Monday, March 7, 2011

Keynesian Madness That Would Even Make Keynes Vomit

Joe Weisenthal thumbs:
Trish Regan asks a good question: Would pumping more money in be a good response to higher oil prices? Some may guffaw, but it's not absurd.
It doesn't stop there. Amazing;ly, Atlanta Fed President Dennis Lockhart also says that higher oil prices may require the Fed to do more money printing.

I have accused government officials in the past of not thinking beyond step one of a program they propose, but Lockhart's view here is more like thinking a half step into the ramifications of step one. Here's CNN:
If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.

Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.

"If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference.
First and foremost, it should be understood that a recession is caused by Fed manipulations of the money supply, which distort the savings-consumption ratio. Lockhart, of course, doesn't get that.

To the degree an oil shock is caused by a decrease in the supply of oil, this a shock to the oil dependent sectors of the economy. This is an admittedly broad sector, but it is a supply shock, and not a shock that is caused by a distortion of the savings-consumption ratio. It is not what in the Keynesian world would be viewed as a failure in aggregate demand. If anything, it is the continued demand for oil that is pushing the price of oil up.

Thus, even in Lockhart's Keynesian world, since there is no failure in aggregate demand, there is no reason for the Fed to print money.

Lockhart is simply taking any restructuring of the economy, even if it is caused by a contraction in the supply of oil, as something that can cured by fixing aggregate demand, i.e., printing money, even though there is no indication of a decline in aggregate demand. To a man with a hammer, everything looks like a nail.

I remind you, this is not just Weisenthal and a CNBC anchor not understanding what the hell they are talking about, but the president of the Atlanta Fed.

For sure, right now, Keynes is vomiting in his grave.


  1. I've taken the Joe Wiesenthal formula for economic inquiry, tweaked it slightly, and share with you the result which I think is highly improved and much closer to perfection than the original.

    Taylor Conant asks a good question: Would pumping more money in be a good response to higher prices? Some may guffaw, but it's not absurd.

    JW, eat your heart out, buddy!

  2. Yes and when the price of oil climbs higher, a result of these new "asset purchases", Lockhart can then claim the Fed should print even more money to help battle the price increases these "asset purchases" precipitated.

    I see nothing wrong with this line of thinking. What could possibly go wrong?

  3. It appears the "experts" are hell bent on sticking to their Keynesian and inflationist guns. I don't believe there is any hope of stopping the widespread belief of PRINT PRINT PRINT.

    That said, it appears all we can do is position ourselves as best we can for what is CLEARLY an inevitable currency crisis, characterized by skyrocketing prices.

  4. I think that comment deserves the "keep choppin'" award for pigheaded perseverance and persistence. There's nothing more asset purchases and more monetary creation can't fix.