Everyone really should read this blog, even if you know nothing about economics or even hate the topic.
Earlier I wrote a sarcastic blog saying economists are always right. It should have been pretty clear it was tongue-in-cheek.
Keynesian economics is like communism, it sounds great on paper. But reality is complete shit. Keynesian economics states that during slowdowns and recessions, the government should run deficits and stimulate growth by offsetting private investment declines. The problem with Keynesian economics is that governments never have the discipline to ever cut back during good times to accumulate surpluses, so that during bad times they can responsibly stimulate growth. As such, Keynesianism is complete shit.
The problem is that this Keynesian economic thought is universally accepted globally. It’s the reason the world is going to go to shit in a hand basket. Government debts just continuously climb to infinity. Even a grade school arithmetic student can figure out the stupidity of this thinking.
I liken keyesianism to communism because it forces dependence on government.
Keynesian economics was first developed by a British economist, Maynard Keynes, in the 1930s, during the depths of the Great Depression. It has pretty much been the bible, the economic playbook of modern times. It’s completely uncapitalistic. It’s destroyed the purity of capitalist theory.
First shot of common sense is to never adopt general policy based on extreme circumstances. Second shot of common sense is never give unlimited candy to a child, which is what keyesianism essentially does.
Economists really are morons. They’re the students in college who weren’t quite smart enough to be a mathematician, so they studied fuzzy math, and invented twisted logic coupled with idealistic notions of human nature and put a dollar sign in front of all the numbers. I can’t believe we place so much importance on their function, which utterly shapes virtually every facet of our lives.
The most powerful person in the world is an economist, the chairman of the Federal Reserve, Janet Yellen. It’s not the president.
The Federal Reserve was also the prime creator of the near global financial meltdown in 2008, a lasting legacy of the excesses created by extended zero rate policy following the 2000 Dot Com collapse. This is well known.
The Fed is repeating the same mistakes of the past, but this time a thousand times worse. The Fed is enemy number one when it comes to long term global peace and security; this will become evident soon enough when the financial collapse beckons global social unrest and invariably wars. People can laugh all day long at these prognostications, but when you peel the layers of their arguments, it becomes quite evident their optimism is based purely on hope and ignorance. I promise you I will be right.
All the modern theories of economics are complete bullshit and I will explain why. These misplaced theories are destroying our world and global economy.
Fallacy 1. Permanent or extended zero rates are stimulative.
Extended zero rates are like nuclear bombs, not tactical precision bombs. In the end, they annihilate everything.
Zero rates and free money, as we saw in 2008 with the housing subprime crisis, allows money to flow to bad and unworthy credit, ultimately resulting in soured investments. They ultimately stop growth dead in it’s tracks.
Zero rates also has a natural tendency to depress all interest rates for a period of time, creating deflationary pressure; the opposite of intended policy to increase inflation.
When rates are near zero, you cannot get inflation. By definition, higher inflation would demand higher rates and returns.
It also decreases wage growth, as we have seen in the past 7 years. This is because wage growth is closely tied to inflation over history. So we end up in a vicious cycle of low rates perpetuating low inflation and wage growths, which in turn maintains further low inflation and therefore permanent zero rates. This is why the Fed has been perplexed why wages (and thus their measure of inflation) has remained stubbornly low, despite record corporate profits, 7 years of zero rates and trillions in money printing QE.
Japan has been stuck in zero rates for decades. American economists thought we were different and the same would not apply. They were and are wrong. Yes, Japan has other fundamental issues, but the zero rate policy traps you unintentionally.
And ultimately, if zero rates do ever end, it is due to force, and the central bank is playing catchup and having to rapidly raise rates, simply accelerating the bubble bursting, as evidenced in 2008.
Once the world is addicted to zero rates, the economic structure – such as loans and capital funding – collapses with the weight of higher rates.
So basically, the exit strategy for zero rates is inevitably catastrophic, regardless of the path. This is why I argue in my book government should never go to near zero rates. Risk should never be brushed aside by artificial means.
Fallacy 2. Unconventional policy like quantative easing, or QE, stimulates reflation.
QE, or massive money printing, creates near term deflationary pressure. The opposite of intended Fed policy.
The reason is simple: zero money motivates everyone to take out loans. Most of these loans simply go into the stock market (including corporate stock buy-backs), driving them into bubbles. But some of it goes to invest in further capital investment. The psychology of QE and zero rates makes businesses and investors optimistic that an upturn in demand is around the corner, so they invest into new factories and buildings. It creates oversupply, which depresses inflation due to chronic over capacity.
The oil price collapse is partly due to overcapacity, coupled with slowing demand growth. Hundreds of billions of zero rate dollar loans have gone into new oil wells and infrastructure.
Having said all that, I’ve previously argued that inflation is much higher in our real everyday lives. And it is. My point is that the government methods for measuring inflation are wrong and have been for a long time to keep interest rates artificially lower; but nonetheless, using this same consistent method, QE will depress inflation (even if it is not accurately reflecting the absolute value of inflation).
