CAPITALISM OR CORPORATE FACISM? KEYNESIAN OR CRONY KEYNESIAN ECONOMICS?

In a world of 24 hour news cycles, social media, print media, the internet it is hard not to get caught up in the moment. The media circus has turned REAL NEWS into a sensory overload experience in ways never thought imaginable. Twitter followers may sometimes get news 10 minutes before it becomes a breaking news story on any of the major networks, slate gives you text news with a blurb and an estimated read time so that you can assess instantaneously whether you feel it is worth the 3, 4 or 34 minutes to read!

The evolution of the way news gets reported and the speed with which it can be sourced is about as fast as it can get. As news has evolved, so has the politics of it, the campaigns, the promotions and of course the slogans. Everything has a nice catch phrase to bring comfort or generate confidence. Everything must be carefully crafted to execute for the media.

Who could forget the Obama “Yes we can” campaign and after he or we didn’t of course it was “Forward”. The “Forward” campaign slogan was important because no one really wanted to look back, least of all the Democrats.

The slogans are not limited to political parties, comforting economic terms to describe monetary policy or political/economic decisions are almost laughable. Here are some examples, Quantitative Easing, sheeesh that sounds good right? It’s quantitative and its easing?

 What are your thoughts on the use of military terminology to define monetary policy with “Operation Twist”?

Last but not least the term “Austerity”. Sounds fair does it not? Why won’t the media and policy makers tell people the truth? Austerity generally means higher taxes, cuts in government spending or perhaps both simultaneously so it follows that the media cannot possibly report that as the mushroom dribble fed plebs would be out on the streets protesting… So “Austerity” it is!

There is no doubt that the global economy is in a dangerous and volatile situation. The global debt bubble is inescapable in my opinion without either a major economic crisis (bigger than the last one) or a period of unprecedented global inflation driven by one big global debt jubilee where debt is monetised in a multinational agreement.

The different attempts at stimulating economic growth that include the easiest monetary policy the world has ever seen is still failing. In conjunction with this easy monetary policy the USA Government has embarked on some of the biggest deficit budgets in an attempt to support the lag and deceleration in aggregate demand from the private sector.

The massive budget deficits of course could not be called that so the term “Stimulus Package” became the accepted politically correct way of misleading the public. With the “Stimulus package” came additional slogans such as the one coined by the BRILLIANT Larry Summers in his testimony before the USA economic committee.

Stimulus packages were the way to go according to Brilliant Larry, but of course the stimulus had to be “Timely, Targeted and Temporary”. HA!. That sounds great and perfectly reasonable. I would support that policy as I am sure many others would, a temporary targeted and timely fix might be great at supporting ailing aggregate demand.

Reading Brilliant Larry Summers testimony I pondered whether the words he spoke would have been echoed by John Maynard Keynes. Students of Keynesian economics would have seen the Summers testimony as filling the criteria set out by Keynes as the targeted, timely and temporary stimulus aimed at supporting aggregate demand in the short run.

In a recent discussion with a close friend of mine back in Australia, a topic trigger and blog idea was born. As we discussed the USA economy, the GFC (don’t call it the Global Financial Crisis) he raised the issue of the humanitarian side to Keynesian economics. It seems an economics professor from his home town had engaged him in the justification of Keynesian policies saying the deep hurt without the Government stimulus would be profound.

In once again agreeing that fiscal stimulus if it is “timely, targeted and temporary” has benefits as a short term fix, the implementation of the fiscal stimulus to satisfy the slogan is a completely different proposition. Let us address each of the Brilliant Larry Summers’ criteria looking in the rear view mirror from today all the way back to his testimony in January 2008.

To provide for open discussion and debate, along with my opinion I would like you to read the link below of the American Recovery and Reinvestment act of 2009 (ARRA).

. http://www.ask.com/wiki/American_Recovery_and_Reinvestment_Act_of_2009?o=2801&qsrc=999&ad=doubleDown&an=apn&ap=ask.com

TIMELY – Debate will always rage over the timing of the stimulus package as the crisis was already rolling and the devastation had already been felt. The stimulus package was more of a clean-up effort after a massive tsunami than it was a barricade built to protect the economy before the storm. President Bush enacted the Economic Stimulus Act of 2008 as an outgoing president however this was largely a watered down attempt and a patch fix than a fully-fledged program or recovery policy.

TARGETED – This is where I have my biggest issue with the Keynesian economic “demand side” theory in that it tends to be driven by short term aggressive spending measures to raise short term aggregate demand. This aggressive spending largely gives a misguided improvement signal by masking the structural economic issues at hand.


