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Gary Jakacky
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As ELSA and ANNA would say: LET IT GO! After six months deep in the forests of the Adirondacks (but with some internet and propane heat) its time to hit the BIG OPEN road on my bicycle this summer. I actually start this April 1st in San Diego and won't get back to my forested hideout until next... More
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  • Why Are Keynesians Clueless?

    Historical evidence ( )proves beyond doubt how pathetic the record of Keynesian "stimulus" has been. As the master of its greatest failure, thank you, President Obama, for removing that word forever from our political and economic discourse.

    But fiscal policy is part of a larger issue. WHY does fiscal policy not work? Simple: fiscal policy is just federal government purchases on steroids.

    The most pernicious of all misunderstandings about economic theory - and there are many - is the belief that there is no theoretical basis for the idea that government spending is overwhelmingly harmful to our economy. Among writers of textbooks, the belief that targeted government purchases - that is what fiscal policy is, after all - can smooth out the business cycle and spur recovery? Unquestioned! Impervious to three decades of failure in Japan, and ongoing years of euro-style stagnation here in the United States.

    And yet the proof is so simple it can be explained without a single chart, graph or formula - all the trappings academicians use to intimidate laymen, win plush tenured posts and suggest only they possess the wisdom to guide government policy.

    The key is to look closely at the process of spending money. That is what makes the wheel go round, or as economists say, what makes the circular flow. As it turns out, all purchases can be broken into four categories.

    1. You spend your own money, and buy something for yourself. Two microeconomic incentives dominate this case. You have the incentive to search for a low price - it is your money after all - and you have the incentive to buy what you want. Maximize your satisfaction, economists say. This is the most prevalent form of spending in capitalist economies, which is why they produce outstanding goods and services at minimal cost.

    2. Suppose you spend your own money, but buy something for someone else. While you still have incentive to economize, it is far harder to determine exactly what that "someone else" really wants. So pervasive is this failure to satisfy the recipient that gift cards are now the second most wanted holiday present in America. The first is cash.

    The very success of gift cards is proof of how difficult it is to make purchases for strangers, yet Keynesians ignore this evidence right before their eyes. This is exactly what government employees do the tune of trillions of dollars a year.

    3. Ever spend someone else's money, on yourself? Not very common, though criminals do this all the time when they steal credit cards or bank accounts. Not much incentive to search for the lowest price, but every incentive to quickly buy what you really like or might need.

    Liberal journalists constantly point out the irony of plush executive offices and limousines by corporate executives who have expense accounts, even as their company falters. Little is said about government agencies with fat cat administrators and padded budgets. Seen the unemployment rate among government employees lately?

    4. Finally, the worst of all. Imagine spending someone else's money to purchase items for a complete stranger. You have no incentive to economize or satisfy. A virtual guarantee that high-priced items will be foisted on those who neither want nor need them.

    Sound familiar? This is the category of spending done by millions of federal, state and local government employees. While I mentioned them briefly in No. 2, their real home is here. And yet academic economists and mainstream media members stand, jaws agape, when they tell us about $500 toilet seats at the Pentagon or $3.00 aspirin tablets at county hospitals.

    The logic is unassailable. Yet if you advocate cutting government purchases (No. 4) and returning the revenue to individual citizens (No. 1), so hung up are analysts on the discredited concepts of Keynesian economics (and National Income Accounts based
    upon them) that unemployment is the only result they foresee.

    In fact, it would be the exact opposite. Throughout the 1980s and early 1990s, government purchases as a percentage of gross domestic product declined. So did unemployment.

    Disclosure: I am long XLK, IYT, XLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Mar 12 11:59 AM | Link | Comment!
  • Keynesians: The New Useful Idiots

    Back in the Cold War days, Joseph Stalin and his Kremlin clique used to refer to European liberals (and their American counterparts) as useful idiots. You can't blame him. After all, his country, the USSR, had starved and slain its own citizens by the millions, set a precedent for global warmingists with crackpot science under TD Lysenko and occupied Eastern Europe from the Baltic to the Balkans in the name of "buffer states." But when he called for street action against American imperialism, zombie millions marched in Rome, Paris, Bonn, London and even a few burgs in "Amerika" as well.

    A knife finally went through the heart of communism with the collapse of the Soviet Bloc in the 1980s. With breathtaking rapidity, the dominoes - you know, the ones liberals said didn't even exist, let alone could fall - fell in the wrong direction. They fell in the direction of freedom, wealth and free markets.

    As an economist, I have been hoping for over four decades now that Keynesianism would suffer the same fate. It is easy to sum up Keynesianism. Forget all the prattle in your college Economics 101 course about aggregate demand curves, marginal propensities to consume and magnificent multipliers. It's far easier than that to sum up! Keynesian can be summarized in 12 words: The Government Knows How to Spend Your Money Better Than You Do.

    All the liberal faults of our post-World War II federal government tidal wave can be traced to this dirty dozen meme. Never mind as soon as 1937, when the stock market and the economy collapsed faster than any time it did in 1929 to 1932, it was clear fiscal policy and initiatives had failed to really pull the economy out of the Great Depression.

    It was World War II spending that ended the Depression, became the new claim.

    When World War II ended, therefore, Keynesians expected a second market crash and depression. There was a cottage industry of doomsayers, foreshadowing the great environmental whack jobs of the 1960s and 1970s. But the depression never came; government cutbacks did not doom the United States to a resumption of the 1930s. The 1950s did just fine, thank you.

