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

Double Dip Recession, Keynesianism Is Dying

Economics / Double Dip Recession Aug 14, 2010 - 12:22 PM GMT

By: Gary_North

Economics

Diamond Rated - Best Financial Markets Analysis ArticlePromoting a revamped Keynesian economic theory – one without any guarantee of job growth – is the equivalent of selling a lifetime subscription to a revamped Playboy: one without any photos. It's a tough sell. Yet this is what Keynesians are facing today. This will be fun to watch.

In the last few days, we have begun to see reports from mainstream Keynesian forecasters and economists who are talking about the possibility of a double-dip recession.


For a year, we have been assured by experts that double-dip recessions are rare. They surely are. The last one was in Carter's final year, 1980 – which is why it was his final year – and Reagan's first year, 1981. As far as the National Bureau of Economic Research has reported, that was the only double-dip recession. The NBER is the unofficial arbiter of each recession's chronology.

A few forecasters a year ago predicted the ever-popular V-shaped economic recovery. They are all hoping that no one remembers. There is no one left standing who predicts anything like this. The economy has barely grown over the last year, and the most recent report from the government is that growth was slower than initially reported for the second quarter of this year.

This remains the mainstream consensus: no double-dip recession, but weak economic growth and slow job growth. A few forecasters have said that unemployment will in fact increase. I have, but I am not in the mainstream.

The mainstream says that we are in a jobless recovery. But this assessment does not convey the uniqueness of the last 12 months. The Federal Reserve Bank of Minneapolis has posted an interactive chart that lets us compare the job non-recovery of the recession that began in late 2007 with all of the post-World War II recessions. We can click a box and get a different colored line for each recession-recovery. Only the double-dip recession of 1980–81 was worse in terms of the duration of unemployment.

In another sense, we are in the mother of all jobless recoveries: median unemployment longer than 27 weeks. As of July 2010, the number of unemployed Americans was 14.6 million, according to the Bureau of Labor Statistics. Of these, 45% had been unemployed for over 27 weeks: 6.6 million people. This figure is unprecedented. Remember also that "unemployed" refers to people without jobs who are still looking for jobs. Those who give up and stop looking are no longer counted as unemployed.

Until the most recent meeting of the Federal Reserve System's Federal Open Market Committee, the press releases began with an affirmation of the increasing strength of the economy – slow but visible. The press release for August 10 began with this uncharacteristic pessimism: "Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months."

In response to this intra-day press release, the Dow Jones Industrial Average recovered from a negative 120 to a negative 55, as the result of a meaningless statement that the FOMC will re-invest net payments from Fannie Mae and Freddie Mac bonds in Treasury bonds. This meant, at best, no change in the monetary base. The media greeted this as a major change in FED policy. It wasn't. The next day, the Dow fell 265 points.

SEEDS OF DOUBT

The financial media are beginning to report statements from Establishment forecasters who are saying that a double-dip recession is looking more likely. One of the most prominent of them is Yale economist Robert Shiller. He is the co-creator of the Case-Shiller monthly report on the residential housing prices in 20 American cities. He also coined the phrase "irrational exuberance." He now thinks the odds favoring a double dip are above 50–50. He says that the job market is the problem.

He is a Keynesian. So, he calls on Congress to spend lots more money on another deficit-funded stimulus. He says that the Federal Reserve is "out of bullets." Economists rarely say this about the FED. When they do, it indicates near-panic. He assures us that "If we focus on creating jobs, it's not as expensive as you might think."

First, who are "we"? Congress? Second, did the 2009 stimulus of $787 billion focus on creating jobs? If so, where are they? Third, how does Federal spending create jobs? Hiring part-time census workers, yes. Creating a few thousand "shovel-ready" make-work jobs that cost small fortunes per job, yes. But sustained job recovery? It isn't happening.

David Stockman, who was briefly Reagan's budget director before he resigned, recently wrote an article on the gargantuan size of the Federal deficit. He made an important but neglected observation. Ever since the third quarter of 2008, the nation's nominal GDP has increased by a tiny $100 billion, but the Federal debt has increased by 25 times the GDP increase.

This means that the hoped-for stimulus has not worked. It has taken $25 of Federal deficits to produce $1 of GDP growth. This marks a major anomaly for Keynesian economic theory. The justification for government deficits in Keynesian theory is that government spending restores economic growth. Money spent by the private sector does not increase economic growth in a recession; government spending does. This has never made any economic sense, but now the non-response of the economy is exposing this original nonsense for what it always was: nonsense. The Federal deficit is skyrocketing, but the economy has barely increased, statistically speaking, and is now slowing.

Lest we forget, the NBER committee which retroactively determines when a recession began and ended met in early April. The committee postponed an announcement regarding the end of the recession which it said began in December 2007. Such an announcement, the committee said, would be "premature."

