Keynesians Chortle in Their Joy

Now that Ben Bernanke continues to have a friend in the White House, all’s going to be well in the world- at least economically.  At least, that’s the impression large segments of the media is promoting.  

When any segment of the media and market participants are feeling so good about things that they appear to chortle, one may want to fear a reaction in the opposite direction.  I continue to believe that business cycles do exist, and that modern governments are specialized to do well certain important things, but that one of those things is not to be able to repeal business cycles.

From Merriam-Webster’s online dictionary: 

Definition of CHORTLE
intransitive verb
: to sing or chant exultantly <he chortled in his joy — Lewis Carroll>
: to laugh or chuckle especially in satisfaction or exultation

Here are two examples of Keynesian chortling this past week.  I certainly hope for the best, but analytically I cannot understand their level of enthusiasm for the immediate prospects ahead for the U.S. and global economic performances. 

First, here is an article that is almost a parody of cheerleading for the central authorities.   Here’s the headline, which is not joking (LINK to article).  

Economic optimism now official

With some quotes:

Economic optimism is now official. The year ahead could be “a very good one for the American economy,” Ben Bernanke, the chairman of the Federal Reserve, declared on Tuesday. If he turns out to be right, these words could probably be applied to the world economy as a whole…

In terms of objective economic and financial conditions, the end of this year looks like a turning point in the slow recovery from the global financial crisis. Outside the euro zone, which now accounts for just 17 percent of global output and will shrink to just 9 percent by 2060 according to the Organization of Economic Co-operation and Development,  economic statistics are clearly improving…

Assuming that Washington decides not to commit economic suicide on January 1, the business obsession with politics will then have nothing left to feed on. Business leaders and investors will be forced to redirect their attention to economics and the financial fundamentals of their businesses. They may be pleasantly surprised. Once this political uncertainty is neutralized, prospects for most of the world economy look pretty good.

Well, we can indeed hope he’s correct. 

It’s really not fair to just omit the eurozone or Britain, as combined they are about as important to the global economy as the U.S.  Also, the E.U. is China’s largest export market, so deteriorating demand in Europe will have important effects on Chinese and global growth.  Europe as a whole has a larger economic footprint than the United States.  Here’s some data on the state of various European economies.

Markit reported last week as follows:  (LINK to all Markit PMI data):

Markit Flash Eurozone PMI®

Eurozone sees ongoing steep decline as services suffers worst month since mid-2009

“The eurozone economy continued to deteriorate at

an alarming pace in November, and is entrenched

in the steepest downturn since mid-2009.

“Officially, the region saw only a very modest slide

back into recession in the third quarter, with GDP

falling by a mere 0.1%, but the PMI suggests that

the downturn is set to gather pace significantly in

the fourth quarter. The final three months of the

year could see GDP fall by as much as 0.5%.

“While it is reassuring to have seen signs of

stabilisation in some survey indicators, the overall

rate of decline remains severe and has spread to

encompass Germany, suggesting the situation

could deteriorate further in the coming months.

Maybe, though, it’s economic springtime in Britain? Unfortunately, probably not.  Here is Markit also from this past week on Britain:

Credit conditions 

Households signalled that their need for unsecured credit continued to rise in November, but the rate of growth was unchanged on the month and therefore still lower than at any time since March 2011…

Tim Moore, Senior Economist at Markit and author of the report said: 

“November’s survey highlights that the alleviation of strains on household finances has continued as winter approaches. A reduced squeeze on cash availability helped to stabilise debt levels, while pressures on savings were the lowest in two-and-a-half years. However, expectations for the year ahead remain subdued, as the dismal global economic backdrop means the recent easing in financial pressures is more a cause for relief than celebration. 

“The surprise uptick in consumer price inflation during October, alongside muted trends in employee earnings, suggests that the recent moderation in financial strains may prove somewhat transitory. Indeed, it may have already started to fray at the edges, since the gradual easing of financial pressure was uneven across the housing categories monitored in November. 

“In particular, tenants in the private rental sector signalled a deepening deterioration in their financial wellbeing over the month, likely a reflection of higher rental costs among those unwilling or unable to get on the property ladder.” 

It’s not only the eurozone and Britain.  Scandinavia is not following the Kaletsky script, either (LINK):

The onset of recessions in Scandinavia is proving no deterrent for bond and currency investors reduced to sifting between Europe’s least ugly markets… The economies of Denmark and Finland have both suffered contractions this year, while Swedish growth is stalling… 

And of course, Japan is back in recession.  China’s economy appears to be at stall speed.  Yet Mr. Kaletsky can tell us that if only the Federal Reserve would embark on yet another round of purchasing Federal debt so that the government can inject yet more deficit spending into the economy, thus avoiding the consequences of several years of record peacetime Federal deficit spending, the entire global economy will heal. 