    But why reach into that distant past, when proof of the failure of Keynesian economics has unfolded in front of our very eyes the last few years? The largest surge of government purchases in history, teamed up with lowest interest rates in the history of the republic - I must admit, it is hard to get below zero, but kudos to President Obama for trying - have produced the weakest recovery financial journalists can remember.

    In fact, it is the pinnacle of gall for the White House to claim credit for job growth whatsoever, when the vast majority of it can be credited to investment by the oil companies (horrors!) in fracking and pipelines and manufacturing spinoffs from lower fossil fuel prices.

    Remember all the howling over the fiscal cliff at the end of last year? Six months into higher taxes and reduced government spending, we see not a dent in jobs growth. It continues to plod along at 200,000 per month, plus or minus here and there and revisions here and there.

    At the same time, Keynesians can't understand why making Obamacare cut fully in at 50 employees might be a reason for slow job growth among small firms.

    But how, thou may ask, are these idiots so useful? Well, bull markets climb a wall of worry, the old Wall Street maxim goes. Since the private sector-induced economic recovery commenced in the spring of 2009, the Standard & Poor's 500 Index has gained more than 146 percent. But Keynesians, and their accolades in the mainstream financial media, can't seem to make up their minds whether a new bear market has started or whether the previous one has even ended yet. (I kid you not.)

    The more scandals that cripple the Obama agenda, the more delays to Obamacare, the greater business optimism soars. It recently touched its highest levels since last year's Romney implosion.

    Network news talks about "dysfunction in Washington." Meanwhile, the Republicans who "obstruct" the normal functions of Washington have managed to reduce growth in federal spending to its lowest rate since the late 1990s. Not surprisingly, that was the last time real Republicans ran the lower house in congress.

    So keep that wall of worry coming, Keynesians! Maybe you will miss the next four years of the bull market, as you have missed the first four. Maybe a few more million jobs will be created (by Wal-Mart and all the other companies you hate). Maybe a few thousand vets will find employment (Wal-Mart just guaranteed vets a job. Will Joe Biden do the same?) Maybe a few more of those very stimulating (no pun intended) countries around the Mediterranean will continue to flounder in bankruptcy and euro-stagnation.

    The day Keynesians throw out their textbooks and start buying shares, that will be the signal to sell.

    Disclosure: I am long XLV, IHI, XLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Mar 12 11:59 AM | Link | Comment!
  • Vanna White Proves It: Inflation Rate Is Actually Zero!

    With the possible exception of the unemployment rate, few statistics draw as much scorn and derision as the monthly consumer price index figures, or more precisely, inflation as measured by the CPI.

    Earlier this month, using the flawless logic mathematical genius for which SA readers flock to my articles, I proved ( ) the unemployment rate, widely believed to be 6.7%, is actually 5.9%.

    I thought I would turn my attention to inflation. After all, we have a new Federal Reserve Chairman---chairperson? chairwoman? Chair? Why should economic policy in Washington always be a seat-of-the-pantsuit affair? Good policy needs good guideposts: unemployment and inflation are certainly two of them.

    There are several criticisms of how the CPI is calculated. We can summarize a few:

    • important items like food and energy are omitted from the index
    • changes in product quality are difficult to evaluate and bias the index downward.
    • the quantity and velocity of money (from the good old formula Mv=pY) are always changing and this obscures price trends.

    All of these problems can be eliminated (!) by calculating a far simpler measure of prices. The price of vowels! Unlike the mysterious statistics compiled by the commerce department and released once a month, the price of vowels is freely and widely available every weekday at 7 PM local time, on a TV program which, like Harry Potters' Dark Lord, shall not be named? OK, heck we all know it is Wheel of Fortune.

    Foolish, you say? Not in the least. Vowels have it all over the gamut of products and currencies used in the world's economies.

    • You can go without water for days. You can go without food for weeks. You can go without energy for years (just ask the North Koreans). You can't say a single thing without using a vowel.
    • Maybe the quality of our discourse and courtesy has taken it on the chin in the last few decades, but the quality of our vowels remains steadfast. From rap music to country, from Obama to Glen Beck, the need for vowels continues unabated.
    • the supply of vowels is strictly constant. There are only five of them: A, E, I, O, & U. (None of this wishy washy "sometimes Y" stuff. When did you ever see someone buy a "Y?")
    • We can dig and find more gold. We can mint more bitcoins. But vowels are a currency even the illiterate cannot increase. Just ask your local professor of Linguistics.

    Thus as a measure of inflation they are a statisticians dream.

    And exactly how much has much the price of vowels gone up in the last thirty years? ZERO! Nada! Vanna has been selling vowels for $250 a clip for decades.

    Prove it. Buy a vowel right now? Go here. (

    Think of it, this most basic and essential of commodities---the one that defines us as humans---isn't rising in price at all!

    By the way, what if, like Mt Gox, the link above brings you to a "page not found?" No problem! You can always find vowels in the dictionary. And Vanna sells quite a few at the end of the day, as well. (Alas, there is no after hours trading in vowels. Yet)

    We have no choice but to conclude the inflation rate is actually zero. Think of the impact this will have on the nation's fiscal problems. All kinds of entitlement programs (from social security to food stamps) are indexed to the CPI: and now we know this has been zero and is likely to continue at that level for the foreseeable future. Balanced budgets are just around the corner. What could be more bullish for stocks?

    Disclosure: I am long XLK, IHI, IYT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Feb 28 5:23 PM | Link | Comment!
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