Let’s look at Japan again. They are doing massive QE that makes our Fed look like wimps. And despite all of this, Japan still registers zero inflation last month and consumer spending still declined. Similar to what we saw in the US, the stock market went bananas, the currency weakened significantly. And by the way, the yen is going a lot lower from today’s value to the dollar of 120.8. I project it will weaken further to at least 130-135 over the next 6-12 months.
Even the Fed’s own internal study of the impacts of QE revealed that it helped equity and bonds markets, but did very little to help the actual underlying economy. But yet, the Fed WILL try more QE, mark my words. How irrational is that?
Our Fed mandate of maintaining moderate inflation and full employment seems to have morphed to simply keep the stock market inflated. This merely drives obscene wealth to the top 1%. The Fed isn’t supposed to be driving policy based on stock market needs or reactions. And yet, that’s exactly what it does. It’s an irrational and broken institution. It’s create more chaos and damage to our real economy than any terrorists or foreign countries. Fact.
Fallacy 3. A weak currency is good for the economy.
For export dependent countries, a weaker currency can stimulate exports. But America is a consuming nation, not an exporting nation. We have the world’s largest trade deficit for a reason. You have to be a math class flunky to ever consider the idea that a weak dollar is net positive for America. Let’s say we help 10% of our global companies (actual benefit is far less, like 3%, since not all export products are so sensitive to price elasticity or commodity oriented). Then we hurt 90% of America. Nice arithmetic math flunkies.
Countries who weaken the currency may see their stock market rise, in local currency terms, but in absolute terms GDP shrinks. GDP only matters in absolute terms, relative to say the dollar international standard.
A weak currency means the country’s economy is weak. A sustained weak economy means a weak country.
I find it hysterical that American politicians are so outraged at China for recently weakening their currency. Actually, China just allowed it to head in the direction the market pressure was forcing their currency due to the weakening economy.
And yet, 6 years ago, America – via the Fed – started this currency war by weakening the dollar considerably, far more than China. Nobody thought this was horrible then. And yet, when China does the same – but on a much smaller scale – there is so much hypocritical outrage. Japan is weakening their yen currency 5 times worse than China and yet nobody says a word about that. Europe, the EU, is weakening their euro 3 times worse and that’s seemingly ok. Stupid politics.
Fallacy 4. Large deficits stimulate growth.
Ideally, short term deficits can be positive. But forever huge deficits are strangling. It’s basic common sense and simple arithmetic really.
Governments fund deficits by issuing debt, called bonds, or in the US we call them Treasuries. Investors buy these and loan money to our government. Today we have nearly $19 trillion of US government debt.
Capitalism is, by definition, a competition of resources and capital. When government issues trillions in bond debts, these trillions can’t go into the private sector to invest in new factories or new companies to create jobs and real growth. Instead, these trillions just sit there, sucking up all our financial capital and preventing it from going to better alternatives. In other words, government is competing directly with private companies for investor’s dollars.
Imagine what $19 trillion invested in the private sector could be doing for our economy and jobs. We wouldn’t need all this stupid QE or zero rates that create so much systemic risk for our way of life.
In short, all the government and Fed actions just continously drive us into and inevitable cliff. It’s ridiculous.
It’s so assensical that it makes one wonder if there is some global conspiracy to eliminate nationalism and borders; to intentionally create global economic collamity so immense that the only viable aftermath solution will appear to be a unified single world government with one simple and digital monetary system.
This is the inevitable direction we are driving toward.
On a more pragmatic topic, I’m want to emphasize, don’t be fooled by the sudden surge in stocks the past 2 day, or the China stabilization. It’s always important to understand the root ressons why.
In China, the government is heavily intervening in the markets buying stocks due to the pending WWII commemoration parade. Understanding the Chinese government need to create the facade of control and power to its people is unquestionable. They have to show, temporarily, they have things under control. This reprieve should be short lived.
On the domestic front, the solid GDP numbers yesterday makes it seem more difficult for the Fed to justify keeping rates at zero, increasing the chance of the pending September rate hike launch. It’s completely absurd to have zero rates when the economy grows 3.7% (hell, even if only 2%) and unemployment is near 5%, once considered full employment. No, it’s fucking idiotic. The coming rate hike is the other key part of the equation, one of the reasons the market corrected so fiercely.
The past week had the highest amount of equity funds outflows since 2002, nearly $30 billion in money moving out of stock funds. Interestingly, a small but important detail happen last week, both bonds and stocks declined. This hasn’t happened since Q4 of 2008, at the peak of the market chaos.
This is an interesting data point because it’s a preview into what will happen when the real crisis hits. Usually when stocks go down, investors rotate their money into safer bonds. But because of the Fed policies creating massive bubbles across the board, all assets declined simultaneously. In 2008, this wasn’t so important because bonds were not in a bubble. It’s completely different now.
The government stress tests don’t account for bonds and all assets declining in tandem. Bonds are considered a safe asset class and used to measure the amount of safe versus risky assets to assess if a financial institution is a systemic risk. If both stocks and bonds declined, say 30-40%, the financial institutions would all be in a world of hurt given their leveraging. They would again need government bailouts. This scenario is not only possible, but almost certain to happen. At this point, the fear would exceed 2008. And more QE, when corporate risks are dramatically increasing, won’t be able to keep rates artificially lower again. Once that sail has sailed, there’s no turning back.