We Have Reached The Point That Keynes Warned Of In His General Theory

by Tyler Durden - June 19, 2016

Now that new warnings about failing central bank policy are emerging every single day, from Deutsche Bank, Citigroup and Bank of America, among others, here courtesy of Bloomberg's Christopher Maloney is a brand new one, one which take a different angle, and suggests that none other than Keynes predicted just the "dead end" outcome that the world finds itself in right now.

Here is the full warning from Bloomberg's Chris Maloney

We have arguably reached the point that Keynes warned of in his General Theory where demand for money and credit to satisfy what he labeled “non-speculative” motives has been more than satisfied; which brings us to this week’s money supply report.

The main beneficiary of growth in available money and credit since the Fed combined ZIRP and QE in the end of 2008 has been financial markets. An example is the outsized aggregate percentage growth in U.S. equity markets compared to the tepid pace for GDP.

As the default response (incorrectly labeled “Keynesian”) of the Federal Reserve to any sign of economic or market stress seems to be ever more “stimulus” this trend is likely to continue; the greater near-term risk for UST rates is for a rally, not a sell off.

M2 measure of the money supply grew at 6.8% y/y clip in May, its fourth m/m yearly increase in a row and its fastest increase since Oct. 2013.

Yet more money and credit would be superfluous as we have likely passed the point where the demand for money to satisfy what Keynes labeled “non-speculative” motives is sated.

He wrote such demand, once sated, is no longer responsive “to any influence except the actual occurrence of a change in the general economic activity and the level of incomes” (pp.194-197) both of which have been muted, at best.

In the ZIRP/QE-era we have seen demand for money for what Keynes labeled the “speculative-motive” take the reins, as this demand “usually shows a continuous response” to changes in the prices of bonds and debts (p.197).

Such speculative demand is a bottomless pit and dangerous lure; it also engenders an explosion in outstanding debt, highlighted by the surge of debt issued by the U.S. Federal govt post-recession.

M2’s monthly y/y growth averaged 6.3% from the end of 1999 to the beginning of 2009; since then it has increased to 6.5%, and still the prevailing sentiment is against any tightening of monetary policy.

At this point it is likely central bankers are “pushing on a string,” positively affecting prices for the financial markets’ flavor of the month but doing nothing for actual economic activity.
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At this rate of collapsing faith in monetary policy, very soon it will be "contrarian" to say that central banks actually have any idea what they are doing.