Keynes Is Dead; Long Live...Who?

We are about to pump trillions of dollars into the world's economy...again. 

We have been doing this since 2008. It hasn't really worked as planned, and it has actually created a totally unprecedented economic situation where there is no clear path forward. 

What am I talking about? 

John Meynard Keynes published The General Theory on Employment, Interest and Money in 1936. When he published his opus, the world had been mired in economic depression for about seven years. At that time, the world was experiencing an economic situation that could be very generally be described like this...

...Too Little Money chasing Too Few Goods...

Keynes response was simple - add more money through government borrowing and spending, and by lower interest rates to facilitate borrowing and spending. 

Where this was done, the effect was almost immediately positive!

With more money now available to chase those too few goods, companies invested so that more goods could be produced to meet the demand of this new money. 

Producing more goods required the hiring of more people, who themselves received more money that also resulted in more investment as their money chased even more goods. 

In short, the "animal spirits" that Keynes famously predicted were released, and economies grew!

Note - World War Two helped by supercharging the "new money" side of the equation as the US economy geared up to fight.  

Fast forward 94 years and everyone is a Keynesian now. 

On the Left, the answer to economic stagnation is given as providing more cash to the poor through hand-outs and tax cuts. 

On the Right, the answer to economic stagnation is given as reducing interest rates and lowering tax rates so businesses can borrow and invest and hire people, thereby growing the economy.

In essence, the answer to economic problems are the same on the Left and the Right - add more money and all will be well.

As we respond to the challenge of COVID 19, governments literally everywhere are planning to borrow like crazy, handing out cash to people and businesses like candy, and Central Bankers have lowered interest rates below zero in real terms to encourage even more borrowing and spending. 

If Keynes' theory is alive and well, then all should be well. 

Which begs the question - how is Keynes' theory actually doing?

We responded to the Great Recession in 2008-09 in typical Keynesian fashion. Governments worldwide borrowed and spent at unprecedented rates, and central banks lowered interest rates to their lowest level in recorded human history in order to stimulate borrowing and spending and encourage economic growth. 

Yes, you read that right - interest rates from 2008 to about 2018 were lower than at any time, literally ever. In those ten years we enjoyed the ability to borrow at the lowest interest rates in 5,000 years!

If Keynes' theory still works, this kind of stimulus should have caused economies worldwide to literally explode. And yet, the United States has not experienced annual economic growth above 3% since Dubya was the president - almost 20 years ago.

Why did this not turn out as advertised?

Well, I suspect that almost no one is sure. I even suspect that many decision-makers don't even know that there is a problem.

We do know that in spite of having unprecedented amounts of new money in the world's economy, there is almost no inflation. In fact, there is significant deflation.

In a Keynesian world order, this is not supposed to happen.

We do know that as we added more and more money, the velocity of that money - the speed at which money moves in the economy as it is earned and invested and spent - has actually dropped below its lowest rate ever, which was recorded in 1932 in the absolute depths of The Great Depression.

In a Keynesian world order, this is also not suppose to happen.

As seen above, we know that when Keynes penned his theory, the world was in a situation of...Too Little Money chasing Too Few Goods. 

In the last two years, American corporations had so much cash on hand that they felt comfortable spending well over a whopping $2.2 trillion on stock buybacks in American stock exchanges - often while the managers of those same companies were selling their own shares into the resulting share price appreciation, earning massive personal windfall gains. 

Companies that are in a cash crunch do not spend money on buybacks. They see capital as a precious resource, and invest in research and development, and they hire staff in order to better compete and survive. This simply is not the world we live in. 

The economic situation that we are in today may be best summarized as this...

...Too Much Money indifferent to Too Many Goods...  

After almost a century of his theory being applied, Keynes would not recognize our world. 

In fact, we have never been in an economic situation like this.  

The way out of what may an impending economic quagmire courtesy of COVID 19 is probably not to add more money. For want of any other economic theory, that is precisely what we are about to do in response to the pandemic. 

I have to think that the result of this unprecedented time in economic history must be wide-ranging bankruptcies, as people and companies that have been living off credit courtesy of ten years of the lowest interest rates in human history face the dim reality that this borrowing must end at some point. 

As well, I have to think that inflation of some sort will have to appear.  