This indicated that the economic data were so mixed that no clear recovery is evident. The Federal Reserve and other organizations have adopted spring 2009 as the end of the recession. This appears on Federal Reserve charts. But the organization that is unofficially the arbiter of such matters is not equally confident.

At this point, the conventional forecast regarding a double-dip recession is that it is unlikely to happen. In contrast, the Austrian School view is that the recovery itself may turn out to have been a statistical anomaly. We are not facing a double-dip recession, only because we have not gotten out of the 2007 recession. We are now facing a more rapid decline of an economy already in decline.

The statistics so far do not point to a full-scale recovery. This was the NBER committee's view in April. The statistics point to something unique: a supposed economic recovery in which commercial banks are reducing their lending, the overnight bank loan rate is close to zero, and long-term unemployment is at an historically high level. To produce this minimal recovery, if it really is a recovery, the Federal government is running a 2010 deficit in the $1.5 trillion range. Meanwhile, Social Security payments now exceed FICA tax revenue, so the general fund must make up the difference, thus adding to the on-budget deficit. Social Security has ceased to be an accounting cash cow for the government. It has become an accounting liability.

Rex Nutting writes for MarketWatch. He is not a famous economist. He is a columnist who spends his life summarizing economic events and data that come in over the wires. But, on August 11, when the Dow opened down by over 200 points and was not rebounding, he wrote an editorial. It reveals the despair of a Keynesian whose confidence in the restoration of economic growth has faded.

The Federal Reserve is pushing on a string, he said. It has gone about as far as it can go. It is therefore time for Congress to reassert leadership. Nutting has had great hope in the creativity of government spending. The government can borrow trillions of dollars, which can be spent by Civil Service-protected government bureaucrats who cannot be fired. His faith is fading. An overly conservative Congress is just too cautious and reluctant to spend more money, he thinks.

It doesn't take a poet to know what happens to a dream deferred. Sometimes, it explodes. If the Fed's hands are tied, are we doomed to a lost decade of deferred dreams?

Happily, no. There is one group that's still able to borrow: the federal government, which could fill the gap temporarily by directly employing idle people to fulfill some of those deferred dreams. They could teach the children, heal the sick, build the infrastructure, discover new drugs, and invent new technologies.

Unhappily, it's not going to happen.

The projected Federal deficits are in the range of a trillion dollars a year for the next decade. Not enough! Too cautious! Woe, woe, woe!

The optimists are saying that the double-dip recession will not happen, but job growth will be minimal. A jobless recovery is the new normal. This is the abandonment of Keynesianism. This is loss of faith on a paradigm-changing scope. The old Keynesian formula is no longer working. Huge deficits have not led to a V-shaped recovery, or maybe any recovery. The Keynesian multiplier is barely even adding. The Federal Reserve is pushing on a string. But so is Congress. The deficits are not working.

What's a Keynesian to do?

Call for more spending, of course. Call for even larger Federal deficits. Call for bailouts of deficit-plagued state governments, which cannot get loans from Asian central banks.

THE KEYNESIANS' FAITH

The Keynesians have only one solution: deficit spending. That is all they have had since 1936. Keynes baptized deficit-spending policies that all governments had begun several years before. He was John the Baptist for his generation. He called on old school economists to repent and be baptized in the logic of deficits. He converted most of the young economists. The old ones slowly died off, although some of them saw the error of their youth and converted.

But today the old Keynesian deficit-spending policy is no longer delivering the promised goods. The old formulas are not providing the old magic. The level of Federal debt is so great today that the percentage of each new annual deficit in relation to the total debt that has to be rolled over every five years is declining. Deficits no longer have the same "punch."

In fact, the old punch had to do with transferring resources from the private sector to the government sector. This transfer made the government sector grow and the private sector contract, compared to what would otherwise have prevailed. Government spending is counted as being the same as private spending. Government spending is considered part of the GDP. Keynesians assume that money collected by means of badges and guns is far more efficient in producing economic growth than money invested in terms of a hoped-for prospect of a positive rate of return. Keynesianism rests on faith in the following:

1. Badges and guns
2. Government IOUs
3. The wisdom of government

It is based on a lack of faith in the following:

1. Voluntary exchange
2. Private investment
3. The wisdom of entrepreneurship

We are now seeing the fruits of this view of economics. The deficits, while unprecedented, represent a declining percentage of the IOUs outstanding, both to investors and the Social Security, Medicare, and Federal pension "trust funds": accounting devices that count government IOUs as legal claims against future taxpayers. Each new deficit adds to this pile of IOUs. No one in the Establishment expects these to be paid off. Everyone expects these debts to be rolled over at low interest rates forever. There is no sense of alarm.

