Dear Keynesians: Your Sad Devotion to Your Failed Religion Hasn’t Conjured Up a Recovery–Here’s Why

That any schoolkid could predict eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult.

The Keynesian Cargo Cult’s ability to print and squander money is insignificant next to the power of Diminishing Returns. By now we all know two things about the Keynesian Cargo Cult’s religion:

1. It has failed to conjure up the recovery its sadly devoted believers insist is “just around the corner if we only borrow and squander more money” because…

2. Its main tenet–that the problem is “lack of aggregate demand,” i.e. people will buy more stuff made in China and corporations will open more stores to sell the stuff made in China–if only it was dirt-cheap to borrow more money–is completely, utterly, painfully false.

The central premise of the Keynesian Cargo Cult is that this mechanism of making it cheap and easy to borrow money will work a kind of magic that can only be manifested by dancing around a fire at night waving dead chickens and chanting “humba-humba.” The Keynesian Cargo Cult calls this magic “animal spirits.”

Unfortunately, waving dead chickens while dancing around a fire doesn’t do anything in the real world, and neither does making it cheap and easy to borrow more money. It turns out that prudent people have no interest in borrowing more money, even at low rates of interest, and imprudent people are happy to do so but will stop paying the loan as soon as something untoward occurs in their finances. The cheap, easy-to-get loans default and either the banks who made the loans collapse or the taxpayers have to bail out the banks who foolishly lent money to imprudent borrowers at super-low rates of interest.

Corporations, meanwhile, look at the real risks of expanding business in a debt-saturated economy distorted by Keynesian Cargo Cult policies and realize that gambling capital on the possibility that waving dead chickens and chanting “humba-humba” will actually increase profits is a truly stupid bet, so they borrow the nearly-free money and invest it in various carry trades overseas that return a virtually risk-free return, thanks to the nearly-free cost of borrowing mountains of money from the Cargo Cult.

The Keynesian Cargo Cult is stubbornly blind to the two key dynamics of the real-world economy: diminishing returns and the S-Curve. Diminishing returns result when a system’s ability to produce an economically valuable output declines.

Higher education is a good example: tuition has soared $1,100% while the output (value of a college degree) has declined precipitously. A recent major study,Academically Adrift: Limited Learning on College Campuses, concluded that “American higher education is characterized by limited or no learning for a large proportion of students.”

‘Academically Adrift’: The News Gets Worse and Worse (The Chronicle of Higher Education)

Meanwhile, student loans exceed $1 trillion, only 37% of freshmen at four-year colleges graduate in four years (58% finally graduate in six years), and 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college–retail clerks, waiting tables, etc.

The Keynesian Cargo Cult solution to the diminishing returns is to provide more debt to students, making them into debt-serfs for life. The cruel stupidity and immorality of the Keynesian Cargo Cult knows no bounds because they refuse to accept the reality that diminishing returns cannot be fixed by more debt and more squandering of good money after bad.

The truth is the failed cartel of higher education has to be leapfrogged and left in the dustbin of history: here’s a model that lowers costs by 90% and aligns the output with the real economy: The Nearly Free University and The Emerging Economy.

The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013)

The Keynesian Cargo Cult’s solution allows no feedback from the real world, and allows no mechanism to discipline the imprudent borrower/speculator. If imprudent borrowers take on too much debt, the Keynesian Cargo Cult’s solution is to offer them more credit at rates they can afford–near-0% if necessary.

If a speculator borrows money and loses it in a high-risk gamble, the Keynesian Cargo Cult’s solution is to force the taxpayer to make good the gambler’s losses and then give the speculator more nearly-free money to continue gambling.

This “solution” works the first time around, less well the second time around, and triggers a collapse the third time around. This lifecycle is called the S-Curve:

The Keynesian Cargo Cult inflated one credit bubble in the 1990s, another in the 2000s, and by an extraordinary expansion of credit and lowering interest rates to near-zero has managed to Beat the Devil and inflate a third credit bubble in the 2010s.

That any schoolkid could predict waving dead chickens and eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult. But since the Keynesian Cargo Cult is headed by a Nobel Prize academic economist, the Cargo Cult members effusively praise the Emperor’s fine (and nonexistent) robe.

You poor, dumb, deluded fools. You’ve destroyed our economy, our values and our ability to deal with reality. Your faith is as boundless and disconnected from the real world as your policies.

