Not very  often, but  occasionally he hit on something of importance.

For example, he said in the Communist Manifesto  that: “The cheap prices of its commodities are the heavy artillery with which [ the profit system]…compels all nations, on pain of extinction, to adopt the  [ profit]… mode of production.” President Obama evidently missed that passage, since he claimed in a debate with Mitt Romney that the government could provide health services more cheaply because it did not have to earn a profit. The truth, as even Marx understood, is that  the search for profit  drives prices down.

One of the few things Keynes got right was his dismissal of Marx. He told his student Michael Straight: ” Marxism was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523] Curiously, Marx had already said much the same about Keynesianism, even before Keynes was born. His scorn for Keynesianism was of course possible because there wasn’t anything particularly new about what Keynes said.

Here is the passage from Capital [ P. 827-29] in which Marx seems to be anticipating the Keynesian  system:

“The only part of the so-called national wealth that actually enters into the collective possessions of modern people is– their national debt. Hence,…the modern doctrine that a nation becomes richer the more deeply it is in debt. Public debt becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost….

As with the stroke of the enchanter’s wand…, [ the public debt] endows barren money with the power of breeding and thus turns it into capital.”… [But] modern fiscal policy…contains within itself the germ of automatic progression. Overtaxation is not an accident, but rather a principle.”

It would be fitting punishment for Marx and Keynes to have to debate each other face to face forever  in some gloomy spot beyond the River Styx.

In Congressional testimony last week, Fed Chairman Ben Bernanke slipped several things  in that no one much noticed. He said that the Fed might eventually  choose to exit from its current monetary expansion binge, not by selling US government securities, but by letting them mature. He also said that the Fed might possibly keep interest or principal payments for itself.

Let’s stop for a moment to consider what these two statements mean. At the moment, the Fed earns interest from the Treasury on bonds which it has bought with the money it has just pulled ” out of thin air.” It then pays its expenses, including the growing cost of the new consumer finance agency created by Dodd Frank that was placed in the Fed so that its costs would not have to be included in the federal budget. Since the interest on the bonds is larger than the expenses, in the end the Fed sends money back to the Treasury.

We aren’t told exactly how much has been deducted at the Fed, but we do see the amount of money returning to the Treasury. It’s a circular flow designed to obscure what is happening, which is the government simply printing money to pay its bills.

So what happens if the Fed holds a bond to maturity? In that case, the Fed presumably receives the principal payment from the Treasury and then sends that back to the Treasury too. In effect, the government has simply canceled its own debt.

When Adair Turner, a candidate for governor of the Bank of England last fall, said that the BOE would consider canceling some of the government’s bonds, this was considered a bit shocking, and the job went to Mark Carney instead. Now Bernanke has in effect announced an intention to cancel US bonds, and it doesn’t cause a ripple.

It can certainly be argued that it shouldn’t cause a ripple, that once the Fed has bought US bond with newly created money, the debt has already been canceled. But central banks like to do these things, step by step, as quietly as possible, and Bernanke has once again succeeded in making radical policy sound so boring that everyone slumbers as he announces it.

To make it even more complicated and confusing, Bernanke added that the Fed might also, for the first time, decide to keep the government’s money, not return the unexpended portion to the Treasury. Why would the Fed do that? The Chairman did not explain. But he must be worried that a rise in interest rates could result in a fall in bond values that would in turn bankrupt the highly leveraged Fed.

If the Fed’s  capital base disappeared, the Fed could just print more money for its own use, but clearly the Chairman worries whether he has the statutory authority to do that. Not long ago, the Fed quietly released a statement that in the event of a need to refinance the Fed, the Treasury would be responsible for doing so. This has no clear statutory authority either. So the new idea may be to hold back some of the interest or principal payments the Fed receives and not return them to the Treasury so that our — the public’s money– can be used to refinance the Fed if needed without publicly asking the Treasury for money.

The Fed is not just ignoring or stretching its own statute in doing all this. It is ignoring the Constitution as well. Only Congress is supposed to be able to authorize the expenditure of public funds.