Not only is this a bit too much like “magical thinking” for my taste, it also misrepresents Chairman Bernanke as being much more optimistic than he really has said he is.  After all, who can disagree with the Bernanke view that 2013 “could” be a good one?  But, is that opinion incompatible with the opposite one that next year “could” be a bad one?  And, what Fed chairman is not going to accentuate the positive?  Isn’t that in the job description?

Here’s another example of media excess favoring Keynesians.  This example came from an interview of  Bill McBride, better known as the founder of Calculated Risk (he is also called ‘CR’).

Most of our readers probably also are familiar with Mr. McBride (LINK to his blog).  What’s less well known is what a committed Krugmanite he is.  The side links on his blog show this.  They are almost all links to Dr. Krugman and his “acolytes” such as Professors Brad deLong and Tim Duy.  (CR used to feature Mish on the same sidelink section of his blog, but Mish is oriented to Austrian economics, and following some post(s) of Mish that were anti-Keynesian, CR dropped Mish from this list of featured blogs.)  I wondered if one of the blogs CR links to might have been non-ideological, titled Capital Gains and Games, but then I checked it out and quickly found this post, titled:

  Paul Krugman Hitting On All Cylinders

12 nov 2012
posted by stan collender

It’s always a really good way to start the day when you realize that a Nobel Laureate agrees with you.

Over at his own blog at The New York Times, Paul Krugman manages in two very short posts to hit on many of the topics I’ve been talking about lately, but to do it with a style, grace and cut-through-the-BS sarcasm that once again makes me envious.

So much for the possibility that this blog focused on simply reporting on politics/economics!  Collender’s blog simply looks like just another part of the Krugman Borg.

As Mr. Collender was to Paul Krugman, so was the interviewer of CR, named Joe Weisenthal, to CR.  Here is the amazing title of Weisenthal’s article (LINK):

The Genius Who Invented Economics Blogging Reveals 

How He Got Everything Right 

And What’s Coming Next

You can’t make this sort of stuff up.  As with Kaletsky’s article, the title is serious rather than humorous.  As evidence of this, here is the lede:

The economics blogosphere was invented in early 2005 by a retired technology executive in Southern California named Bill McBride.

Thank God for that, because his blog, Calculated Risk, has been an invaluable and influential read for numerous reasons.

For one thing, it’s always been right.

Thank the Almighty?  Is he serious?  (My goodness, even the fanbois on the Apple Forum I help moderate never go that far.  They know that even Steve Jobs himself was fallible.)  CR “invented” economics blogging?  No, even CR debunks that in his comments.  His blog has “always been right”?  Always?  

This is extraordinary- no, it’s extra-ordinary praise for anyone.  At least, anyone of woman born.  So here’s the set-up.  Weisenthal goes wild over CR.  CR’s blog almost exclusively links readers either to Paul Krugman’s writings or to people such as Stan Collender  It’s a Keynesian love-fest.  It strikes me as too much, too self-referential, and too exultant.  Too much chortling and not enough humility about how difficult it is to understand the present, much less predict the future.  This is the sort of attitude one would tend to see much more often at economic, and stock market, peaks.  (Though, one never knows…)

Here are some quotes from CR given in the interview, followed by my comments:

You’ve been around long enough to know that there’s a whole industry of gloom and doom, that the ZeroHedge mentality kind of guys. I’m almost 60 years old. All my life there’s been people telling me that the world’s gonna end for this and that reason in the next few years…. I don’t think so…

Well, yeah, and now we have the Mayan end-of-the-world “prediction” to “worry” about.  (To break the seriousness, here is a LINK to a blog with some pretty funny cartoons about said dire prediction.  Several people have agreed with me that they are LOL-level.  If you click through to any of the links in this piece, this may be the most worthwhile.)

Sorry, this is (once again) over-the-top rhetoric, this time from CR rather than Weisenthal.  Even the site for short-sellers that plays up the dark cloud rather than the silver lining, Zero Hedge, does not say “the world’s gonna end”.  What “Tyler Durden” (the head man (head men?) at ZH) does say is that too much money-printing means one should own gold, that the U.S. economy has been worse than it appears due in part to all the money-printing, and that the stock market has become a policy tool of the Fed.  Now, one can agree or disagree with any or all of those viewpoints, but there is no doubt based on innumerable surveys that the standard of living of the average American has declined since the NBER-defined end of the recession in June 2009.

Why did CR “go there”?  It would appear that he disagrees:  he thinks the U.S. economy is in pretty good shape.  