The Tea Party voters are beginning to sense that this is an impossible dream. Yet voters who are approaching age 65 also believe that they have a legal claim on lifetime support. They believe that these claims will be met. They believe that, since they are special, the Federal government can and will deliver on its promises to them. In short, they know they are being conned, yet they insist that the retirement Ponzi schemes will go on forever. In short, tens of millions of voters are schizophrenic.

Two groups of voters are not schizophrenic: the optimists and the pessimists. The optimists think that the promises will be kept, the Federal government can be relied on, and the system will hold. The pessimists believe that the promises will be broken, they will be stiffed in their old age, and the government is headed for a huge default.

Presumably, you are in the second group. Therefore, you are not a Keynesian. You do not believe that endless Federal deficits can continue. You do not believe that deficits will save the economy.

This raises a question: What are you doing to hedge your future against the optimists and the schizophrenics, who will resist any major spending cuts?

RUNNING OUT OF TIME

The Democrats are likely to lose control in the House next year. Their ten-vote edge in the Senate will disappear. Republicans will be able to filibuster any spending bill. This will end House Democrats' hope that voting in favor of a new spending program will get through the Senate. They will ask: "Why risk my slender base back home on a suicide vote to increase spending? If it passes, it will be killed in the Senate."

The Republicans will play the spoiler. Obama will get no new big spending programs passed by Congress. He will be able to blame Congress, just as he has blamed Bush. But if the economy does not visibly recover, and if the unemployment rate does not fall below 6%, he will take the heat. That is what the Presidency is for: taking credit or taking blame.

The government will move to gridlock next year. It will remain there for two years. The deficits will remain high. The economy will stagnate at best, or fall into a decline. There will be no major recovery that persuades voters that they are safe, that the economic future is bright.

We are seeing a loss of faith. It is all-pervasive. The voters see that Congress is impotent. The Keynesians see that the FED is impotent. The economists as a profession have rushed to the Keynesian pump to keep the ship from sinking, but the ship appears to be taking on water despite their best efforts.

Gridlock will end the prospects for a new round of spending. The Republicans will be busy campaigning for 2012. They will hold the line against major new spending projects. The deficits will continue, but the Republicans will blame Obama, the way that Obama blames Bush. "Obama saddled us with these deficits. We did not have the votes to stop him. Now we do. You can't hold us responsible for what Pelosi and Obama did." The voters, always disappointed, will respond in hope.

You can see why I have registered this domain:

www.ChangeBack2012.com

CONCLUSION

"Double dips sink ships." The prospect of a double-dip recession threatens the Keynesians, just as it threatens Obama's hopes for re-election.

The Keynesians have far more at stake. Obama is limited to two terms by law. The Keynesians must keep the faith in deficits alive permanently. If their policy prescription fails, and the deficits accelerate without job growth and income growth, then they have no fall-back position. They can tell us that in the long run, the deficits will finally turn the economy back up, and things will go back to the pre-2007 normal. But if things do not return to the pre-2007 normal, then non-Keynesians will cite Keynes in their defense: "In the long run, we are all dead."

So is Federal solvency.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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


Comments

B
17 Aug 10, 14:38
Excessive Debt is What again Gary North?

Gary North has perhaps been too busy with his bible studies recently to have noticed that the reason that the private sector in the United States is in a shambles is not because of Keynesianism or anything else he dislikes - it's because it voluntarily took on too much debt and imploded - all while Gary north was crying that the Fed was too tight or other excuses. Excessive debt is not a tenet of free market capitalism, nor indeed communism - perhaps it is more worthy of Bakunin and the anarchists. Gary North likes to give the impression that Central Banks and others are merely behaving the way they are in a vacuum - as if there was nothing wrong and that they have a choice. He really does need to give up Sunday school and learn to read some economics.


REB
19 Aug 10, 01:19
Keynesianism

Sad when people cant see what a failure Keynesianism and all other marxist related forms have been and are! Economists who follow this warped thinking are frauds,not economists,quit apoligising for a failed theoligy while attacking the mans beliefs in biblical finance and free enterprise,its thinly veiled bigotry on your part,that remark had nothing to do with the article,why else bring it up?!

The idea that the banks are not responsible for this mess is absurd,especially the fed system,sure debt is a factor but to say its the main factor is ridiculous,besides alot of the debt is the responsibility of the fed and the govt,obama bailed out his supporters in the money world at the expense of the greater economy,he stole the working mans money to pay back his friends after govt policys failed and they took a hit, all the while blaming them for the problem,Id take credit for collapsing the economy too if I suffered no loss and made alot more to boot,they thinking behind Keynesianism is what got us here no matter what else may have happened,THINK!


Post Comment

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