S. policy makers, which are almost universally pro-Keynes.

The Rebirth of Hayek

In a recent FT article entitled “Today’s Keynesians have learnt nothing”, Niall Ferguson says that “People are nervous of world war-sized deficits when there isn’t a war to justify them”, adding “Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations.” Mr. Ferguson personifies the anti-Krugman point of view; a view that is supported by recent history (i.e. unprecedented fiscal and monetary stimulus actions since 2008 have done little to engender a strong economic recovery).

Along with Ferguson there are numerous European austerity enthusiasts, most notable Britain prime minister David Cameron and president of the European Central Bank, Jean Claude-Trichet.  Mr. Cameron, perhaps eying the crown of Mr. Austerity, shocked the markets (in what turned out to be a good way) when his emergency budget laid out the largest cuts in spending since World War II.  The basic proposal from Cameron, a template that would give any U.S. policy makers a heart attack, was “about four pounds in spending reductions for every pound in tax increases.” As for Mr. Trichet, in writing “Stimulate no more – it is now time for all to tighten”, he discussed the ‘fiscal buffers’ that were in place before the financial crisis (insinuating that these buffers are no longer in place), and added quite bluntly, “there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now.”  Cameron, Trichet, and even Germany’s Merkel represent a unified European front for austerity, and are the major source of a de-unified outlook for the developed world.

Then there is a growing mob of anti-Keynesian thought coming from some unlikely sources, including the likes of Alan Greenspan. In a recent WSJ Op-Ed Mr. Greenspan contended, “We cannot grow out of these fiscal pressures” adding, “The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.” It goes without saying that if Easy Al’ was still running the Fed he would not be uttering what many policy makers would consider heresy.

Also highlighting the limits of Keynesianism has been FOX’s Glenn Beck, who, after reviewing ‘Road to Serfdom’, helped catapult Hayek’s 1945 text to number one on Amazon. Finally, there is a mob of individuals that FallStreet follows that despise Keynesian thought, including Ron Paul, Peter Schiff, Mish, Gary North, etc.

Can Both Ideologies Be Right?

Strangely enough, followers of both Keynes and Hayek are well aware of their limitations. For example, even the Krugmans acknowledge that deficits are a long-term problem that should be dealt with (but only after greater amounts of deficit spending set the economy down a firmer recovery path). Similarly, it is difficult, Ron Paulites perhaps being the exception, to find an Austrian that is dedicated to the pursuit of jarring policy changes in the name of Hayek (i.e. if the Fed started raising interest rates, a throng of government-run institutions were allowed to fail, and the U.S. budget was immediately balanced the unmitigated chaos that would ensue is unthinkable). In short, what is at issue are not the sound principles of austerity, but the pace of the austerity embrace. Keynes says ‘definitely not now!’, while Hayek remarks ‘if not now, when?’

A Futile Debate?

Despite today’s austerity noise there is no collection of U.S. debt holders that have achieved the clout required to demand austerity from America. For that matter, it is exceptionally difficult to foresee the U.S. being compliant when, and if, foreign austerity demands do arrive. In other words, it appears likely that we will follow the ebb and flow of the current path until the destruction of dollar, intentional or otherwise, comes to pass.

In this regard the deficit spending/austerity debate is somewhat of a red herring in that it is supported by the flimsy assumption that policy makers must indulge theoretical models relating to debt thresholds while at the same time not completely discounting current market forces.   The contention is akin to ‘if you ignore rising debt levels for X amount of time you do so at your peril!’ Problem is, no one is all too sure what X is…

“Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.” Alan Greenspan

Conclusions

The U.S. dollar can be seen as being both the lynchpin of the great fiat money experiment and the weakest link of all fiat money.  And yet despite all of the jabbering by economists and analysts, neither Keynes nor Hayek-based speculations can lay claim to having accurately mapped the recent path of the markets, let alone the coming path.  Many today think that Keynesian thought has reached its limits and contend that USD hegemony has entered its final countdown.  But few even attempt to offer a precise depiction of how transference to a new monetary regime will unfold.  Can there really be an end to Keynesianism without the beginning of something else completely different?  Conversely, the insights of Hayek are indeed a common sense blessing that policy makers would be wise to heed, but they can also act as a burden.  After all, remembering that the market has made it clear that austerity is a strategy undertaken only by the weak*, why should the strong indulge in Hayek? Didn’t the 20-years of Hayek inspired IMF mandated shock therapy in the third world cause more harm than good?

Again zeroing in on the U.S., the deficit spending/austerity perspective lends itself to two considerations: in theory the U.S. must soon stop spending/printing or it will wreck its currency and economy, but in reality since all U.S. debt is denominated in USD the U.S., unlike those European nations tied to the Euro, can always print.  In other words, it does not take a leap of faith to contend that the U.S. will print, and that tomorrow’s question will not be focused on deficit spending or enacting austerity per se, but of devaluing the dollar or repudiating debt. Until then, was preventing the ruin of an over-leveraged, non-transparent, and bubble-driven financial system really the best path?  Really???

“We can always pay our debts in the United States as long as we borrow in dollars. We just keep printing more dollars.  The Greeks can't do that or other members because they are tied to the euro...” Warren Buffett

* “After all, the market has made it clear that austerity is a strategy undertaken only by the weak.” To note: it is possible that the market is mispricing U.S. debt because of the rising threat of the Euro’s collapse and/or the lack of current alternatives to USD.   In other words, historically low U.S. interest rates in the face of historically high (and rising) U.S. debt levels may not necessarily be a sign of any fundamental ‘strengths’, but the result of potentially transient forces.

By Brady Willett and Dr. Todd Alway
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets.  In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in