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  • Harry Skip Robinson

    That was fun and to the point, but I still don’t think they will understand it. Part of their dogma is that they can alter human nature through education, which you can, but not people, first and foremost, acting in there own self interests. Only once people have established an economic foundation can they really start focusing on others. They think it is bad to take care of yourself first, even though to do so, you must take care of others at the same time. An example is building a chair to make money. To actually make money you have to sell it to someone who needs a chair. They consider all profit immoral, even if it is reinvested to make the next chair. They only see what fascism, the use of taxation and regulation by the ruling oligarchy to control the resources and means of production, believing that this is capitalism rather than the Keynesian fascism it really is. They think, as the educated and enlightened, they can macro-engineer a society to improve those things only market economies have been shown to do. They’re generally not poor or deluded, just naïve and foolish. However the internet is helping to wean them off their arrogance and naivety.

  • sufferingsuccatash

    This article is idiotic. If Smith thinks that the present FED policy is Keynesian, then he is lost—-truly lost. This is corporate fascism whereby the FED is lavishing $$$$ on the banks—-it has trickled into speculative international investment markets and commodities. It has done nothing to stimulate the economy in any broad nor productive manner—by increasing employment nor stimulating demand. QE is a scam and federal budgets have been austerity budgets that have done little to rebuild our failing infrastructure nor put people to work. Generally this sight does good stuff, but this is a whiff.

    • jadan

      Agreed, succatash. Smith confuses ridicule with rational thought. Loaning money at interest is not Keynesian stimulus. FDR’s WPA was Keynesian stimulus, using government power to create jobs when the almighty market falls on its stupid butt and can’t get up under its own almighty power. The only stimulus that helped move this economy out of the ditch in this current downwave was the money Obama GAVE directly to the taxpayers. I went out and spent mine. Bought an electric lawn mower. The economy emerged from recession we are told with a burst of aggregate demand.

      Another bit of nonsense in this article is the idea that education is an “economically valuable output” . This thinking is completely ass backwards. Education creates an economy’s capacity to create value, it is not itself an “output” of the “system”. Because colleges & universities have adopted the business model to define themselves, they have failed to produce students ( not “economically valuable outputs”) with the ability to think. Smith does not understand education at all. It is the very definition Keynesian stimulus. Education is a universal entitlement without which modern economies cannot exist.

      Smith, you don’t know WTF you’re talking about.

      • sufferingsuccatash

        Agree wholeheartedly with you jadan—a jubilee is, in fact, precisely what is needed to tame the $11-12T of household debt—instead the gov’t gave a jubilee to the banks and then a hand out. The American public has missed this in its assessment of Obama as some kind of “socialist” when he is anything but that. However, internationally it is a different story all together. The Brazilians, Indians, and especially the Russians and the Chinese watched carefully as the US allowed its banking system to act criminally and then reward the criminal element to boot. They must be wondering how realistic it is to trust the political leadership that executed such nonsense.

        • jadan

          A jubilee ( thanks to Michael Hudson’s clear view of economic history) would kill the banks. Not even the QE bail out strategy has been able to save them from themselves: they are icons of elite mismanagement. I really don’t understand people like Charles Hugh Smith and even Wm Greider ( Secrets of the Temple) who seem to deliberately ignore the private nature of the monetary system. They refuse to indict it for its gross incompetence and criminality which stems directly from its nature as a private club. What are they afraid of? As you say, the rest of the world that embraces to some degree principles of the public interest can see clearly who we are and what we are doing. The US is no longer the role model for nations. Our institutions are venal and corrupt. We have no leadership. What we offer the world is “privatization”. The BRICS can see through that fraud.

    • Name

      Today’s policies are about saving the power structure, not the economy. TPTB could care less about the real state of things as long as they wind up on top after the inevitable collapse. I doubt Keynes would have endorsed the wounded-animal economic policies our collossal failures, I mean leaders, are foisting on us today.

      • sufferingsuccatash

        Right on about saving and preserving the power structure of the oligarchs—-in fact saving the power structure may mean depressing our own economy. It is truly a perverse situation we find ourselves in at the present. The political leadership is truly just a menagerie of surrogates for the elite.

  • Henry Luciano

    I’m going with oil companies on who did the destroying. One sentence, more plausible than a bullet point scratch session from a troubled libertarian-con. There’s a large contigent of rabid hatred for Keynes. It’s senseless to blame it all on Keynes but the Casino operators want to keep the message simple and stupid for your consumption. Hating black people, mexicans or illegals is almost dead. It has to be a full frontal attack on Government that doesn’t serve the most powerful, relentlessly, and ‘dag-nab’ it Keynes is just as bad as Marx, or someone “who don’t want to work.”
    Hugh’s oversimplification should be posted for the masturbators of zero hedge. There the discussion would be further distilled: comments about printing presses, Gold, one lil’ pig will provide a passing reference to Zimbabwe, two or three more will unleash a racially obscure fury at the food stamp people, dorm buddying about self sufficiency and so forth.