Keynes, Economics And Our Future.

[Editor's Note: The following post is by TDV contributor, Mark E. Jeftovic]

John Maynard Keynes is the grandfather of all modern mainstream economic thought.  Richard Nixon was famously attributed as saying, “We are all Keynesians now” whilst slamming shut the gold window and launching the era of global fiat money. (Nixon didn’t really say this, it was actually Milton Friedman)

The phrase came back in vogue in the aftermath of the Global Financial Crisis when neo-Keynesians like Paul Krugman called for, and got, massive government and Central Bank intervention into the global economy in order to “save it”.

Back in 1930, Keynes looked out into the future and saw that with the proper management of the economy, monetary policy and the like, the world could attain a type of utopian stasis:

Keynes, working in 1930, expected growth to come to an end within two to three generations, and the economy to plateau. He referred to this imaginary state of equilibrium as “bliss”.
– Nick Gogerty, “The Nature of Value”

In his essay “The Economic Possibilities of Our Grandchildren” Keyne’s imagined the big challenges of our days in the 21st century would be what to do with all that extra leisure time and how to achieve fulfillment since by now the quest for wealth and material gain would become more or less unfashionable or even obsolete.

“Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

Granted, Keynes did say this would happen if mankind avoided any calamitous wars and if there was no appreciable increase in population. Two more flawed base assumptions there could not have been.

But this hasn’t stopped the world’s conventional economists, not to mention the political and policy-making class (a.k.a The Overlords) from embracing the uniquely Keynesian notion that if you just know which macro-economic levers to pull, and how much and for how long, and when to do it; then you can get just the right amounts of: money quantity, money velocity, interest rates, nominal inflation, savings rates, capital expenditures, unemployment levels and consumer spending to make Everything Just Right All The Time without ever having so much as a downtick or a speed-wobble, ever again.

(In case you were interested, it looks something like this: K¢ = [B - U(C)]/U¢)

Converging on Bliss

The formula I linked above comes from a page examining “The Ramsey Exercise” after Frank P. P. Ramsey who published an article in 1928 which Keynes called “one of the most remarkable contributions to mathematical economics ever made”.

Ramsey endeavored to find the optimal rate of savings which would maximize social welfare.

He sought to find the allocation across generations which maximized social welfare — with “social welfare” defined as the sum of utilities of people in a society. From the social welfare-maximizing allocation, we will be able to determine an “optimal” rate (or rather, path) of saving.

Why is this important? Because politicians believe that there is such thing as an optimal rate of savings. While in the past there may have some rumination that it was too low (“myopic agents”), what really bothers Keynesians is if it gets too high, which is why you have things like artificially supressed interest rates – ZIRP without end, and even negative interest rates.

As I lamented in Cronyism in the 21st Century:

These policies are utterly backwards in that they posit what economic forces should do according to some model, instead of trying to understand what they actually do based on observed results.

So according to politicians, pundits and Krugmans, you tweak stuff just right, and you get this:

Take a look at the 30 year chart for USD:

Source: http://www.financialsense.com/contributors/doug-short/economic-growth-in-the-us-since-1930

We do see the 5-year moving average coming down to 0. No growth, just like Keynes postulated in 1930. Combine this with Janet Yellen’s revelation that if poor people would just get with the program and accumulate more assets things would be grand and guess what?

We have arrived at Bliss. Doesn’t it feel great?

ALL PROGRESS IS CYBERNETIC

What anybody who actually examines the issue realizes is that all progress is cybernetic in nature. What this means is that all self-sustaining systems or processes (like an economy or an ecology) employ methodologies for self-regulation, and they rely heavily on evolution in one form or another.

Maxwell Maltz, in his groundbreaking (albeit largely uncredited) antecedent to which the entire modern self-help movement owes it’s existence, Psycho-Cybernetics,  stressed that a big component of any system’s progress is that it relies primarily on feedback loops both positive and negative.

The process simply doesn’t work without both negative and positive consequences of past-actions to inform present decisions toward future goals (the original title of this post was “The Extinction of Consequences”)

Gogerty’s “The Nature of Value”, shows a chart of a cybernetic process:

The dots indicate dead ends – negative feedback “this doesn’t work” while the arrows indicate paths of “so far, so good”.

