The Last Keynesian Standing

After 20 years without a recession, how will Australians react when one finally comes along? Will they set themselves alight, protest, loot, stage a revolution?

Those weren’t rhetorical questions. Tell us what you think at

Perhaps the focus on recession is a little misleading. After all, GDP is a pretty poor indicator of true economic growth. Spending borrowed money increases GDP, even though borrowing represents consumption stolen from the future. That’s why Keynesian thinking, obsessed with massaging GDP, ends in excessive debt.

Most of the world is figuring that out. But it seems US President Barack Obama will be the last Keynesian standing. He continues to tout his latest jobs (read spending) bill as a solution to everything, blaming Republicans for blocking it. But the Democrats want none of it either, blocking it in the Senate they have control over.

Meanwhile, Europe splits into fragments of economic policies. There are the soon-to-be defaulters, the bailed out for now, the Austerians and the half-hearted Austerians.

A glance at GDP growth over the past few quarters will tell you what’s working:

(Note the time scale runs from right to left)

GDP Growth by Policy

Data Source: Trading Economics

The closest thing we have to Austerians are the Germans, whose GDP growth has been stellar despite the controversial austerity. The bailed out for now, Iceland and Ireland, are doing much better now that they have implemented austerity. The half-hearted Austerians, the UK and France, are struggling along, but still positive. The soon-to-be defaulters, also known as PIGS , are barely breaking even on GDP growth just this year. (Note that Greek data for Q2 2011 was not included.)

Obama’s Keynesianism has the US in the middle of the pack in terms of growth. As you’d expect, stimulus increases GDP growth in the very short run, but drags on it thereafter. That’s why the Keynesian curve above is in steady downtrend.

What’s interesting is that American stimulus efforts pushed US growth beyond Germany’s only until the end of 2009. Since then, Germany has outperformed on growth. Considering the US has been spending like mad, while the Germans have been cutting back, that is pretty pathetic.

Which is why Republicans and Democrats are unhappy about more stimulus (for now). But the Keynesians will stage a comeback. Some are already suggesting the world should declare a war on imaginary aliens, just to revive government spending. What’s odd about that is that economies do not recover during wars, but after them – when government recedes and public debts are paid off. You could say that the US economy is at war level government spending, while the German economy is at post-war level.

Anyway, don’t count a Keynesian comeback out for 2012. Even in Germany. The frightening thing is that governments will have trouble funding their stimulus efforts. That leaves the central banks.

But central bankers are probably sick of ‘pushing on a string’. That’s the acadmic name for the phenomenon when central banks pump money into the economy, but it only gets as far as the banks. Eventually, central bankers and their friends in parliaments around the world will find ways around the banking system.

That would mean inflation.

Remember, the Federal Reserve created trillions of dollars to save banks around the world. You have to think they would be willing to do the same for governments who have spent themselves into a hole.

But to justify any extraordinary central bank actions, the economic climate must be equally extraordinary. The question is how bad things have to get before policy makers ride to the rescue on their show ponys.

That question is the answer to the recent volatility. The worse things get, the better the chance of intervention. Traders are betting on the point at which some interventionist somewhere does something.

It must be driving stock brokers nuts to see their client’s wealth appear and disappear daily. No doubt property investors are having a chuckle. But Murray Dawes’ Slipstream Trader subscribers are thoroughly enjoying themselves, having gone long on 3 stocks Thursday morning. Since then, the market is up several percent. You can find out why Murray went long by watching his free video here.

In the end, if inflation does win out, both equities and property should do well. But they will both be hit hard in the meantime. So you can either join the traders like Murray, or hold a diversified portfolio and preserve wealth for now.

With the latest rally in stocks, now might be a good time to find out what to sell if things go bad again. According to Greg Canavan in Thursday’s Money Morning article, the rally isn’t going to last. You can read about why here. Greg has prepared his subscribers with a report warning them of four stocks to sell in the coming turmoil.

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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4 Comments on "The Last Keynesian Standing"

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Patrick Donnelly

The Irish have NAMA and a deficit that Europe is financing!

The PNAC wanted a new Pearl Harbor. What if 9/11 was not sufficient?

Charles Ponzi
After 20 years without a recession, how will Australians react when one finally comes along? Will they set themselves alight, protest, loot, stage a revolution? Herd mentality has been part of the Australian psyche since the arrival of sheep on The First Fleet. As a nation we do not value individuality. We tend to ridicule those in our society who dare to think for themselves. Ask any Australian who has chosen to rent rather than buy a home during the last few years how they are treated by family members and colleagues. Once the sheeple awake and see how they… Read more »
You need to differentiate between austerity and frugality. Australia’s short to medium term economic conditions are being determined not by private sector activity but by government cut-backs. Because Australia’s government acts at the bidding of the IMF and credit rating agencies, it has placed the country in a position where economic policy can be imposed by foreign interests. There is already strategic winding down of the public sector, in the name of austerity. This will further weaken consumer confidence and slow the economy .. well it will at least for the lower tier of the economy. The danger is that… Read more »

After 20 years without a recession, how will Australians react when one finally comes along? Will they set themselves alight, protest, loot, stage a revolution?

Why would there be such an overreaction for a mere recession when we’ve had several of them since WW2?

But if you mean we’re heading for another Great Depression, why don’t you come clean and say so? Even then I doubt whether there’d be any more than street marches, or that it would be any worse than it was in the 1930s.

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