Back to the interview:

I remember when I wrote a post – I think it was in January of 2009 – you know who David Rosenberg is – he wrote a commentary back when what he wrote was free…, and I’m pretty sure about the timing that auto sales were going to collapse a lot further, and he had some arguments on it and I went and looked and thought “auto sales also can’t go too much further, people have to replace their cars.” And so I wrote this article that says look, auto sales are near the bottom – we were at a 9 million annual rate then- I said there’s just no way – we have to be selling 12, 13,14 million because people need new cars every 5-7,8 years…

And that’s the same kind of logic that I used on the housing. You just kind of look at it and go, after a while, there’s all this excess supply that was built, then people pulled back and lived with their parents – but people don’t want to live with their parents very long. That supply gets absorbed.

Yes, but.  The big “but” is that perhaps little or none of the partial rebounds in housing and autos would have occurred without massive deficit spending in association with Fed money creation, at least so I guess.  To use CR’s language, the fact that people “needed” new cars and homebuilders desired much more business did not mean the buyers of these expensive products could afford them without the Fed’s printing press going into overdrive.

Finally, CR said in this interview:

I’m not a roaring bull, but looking forward, this is the best shape we’ve been in since ’97 or something.

’97 of course is the year in which Bill Clinton began his second term as president.  So CR is overtly saying that the “Obama economy” (if I may say that, though of course no president can control the gigantic U.S. economy) of 2013 parallels the “Clinton economy” of 1997.

This strikes me as the most important quote in the interview.  He really believes that the U.S. circa late 2012 is not more like post-bubble Japan and is more like 1997, when the Federal budget was moving rapidly toward surplus and the Baby Boomers were at their peak beneficial effects on the economy.

How valid is this view in the current era of zero interest rate policy (ZIRP)?  How much does it come from truly believing that the various Keynesian exertions of the Federal government and the Fed in the past several years have brought the U.S. economy back to such an exalted state as the fondly-remembered 1997 situation?  

What is really going on with economic trends in the U.S.?  How might changing economic trends, and perceptions thereof, affect financial markets?

To be discussed soon…








8 comments to Keynesians Chortle in Their Joy

  • El Gabo Gringo

    Thank you.

  • John F. Opie

    Of course, if housing prices had been allowed to revert to their true equilibrium (which they have not, of course, since those holding the mortgages would have lost everything as people ceased to pay for houses worth only 30% of what the mortgage said it was worth), the surplus would be gone and the pundits praising the heavens for any small movement upward in prices would be correct.

    Since prices are nowhere near marketing-clearing, they are wrong. Mark of a small mind, I suppose…

  • George Orwell

    I read the article referred to (concerning the ‘Calculated Risk’ blog) and wondered if I was out of my mind (in that the article seemed delusional) or if the author was.
    I may, indeed, be out of my mind, but at least someone more knowledgeable than me agrees that the Keynesians seem to be crowing before the sun has come up.
    The economy, it seems to me, is like a runner that has been fed a near fatal dose of ‘speed’ and still cannot get above a slow jog. Time will tell, obviously, but I am not confident that the solution to being broke is to borrow more money.

  • George, you’re not quite broke if without lying you can convince others to keep lending you money!

    ElGab: You’re welcome.

    John: If you are referring to CR as having a small mind, perhaps it might be a bit fairer to say that he’s very comfortable in the Keynesian-Krugmanite “borg”. Re your main point about housing prices, yes I agree– but that simply was not “in the cards” if TPTB were to have anything to say about it, at least in the short-to-intermediate term. Is another “dogleg south” in housing prices coming? Stay tuned…

  • John

    I think it’s the itulip guy, Eric whats-his-name, that is the real genius:

  • John F. Opie

    @doctorx: No, the small minds I refer to are the sole-solution Keynesians, the vulgar Keynesians, who truly believe that they can tune the economy based on government spending. They don’t understand that their world corresponds to only a part of the real world.

    Funny thing is, in one way Keynes was absolutely right: it is a problem of aggregate demand. With wages stagnant or falling, people aren’t buying stuff and hence the economy is in the doldrums (especially, which Keynes didn’t foresee, when people at the low income range are not buying locally produced goods, but rather imported ones that have driven local producers out of business).

    But as Mr. Orwell ut supra wrote, I am not confident that the solution to being broke is to borrow more money. Only those who are incapable of looking past short-term immediate effects can see that it is not the solution, hence my small minds comment.

  • DoctoRx

    Thanks, John, for that clarification. You appear to be careful with words when you say that you “are not confident” that problems of too much debt involve borrowing yet more.

    Yet TPTB including the IMF and the MSM want more deficit spending. This next (desired by them) QE, they believe, will do the trick.

    Time will tell.

  • mak

    I ask this question with all sincerity so please be gentle with me. What if, instead of treating amerika as a sovereign, we look at it as a medium size fish in the big pond of the big world empire? With that said….what does it really matter if in the end, all currency becomes one..”The World Order Buck”…then it seems, debt doesn’t matter…or am I really out of it? I realize that on a personal level I would be screwed…but I mean other than that…..