What modern economic interventionism attempts to do is eliminate all the dots (and then make sure all the arrows are “equal”). Policy makers and political fixers hold a mechanistic view of the macro economy, implementing “fixes” and managing it because in their minds, it’s just an algorithm.

As Gogerty observes:

“[..]mechanical theories still have adherents, however, and can be dangerous if pursued aggressively using monetary or political force. The only economic systems today that are truly at or close to equilibrium are nearly dead economies. A cow that achieves equilibrium is called a steak, and the economy closest to achieving equilibrium today is North Korea circa 2013″.

The reality is that the economy is a complex adaptive system and thus inherently “unmanageable”.The system itself adapts so you will never come up with anything that achieves “perfect equilibrium”.

Any attempt to do so suppresses  the built-in signaling mechanisms and thus all system participants begin to make choices based on “facts” which are increasingly and iteratively distorted by the overlaying policy attempts at eliminating negative feedback.

“Keynes and other economists ignored, dismissed, or seriously misunderstood growth, innovation, value, and adaptive economic processes. Economists mathematic models created the economy like a linear or probabilistic machine.” (ibid.)

And the centrally planned attempts at running the economy as if it were such a linear, probabilistic machine that could be steered shy of recessions or downturns has instead created an escalating sequence of severe dislocations.

• In 2008 had there been no bailouts and the insolvent banks were allowed to die, the economic malaise would have been cleared out within a year or so and a genuine economic recovery could have commenced. (As Stockman exhaustively detailed in The Great Deformation)
• In 2000 had the .COM bubble simply been allowed to burn itself out, with a not-so-bad recession, we would never have had The Housing Bubble in 2008 (which Krugman demanded)

This pattern of intervening to avoid recessions and economic downturns goes all the way back to Nixon’s existential crisis of 1971, perhaps even further – to 1913, when the Fed was created to ensure economic stability for all time.

Today the distortions are now so far advanced that all market signalling is for the most part, totally broken. The stock market reaches new highs on diminishing volume, it costs you money to save your money and there is no official inflation – despite the fact that everything either costs more or it comes in a smaller package for the same price (shrink-flation).

The global financial system is flashing bright red warning lights and yet complacency rules the day and the official policy and media pundit line is that the recovery (now in it’s 5th year) actually exists.

One of these days all of the market signalling mechanisms are going to snap back into functionality and most likely overshoot the mean in a non-linear, disorderly way.

When that happens, the best possible course of action is to not be in the path of one of the gigantic elastic forces snapping back into place at extremely high velocity. Stay out of debt, avoid counter-party risk, be diversified, and have a bug-out plan.

Questions or comments? Join us at The Dollar Vigilante!

"Mark Jeftovic is the CEO of easyDNS Technologies Inc. the Toronto-based domain registrar and DNS provider who lives by the credo "Power & Freedom™". In his copious spare time he blogs about anarcho-capitalism, bitcoin and tectonic shifts at Wealth.net and is the guitarist/singer for indie-rock sensations The Parkdale Hookers

Economic Issues Will Have A Significant Impacts On Your Life.

Why Your Savings And Retirement Will Soon Be Gone

April 14, 2014 by Bob Livingston 

 1297 73

 

 18 1815

THINKSTOCK

What’s left of the U.S. middle class is under economic assault like no time in American history.

Federal Reserve money printing is finally catching up to us. One hundred years of money printing is coming to a head. We are seeing the beginning phases of hyperinflation.

Never mind the Bureau of Labor Statistics’ phony inflationary measurement, where the consumer price index basket of goods is changed monthly to remove price-rising goods. Food prices are up 19 percent just since January. On an annualized basis, that is 76 percent. Rising food prices and rising gas prices are where the middle class see and feel inflation.

Remember that inflation is not rising prices. Rising prices are a symptom of inflation, which is an increase in the money supply through money creation or debt.

Printing money is a crime if you do it. But if the powerful government monopoly does it, it’s called “monetization.” Government is now desperately inflating because the more inflation, the more wealth is stolen.

