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Hayek vs. Keynes – An Economic Smackdown (Redux)

Back in Januaray I made the anti-Keynesian comment and now that we are 6 months into the year, I think my point (and Hayek’s) is being made very clearly as this global end-game unfolds:

Ordinarily I wouldn’t care if a new bunch of suckers gets fleeced buying shiny bits of metal and gooey liquids but the rising commodity prices suck capital away from the entire rest of the planet and that damages the global economy.

The World did not suddenly fall apart last week, we are only finally dealing with the myriad of problems that have been swept under the rug during 2009 as the market mindlessly ran up 30% off our June/July consolidation without a significant break.  Could things really have been that good?  Of course not, it was silly.  Actually it was reckless and stupid and, ultimately, damaging because, as I said in my 2010 Outlook, it causes a MIS allocation of capital away from new companies and sectors that can thrive and create jobs – instead plowing money into the same idiotic commodity investments that popped just 18 months ago.

Now ordinarily I don’t want to get into long drawn-out academic discussions of various economic philosophies in my morning posts (that’s what weekend posts are for!) but who knew the whole thing could be set to music?  Well, Zero Hedge did and I thank them for posting up this video, which I hope does a little to bring attention to poor Hayek who, although well honored himself, had to endure a 93-year life where everyone knew what "Keynesian" meant and everyone thought Hayek was "that hot Mexican actress."   

Freidrich (as opposed to Salma) Hayek belived that the central role of the state was to maintain the rule of law, with as little arbitrary intervention as possible and that interventionist policies caused dangerous mis-allocations of capital that were damaging to the system.   In The Use of Knowledge in Society (1945), Hayek argued that the price mechanism serves to share and synchronize local and personal knowledge, allowing society’s members to achieve diverse, complicated ends through a principle of spontaneous self-organization. He used the term catallaxy to describe a "self-organizing system of voluntary co-operation." 

Although both Thatcher and Reagan based much of their econonomic policies on his work in the 80s, Hayek himself laid out the case for "Why I AM Not A Conservative."  He’s a complicated guy – I like that…


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  1. "is being made very clearly as this global end-game unfolds:"
    So the questions remain…..what is the endgame?…..How will it play out?…….is there a realistic solution?  How maximize profits as it unwinds?

  2. Endgame/Exec – No realistic solution.  Right now we have a battle between US Keynesians and the Hayek crowd in the EU.  Europe followed Keynes after WWI and ended up with hyperinflation and WWII while the US followed Keynes but the fact is that we were heading into another disaster UNTIL WWII kicked off our manufacturing and sent 20M unemployed people overseas, where they sent their paychecks home to add to household savings (which were partially forced by rationing).   The US government was able to finance a massive debt cheaply by issuing bonds (war bonds!) as well as the global investment flight to the relative safety of the US.  Putting women to work put more and more money in people’s bansk and, after playing war games for 4 years, the boys came home and everyone could afford new cars, new homes and appliances and that put even more people to work and led us to a pretty good quarter-century of growth. 

    THAT’S the only reason the Keynesian solution worked.  Otherwise, as Europe painfully learned in the 30s, the hangover isn’t worth the party. 

    I think the endgame for the US is hyperinflation.  It’s the only way we’ll ever pay off this debt (with funny money) and that means equities are safer than cash.  There’s no logic in us "tightening our belts" because we don’t have the same social safety net Europe has so it is asinine to talk about the US going into austerity mode and letting unemployment rise to 20% becuase THEN you will see riots pretty much everywhere in this country and our state budgets can’t afford the police to manage the mobs. 

    Spain can float 20% unemployment because being unemployed in Spain means sitting at a cafe all day with a good book and getting free refills on coffee and eathing a roll for lunch.  Being unemployed in the US if the checks run out means ignoring your bills in the mail and avoiding creditors on the phone and waiting for the bank to finally foreclose on your home while trying to put off the shame of seeking charity from a shelter or soup kitchen with no hope at all of getting medicine you or your family may need.  That’s why US = Riots while Spain = Discontent.  Only people who have totally lost touch with the bottom 60% can possibly think that we can afford to lay more people off AND cut government aid programs AND tighten lending requirements AND survive as a country but that’s no surprise as they are the same people who think we can run a $1Tn war, double the size of government AND cut taxes to stimulate growth.

    Jobs/DrC (I like it!) – Nothing we haven’t discussed to death here.  I’ve been talking about the marginally unemployed, the under-employed and those who’ve dropped out of the workforce for years so, like many things, now that the MSM is paying attention, I’ve lost interest as I’m sure it’s baked in the cake by now. 

  3. Endgame/Phil:  I agree that hyperinflation is the least stinky outcome in a toilet full of crappy outcomes, but I think its probably the political endgame that will determine our economic endgame…

  4. good morning, Phil--do you think fcx will come back to its 65 level anytime soon? or is it headed lower do you think? we have puts on it at july 60 and jan 65  thank you,

  5. Phil, Good Morning, great post – so simple, yet so hard to get our leaders to understand.  I think Natural Gas may finally get it deserved respect.  Given that premise, how would you suggest building positions?

  6. Phil – I may not have my history correct and I keep learing from your perspective but asside from the revolutionary war (which could be considered one big riot against the establishment), and the riots over racial tensions during the 60s when did we ever have riots in the streets over economic issues?  Did it happen during the dark economic times of the depression ? From all the history I have read I really don’t hear or have read of a time in our history when the bottom 60% took to the streets in full riot mode. What am I missing ? Thanks

  7. Phil,
    Great response to my comment.  Your knowledge of history and perspective on current events is impressive.
    I also agree that the only way out of this mess is hyperinflation.  The books I read say gold is where to be during inflation.  I just can’t get my mind around that.  On the other hand,  is it possible that if we go hyper, then stocks will continue to escalate because the money will not be worth as much?  A wise man once told me to buy a house because what seemed like a big mortgage payment at the time would seem like funny money in 10 years.  He was right, that 1000 dollar a month payment seems like nothing today.  So can the same thing be true for companies and stocks?  Will 100 dollars a share for company XYZ seem like nothing during hyper or is there another dynamic that I am missing?