John Lindauer

John Lindauer
Contributor since: 2011
You read Keynes correctly. The most important single concept Keynes wrote about was the reality that employers, both private and government, need to take in more revenues if they are to hire more people, produce more goods and services, and pay more taxes. He then asked the rhetorical question as to who could provide the necessary additional revenues when there is a depression - and pointed out that it would have to be either consumers, foreigners, investors (buying inventory, plant and equipment) or the government.
Every businessman is a Keynesian even if they don't realize it - they know they must either actually take in more revenues if they are to produce more and hire more people (or expect to take them in if they produce inventory or borrow money to invest). The only people who complain about Keynes are those who haven't (or can't) read what he wrote and the Socialists/Communists who became distraught and his biggest critics because he said depressions could be ended without government regulations and government ownership so there was no reason for capitalism to fail.
This article is a good example of the views of a well meaning person who has never studied macroeconomics presenting an intelligent analysis based on a useless indicator - the official rate of unemployment which every trained economist knows is meaningless and the "World Bank" is an agency staffed by third world bureaucrats whose projections have proven very consistent - always wrong.
Even if the "official" unemployment rate of the past is significant, which it is not, trying to project the future by looking at the past is like trying to drive the road ahead by looking in the rear view mirror. Sooner or later the road bends and you crash.
Every trained economist with real world experience knows we are stuck in a deep and worsening economic malaise with nothing on the horizon to pull us out. The continuing slow decline of the real economy that ultimately underpins the markets suggests a bleak future for security prices. Maybe the departure of Bernanke and the arrival of three new Federal Reserve governors means we have a hope. Until they act investors would be wise to be cautious.
the more you pay in the more you receive under the current formula. And like any insurance policy, those who live long enough to draw the benefits get more than those who don't (who don't get anything). That's how congress set it up.
You just made the case - Social Security is not a liability of the government just as the military and agriculture budgets are not on-going liabilities of the government. They are all federal spending programs whose amounts are subject to the whims of Congress which can increase, decrease, or eliminate them. And Social Security is available to serve all Americans just as Defense does, and certainly more Americans than farm subsidies. The key item is that long ago Congress, for better or worse, did away with the original trust fund concept and made it just one more of the many federal programs. We still have actuarial naifs at Social Security drawing salaries to tell us when it would run out of money if it was still a trust fund. Their role is similar to the naifs in the military who probably still calculate the price of hay and swords if we still have a calvary. We have neither. And yes the program has expanded - so has agriculture, the military etc etc as our congressmen pack the programs with whatever their constituents and donors want. In other words, its time to let go of the 1930s concepts which were abandoned more than forty years ago. Any politician who claims Social Security is in trouble is either to dumb to serve or thinks the voters are too dumb to know better.
You are correct. That is the biggest single sector with a problem - But if more people had jobs and more businesses had profits there would be more buyers eligible for for mortgages and willing to buy houses and fewer people losing their jobs and becoming unable to make their payments. Prosperity for all via the Fed is available faster than if we try to help one sector. But if we do want to channel new money directly it might well be the best one to concentrate on.
Please read the reply I just submitted to the comment preceding yours. It totally applies. Since I think its decisionmakers are gross incompetents I can indeed believe the Fed uses some meaningless "official" calculation of the unemployment rate type you cite. An accurate rate can only be obtained using labor force participation rates. The so-called unemployment rate the government issues each month is an inaccurate travestly that insults the intelligence of every American high school graduate. We don't need more federal spending and federal regulations and federal deficits - we just need a few competent people appointed to the Fed.
Please reread what I wrote. The Fed can "unwind" QE1, QE2, QE3 and all thereafter within minutes (minutes, not weeks and months, minutes) if it ever finds it wise to do so. The Fed has two big weapons that it can use instantly - open market sales and reserve requirement increases. Both instantly take loanable funds out of circulation - reduce the money supply in other words. Your concerns about the debt are equally unwarranted - you are confusing private and state and local debt with federal debt. Very very different. The federal debt mostly came about by the Fed creating the necessary additions to the money supply as our economy grew. The Fed can instantly pay off all or part of that debt with the stroke of a pen and simultaneously totally offset the expansionary/inflationary effect that might otherwise result. For example, much of the debt is held by the Fed as required by congress which wanted to pretend there were assets backing our currency. No need to pretend. Our currency is worth what you can buy with it - not more, not less. Many many years ago I suggested that course of action in the first edition of the first book I wrote. It's not a new idea. We don't need inflation or unemployment or deficits (at today's tax rates we would have surpluses if we had full employment) and we don't need foreclosures and bankruptcies and bank failures because people lost their jobs and incomes. With modern macro policies we can have prosperity with inflation. We're overdue for intelligent policies that support free enterprise - not silly policies that lead to ever more government spending and regulations.
