“Economics ends where Keynes begins.” – @EconCircus
Please pay attention to the current state of society and take stock of the economic failure ahead. The anti-capitalist polices championed by mainstream economics has led us here. Now, we have the opportunity to watch as they lead to cataclysmic failure one after the other. Here are a few of the failures to watch for:
What is the Crisis?
The public health and safety risk that comes with a novel Coronavirus is very real, but how many people have actually articulated what the economic problem is? The “problem” is that a high concentration of people will be unable to “produce goods and services,” partly from the virus but also through government lockdown measures. If millions of people are suddenly unable to produce goods and services because they are either incapacitated or under quarantine, then any semblance of the free market will grind to a halt.
It doesn’t matter how many trillions of dollars are created out of thin air and given away, if production of goods and services slows and eventually stops, chaos will ensue. Contrary to what we’ve been told the crisis cannot be solved by creating more money.
Also consider, if poverty can be alleviated through creating money out of thin air, then why does poverty exist at all?
It is difficult to keep track with the various “policies” of the Fed, but we know they announced $700 Billion in asset purchases (U.S. Treasuries and Mortgage Back Securities), there is a $1.5 Trillion REPO commitment and recently the Fed offered to loan $2.3 Trillion to municipalities and businesses across America. In the last month the balance sheet grew by almost $2 Trillion to its new all time high of $6 Trillion.
This literally means that the Fed created $6 Trillion and gave it to the wealthiest foreign and domestic corporations in the world. Yes, this eventually leads to an increase in the price of household items, but you’ll be able to see the biggest increase in stocks, bonds and real estate prices first. This is what the Fed did in the last recession and there is nothing new other than the quantity of money that has been created.
The Fed’s Excess Reserve
A lesser known chart is the Fed’s Excess Reserve, per below currently stands at $1.9 trillion!
This means that banks have “parked” a cumulative total of $1.9 Trillion at the Fed, so that they could get compensated for not lending money to the public. Not many people are aware of this balance but it becomes highly absurd when one considers that the Fed just created trillions of dollars (Graph 1 above) to the same banks who had so much “excess cash” that they felt best to give it back to the Fed. How can there be a “liquidity” issue when the banks have nearly $2 trillion in “excess reserves?”
The Fed’s Mandate
The Fed continues to maintain its highly untenable mandate of “maximum unemployment and stable prices.” As long as I can recall, for over a decade they have talked about the trade-off between “inflation” and unemployment (known as the Philips Curve) and also claim to be “data dependent.” This was proven to be false many decades ago and we can cite stagflation in the 1970’s or a country like Venezuela with a high “inflation” rate and high unemployment. Still, where is the Fed’s mandate now, shouldn’t they still be concerned with unemployment and price stability?
To answer this almost requires a suspension of disbelief as follows: According to mainstream economists, interest rate cuts are good when “inflation” is “low,” because rate cuts will increase inflation but that is okay because the economy can support it, (almost like “slack,” in the economy, there is room for more inflation). At the same time the increase in inflation will be good because the rate of unemployment will then decrease. The goal is to reach the ideal 2% inflation target with full employment, both targets being entirely arbitrary and baseless. The question is, now that rates are close to zero, shouldn’t that mean that inflation becomes higher and unemployment becomes lower? Will any central banker address this issue again considering that they’ve been touting their mandate and the Philips curve for over a decade?
Also note one of the strangest economic stories of the week, when it was reported that U.S Consumer prices declined the most ever in the last 5 years, citing the Coronavirus and low gasoline cost.
Governments across the world don’t have much of a different response. In America, most citizens will get an extra $1,200 USD as part of the governments $2.2 Trillion “stimulus” package. For the first time almost everyone and corporations may be getting some monetary benefit from the government. There is little to say here, but is this not what the Socialists have been asking for? More money to help those who need it most. Have any prominent mainstream economists spoken out against this money for nothing policy?
Wasn’t Universal Basic Income a major campaign promise in the US presidential elections? Where are the UBI supporters now? We’ve heard examples of states and other countries where it was a success, yet are we not in the greatest worldwide UBI experiment of all time? For the first time in recorded history, and unprecedented amount of people will be receiving money “to not work,” however we seldom hear of any of the repercussions of this.
The Stock Market
Since the March 23rd close to $2 Trillion was created by the Fed and given to banks, the Dow Jones has increased by nearly 5,000 points. Is it possible that the world could be in a major depression, but the stock market continues to rise? I would have to say yes, so long as the Fed is willing to create more “liquidity” in order to “stimulate” the market then sadly, stocks may have to continue to rise.
This was touched on in last weeks article about the N95 mask and the hundreds of patents that exist on the mask. As the world continues to face supply shortages and still cannot buy N95 masks or a replica or knock off product, at what point will people start to realize that patents are monopoly protectionism and the anti-thesis of free market capitalism?
Note that a formal recession has not been called yet. But considering that unemployment is skyrocketing across the globe, debts are reaching new highs, travel and commerce are on the decline while supply shortages are increasing, it’s safe to say that we are currently in a recession even though the Bureau of Labor and Statistics still has not given the go ahead.
The End of Mainstream Economics
Will the masses be able to question the narrative? What do they mean by stimulus? It has never been defined. How do we know if there is too much or too little of it? What about liquidity? It doesn’t really mean anything, nor has it ever been adequately defined. As noted above the banks have $1.9 Trillion literally deposited at the Fed, if they were ever short on cash they could always use that. The other thing that also gets overlooked is the pyramiding effect that commercial banks will create from the money from the Fed. As far a liquidity concern goes, we must understand that banks also create money out of thin air every time they grant a loan. The supposed danger that banks “won’t lend,” was used in the previous recession and has been used again. If banks don’t lend to main street, it’s not a problem of insufficient funds at the banks, it’s a problem of “banks don’t lend to main street.” They have always had the money, the ability to create the money and now $1.9 Trillion of excess of money; there has never been, nor will there ever be a “liquidity problem,” problem.
I want everyone to think of all that they see on the television, from the politicians, to the experts, and especially the mainstream economists who seem to have no problem with debt. For reasons unknown the answer to the world’s problems seems to be “stimulus” whereby money must be created out of thin air, coupled with low interest rates, and this will someone give “liquidity” to people and enable them to buy more things, which in tern will boost “growth,” GDP, raise incomes, lower unemployment and reach an arbitrary inflation target.
This will all fail, and when it does, what will they say?
How will they blame capitalism for these blatant failures of socialism? And how will they use these failures to justify more socialism?
Money creation is not wealth creation; some of us already know this while the rest may (or may not) have to learn this in the most difficult way possible.
 @EconCircus tweet April 12, 2020