A monetary solution to a structural problem may offer relief, but that relief comes at the expense of a planned mixed policy that targets real jobs growth and the private sector which ultimately offers a more sustainable humanitarian solution. I would suggest that the fiscal stimulus package should carry a larger weighting on bigger incentives to promote employment rather than spending measures on public sector projects which provide temporary jobs that may terminate once the project is exhausted.

One measure may include tax concessions for an employer for providing a new job equal to the tax that will be paid by the employee in the job. A cash neutral tax policy aimed at jobs which will directly feed into raising aggregate demand from the private sector through earned wages that takes the burden off the public sector. This measure, may assist in raising efficiency and cost effectiveness in the public spend whilst promoting a more sustainable and organic growth environment.

Looking at the tax concession section of the ARRA you can clearly see that of the nearly $800bn package only $51bn was offered as incentives for companies and $237bn in incentives for individuals. Before you think I am beating the corporation drum at the expense of the individual I am not. I support the $237bn incentives for the individual, but believe at least $300bn should have been provided for business targeting employment promotion. The remaining $250bn could be used on targeted public sector infrastructure projects aimed at assisting in raising productivity. Improved roads, transportation, ports etc.

The fact is that there was over $350bn in stimulus spending including $155bn on healthcare, $100bn on education, 100bn on infrastructure. There was also $40bn allocated to extend unemployment benefits, $20bn for food stamp program, 14bn in one off $250 social security payments. In the same section is the provision of  $3.2bn for “temporary welfare”. The upside of this section was a miserly $3.45bn on training programs and an absolutely insultingly low $500m for vocational training for the disabled!  

All of the above were implemented with the backdrop of public sector wasteful spending that include the government trying to pick winners through initiatives such as the auto industry bail outs and green energy sector (solindra) just to name a couple.


 Airport runways were fixed in towns where literally only 5 or 6 planes land per day, potholes fixed on Rodeo Drive, heck there was even a few million spent by the department of defence to try and determine how democratic goldfish are (not kidding you, worth a google). It is absolutely absurd to think that in a true capitalist economy the private sector would facilitate any of the above especially the goldfish study!

I am sure when Keynes proposed his theory of government fiscal support he did not intend it to be inclusive of waste. Sure a monetary solution to an economic problem that is structural is not ideal, but a targeted and efficient government stimulus spending program would not be so bad if it was cost effective and provided similar returns on investment than would be achievable out in the private sector.

There should never be waste because the debt incurred by the government in enacting the stimulus will ultimately be serviced somewhere down the line by the tax payer, or felt by the country’s citizens in the form of inflation as the debt gets monetized.

Looking back over the last 6 years the USA Federal Government, under President Obama has doubled the public sector debt adding some 8 or more Trillion dollars to the bottom line. With this in mind I pose the question how “targeted” could the spending have been given the fact that the workforce participation rate here in the USA is the lowest it has been in nearly 3 decades? GDP even under the new calculation methods is lagging and signs of improvement now appear a pipedream not a chance of becoming reality.

TEMPORARY – Well this one should be self-explanatory, we all know that the Government deficit spending has been at record highs since 2008 and that is represented by the double down in public sector debt in that corresponding period.

So from a humanitarian perspective, my contrarian view to the Aussie professor is, that Keynesian fiscal stimulus that is not implemented with a timely, targeted and temporary focus will end up a short term fix at the expense of a deeper humanitarian issue into the future when the public debt has to be serviced.

I would also argue the point that Keynes advocated tax cuts in conjunction with government stimulus spending. Governments seem to ignore the former and concentrate on the latter more for political and not economic reasons.

If Government spending through stimulus is largely inefficient and wasteful vs private sector then surely the stimulus is more of an inefficiency enabler rather than an economic restructuring promoter and the adverse effects will be felt into the future rather than in the now?

To illustrate my point more simply, if an individual has a certain propensity to borrow, to service their debt and have their credit card maxed out they have no other option but to either work another job or begin to deleverage or save. A shift away from consumption and spending to savings and production is needed, that is a recession!

The economy needs to recalibrate and restructure. Right now despite the fact that there have been massive year on year government deficits investment into the private sector which will ultimately drive consistent and sustainable employment growth has been slow. As has been discussed in previous blogs the correlation between employment and credit acceleration/deceleration are undeniable.

Below is a chart which illustrates the “private sector” investment from 2007-2012

 The correlation between employment and credit acceleration/deceleration is also supplied for those reading my blog for the first time.