I am not at all sure the Fed is limited to funding "commercial banks" in an emergency and massive unemployment would certainly qualify as one to any macroeconomist. In any event, if the Fed and Treasury can pretend Goldman and AIG are commercial banks they certainly can pretend anyone or anything else is one also.
You are right about the last bit of content - I was venting my frustration at the imcompetence and inadequacy of today's Fed's governors and speculating as to why it exists and what can be done about it.
There are seven governors so its a matter of only one missing leader. Yes new governors (or enough resignations) are needed but recess appointments could occur. I was not thinking of the discount window but rather of a direct provision of liquidity similar to that sent to those great U.S. commercial banks Goldman Sachs, AIG, and Deutsche Bank.
I believe that if you look elsewhere in the statutes you will find the Federal Reserve has both the authority to determine what is acceptable collateral and to do whatever it thinks best in an emergency. Thus it could act quickly just as it has recently done.
In any event, it took the Fed and Treasury less than 48 hours to proclaim Goldman Sachs to be a commercial bank and have its eligible for billions in Federal Reserve financing based on its various asset holdings and the Treasury the same less-than-48 hours to "guarantee" Goldman's notes. The Fed and Treasury could do the same for any other public or private recipient to whom they wish the Fed to disburse funds.
If the White House appointees can help Goldman and AIG they can certainly help everyone else. What's missing today is Fed decision makers with appropriate educations and real world experience in business and COMMERCIAL banking. Until they are appointed by the President and approved by the Senate we will continue to have unemployment in the twenty percent range with no light at the end of the tunnel - and continuing lower-than-possible tax collections and profits and higher-than-necessary welfare and "make work" spending, foreclosures and bankruptcies.
Historians will not be kind to Presidents Obama and Bush and messrs Geithner and Bernanke. They have failed us by confusing the welfare of investment banks which primarily deal with the buying and selling of previously issued securities with the commercial banks which primarly deal with consumer and business loans. Such ignorance is inexcusable and suggests a massive failure on the part of our economics departments to properly educate their students as to the application of economic theory to the real world. It also suggest economists need a code of ethics to prevent people who are not macroeconomic experts with appropriate experiences from accepting positions for which they are patently unqualified. (Dentists may be doctors but they would be censured if they got near an operating room without ever having studied or practiced surgery. People like Geithner and Bernanke should not be allowed near the Fed for the same reason.)
Eric Maria Remarque was an author of fiction. He never studied economics. The causes of the German hyperinflation are well known - massive printing of money to pay war reparations to France and the UK. There is no doubt that massive excess spending can cause prices to be bid higher across an entire economy.
Prices are in most cases set in markets by the basic forces of supply and demand. Governments can and do intervene (and typically to favor cronies and inevitably make things worse). But demand only increases generally and causes an economy's general level of prices to rise when the central bank creates too much money. That is certainly not the case today.
What the public sees as "trained economists" are typically not so from a real economist's viewpoint. All too often they are jumped up bank tellers and brokerage salesman being appointed as their banks/brokerage's "business economist" to give economic speeches at rotary clubs and Junior Chamber of Commerce meetings and "publish" canned columns in the local weekly paper. Being as they are equally qualified as "business dentists" or "business lawyers" one would assume the next set of their speeches would cover dental and courtroom procedures and they would have an equally bad record there as well.
Every tenth car on the road may be an import but the other half the population works only for barely enough food. And that population half is growing in size as fast as the "modern" half - so for India to grow 8 percent per year overall means the more modern half will have to grow 16 percent. No growth at all is more likely, particularly without more electricity and the rule of law.
I agree with much of what you say and the idea the Fed should stop paying interest on reserves is an excellent idea under today's unique circumstances. Raising the Federal Funds rate is totally irrelevant except, at best, as a signal of the Fed's intentions. (The Fed use of the FF rate is a holdover from the early UK-sourced textbooks which were writing about the Bank of England wherein the bank rate is important). I totally disagree that the Fed's balance sheet is "shaky." It is in wonderful shape. The answer today, and the only answer so far as I can see, is for an actual Quantitative Easing. Contrary to the common knowledge such an easing would be the first since QE1 and QE2 were more than totally absorbed by the simultaneous increasing of bank reserve requirements and loan requirements. In today's world the economy has sunk so badly that even a traditional quantitative easing might not work. That appears to leave a quantitative easing going directly to actual worthy recipients as the ONLY solution left. Perhaps 3 percent of the required 5 or 6 percent annual increase in liquidity needed for transactions to proceed without causing excess spending resulting in inflation could be channeled directly to the very elderly social security recipients. But something must be done and only the Fed can do it. Our problem, in a nutshell is the weak, unqualified, and unworldly political appointees who dominate the FOMC. Know any influential Obama people? He needs to act or Bernanke and his other Fed appointees are going to have him in real trouble because of their gross ineptitude.
