Old fashioned Keynesianism, as practiced by the likes of [Paul] Krugman, resembles a set of religious dogmas, not scientific propositions. Austrians view economics as a science, a body of theory and application that helps us understand the world. Keynesians see economics as a set of political tools useful to rationalize and justify an a priori faith in unlimited government. Krugman, like Keynes himself, dislikes businesspeople, consumers, and especially entrepreneurs and investors, and prefers a world in which an elite cadre of intellectuals and bureaucrats controls most investment, production, and consumption decisions. Fine, everyone has a right to his personal belief system. But let’s not pretend there’s anything scientific about the multiplier, the marginal propensity to consume, the liquidity trap, and the other relics and sacraments of the Keynesian religion.
Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion. With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt. The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
Although many were up in arms when the Fed said it would buy $600 billion in government debt outright for the previous round, QE2, all seems quiet about the magnitude of QE3 because it doesn’t come with huge up-front total price tag. But by year’s end the Fed’s balance sheet could hit $4 trillion.
With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt.
The stock market has been hitting record highs for the past two months as investors seek to capitalize on the Fed’s easy money. After all, as long as the Fed keeps the spigot open, nominal profits are there for the taking. But this is a house of cards. Eventually, just like in 2008-2009, the market will discipline the bad actions of the Fed and seek to find the real normal.
— Ron Paul
The whole Keynesian edifice was constructed on the preposterous supposition that economic advice is offered to a genuinely benevolent despot, an entity devoid of its own interests, and presumably willing and able to implement, without resistance, the advice offered to it. The early monetarist challenge was directed to the Keynesian analysis and, in itself, did not question the implicit political supposition. …
Effective authority lodged with an hereditary monarch might represent the closest historical parallel to the implicitly presumed Keynesian model of politics.
— James M. Buchanan
In the 1920s as now, fashionable opinion could see no major crisis coming. Then as now, the public was assured that the experts at the Fed were smoothing out economic fluctuations and deserved credit for bringing about unprecedented prosperity. And then as now, when the bust came, the free market took the blame for what the Federal Reserve had caused. It is fitting that a century of the Federal Reserve should come to an end at a moment of economic crisis and uncertainty, with the central bank’s leadership confused and in disarray after the economy’s failure to respond to unprecedented doses of monetary intervention. The century of the Fed has been a century of depression, recession, inflation, financial bubbles, and unsound banking, and its legacy is the precipice on which our economy now precariously rests.
In the 1920s as now, fashionable opinion could see no major crisis coming. Then as now, the public was assured that the experts at the Fed were smoothing out economic fluctuations and deserved credit for bringing about unprecedented prosperity. And then as now, when the bust came, the free market took the blame for what the Federal Reserve had caused.
It is fitting that a century of the Federal Reserve should come to an end at a moment of economic crisis and uncertainty, with the central bank’s leadership confused and in disarray after the economy’s failure to respond to unprecedented doses of monetary intervention. The century of the Fed has been a century of depression, recession, inflation, financial bubbles, and unsound banking, and its legacy is the precipice on which our economy now precariously rests.
Central planners cause chaos; free people create order. - Tom Woods
Start video at 7:30. Worth your time, particularly if you haven’t read Woods’ Rollback and Meltdown.
“My wife is a Keynesian”
Keynesian stimulus falls out of the sky in Russia.
Related: The Magical Trillion Dollar Coin.
There’s been lots of discussion lately regarding the minting of a “trillion dollar platinum coin.” The scheme was first promoted by Krugman less than a week ago, and has been discussed heavily the last few days - with “progressive” statists diligently supporting the cause.
Yesterday, Paul Krugman noted:
Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous.
So, Krugman is in support of minting a platinum coin and declaring its value a trillion dollars. And why wouldn’t he be? This is not, functionally, any different than what the Fed and Treasury do now. The Fed creates “money” as simply as typing on a keyboard.
Philip Diehl, “the former Mint director and Treasury chief of staff who, with Rep. Mike Castle, wrote the platinum coin law and oversaw the minting of the first coin authorized by the law,” explains how money can be simply divined out of thin air:
The accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the Treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.
Indeed: the same applies to all fiat currency. Therein lies the problem.
But back to Krugman: as is customary with him, it is a game of partisan politics. His opponents are, naturally, evil dolts who wish to see the world burn for their own selfish profits (in that very piece he calls them “ruthless” and “crazy”). In truth, this is a charade he must maintain so that people don’t catch on to how much the two major parties actually have in common. The alternatives are default and inflation, as he notes. But in truth, by paying debtors with money valued less than what was borrowed, inflation is merely a slower form of default. So Krugman makes a distinction without much difference.
What Krugman is peddling here - what he’s pretty much always peddling, to be honest - is magic:
Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.
Here, again, is Diehl:
Once the debt limit is raised, the Fed could ship the coin back to the Mint where the accounting treatment would be reversed and the coin melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.
So it’s like the coin never happened! It’s all make-believe money… so what, then, are the debtors “receiving”?
Diehl, too, believes in the magic of this make-believe money:
There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit.