Here are some truths:

• Governments steal as much as they can without collapsing the system (they hope).
• The more money they create for nothing, the richer and more powerful they get.
• The bigger the government gets and the more reckless it gets, the more it must suppress its people, because many begin to wake up.
• The bigger government crime, the greater the propaganda and deception.
• Fact: Every dollar the government creates means that a dollar is stolen from the people. Paper money confiscates wealth.

The act of money creation means that more and more of the national wealth flows to the Federal government. How in the name of Pete do people think that the U.S. government became so powerful and so wealthy in property?

The government produces nothing. It has to steal, and it does so on an unimaginable scale. The mind of man cannot deal with such a massive transfer of wealth, and few people even suspect it. Why do people not know about the biggest fraud in history?

In addition to $75 billion a month of quantitative easing, the Federal government is running multi-hundred-billion-dollar deficits. The U.S. now has at least $126 trillion in outstanding obligations (i.e., money it has stolen from the American people).

So what’s a government to do? Steal even more from the people.

The Federal government is eyeing the remaining savings and retirement accounts of the American people. This has been going on for years. In fact, individual retirement accounts were set up to fool Americans into investing in the stock market to prop it up, help consolidate retirement accounts and transfer it to the bankster mob. Think your money in IRAs, 401(k)s and pension funds belong to you? Ha! Try to take out your money and see what hoops you have to jump through and what penalties you have to pay.

There is now more than $21 trillion in U.S IRAs, 401(k)s and pension plans. That $21 trillion would more than offset the mythical $17.5 trillion U.S. “debt.” For more on the U.S. debt, readThe ‘National Debt’ Is Smoke And Mirrors.

Last year, the U.S. Consumer Protection Bureau, established by the 2010 Dodd-Frank Act, stated that it believes Americans are too stupid to prepare on their own for retirement and that it has proposed “managing” people’s retirement funds. What that means is another unConstitutional government agency will take your money and swap it for government funny money.

President Barack Obama’s MyRA “savings plan” is yet another scam to try and prop up the failing system. Announced at this year’s State of the Union address, Obama tried to huckster this boondoggle as a great way to “invest” in safe government securities and a starter savings account.

The term “government securities” is nothing more than typical government double-speak and an oxymoron. When the government goes bankrupt — and it will — those Treasuries will be worthless. And now the government is encouraging you to buy them.

MyRAs will earn the same interest as the Thrift Savings Plan (TSP) Government Securities Investment Fund that is available to Federal employees. The TSP’s own paperwork says this about its interest rate: “The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation.”

If you want to “invest” in the U.S. government (not something I would recommend), there is currently a provision to do so. The MyRA plan mimics it. Just open an account with Treasuryto buy U.S. savings bonds. The difference is that MyRA will be run by a crony Wall Street firm.

All your savings will be visible to government and available for confiscation — the same government that is already eyeing your pension funds, individual retirement accounts and 401(k) plans, as I mentioned. Don’t think this will happen? Governments across the globehave already done so, and the U.S. government is on board in supporting what it is speciously calling “bail-ins” as occurred in Cyprus.

Under the scheme, when banks get in trouble or government needs more money, it swaps your bank savings for bank stock. You are in essence “buying” into the bank.

And if this news isn’t bad enough, take these two factors into consideration. Last fall, the International Monetary Fund issued a report recommending a series of escalating income and consumption tax increases, culminating in the direct confiscation of assets. Then last week, Russia floated a balloon through its Voice of Russia propaganda arm that it intends to attack the petrodollar in retaliation for America’s meddling in Ukraine.

First, from the IMF, according to page 49 of its report:

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair). … The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away…

The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.

Regarding Russia and the petrodollar, this is not the first time another nation has threatened to trade oil outside the dollar. Such a move would be disastrous for the American economy and likely crash it.

Because of an agreement between the U.S. and Saudi Arabia, in order to trade in oil, countries must first transfer their money into U.S. dollars. This happens no matter who is buying the oil or who they’re buying it from. The oil-buying country gives the oil-selling country U.S. dollars and receives oil in exchange.

The oil-selling country then has to sell those dollars to convert it back to its own currency. If Russia, China and a few other countries begin trading oil in some other currency, about 3 trillion U.S. dollars will suddenly flood the market. This will send hyperinflation into the stratosphere.

