The Keynesian Fool's Errand: Constant Monetary Stimulus Is Whacking The Peaks, Not Filling The Troughs

I’m not too sure about the relationship between skipping dental appointments and the tendency of markets to crash, but in terms of gaining some anecdotal insight into economic function and consistency there may be some value in tracking something like that. As I noted on a couple prior occasions, the movie business, for example, has spun a horrendous 2014 starting around late spring. While that may be a attributable in the end to a difference in “quality” I don’t believe that to be the case – the same trash that sold well last year isn’t selling this year.

This weekend, BloombergBusinessweek ran an article purportedly displaying the appointment habits of Americans as it relates to dental visits. The upshot is that somewhere in early 2013, dental visits tailed off quite dramatically. As BBW puts it, “patients are increasingly canceling required follow-up appointments, or simply not showing up.” The data is compiled by a Sikka Software (caveat: “big data”), a company that claims a forward correlation with consumer confidence.

Intuitively that makes sense, particularly in combination with other anecdotes. Americans are increasingly skipping the dentist, which includes hygienic visits and even paying for all of it, skipping the movies and skipping the mall – and all of it times to somewhere after the 2012 slowdown. Used in connection with other statistics, notably hard dollar revenue indications, the picture of the economy is not one that tends toward health.

That is directly contrary to the mainline statistics of the month-to-month changes (without regard to what actually passes for statistical significance related to the rather wide confidence interval) in the Establishment Survey and unemployment rate. But it does fit within the confines of the continued lack of wage growth.

The divergence has as much to do with the statistical construction of those measures as it does the very nature of economic understanding. The main view of the economy is predicated on the Friedman/Schwartz formula for the Great Depression, something that came up and infiltrated the “discipline” in the 1960’s. That was further refined by some very bad missteps in the Great Inflation, which put the final touches of rational expectations and an activist monetary stance.

Prior to all of that, the state of economics tended far more toward actual markets, most especially for money, than circumvention. For example, in the minutes of the August 1958 FOMC meeting, Chairman William M. Martin was quoted as saying:

If inflation should begin to develop again, it might be that the number of unemployed would be temporarily reduced…but there would be a larger amount of unemployment for a long time to come.

It is a simple yet elegant idea that derives from sound money and stability. It is premised on the historical validation that trading short run “gain” for long-term trajectory was a fool’s errand. But John Maynard Keynes muttered something about how we are all dead in the long run and monetary neutrality was taken up to somehow prove it (as if it were possible to establish a counterfactual), so economics suddenly shifted to the statist idea of controlling everything with the shortest possible context and scope in terms of time. Like aviation, it has proved nigh impossible to fly the economy at great speeds looking only at the nose of the “aircraft.”

Contrast Chairman Martin’s statement with that made by economist Brad Delong in a 1988 paper that advised trying to, through ostensibly top-down means including “monetary”, “fill in the troughs without shaving off the peaks.”

The Great Depression alone provides sufficient evidence to reject the claim that the canonical shock to production is a permanent one.

At the center of contention is redistribution via monetary means, which is all that monetary policy can actually accomplish (or all that it wants to). On the one hand, the new Keynesian/Friedman framework believes wholeheartedly that intentionally stoking instability via redistribution in the short run is the surest way to retain active output heading toward the “potential” economy. The other side is equally persistent in that doing so only creates the temporary illusion of activity, instead silently and steadily eroding economic function and most importantly potential from the inside out – and in ways and means that are not captured by statistics since all of the main statistical accounts were developed by statisticians (economists) that only favor the former and totally reject the latter.

Yet, for all that redistribution supposedly accomplishes in the short run, we have experienced now long-term disruptions that feature some of the “greatest” and most evident interventions in history – and so very little to actually show for them. In fact, the case is getting easier, as in Japan and Europe, that Martin was right and Delong has it all wrong, especially as it was Delong who now, under the cover of “secular stagnation”, speaks of the current “recovery” as the “Lesser Depression.” “Somewhere”, the peaks not only were shaved but may have disappeared altogether.

In this determined focus to deny that monetary instability can have lingering negative effects on economic function, the intense primacy of generic activity right now has spawned a “cycle” whereby after seven years of the same, Americans skip movies, skip the dentist and skip the mall at the same time as the “longest uninterrupted streak of job growth” in history. Well then. Maybe it really is the case that movies and dentists and the mall experience have all become highly unsatisfactory suddenly at the same moment, or it just may be that Occam’s Razor applies and that Americans are experiencing tight discretionary conditions and applying them intuitively in these same discretionary categories.

It is exceedingly expressive in how secular stagnation fits into all of this, as if the 1960’s and Great Inflation is being rerun in almost the exact same fashion. When the economic orthodoxy adopted a “natural rate” framework back then, they did so in a manner that very much favored low unemployment to price disruption. In the IS-LM understanding, that meant a very heavy tendency to push interest rates always lower (under this theory, the economy “grows” where the actual interest rate is below the natural rate, so if you assume a low natural rate you also assume the “need” for interest rates to be even lower, seemingly always so).

This revisit of the Great Inflation should all sound very familiar to our own time, even though the lack of double digit CPI seemingly reflects something else. Again, the orthodox tendency to ascribe such narrow boundaries offers the solution – the “missing” inflation is found in other prices, namely commodities and assets.

They’re [S&P 500 companies] poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments, according to Jonathan Glionna, head of U.S. equity strategy research at Barclays Plc.

Almost $1 trillion in shareholder “flow” that filters upward to the top ends of the income scale vs. a determined effort to not take on the “expense” (as it exists in net income and EPS calculations) of actual capital creation where “flow” runs through actual wealth creation and wages at the lower ends.

CEOs have increased the proportion of cash flow allocated to stock buybacks to more than 30 percent, almost double where it was in 2002, data from Barclays show. During the same period, the portion used for capital spending has fallen to about 40 percent from more than 50 percent.

The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.

We live in an age where every central bank on the planet is pursuing some type of ZIRP focus to gain a theoretical spread from where they believe the “natural” interest rate is. That is what secular stagnation actually posits, where the natural rate is “somehow” not just low, but actually negative now. Economists now are rerunning the Great Inflation mistakes (seriously, the parallels to the current approach and analysis of failures is far too similar to those of the late 1960’s and 1970’s; except nobody seems to have any interest in economic history aside from the upward surge of the bubbles which “everyone” loved) all over again, but get away with it because the CPI only focuses on the basket approach and hedonics of consumer spending.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access