That any schoolkid could predict eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult.
The Keynesian Cargo Cult’s ability to print and squander money is insignificant next to the power of Diminishing Returns. By now we all know two things about the Keynesian Cargo Cult’s religion:
1. It has failed to conjure up the recovery its sadly devoted believers insist is “just around the corner if we only borrow and squander more money” because…
2. Its main tenet–that the problem is “lack of aggregate demand,” i.e. people will buy more stuff made in China and corporations will open more stores to sell the stuff made in China–if only it was dirt-cheap to borrow more money–is completely, utterly, painfully false.
The central premise of the Keynesian Cargo Cult is that this mechanism of making it cheap and easy to borrow money will work a kind of magic that can only be manifested by dancing around a fire at night waving dead chickens and chanting “humba-humba.” The Keynesian cargo Cult calls this magic “animal spirits.”
Unfortunately, waving dead chickens while dancing around a fire doesn’t do anything in the real world, and neither does making it cheap and easy to borrow more money. It turns out that prudent people have no interest in borrowing more money, even at low rates of interest, and imprudent people are happy to do so but will stop paying the loan as soon as something untoward occurs in their finances. The cheap, easy-to-get loans default and either the banks who made the loans collapse or the taxpayers have to bail out the banks who foolishly lent money to imprudent borrowers at super-low rates of interest.
Corporations, meanwhile, look at the real risks of expanding business in a debt-saturated economy distorted by Keynesian Cargo Cult policies and realize that gambling capital on the possibility that waving dead chickens and chanting “humba-humba” will actually increase profits is a truly stupid bet, so they borrow the nearly-free money and invest it in various carry trades overseas that return a virtually risk-free return, thanks to the nearly-free cost of borrowing mountains of money from the Cargo Cult.
The Keynesian Cargo Cult is stubbornly blind to the two key dynamics of the real-world economy: diminishing returns and the S-Curve. Diminishing returns result when a system’s ability to produce an economically valuable output declines.
Higher education is a good example: tuition has soared $1,100% while the output (value of a college degree) has declined precipitously. A recent major study,Academically Adrift: Limited Learning on College Campuses, concluded that “American higher education is characterized by limited or no learning for a large proportion of students.”
‘Academically Adrift’: The News Gets Worse and Worse (The Chronicle of Higher Education)
Meanwhile, student loans exceed $1 trillion, only 37% of freshmen at four-year colleges graduate in four years (58% finally graduate in six years), and 53% of recent college graduates under the age of 25 are unemployed or doing work they could have done without going to college–retail clerks, waiting tables, etc.
The Keynesian Cargo Cult solution to the diminishing returns is to provide more debt to students, making them into debt-serfs for life. The cruel stupidity and immorality of the Keynesian Cargo Cult knows no bounds because they refuse to accept the reality that diminishing returns cannot be fixed by more debt and more squandering of good money after bad.
The truth is the failed cartel of higher education has to be leapfrogged and left in the dustbin of history: here’s a model that lowers costs by 90% and aligns the output with the real economy:Â The Nearly Free University and The Emerging Economy.
The Fatal Disease of the Status Quo: Diminishing Returns (May 1, 2013)
The Keynesian Cargo Cult’s solution allows no feedback from the real world, and allows no mechanism to discipline the imprudent borrower/speculator. If imprudent borrowers take on too much debt, the Keynesian Cargo Cult’s solution is to offer them more credit at rates they can afford–near-0% if necessary.
If a speculator borrows money and loses it in a high-risk gamble, the Keynesian Cargo Cult’s solution is to force the taxpayer to make good the gambler’s losses and then give the speculator more nearly-free money to continue gambling.
This “solution” works the first time around, less well the second time around, and triggers a collapse the third time around. This lifecycle is called the S-Curve:
The Keynesian Cargo Cult inflated one credit bubble in the 1990s, another in the 2000s, and by an extraordinary expansion of credit and lowering interest rates to near-zero has managed to Beat the Devil and inflate a third credit bubble in the 2010s.
That any schoolkid could predict waving dead chickens and eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult. But since the Keynesian Cargo Cult is headed by a Nobel Prize academic economist, the Cargo Cult members effusively praise the Emperor’s fine (and nonexistent) robe.
You poor, dumb, deluded fools. You’ve destroyed our economy, our values and our ability to deal with reality. Your faith is as boundless and disconnected from the real world as your policies