This is magical thinking, and like Tinkerbell and Santa Claus, they need you to believe for the pixie dust and reindeer to take flight. How can such activity do “no economic harm at all” or have “no negative macroeconomic effects”? If I paid a debtor back with pennies on the dollar, would he feel no economic effects? Would our future economic activity not be harmed?
And if this works “just like additional tax revenue or borrowing,” then why must there be any taxes or borrowing at all? Why not just mint trillion dollar coins ad infinitum? And why not mint a quadrillion dollar coin and profit? And why don’t we all do this? If there are truly no negative economic consequences to simply declaring something with little value as having higher value and paying debts with this “money,” then why aren’t all homes installed with counterfeiting machines as a means to economic prosperity?
Explaining this magic Keynesian thinking, Krugman actually puts his foot in his mouth a bit:
It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.
For starters, he’s using the modern lie that monetary expansion is not inflation. As I have frequently noted: this is a purposeful shift in definition to obscure the cause (monetary policy) from the consequence (price increases): “By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money. This is not unlike suddenly using the word dog to instead refer to dog piss.”
But here he admits a couple of things he doesn’t tend to. Notably, he states that printing money does cause price inflation, just not “under current conditions.” Of course, he has a long track record of always finding ways to make “current conditions,” whatever those may be at the time, just right for printing money. Still, he’s exposed himself. Furthermore, he concludes that this process of turning government debt into “debt held by the public” as “doing no economic harm at all.” I wonder: if my student loan debt eventually turned into debt held by Krugman, whether he would conclude that it did him any economic harm.
In any case, let’s understand, specifically, this trillion dollar coin a little bit and why it is completely laughable.
First, let’s assume that it is a full one ounce platinum coin. Currently, such a coin has a spot price of approximately $1,500 (and is actually $100 less than a gold coin - but a gold coin doesn’t sound as impressive, does it?). So what is this coin’s true market value relative to the fiat value that Krugman and his cronies wish to “impart” on it?
$1,500 out of a $1,000,000,000,000 is 0.00000015%. That’s 3/2-billionths of a percent.
Most people have a hard time conceptualizing very large numbers, myself included, so let’s think of it another way. That is approximately the same relationship between one M&M and 400,000 5lb bags of M&Ms. Imagine eating ten pounds worth of M&Ms every single day (that’s a hundred ”servings” a day) for 550 years. That’s eating 35 M&Ms every single minute of every single day of every single month of every single year, without sleep, for nearly eight lifetimes. Now contemplate the value of a single M&M in that context. That’s the same relationship one penny has with the combined values of twenty $10 million mansions.
Its value is negligible. It is, essentially, zero.
So using a platinum coin is merely ceremonial. It is a way to give something the appearance of value since, again, most people have a hard time conceptualizing very large numbers.
In truth, the platinum coin has basically the same value, relative to a trillion dollars, as this:
But if monopoly money were used, then people might soon realize that the federal reserve notes in their wallets are hardly any different (as Diehl admitted: it is the same “accounting treatment”) - and as such people may begin to question the legitimacy of the entire Keynesian/monetarist enterprise.
And we can’t have people learning the truth, now, can we?
With some free time today, I thought it would be interesting to visit the Philadelphia Federal Reserve - specifically its “Money in Motion” exhibit. It felt good traipsing around the displays laughing at the content while proudly wearing my Hans-Hermann Hoppe “Privatize Everything” t-shirt. There was even one area that asked people to determine if a federal reserve note was “real money” or counterfeit - I slapped the “fake” button every time. After a while, though, I needed to get out as my nausea was beginning to overtake me.
The exhibit was… whatever the opposite of “honest and enlightening” is. Notably, and of course predictably, the “What is inflation?” display defined inflation as merely “an increase in the overall level of prices,” instead of what it actually is: an expansion of the money supply and that price inflation is purely a consequence of monetary inflation. This, as I have noted many times before, is a purposeful shift in definition to obscure the cause (monetary policy) from the consequence (price increases): “By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money. This is not unlike suddenly using the word dog to instead refer to dog piss.”
But amidst the half-truths, misinformation, and outright lies there was something I found ironically honest, if only the average observer would be able to piece the truth together. In the “Early Money in America” display was a short nugget on wampum:
“Small, rounded shells with holes drilled through their centers were threaded onto strings and used as a primitive medium of exchange between Native Americans. The first colonists soon learned to use this Wampum as money, and they also learned to manufacture it cheaply, causing the first “inflation” in America.”
There it was, the truth about inflation: “they also learned to manufacture it cheaply, causing the first “inflation” in America.” Even those who would believe the obfuscation offered by the Fed’s “What is inflation?” display, if they weren’t mindless, would have to pause and consider this statement - particularly in light of what they likely held in their hands.
You see, upon entering the exhibit, every visitor is handed a small bag of shredded federal reserve notes (which, according to the packaging, “represents about $100”).
