Downward Dog

The world will turn at least that's what they say
We'll crash and burn, it's hard to look away
That kind of thing is easier to say than do
--Til Tuesday

Wanted to capture a nice passage from John Mauldin's (consistently) fine work. The passage is actually a quote from Charles Gave at GaveKal:

"This is the law of unintended consequences at work: If an individual receives US$100 from the government, and at the same time the value of his portfolio/house falls by US$500, what is the individual likely to do? Spend the US$100 or save it to compensate for the capital loss he has just had to endure and perhaps reduce his compensation even further?

"The only way that one can expect Keynesian policies to break the "paradox of thrift" is to make the bet that people are foolish, and that they will disregard the deterioration in their balance sheets and simply look at the improvement in their income statements.

"This seems unlikely. Worse yet, even if individuals are foolish enough to disregard their balance sheets, banks surely won't; policies that push asset prices lower are bound to lead to further contractions in bank lending. This is why "stimulating consumption" in the middle of a balance sheet recession (as Japan as tried to do for two decades) is worse than useless, it is detrimental to recovery.

"With fragile balance sheets the main issue in most markets today, the last thing OECD governments should want to do is boost income statement at the expense of balance sheets. This probably explains why, the more the US administration talks about a second stimulus bill, the weaker US retail sales, US housing, and the US$ are likely to be. It probably also helps explain why US retail investor confidence today stands at a record low."

The boldface paragraph is my emphasis. Thought this was particularly well said. Keynesian theory, as with all elitist philosophy, is grounded in the assumption that people are generally fools, and that 'smart' people must take control and alter decisions that are 'obviously' wrong.

There may indeed be a foolishness phase. After all, we've been willing to go along with Keynesian policies, despite their destruction, for 80 yrs.

At some point, hopefully soon, the foolishness will end and we'll chuck Keynesianism onto the scrapheap of history where it belongs.