There is so much in the government’s official deficit figures  that is phony it is hard to say what is real.

But we should add at least $89 billion to the official deficit figure. To see why, we need a bit of background.

The US government deficit is supposed to be running at around $1.2 trillion. But the government gets there by using accounting methods that would put private business executives in jail for fraud. The real deficit by different estimates should be multiples higher. This is already widely known.

It is also increasingly understood that the Fed is covering the deficit by creating new money out of thin air and using it to buy the government’s bonds. What is not generally understood is that the Fed then posts “income” from the newly purchased bonds, uses some of it to cover its own expenses, which are not subject to Congressional oversight, and then remits the rest to the Treasury. The Treasury in turn can use this phony income to reduce the deficit.

Consider what has happened here. The government sells a bond to itself by selling it to the Fed. The Fed then “charges” the government interest. The interest is actually paid by borrowing more from the Fed, but nevertheless is booked as real Treasury income and used to “reduce” the deficit.

A Bloomberg article mentions in passing that the Fed sent $88.9 billion of this phony income to the Treasury in 2012. That is another $89 billion that should really be added to the deficit.

To put this $89 billion in perspective, it is much larger than the $62 billion per year in expected tax revenue from the new taxes on the rich ( those making over $400,000 a year) that were enacted in January with the “fiscal cliff” legislation.

We now have the announcement that Ben Bernanke’s Fed will buy $45 billion a month in treasuries, QE4, until unemployment reaches 6.5% or his version of inflation exceeds 2.5%. What a surprise!

Last September, when Bernanke announced the third phase of the government’s program of borrowing from itself by creating new money and using it to buy government bonds, I wrote:

Bernanke says that the new announced round of money printing (QE3 plus more Twist) is intended to reduce unemployment. Does he believe that? It is possible that Bernanke really drinks his own Cool Aid, but I doubt it. Does he think that stock market gains will boost confidence and somehow help employment indirectly? Perhaps. He has in the past claimed credit for spiking the stock market, although he must know that the empirical evidence does not show a link to employment gains.

Why then this dramatic move only two months before a presidential election?…

The most likely explanation is that Bernanke is worried about the treasury auction market. He wants to be able to use his printed money at will to support it…. Ostensibly the QE3 purchases will be mortgages…. The program can always shift into treasuries at any time….

Well, it does appear now that Bernanke was just easing his toe in by announcing the purchase of agency mortgages last September, and is really focused on treasuries. In all probability, he is afraid that the market for treasuries will falter. He can now support it anytime he wants without causing panic.

The next announcement may well remove the $45 billion monthly limit. Then he will be able to finance the government with as much fairy dust money as he likes.

There is always the chance that the foreign buyers will eventually be spooked and it will all come crashing down. But right now the foreign buyers do not have a lot of options and anyway Bernanke retires in a year.

It would be interesting ( and helpful) if Alan Greenspan suddenly had a Saul of Tarsus/ Paul experience and spoke out against his protege Bernanke. Or perhaps Paul Volcker, who admitted that the Fed might be violating the Fed statute in 2008 ( there was really no doubt about it) might speak up? Unfortunately none of this is likely. And we will continue on down the rabbit hole.

Bernanke says that the new announced round of money printing ( QE3 plus more Twist)) is intended to reduce unemployment. Does he believe that? It is possible that Bernanke really drinks his own Cool Aid, but I doubt it. Does  he think that stock market gains will boost confidence and somehow help employment indirectly? Perhaps. He has in the past  claimed credit for spiking the stock market, although he must know that the empirical evidence does not show a link to employment gains.

Why then this dramatic move only two months before a presidential election? Is it intended to spite Romney who said he would not reappoint Bernanke? I doubt that too.

The most likely explanation is that Bernanke is worried about the treasury auction market. He wants to be able to use his printed money at will to support it. The new printing and bond buying  program is open ended by date. It can continue indefinitely. Ostensibly the QE3 purchases will be mortgages. That will help the banks, will help treasuries indirectly, and the program can always shift into treasuries at any time. The next step will be to remove the monthly limit and then, presto, the Fed will be able to print and monetize debt at will.