In its shredded form this “currency” is useless - which means its lack of value is revealed. Federal reserve notes, which gain their usability only through fiat (or decree), lack the hallmarks that emergent money has shown for millennia. A stable currency has these characteristics: it (1) must be relatively imperishable (retain its value over log periods of time - thousands of years - without decay), (2) must be easily divisible without losing value, (3) must be malleable and ductile, able to be shaped into more convenient and portable forms, (4) must remain stable in a wide range of temperatures and climates, (5) has never been worth nothing (has intrinsic value, or rather value as something other than an intermediary of exchange), (6) must be fungible (an ounce from one source would be equal and identical to an ounce from another source), (7) supply is finite without being so rare as to be difficult to use (relative scarcity), (8) new supply is relatively uncommon and difficult to acquire, (9) has a long-standing history of being used as currency, and above all else (10) free people have used it as a medium of exchange or intermediary of trade.
Federal reserve notes, like the wampum those many years ago, is manufactured cheaply and ultimately worthless on its own - triggering the same inflationary consequences.
A robber who justified his theft by saying that he really helped his victims, by his spending giving a boost to retail trade, would find few converts; but when this theory is clothed in Keynesian equations and impressive references to the “multiplier effect,” it unfortunately carries more conviction.
— Murray Rothbard, Anatomy of the State
[L]et us concede for the sake of argument that there is, say, $10 billion in total reconstruction spending, and that this money sucks only unemployed workers back into production; no other output suffers. Just for a specific example, suppose that the $10 billion ends up going to 1 million previously unemployed workers, who each earn $10,000 over a few months repairing the damage. Official GDP goes up, because (by assumption) the output on other items follows the same path it otherwise would have, and now in addition we have the “finished goods and services” of the new window panes, shingles, telephone lines, etc. being produced over the next few months. Can we say in this case that the storm “helped the economy”?
We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare. For in this hypothetical case, the boost to GDP would go hand-in-hand with a demonstrable reduction in aggregate economic well-being. In particular, the people spending the $10 billion would be out $10 billion. By construction in this example, their consumption and accumulation of other durable goods is the same, but they are also spending an extra $10 billion just to repair storm damage. So their savings is necessarily lower by $10 billion, and they have nothing to show for it.
In contrast, the previously unemployed workers are up by $10 billion. Yet it’s not a simple transfer or redistribution—these people had to work for a few months to earn that money, so they didn’t actually gain a full $10 billion, as if they had just been handed the money for free. Thus, to the extent that we want to engage in aggregate measures of human well-being, the only sensible conclusion is that “society” or “America” or “the economy” is poorer on net. To repeat, this is because one group of Americans (those suffering storm damage) are down $10 billion and have nothing new to show for it, while another group of Americans (the 1 million previously unemployed who now get hired to fix the damage) are up, but not the full $10 billion, because of the value of their forfeited leisure.
The “macro” case of an economy with idle resources, suddenly being jolted out of its rut by a hurricane, is analogous to a “micro” case of a man who was laid off, agonizing over what to do with himself. Should he go back to school, apply to work at fast food restaurants, start his own lawn-cutting business…? Then, in the midst of his indecision, he realizes his house is on fire! The man suddenly knows exactly what he needs to do with himself—he has to run to the kitchen and grab the fire extinguisher. Yet would anybody dare argue that the fire, notwithstanding the property damage to the house, at least solved the man’s problem of idle labor?
The Keynesian intellectual “fog,” for that is what the whole discussion surely reflected, was motivated, in part, by the underlying purpose of securing widespread public and political acceptance of an activist fiscal policy regime. To convince the noneconomist public to abandon the classical precepts of fiscal prudence, the Keynesians felt that they needed to show that public debt did not matter because, after all, “we owe it to ourselves.
— James M. Buchanan
Worrying that some low-skill jobs have “moved” overseas and may never return is like worrying that after being promoted you’ll never again be able to clean toilets for a living.
And raising tariffs to “protect” jobs in favored industries - like both Obama and Romney vowed to do in the recent debate - is like shooting your foot to keep the doctor busy. This tax placed on the consumers of those cheaper goods (which is, ultimately, what every tariff is) would have otherwise served another purpose of higher utility to the consumers. The consumers would have been better off, in other words. And we are all consumers. Furthermore, following the candidates’ logic, they’d have to agitate against all other sources that, in their view, ‘limit jobs’: from machinery (low-skill labor replaced by machines) to durability (the longer goods last, the less demand for manufacturing replacements) to advances in education and skill (if workers are more productive, fewer workers would be needed for the same work).
As I noted over a year ago when I addressed tariffs and other silly proposals for ‘creating jobs’: “Take away the ability of people to make free decisions for themselves and you can top-down all sorts of results favorable to bureaucrats and unthinking [statists]. Why not outlaw emails? That will certainly create more postal worker jobs. Or shut down shovel factories and shovel imports. If everyone has to dig with a spoon, more people will be forced to dig the same size hole.”
Keynesian economics is absurd at its core. It literally claims that the conventional laws of economics go out the window in a “liquidity trap.” (Krugman went so far as to explicitly say that mercantilism works in our current world.)
Because they are based upon a falsehood, Keynesian policies fail empirically, quite obviously to anyone with an open mind. Bright guys like Krugman have to come up with a handful of ad hoc reasons to explain away all of the success stories from his opponents; and he can always point to an unobservable alternate reality to “prove” the efficacy of his own remedies.