by David Stockman, DailyReckoning:
The Keynesian statists at the Fed think the devastating financial busts we’ve suffered since 1987 were due to a mix of too much investor exuberance, too much deregulation, a one-time housing mania and a smattering of Wall Street greed and corruption, too.
And that’s not to overlook some of the more far-fetched reasons for the two big financial meltdowns of this century. Foremost among these is the Greenspan-Bernanke fairy tale that Chinese workers making under $1 per hour were saving too much money, thereby causing low global mortgage rates and a runaway housing boom in America!
Needless to say, not only are these rationalizations completely bogus; but so is the entire underlying rationale for Keynesian monetary central planning.
The claim that market capitalism is chronically and destructively unstable and that the business cycle needs constant management and stimulus by the state and its central banking branch is belied by the historical facts.
Every economic setback of modern times, including the foundation events of the Great Depression — was caused by the state. The catalyst was either inflationary war finance or central bank fueled credit expansion, not the deficiencies or inherent instabilities’ of market capitalism.
Nevertheless, the Fed’s model robs the millions of workers, entrepreneurs, investors and savers who comprise the ground level economy and the billions of supply-side prices for labor and capital through which they interact and ultimately generate output, income and wealth. Instead, the Fed focuses on the macroeconomic aggregates as the key to achieving its so-called dual mandate of stable prices and maximum employment.
Essentially, the United States is held to be a closed economy resembling a giant bathtub. In the pursuit of “full employment,” the central bank’s job is to keep it pumped full to the brim with “aggregate demand.” But the domestic macroeconomic aggregates of employment and inflation cannot be measured on an accurate and timely basis.
Neither can they be reliably and directly influenced by the crude tools of the central bank, such as pegging the money market rate, manipulating the yield curve via QE, levitating Wall Street animal spirits via wealth-effects and various forms of open-mouth intervention such as “forward guidance.”
Now, these Keynesian aggregate demand management tools did appear to work for several decades prior to the arrival of Peak Debt. But that was a one-time monetary parlor trick. Households and other economic actors were repeatedly induced to “lever up” via periodic cycles of cheap-money stimulus, thereby supplementing consumption spending derived from current incomes with the proceeds of incremental borrowings.
That did goose “aggregate demand” but only on a temporary and artificial basis. That is, ever-rising household leverage ratios simply borrowed economic activity from the future; they did not generate new, sustainable wealth. And now monetary stimulus doesn’t work anyway because household balance sheets are fully leveraged.
This basic reality is completely ignored by the central bankers, however, because they are in thrall to the primitive idea handed down by J.M. Keynes himself: namely, the notion that the capitalist business cycle is always running short of an economic ether called “aggregate demand.”
The latter is purportedly an independent quantity of household and business “spending” which should be happening in order to fully utilize domestic labor and business capacity. The term independent needs special emphasis…
Under the historical and sound economics of Say’s law, supply creates its own demand. Production comes first. Aggregate demand is not independent; it is a derivative of production and income. It is what households and businesses choose to spend, rather than save, from current income and cash flow.
Prior to the confusions introduced by John Maynard Keynes, most economists understood the common sense proposition that production comes first. In an honest and stable economy, it still does. Accordingly, true “aggregate demand” never needs any help from the state and most especially its central banking branch.
That is, the true source of increased aggregate demand is more labor hours and improved productivity, increased entrepreneurial effort and managerial efficiency, greater savings and investment and more technological innovation and invention.
By contrast, today’s central bankers who lean toward the Keynesian texts are statists. They claim to know that the actual level of “aggregate demand” derived from current production and savings is incorrect and chronically deficient.
Accordingly, the job of the state — the fiscal authorities in the original 1960s Keynesian incarnation and since Greenspan essentially the central bank — is to supply this chronically missing quotient of “aggregate demand.”
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