This is also a good time to start the process because other major currencies are committing their own forms of hari-kari. At least for the moment global bond buyers won’t be exiting the dollar in favor of the Euro or Yen– or even the Swiss franc, since the Swiss authorities are madly printing money too.

At some point, however, Bernanke will go too far and spook the foreign buyers. Then his game will be up.

In his current  Bloomberg piece ( link below). Keynes’s biographer Robert Skidelsky tells us that the famous economist’s “notion of satiety” has  been buried by the “Darwinian capitalism” unleashed by Thatcher and Reagan in the 1980′s,  with its “ideological faith in the market system” and glorification of “untrammeled self-interest” as expressed through the “profit motive.” He further  tells us  that Keynes and other sensible earlier economists believed that “people would, and should as rational agents, work less and enjoy life more.”

A reader on Bloomberg states that ” Skidelsky inhabits the mental world of his hero, Mr Keynes.” But does he? His three volume biography seemed reasonably balanced and accurate. Keynes’s many contradictions were noted. But in recent years, Skidelsky has presented Keynes more as the person he wishes he had been, not the real person.

Consider Keynes’s own life for a moment. Did he ever stop or even decelerate  his furious pursuit of ever greater personal  wealth? No. Did he ever stop working so hard? No. Even when disabled by a serious heart condition, he refused to stop working himself to exhaustion  and may have contributed to his early death by doing so.

Was it a case of ” do as I say, not as I do” on Keynes part? Not entirely. He did think that society could and should reach a point of satiety in consumer goods, but he did not think society should then start loafing. He envisioned that hard work and the accompanying wealth would be directed to support  the arts and what he considered the higher pursuits  of life.

Would Keynes have agreed with Skidelsky that the ” main challenge [now is] to ensure that the fruits of the new abundance [ are] democratically distributed?”  It is doubtful. Keynes said  that in the class war, he would be on the side of the educated and cultured bourgeoisie. As a thorough-going elitist, he was  often impatient with “democracy” but  in any case was  thinking of it in political, not fanciful economic terms.  And of course any such discussion is puerile because wealth is not something that we pick up on the beach and share among ourselves. It has to be created through hard work and investment and insight. Most  socialist schemes of redistribution just destroy it for everyone.

Skidelsky is also against what he, like many others, calls “trickle down.” This would be more persuasive if “trickle down” were not  oxymoronic. When asset owners invest their assets in a business, the money flows immediately to workers and contractors, or indirectly to workers or contractors in other industries by buying or renting buildings and equipment. This money may or may not flow back eventually to the investor, but if it does, and better still if there is a profit, the asset owner is paid last. The party who is receiving payment last cannot logically be “trickling down” his or her wealth.

One point at least Skidelsky gets part right. He says that the “system of the past 30 years… has been retained for the benefit of a predatory plutocracy that creams off the riches.” This is indeed going on. But this is not a plutocracy of honest businessmen and women. It is a crony capitalist  plutocracy linking  politicians, bureaucrats, public union leaders,  trial lawyers, Wall Street, and many other government dominated and directed industries. It is  a crony capitalism that has been created and defended  by the very economic policy ideas which Skidelsky espouses.

http://www.bloomberg.com/news/2012-06-07/too-much-faith-in-markets-denies-us-the-good-life.html

Do you recall the courtroom classic in which the prosecutor says to the person in the box: “Just yes or no please, have you or have you not  stopped beating your wife?” Yes of course means that you were beating her. No means you are still beating her.

Debaters and politicians know that if you can control the terms of the debate, you will have won it. Sometimes the effort by politicians to insinuate their own loaded  language into the dialogue becomes ridiculous.

Here’s a recent case in point. The new French President, Francois Hollande,  campaigned on a theme of less “austerity” and more   “growth.” On being elected, he promised both France and Greece more “growth.” President Obama and other leaders at the G-8 meeting liked this terminology and agreed that less “austerity” and more “growth” is needed.