Sorry but socialism involves state ownership, employment, and planning. The biggest government employers are the military annd the local school systems. The Path to Prosperity may be good or bad depending on your spending and taxing philosophies but it has nothing to do with state ownership and employment. Perhaps you are confusing socialism with government taxes and spending which in the US result in about five percent of our employers' total revenuesof which the military is by far the largest. Today that spending is about five percent of the total customer spending that causes employment to occur. That five percent involves highways, federal prisons, military spending for military people, planes, tanks etc. Additionally, of course, there are the federally funded transfer (transfers money to beneficiaries) programs of which social security retirement and farm subsidies are among the largest. Which of the federal programs do you think we should cut?
Though I must admit you are the very first person who has ever claimed that all those hundreds of billions spent to bail out Goldman Sachs (twice) and Deutsche Bank were going to trickle down to the American people, businesses, and commercial banks. It never happened you know. You must be a German banker or a Goldman Sachs partner???
Exactly so. Excellent point - I should have made more of the negative second-guessing of the regulators.
The regulators and public have basically, I think, confused the country's commercial banks with the advisory and trading firms that gambled and lost on derivatives, the so-called investment banks - who got themselves bailed out and all banks regulated and the economy left in the tank in exchange.
The real culprit is the weak Federal Reserve tthat went along with leaving the public and commercial banks in the tank. It seems they really thought that saving the profits the investment banks would somehow cause prosperity to trickle down to the rest of the economy. I see no hope of a turnaround until the Fed finally acts.
Alas no trained economist with real world experience in business and commercial banking would agree with your analysis. The basic all-important function of any central bank such as the Federal Reserve is to see that their economy has "enough" money in circulation - not too much such as to cause inflation nor too little so as to cause unemployed. Being political appointees, as the fed's decision makers are today, they are often unqualified, as the Fed's are today, and make mistakes. But the overall track record of central banks is far superior to that of gold or central planning or any other system of controlling the quantity of money in circulation. But I do love the quantity theory of money - its so simple even a congressman, presidential appointee, or pundit can understand it. If only the real world was equally simple so it applied.
Smart man Ben. He described the Fed and congress to perfection.
The day to day monetary policy is carried out by the Open Market Desk of the Federal Reserve as instructed by the Open Market Committee which is dominated by the Federal Reserve governors led by its chairman, Ben Bernanke - a nice academic and historian.
The desk buys and sell from major financial institutions every minute of the banking day - to fine tune the money supply. They are honest. The problem comes when there is a crisis and the leadership has not a clue as how to respond. Then their cronies who helped them get appointed "suggest" what to do. When the current recession started four years ago Goldman Sachs suggested to its partner and former leader then acting as the Secretary of the Treasury to pressure the naive Fed and congress into bailing out (surprise, surprise) Goldman Sachs and all the counterparties that owed it money - AIG, Fannie May etc. So that's what they did. Worse, they then stopped they stood idly by when the FDIC ordered stress tests of all the banks - so the banks had to stop making loans as they scrambled to avoid being closed by lack of capital. In essence, QE1 and QE2 never effectively happened. Yes the quantity of money was increased but simultaneously the banks were pressed on threat of closure to hold it as reserves and not keeping making loans for such things as business working capital etc. Historians will not kind to either Bernanke or Bush and Obama who appointed and reappointed him. Neo-macroeconomists like me literally despise them all for the unnecessary pain and suffering they have inflicted on so many Americans, businesses, commercial banks, and local governments instead of quickly solving the problem. With the right policies today the economy would recover in a few months and the market go to 16-20,000. We are in a great recession and there is nothing in sight at the Federal Reserve to change it and that is the only place from which the solution can come - not congress, not congress spending and tax increases or reductions. Only the Fed - and it is weak and leaderless and unqualified.
It would be a terrible thing to print too much money. It would/could indeed cause too much spending and thus inflation to occur. You are absolutely correct that overnment hacks certainly might do it. But Keynes NEVER advocated such a policy. Keep in mind that he was a serious hedge fund manager and man of the real world. Your concerns are valid but not applicable to an economy with an adequately competent and independent central bank. Such a bank is intended to protect us from the government hacks. But like other government agencies it all too often falls into the wrong hands with presidential appointees whose light-weight appointment comes from major donors and so-proclaimed experts instead of their advocacy trained macroeconomists with real world experience in business and banking. That's our problem today. Your concerns are valid but have absolutely nothing to do with Keynes and his advocates. Since Keynes macroeconomics has branched in two parts - narrow and unworldly "scientists" trying to impress their peers with their ability to be "scientists" by solving equations and worldly neo-macroeconomists whose analysis goes far beyond Keynes. It's the latter who are right - not the Keynesians or anti-Keynesians with their simplistic and naive views of the world, a world that does not exist and never did.
