Keynes and the Ruling Class' Game of "Bubbles": Is the End Near?

From Prudent Bear via Asia Times.  If this guy is right, there's Hell to pay in the not-too-distant future.

The Keynesian theory of fiscal stimulus, under which random government spending stimulates the economy, is bolstered by one enormous hidden advantage: Keynesians designed the principal measure of economic output, gross domestic product - or GDP.

IOW, the 'test' of Keynesian economics is based on circular logic.

Thus if a dozy government wastes $1 billion on rubbish of no value, GDP is said to be increased by $1 billion. Naturally, with that kind of "cooking the books", stimulus can appear to stimulate.

Yah, hey.  President Disaster can claim that "GDP went up" simply by........ahhh.........spending the living daylights out of your grandchildren's pockets.  (But he wouldn't be so cynical, of course.)

The solution is a simple one, even based on the statistics we are already provided with by the US Bureau of Economic Analysis: subtract line 21 (government consumption expenditures and gross investment) from line 1 (GDP) and examine the behavior of the net figure, which we can conveniently call gross private product (GPP).

...making Liars' Poker just plain-vanilla poker.

In the Great Depression, GPP performed even worse than GDP during Herbert Hoover's futile expansion of government. GPP then paralleled GDP through the New Deal, reaching its 1929 level a year later, in 1939 rather than 1938. Real GPP growth of over 10% in 1940, a year in which real government spending grew only 2.5%, showed that the US economy was by that stage rapidly leaving the Great Depression behind it.

This method also nukes the "war is good for the economy" mantra.

The two series then diverged during the war years, with real GPP halving between 1940 and 1944, showing that, contrary to Keynesian opinion, World War II did not reflate the private economy but squeezed it further - real GPP in 1944 was a quarter below its 1932 nadir. The true explosion of GPP growth came in 1945-47, with an astonishing doubling of real GPP in 1946, and GPP growth continuing through 1947 and 1948 before a "double-dip" recession in 1949-51 as the Korean War squeezed the private sector again.

We could infer that GPP had to do with pent-up consumer demand AND the European purchases of US goods.

...By far the largest expansion of government overall, at a 5.9% annual rate, came in the 2009 second quarter, when GDP declined marginally and GPP declined more substantially, at a 2.3% annual rate. Conversely, by far the two fastest growth quarters in GPP, at a 5.1% annual rate, came in the last quarter of 2009 and the first quarter of 2010, when government was actually shrinking at a 1.1% annual rate.

Now we get to the provocative part:

By the GPP measure, 2011's economy is not so bad, with steady growth in the first two quarters at 1.9%, compared with official GDP growth of 0.8%. Notably, government has been shrinking during this period, with both federal spending and total spending down at a 3.5% annual rate. That suggests that the current economic position is not in fact dire; it also suggests that continuing government shrinkage may encourage further growth.

That's not going to play well with the Ruling Class, folks.  Both the (R) and (D) vests of that smothering suit do NOT want to recognize that their fiddling and wankery are not "useful;" the Wizard of Oz will be exposed!

...It is now clear that the massive expansion of federal debt would have been impossible without Bernanke running negative real interest rates and buying more than US$3 trillion of federal and agency debt over the past three years. With a gold standard or with a Paul Volcker at the Fed, the massive deficits required for "stimulus" would have caused indigestion in the government bond markets long ago, and forced the rating agencies into a realization that the US credit was not all that it might be.

With a firm Fed and Platonic rating agencies, unswayed by political considerations, the US Treasury would have been downgraded in early 2007, when it became clear that the economically witless George W Bush administration was running a $400 billion deficit at the top of a credit cycle. By now, Standard & Poor's rating of the US government would be about the same as that of Dagong

Here comes the light at the end of the tunnel, and it's going 120 MPH:

The fact that the S&P rating downgrade was followed by a DECLINE in the 10-year Treasury bond yield, with buyers scooping up a massive new issue enthusiastically, is a clear sign that the long-term Treasury bond market is now in an out-and-out bubble, no more rational than that for Dutch tulip bulbs in 1637.

Bubbles burst, after all.  Ask any realtor.

HT:  Monty/AOSHQ