Or...conversely, and strangely, I suspect that lowering the most important price in the economy below zero - that price is the interest rate, as the most important price in the economy is the price of money - may cause the very deflation that adding money to the economy is supposed to avert. As in, when the price of money is below zero, why would the price of anything else go up?

In the end - I don't know.

But what I do know is that I can't see how any of this is bad for the price of Gold!

That Barbarous Relic never met John Meynard Keynes. 

Gold has been what it has been for millennia, and what it has been is a store of real wealth that no government or any theory has ever been able to erase.

Put another way - if someone offered you a bar of Gold, would you say "no"...would almost anyone in recorded human history have said "no" to the idea of having Gold? 

You know where I am investing next...

Stay safe!

Random Thoughts...Biden, Trump, COVID

The Next US President: Biden will take on Trump in he next US presidential election. Game on!

The US Right accuses Biden of being mentally deficient owing to age. He does look OLD when not 100% focussed on looking otherwise. He moves around like he is OLD; he glances about like he is OLD; he forgets things when he speaks from time to time like he is OLD....

...this is because he is OLD.

Although he is likely closer to a heart attack than Biden, Trump comes across like he is 20 years younger than Biden, in spite of the fact that there is only three years between them in age...Biden is 77 and Trump will be 74 at the next election. The US Left essentially ignores this issue - it is key.

Much will rely on who Biden chooses as a running mate as most will look to that person as a very real "president in waiting" when they vote in November. Biden has about a 7% lead in polls versus Trump today...expect this to disappear.

Note - There is a very real possibility that one of these men will have a medical issue owing to age and will not make it to the November vote. The man I am worried about is not Trump.

COVID 19 and the Economy: We are starting to see just how much damage COVID 19 is doing to the world's economy.  

For example, 11% of the entire US workforce applied for unemployment insurance benefits in the last three weeks...only 69% of renters paid their rent for April in that country, and this is just getting started.  

Governments are plunging money into an international economy that is not operating. Central banks have lowered rates to zero so people who aren't borrowing money will borrow and spend. The efforts of policy makers will only work if we are soon on a trajectory that is at least semi-normal. There is no plan to do this.

But will these fiscal and monetary efforts work at all?  

We have been priming the pump for ten years incurring massive public and private debts courtesy of the lowest interest rates in human history, and endless government spending. 

The economies of the developed world have not responded as economic modelling suggests they should - the more money we have added to the pump, the slower it has operated as the velocity of money has inexplicably slowed to its lowest rate since the Great Depression. Keynes never said that countries should borrow and spend past the point of fiscal saturation.

The world is changing...

COVID 19

We are in the midst of a worldwide pandemic.

Some thoughts...

Numbers: The world topped 1 million infected yesterday. These are only people who have been tested for COVID 19. People who show no or few symptoms are usually not tested, and as most people who catch this malady will show few or no symptoms, it stand to reason that the 1 million reported infected persons is likely a very low number.

This matters because...

Death Rate: The reported death rate has ranged from a low of under 1% to a high of over 5%. If we are not testing the majority of persons who catch this malady and we only test those who present serious symptoms, then the reported death rate is not the death rate from COVID 19, but it is closer to the death rate amongst those who presented serious symptoms and who were tested for COVID 19, which is a small subset of all of those who caught COVID 19. Once this is over, we will be able to calculate the actual death rate from COVID 19....it is very likely that it is not nearly as high as is being reported.

This matter because...

Actions Taken: The reported death rate is a prime driver behind all of the public health actions being taken to stop the virus, which actions have largely shut down the Western World. These actions are doing enough damage the the world's economy to potentially cause a permanent decline in living standards worldwide. 

This matters because...

Living Differently: People are learning how to live quite differently - walking more; cooking at home more; working at home; spending time with family; not travelling. The "extras" that we used to pay for like vacations and dining out have disappeared. With a serious economic decline they will not come back any time soon, not because of COVID 19, but because we will not be able to afford them.

This matters because...

Mother Nature: The COVID 19 crisis and the world's response will mark the largest reduction on Greenhouse Gas emissions ever. There will be a significant push to continue to live a more environmentally-friendly way once this is over... 

Hopefully we are wise enough to take advantage of this opportunity.