There is no connection between having enough money in circulation so that we have full employment without inflation and providing make-work public jobs. Lower interest rates are also not the issue. The issue is having a central bank that provides enough money in circulation so that we have full employment without inflation. In the real world employers need to have money coming in if they are to hire workers and produce. In other words, it is customers and only customers that cause private and public employers to hire people. Greece is just another minor area of the EEC comparable more to Detroit than to the US.
Both of you seem realistic and right. I agree.(except surely not that we should become a Greece with everyone on the public dime and not working or moving ahead..
The saving of both union and non-union jobs is a good point and I should have included it. On the other hand, lots of businesses have failed because the aid was concentrated on the favored few and as a result many millions of people became unemployed. I suspect we would have saved more jobs if the money had been spread more carefully and evenly around the economy. And saving the two most inefficient of the dozen or so major automobile manufacturers producing in the United States is hardly saving an entire industry, particularly since almost all of the "saved" business would have gone to other American manufacturers. (most cars sold in the US are produced in the US just not by companies headquartered in Detroit)
You are right, of course, that state and private pension funds must be fully funded for the life of their projected withdrawals. Social Security is totally different - because, unlike the state and private pensions, the federal government is always be able to pay the benefits. That's why its future monthly payments to recipients do not have to be fully funded up front any more than those future monthly payments going to people such as farmers and marine corporals. If you think social security payments in the future must be fully funded up front then you must also think that the payments to the farmers and corporals should be funded up front also. Do you?? If not, please tell us why.
That's a good question and I don't know how the temporary tax cut will affect future benefits. Anyone know??
Gold has a market value today and will certainly have one for many years in the future. But its value is set in the market and so will decline in the long run as its major historical buyers, governments, stop buying it as a backing for their currencies. That, of course, would change entirely if a new source of demand were to be developed for it because of technological advances.
I appreciate the service you have provided for such an important program and I agree with you entirely. It irks me tremendously that ill-informed prophets of doom would attack social security or scare people by questioning its future. I cannot in any way see a need to reduce benefits or raise the employment taxes. To the contrary, if we can spend hundreds of millions of "jobs bill" money in Finland to get cars produced by Fiskar and billions for air force generals' toys so they can refight WWII with ever-faster piloted planes that can be destoyed by propeller driven Cessnas and drones carrying the right electronics and missiles, we can surely protect and increase social security which actually does something for people - just my opinion and I know others differ.
That would be true only if we did not have a central bank capable of instantaneously removing an offsetting $15 trillion from circulation. We do have a central bank and it does have such a capability and it does use it to constantly fine tune the money supply to whatever level the FOMC deems appropriate. Social Security is not any more endangered today than any other federal program.(and inflation does not threaten from too much spending - we are today about $4 trillion short of operating at full employment)
Why can't it be paid off - it can! And debt can disappear with no attendant inflation - why for heavens sake would businesses and governments that produce something with a price raise their prices if the debt is paid off? There is no connection. You really need to get a macro text and sit down some day and read it. Your concerns are absolutely not warranted.
Yes the money supply has been going up every year and yes prices have been rising. But that does not mean the increased money supply CAUSED the price increases. It is often the case that the Fed increases the money supply as a result of the price increases caused by other causes of inflation (such as "fighting" inflation with higher interest rates and excise taxes so people have to pay more for housing, cars, theatre tickets, etc etc). The Fed does so to enable transactions and the employment and production associated with them to continue even though the prices at which the occur are higher. In other words, a simple association between price increases and money supply increases proves nothing - airplanes also flew higher and higher in the past 30 years as the price level moved higher and higher. Since their ever higher altitudes also were accompanied by higher prices would you also suggest fighting inflation by grounding all airplanes?
Zulauf and anyone else who thinks that the Fed will pump in excessive money such as to cause a "hyper-inflation" obviously does not understand the real and complex world of the United States and the role of the Federal Reserve. Every (repeat every) such alarmist I have ever heard of turned out to be someone who had not studied macroeconomics and/or had no experience in the real world of business and commercial banking. Such people, no matter how well-meaning, just don't have the knowledge and background to "get" the realities and complexities of inflation. He sounds like one of them. Don't let him distort your investments - inflation is not on the horizon. We are $4 trillion of purchasing short of getting to full employment - and inflation from too much spending bidding up prices won't significantly start until we do. In other words, don't let inflation fears distort your investments.