Keynesianism – Monetarism

COMMENT: Dear Martin Armstrong,

Being a fund manager and with several bigger and commercial clients a commodity hedger, I truly admire your work. Not only that, our research, even by other methodology foremost pattern recognition and cross pattern recognition and liquidity flow detection – comes to very similar results as your calls, but we do not have Your preview reach, we detect it much later, yet before it happens.

Why I write You is that I do not understand as the Mengerian that I am, why You blame the Keynesians (which I do not belong to) for mistakes and idiocies of the ruling monetarists. This mix opens a backdoor to danger. It is the monetarists who preach money supply and interest rate management, not understanding that it is confidence as well as Irving Fisher´s velocity that determine if the credit multiplier works (inflation) or not (deflation). The ruling Monetarists do also not understand the very true (it is the best part of Keynesianism) Keynesian inflation model, the only one around understanding capacities of production as well as the fact that with empty capacities more demand goes into volume and not into price increases until the capacities are fully filled and from that point it will go into price increases.

The Keynesians do not care too much about money supply nor interest, they do understand that lack of confidence cannot be remedied by more money, but by an anti- cyclic investment made by the state instead of the private market entities. While this works, it leads to structural indebtedness of the State. Nevertheless it works short term, if the state orders 200.000 new police cars, they will be produced and if the FED playing Keynesian for the first time since 1985 (Stieglitz´s or Volcker´s mind?) buys MBS, real estate rises. Anything DIRECT works. I told this to 2 of my clients (Gold mine, Gold hoarder) when I started to aggressively hedge their gold end of November 2012 when it became clear that within the monetarist FED, a Keynesian program was built inside QE3, TRANSFLATING money from commodities to real estate, especially bad for Gold. (Like low interest rates are bad for Gold too).


We both know, that the real market economy (which is anarchic like Menger understands best and maybe Schumpeter translated best and Mr. Mises translated always wrong) has no lobby today, there is still the ruling Monsters out of the Conservative Frankenstein kitchen called Monetarists in place who love there (Mundell´s) EURO which makes them even more stupid than Frankenstein senior (Conservatives and classics) loving the Gold Standard.


Now my wish would be that the self destroyers born out of a mistake from the right – the Monetarists with their FOMC and other nonsense may not be mixed with center left Keynesians who are more brainy, slightly Mussolini Style (He re- discovered this “Neo- Mercantilism” which gave birth to Keynesianism) and may surprise us. The MBS program by the FED was such a surprise, I understood it, I hedged the consequences early enough but with Yellen, we get such a Keynesian instead of a Monetarist egg head and this may cause surprises.


The Monetarist Enemy of Markets are not dangerous to Your or my money, they are super easy to call. The Keynesians are another caliber of brain. This buying of MBS causing risk on housing loans to shrink, causing housing to rise, therefore remedying families being under water with negative equity and putting them (by recovery of the house value) back over the edge to positive equity therefore allowing them to borrow fresh money for buying cars was not stupid. It will not last- as every Keynesian policy stuff (it will reach the unused capacity level and thereafter need exponentially rising amounts of money going into the sector to sustain and that money will not come)- but it was not stupid and intellectually miles higher brainy than the Greenspan- Bernanke Friedman Handbook before. They did create a “US- Recovery” out of thin air. Because of them, I will have “the pleasure” to slowly prepare the shares that we have in a certificate and that pay dividend and that are a multiple of the S&P 500 index to be hedged with the SPX Future (sell to open trigger) and Gold and other such stuff might earlier to be de- hedged than I expected (I expected 2017); Palladium might start to run even now. Those Keynesians create stress.

Best Regards,



REPLY: The Keynesians are all about manipulating society via their view of DEMAND. The Monetarists view it is not DEMAND but the supply of money. I perhaps just lump the two together as Keynesian largely because the common bond is manipulating society to try to eliminate recessions, which is the same thing as Marx is trying to eliminate the business cycle. Perhaps my short-hand explanation is wrong and I should address the two separately, but quite frankly, they are the same to me for I look at the effect is the same, only the tool differs – a hammer or a screw-driver. One hammers the screw in place as the other turns it more slowly. Either way, it ends up in the same position.

MiltonAs most people know, Milton Friedman came to listen to me lecture in Chicago. He encouraged me to write when I saw myself simply as a trader and not an academic. I believe Milton was wrong in his view of the Fed and the Great Depression, not entirely, but he did not fully grasp the importance of international capital flows. I believe that is why he came to listen to me and said I was doing what he only dreamed about back in the ’50s. He said I had a front row seat. He made me see that having offices everywhere on all continents exposed me to observe the core workings of international capital flows. I believe Milton saw through international capital flows monetarist theory was not complete.


Both are wrong because they focus on the DOMESTIC economy ignoring INTERNATIONAL and all theories then crumble to dust because they create the Fish Bowl Economy model. They ignore the fact that capital moves around the world globally and that can alter both DEMAND as well as the MONEY SUPPLY. If China buys US debt that injects cash into the domestic system, that is increasing the money supply without the Fed doing anything. The Fed cannot control the money supply and behind closed doors the central bankers KNOW this. They cannot control spending and hence are expected by the politicians to sterilize their fiscal mismanagement.

The Keynesians advocate manipulating demand and thus advocate fiscal spending that the Fed cannot control and thus is neutral in creating inflation. However, the other part of Keynesianism is manipulation of taxes. Keynes argued to stimulate demand you lower taxes. This he saw correctly, but again it does not fit with government agendas.

So what we really have is a mixed-up mess of Keynesian/Monetarist ad hoc management. Both address trying the manage and “stimulate” the economy indirectly hoping against the obvious that they can restore “confidence” but cannot see that their tools are pointed in the wrong direction. Only Caesar and Tiberius took a direct approach. Caesar ordered all past interest payments be applied to principle. Tiberius suspended interest for 3 years on past debts. Both directly sought to eliminate the distressed sales and that was a direct attack on the deflationary impact.


Keynesian/Monetarism seek to save the banks rather than stop the deflation and then hope and pray that will somehow prevent a bank run and restore confidence. They fail to comprehend that the bank runs in the Great Depression were caused by the sovereign debt defaults. Precisely with Europe today the banks bought government debt that when it defaults is unsecured. When a government defaults you wipe out capital formation. That is what caused the bank runs for foreign debt was sold in small denominations to the public. When they lost as well, the entire system collapsed and required the closure of all banks.

There is a SUBSTANTIAL difference between Public and Private debt. Even MF Global people got something back. With public debt (presumed to be the safest) is actually the worse for you get nothing when they go bust. Additionally, there is also a significant difference between capital inflows and outflows whereby the effect is completely different depending upon international confidence in a sovereign state. Lack of international confidence causes rising interest rates and a shrinking domestic money supply. Strong International confidence results in capital inflows that cause an expansion in domestic money supply.


When I stood up in London and warned Russia would collapse in 1998, I expressly stated that we saw $150 billion coming out of Russia with $100 billion going in. It was the classic capital flight. So the fund managers like LTCM were too greedy on interest rates and assumed bribing official at the IMF would guarantee Russia would not default. That did not work out too good back then,