I will also add a link to view money velocity chart as a point of reflection to illustrate that it is the private sector that drives the employment, money velocity, credit acceleration in a cyclical growth loop.

http://research.stlouisfed.org/fredgraph.png?g=stp

If the Professors justification of Keynesian economics is to give the debt laden individual another credit card to ease the pain in the short term and it is proven that the credit card will be used inefficiently (just like government spending v private sector) surely the new maxed out credit card simply exacerbates the problem already at hand.

So whilst the theory has merit the policy implementation is far too inefficient and ineffective. It does not address the issue of debt driven deflation as household and private sector try and deleverage as central banks and government try and force feed the economy more debt.

The theory has also been tested and proven largely ineffective in producing real thrust into investment into the private sector that is needed as this is the engine room of the economy. The problem with policy makers and indeed many economists is that they read and rely on text books and largely ignore the problems of the dynamic global economy which tosses up real evolving problems that require flexibility in policy not rigidity.  

The stimulus policies along with the term “Too Big To Fail” are destroying capitalism and morphing it into global corporatisation where oligopolies rule. Oligopolies lead to idiocracy and you only have to take a look at where the USA is headed with the number of low paid jobs increasing at the expense of high paid jobs.

The four words “Too Big To Fail” according to Gerald Celente were the words that signalled the end of capitalism. I feel he is right, right now we have either crony capitalism or corporate facism where  the incestuous relationship between government and big business is becoming more and more of a blur. The relationship is so incestuous now it leaves me pondering from a historical perspective the question of who co-opted who?

Was it the Government representatives that co- opted big business or was it big business that co-opted government? It may be a case of the chicken or the egg, but really who cares when it’s a rotten egg!

A further example of this shift away from true capitalism into corporate facism can be found in the number of ex GOLDMAN SACHS executives now involved or heading up Central Banks. There is Carney, Draghi, Paulson and of course MF Global’s Jon “The Don” Corzine. Below is a link with a revolving door list CBS composed, reading it will take your breath away and have you questioning how any of this has been allowed.

http://www.cbsnews.com/news/goldman-sachs-revolving-door/

I have arrived at the conclusion throughout my personal study and analysis that we do not have a capitalist economy, we have corporate facism or crony capitalism.  I am also saddened for the destruction of Keynesian economic theory as governments have, for political reasons (my opinion) implemented Crony Keynesian policies in an attempt to kick start a recovery. These have been largely ineffective and inefficient and therefore lump more public sector debt burden on to an economy that is trying to restructure and recover.

To those that disagree I would like to leave you with a few thoughts and questions to think over and critically analyse. These are the questions I had sought answers to and the answers derived formed the backbone for my assertions in this blog. Perhaps if you answer these questions you may come to similar conclusions.

1. Given the benefit of hindsight on his policy implementation of QE, operation twist etc which has added over $3tn to Fed balance sheet. Would Bernanke do the same given the sluggish recovery since the programs were implemented?
2. Considering the fact that US public sector debt has added over $8tn or 8,000 BILLION for those not familiar with what a TRILLION is. Why has the unemployment scene not improved significantly? Why are GDP numbers still representative of a sluggish growth economy? What will be the impact this additional $8tn will have on a recovering economy when interest rates move up and the cost of the borrowing mean higher tax impositions to service the debt?
3. Finally after assessing all of the above consider if the policy agenda in 2009 targeted private sector growth, more tax cuts for small and medium business, tax incentives to employ people in the private sector, reduction in red tape constraining private sector would there have been a better result?

My point is if one were to assume that the $8tn that was added to the public sector debt was not used on Government “stimulus” packages where the government tried to pick the winning projects, rather the stimulus money targeted private sector growth. Could we or would we have a more sustainable and organic growth story now driven by employment growth which will drive real GDP?

I have no doubt that $8tn spent driving employment in the private sector, a more aggressive tax reduction and a reduction in red tape would by now be netting a positive return as the economy recovered. Permanent jobs in the private sector and not temporary project jobs in the public sector is the answer. Employment growth means an increased taxation base, a reduction in the welfare drain, a boost in perceived recovery, increase in money velocity, increase in GDP and a REAL recovery.

If Keynesian economics is passed off as being more of a humanitarian policy as the professor back in Australia asserts, surely a stable secure job creation policy driven by private sector provides the best avenue. Perhaps I am making the assumption that he supports true Keynesian economic policies not crony Keynesianism, just as I support true capitalism not crony capitalism or corporate fascism.  If that is the case, I apologise, but still thank him for the idea for this blog and hope that he can find the time to critically analyse my piece and offer his ideas on my assertions.

The right of rebuttal is open to all and I welcome feedback from all of my readership.

If you like this piece you can follow me on twitter @carneycapital

OVER TO YOU!