I have long sounded a warning to get your retirement funds out of the system and remove your money from banks (beyond what is necessary to pay bills) in order to protect yourself. I did so long ago. I gladly took the penalty and have long since recovered what was taken.

I also recommend you buy gold and silver and keep it in your possession, not in the bank or in a safe deposit box.

Could Your Savings Be The Next Target For The Government

They’re Coming For Your Savings

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by John Rubino on October 12, 2013 · 19 comments

Another of history’s many lessons is that governments under pressure become thieves. And today’s governments are under a lot of pressure.

Before we look at the coming wave of asset confiscations, let’s stroll through some notable episodes of the past, just to make the point that government theft of private wealth is actually pretty common.

• Ancient Rome had a rule called “proscription” that allowed the government to execute and then confiscate the assets of anyone found guilty of “crimes against the state.” After the death of Julius Caesar in 44 BC, three men, Mark Anthony, Lepidus, and Caesar’s adopted son Octavian, formed a group they called the Second Triumvirate and divided the Empire between them. But two rivals, Brutus and Cassius, formed an army with which they planned to take the Empire for themselves. The Triumvirate needed money to fund an army of its own, and decided the best way to raise it was by kicking the proscription process into overdrive. They drew up a list of several hundred wealthy Romans, accused them of crimes, executed them and took their property.

• In the mid-1530s, English king Henry VIII was short of funds, so he seized the country’s monasteries and claimed their property and income for the Crown. As historian G. J. Meyer tells it in The Tudors: The Complete Story of England’s Most Notorious Dynasty:

“By April fat trunks were being hauled into London filled with gold and silver plate, jewelry, and other treasures accumulated by the monasteries over the centuries. With them came money from the sale of church bells, lead stripped from the roofs of monastic buildings, and livestock, furnishings, and equipment. Some of the confiscated land was sold – enough to bring in £30,000 – and what was not sold generated tens of thousands of pounds in annual rents. The longer the confiscations continued, the smaller the possibility of their ever being reversed or even stopped from going further. The money was spent almost as quickly as it flooded in – so quickly that any attempt to restore the monasteries to what they had been before the suppression would have meant financial ruin for the Crown. Nor would those involved in the work of the suppression … ever be willing to part with what they were skimming off for themselves.”

• Soon after the French Revolution in 1789, the new government confiscated lands and other property of the Catholic Church and used the proceeds to back a new form of paper currency called assignats. The resulting money printing binge quickly spun out of control, resulting in hyperinflation and the rise of Napoleon.

• During the US Civil War, Congress passed laws confiscating property used for “insurrectionary purposes” and of citizens generally engaged in rebellion.

• In 1933, in the depths of the Great Depression, president Franklin Roosevelt banned the private ownership of gold and ordered US citizens to turn in their gold. Those who did were paid in paper dollars at the then current rate of $20.67 per ounce. Once the confiscation was complete, the dollar was devalued to $35 per ounce of gold, effectively stealing 70 percent of the wealth of those who surrendered their gold.

• In 1942, after entering World War II, the US moved all Japanese citizens within its borders to concentration camps and sold off their property. The detainees were released in 1945, given $25 and a train ticket home – without being reimbursed for their losses.

Since the 2008 financial crisis, various kinds of capital controls and asset confiscations have become common. A few examples:

• Iceland required that firms seeking to invest abroad get permission from the central bank and that individual Icelanders get government authorization to buy foreign currency or travel overseas.

• Greece pulled funds directly from bank and brokerage accounts of suspected tax evaders, without prior notice or judicial due process.

• Argentina banned the purchase of U.S. dollars for personal savings and required banks to make loans in pesos at rates considerably below the true inflation rate.

• The US Fed proposed that money market funds be allowed to limit withdrawals of customer cash in times of market stress.

• Cyprus, a eurozone country, responded to a series of bank failures by confiscating 47.5% of domestic bank accounts over €100,000.

• Poland in September responded to a budgetary shortfall by confiscating the assets of the country’s private pension funds without offering any compensation.