But what do these terms actually mean? Translated, “austerity” refers to a reduction in government deficit spending, which the Europeans are attempting to accomplish almost entirely through tax increases, with little or no reduction in government spending. “Growth” means an increase in government deficit spending.

So an increase in government deficit spending is synonymous with “growth.” The two terms are identical and either term may be used interchangeably without explanation. President Obama will no doubt use this formula extensively in the campaign. He will say he is  for “growth” and his opponent is against “growth.”

Of course, as any student of economics knows, there is little logic and no empirical evidence to support the idea that government borrowing to spend promotes growth, especially when so much borrowing has already taken place. There is plenty of reason to think that government money printing and deficit spending lead instead  to bubble and bust, and  therefore prevent economic growth.

Still you have to hand it to M. Hollande and now President Obama. Calling an increase in borrowing to fund government deficits ” growth” is a lot smoother than calling money printing ” quantitative easing.” QE has the merit, like “growth,” of obscuring the real terms of the debate. But “growth” rolls off the tongue so much more easily and will sound good to the average person.

Meanwhile it is not just the politicians of the left  who are trying to do something about the current revulsion against soaring government debt. Creative Keynesian minds are at work. Robert Shiller, leading Yale economist, would like to increase government deficit spending even further, but recognizing that the political climate is against it,  has a fallback idea. Why not just increase taxes on the wealthy and immediately  spend every dime of the revenue. That way, the deficit won’t go up and the economy will still  be stimulated by the spending.

Shiller is a very smart man. There is no doubt about that. But isn’t it remarkable that he apparently believes the government spending will help the economy even more than  the private spending or investment which has been precluded by the new taxes. In effect, we are to take money from experienced and successful investors, people who really know how to create jobs and are motivated by the profit system to do so, and give that money to politician spenders and investors, and lo, it will help the economy recover.

Maybe Shiller thinks these politician spenders and investors, in Keynes’s words, decide matters based on ” long views,…[ the] general social advantage,…[and] collective wisdom.” This idea defies history and experience, but even if politicians did decide matters that way, they still wouldn’t be able to run an economy.

Shiller’s new idea is almost as bad as the earlier brainstorm of leading Keynesian academics that the Fed needs to gin up inflation so that interests rates would be come even more negative than they are. The originator of this idea, Harvard economist Greg Mankiw, who in addition to being a former George W. Bush CEA chair, also happens to be one of two named economic advisors to George Romney, has been coy about how much extra CPI inflation he would like to see. But his Harvard colleague and co-author of This Time is Different, Ken Rogoff, has explained that they are thinking of about 6%.

Even Keynes never advocated giving away money to that degree. He did advocate zero % interest rates, but not -6% interest rates. That really raises the art of giving away money, generally to government cronies, to a new level. Of course it also assumes that the bond market will just go along with it and keep buying debt securities offering  such a return.

The one thing  that all these Keynesian remedies have in common is a desire to control prices. Unfortunately it is this very lust to control prices that is giving us the “austerity” and ” lack of growth” that M. Hollande, President Obama, and the other members of the G-8 so deplore.

The richest and most successful Keynesian on Wall St has summarized his current policy advice succinctly. The Fed should monetize all kinds of debt in order to keep the nominal economic growth rate north of the nominal interest rate. In this way, necessary deleveraging can take place gradually and less painfully.

This policy of course won’t work. Instead of letting the economy adjust to reality, it will just make more ( and more painful) adjustment necessary. It might be nice to have a short but  more technical explanation of why it won’t work. If one of you wish to take this on, I would be glad to share it with the Keynesian in question for response.

Apropos of this, although QE 2 supposedly ended, the Fed is still growing the monetary base at a rapid clip ( 4.1% over the last 26 weeks). As Ned Davis has pointed out, this is like QE 3 in disguise. Some of this may be an attempt to deleverage the economy gradually, but it may also reflect the Fed’s fear that the government securities market will collapse without help. Over the same half year, global central banks have provided monetary ” stimulus” at a rate equaling about 50% of what was done at the peak of the crisis.