• Spain was recently revealed to have looted its largest public pension fund, the Social Security Reserve Fund, by ordering it to use its cash to buy Spanish government bonds. Currently 90% of the €65 billion fund had been invested in Spanish sovereign paper, leaving the fund’s beneficiaries dependent on future governments’ ability to manage their finances.

Now for the big one, reported by Automatic Earth on Saturday October 12:

The IMF Proposes A 10% Supertax On All Eurozone Household Savings
This is a story that should raise an eyebrow or two on every single face in Europe, and beyond. I saw the first bits of it on a Belgian site named Express.be, whose writers in turn had stumbled upon an article in French newspaper Le Figaro, whose writer Jean-Pierre Robin had leafed through a brand new IMF report (yes, there are certain linguistic advantages in being Dutch, Canadian AND Québecois). In the report, the IMF talks about a proposal to tax everybody’s savings, in the Eurozone. Looks like they just need to figure out by how much.

The IMF, I’m following Mr. Robin here, addresses the issue of the sustainability of the debt levels of developed nations, Europe, US, Japan, which today are on average 110% of GDP, or 35% more than in 2007. Such debt levels are unprecedented, other than right after the world wars. So, the Fund reasons, it’s time for radical solutions.

The IMF refers to a few studies, like one from 1990 by Barry Eichengreen on historical precedents, one from April 2013 by Saxo Bank chief economist Steen Jakobsen, who saw a 10% general asset tax as needed to repair government debt levels, and one by German economist Stefan Bach, who concluded that if all Germans owning more than €250,000, representing €2.95 trillion in wealth, were “supertaxed” on their assets at a 3.4% rate, the government could collect €100 billion, or 4% of GDP.

French investor site monfinancier.com talks about people close to the Elysée government discussing how a 17% supertax on all French savings over €100,000 would clear all government debt. The site is not the only voice to mention that raising “normal” taxes on either individuals or corporations is no longer viable, since it would risk plunging various economies into recession or depression.

Here’s what the October 2013 IMF report, entitled Fiscal Monitor : Taxing Times, literally says on the topic, in the chapter called:

Taxing Our Way Out Of – Or Into? – Trouble
The sharp deterioration of the public finances in many countries has revived interest in a capital levy, a one-off tax on private wealth, as an exceptional measure to restore debt sustainability. (1) The appeal is that such a tax, if it is implemented before avoidance is possible, and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

There have been illustrious supporters, including Pigou, Ricardo, Schumpeter, and, until he changed his mind, Keynes. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away (these, in turn, are a particular form of wealth tax on bondholders that also falls on non-residents).

It should probably be obvious that there is one key sentence here, one which explains why the IMF is seriously considering the capital levy (supertax) option, even if it’s presented as hypothetical:

The appeal is that such a tax, if it is implemented before avoidance is possible, and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

It all hangs on the IMF’s notion – or hope – that it can be implemented by stealth, before people have the chance to put their money somewhere else (and let’s assume they’re not thinking of digging in backyards, and leave tax havens alone for now). Also, that after the initial blow, people will accept the tax because they are confident it’s a one-time only thing. And finally, that a sense of justice will prevail among a population, a substantial part of whom will have little, if anything, left to tax.

Some thoughts
Will more countries introduce capital controls or asset confiscations in the next few years? Duh, of course. Debt levels are unmanageable, so they have to be lowered. And there are only three ways to do it: deflationary collapse that wipes out the debt through default, inflation that wipes out the debt by destroying the world’s major currencies, or stealing enough private sector wealth to reset the clock. Option one – depression – is political poison so will be avoided at all costs. Option two is being tried and is failing because the deflationary effect of trillions of dollars of bad debt more or less equals the inflationary impact of trillions of dollars of new currency.

That just leaves door number three, demonize the successful and take what they’ve accumulated. Recall from the historical list that opened this post that governments like to pick on members of society who 1) have lots of money and 2) have lots of enemies or can easily be framed for crimes. This time around it will be “the rich” who are living well at the expense of the rest of us. The trick will be to define “rich” down far enough to make possible the confiscation of middle-class IRAs and 401(K)s, since that’s where the real money is.

Interesting that the build-up to asset confiscation is coinciding with a coordinated take-down of gold and silver, the two assets that will be hardest to steal when the time comes.