How Mainstream Economics Is Lost In A Keynesian Fog

Joining Anglo American and Kinder Morgan, Freeport-McMoRan announced the full suspension of its dividend. The clustered nature of these announcements only create questions about what might have changed recently, a possibility which actually holds very little mystery. After all, the company’s stock price has been falling steadily since about December 2010 (trading at about $60) so that surely isn’t the catalyst. Having been on a more gentle downward slope to June 2014 (trading at around $37), the stock has plummeted with commodities (timed to the “dollar”) to less than $7 recently (though it is up in trading this morning by about 10%).

It is not stock price considerations that have struck Freeport in recent days, nor can it be strictly commodity prices. Both of these have been known facts and predictable drags (except to economists and policymakers) for at least seventeen months, if not four years. Increasingly, we are forced to reckon, as Freeport, Anglo American and Kinder Morgan (and countless other unknown, private entities and partnerships already) with a full inflection and paradigm shift in finance.

The company also said it was looking at other financing alternatives, including a potential sale of minority interests in certain mining assets.


Freeport cut 2016 capital expenditure budget for its oil and gas operations by 10 percent to $1.8 billion, and slashed its 2017 budget by 40 percent to $1.2 billion.

These are the moves of a business under threat of debt rollover problems; actively managing, for the first time, a potential liquidity bottleneck in combination of a continuing horrible business environment that is no longer being overlooked by a formerly mania-crazed “reach for yield” that not long ago funded almost anything and everything on Janet Yellen’s (Ben Bernanke’s) word alone. As noted yesterday, the “exploration” for asset sales to alleviate the balance sheet devastation that has taken place is going to get more and more crowded – when the debt runs out, the credit cycle turned, the words “bankruptcy” and “liquidation” begin to enter the pertinent lexicon, forcing more drastic, painful attempts. Better to get through the exit, any exit, first.

While this new and perhaps frightening (for those that see this as a negative instead of the necessary adjustments toward actual capitalism, though belated and made so much worse by monetary policy faith alone) turn broadens and gains more traction, the rest of the mainstream is left, literally, dumbfounded:

The world’s central bankers just got a helping hand from the world’s oil ministers.


As the European Central Bank delivers less monetary stimulus than investors sought and with the Federal Reserve set to tighten next week, the world economy may find support instead from the weakest oil price in more than six years.

Written under the incredulous headline OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t, what makes this truly astounding is not the contention low oil prices are a huge boost to consumers, as that one had been passed around and repeated widely, with emphasis, earlier this year. Instead, you can see the desperation in the attempt by the very fact the article acknowledges that it didn’t work then:

While its [oil prices] earlier slide failed to provide the economic pickup some anticipated, economists at UniCredit Group AG, Commerzbank AG and Societe Generale SA are still banking on cheaper fuel to spur spending by consumers and companies in 2016.


“On net, central bankers should take this as a positive,” said Peter Dixon, an economist at Commerzbank in London. “This does help to stimulate demand by leaving a little bit of money in the pocket and providing a feel-good factor.”

They also said it was “transitory.” The Aristotelian hold of the recovery fantasy is simply blinding, and it produces (very much like commentary on China currency) no end in contradictory nonsense that devolved into honest logical mess, such as this clear, frantic example.

“A drop in energy prices is the equivalent of a tax cut, with no implications for debt,” he [Erik Nielsen, chief economist at UniCredit Bank] said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a [sic] deterioration in inflation.

In this one paragraph is everything that is orthodox monetarism in economic form; this is the exact nature of true “forward guidance” as it was under Bernanke (rather than the watered-down versions practiced under Yellen). In other words, the credentialed chief economist tells us that low oil prices are good because they act as a “tax cut” for consumers which then produces a boom in consumption leading to higher oil prices (“wary of wagering”) inevitably. In other words, for that to work, oil investors and the futures curve has to be so incredibly dumb as to not expect it all to work, otherwise they would bet on it working before it ever started to, and thus oil prices never would have collapsed in the first place.

Again, this is “forward guidance” that led Bernanke’s view on QE, because if QE worked as it was proclaimed then investors would demand higher interest rates at the start (rather than the lower interest rates QE was supposed to create) in anticipation of expectations of lower interest rates producing the full economic recovery and thus the benefit of higher future interest rates. In both cases here, QE and oil prices, the “stimulus” never arrived and it isn’t hard to see why monetary policy and orthodox economics can’t maintain a grip on economic function. Rational expectations theory has so corrupted the discipline as to convince it that what wasn’t happening will undoubtedly because what is will not.

I would apologize for that last sentence except that it perfectly captures where we are, and a good deal about how we got here. The importance, then, of this shift past the “end of the beginning” is that companies (and other economic agents that we might not appreciate until lagged into some other point) are no longer being left in denial, whether of their own choice in picking up past “forward guidance”-type nonsense or whether being forced to by financial prices and conditions that are much further down this same road of reckoning. The more these points converge, the greater the desperation to counter the possibility (including Janet Yellen’s September “professional forecasters” speech).

If nothing else, we are supposed to believe that what didn’t work already (oil prices as a “tax cut”) will suddenly start to even though more and more of those businesses directly in line of it all are not just claiming much worse but now acting on it. All that’s left at this point is for Ben Bernanke to show up on TV and tell us that this is “contained” to oil (I doubt Yellen would, not because she holds more or greater interpretative abilities but because she is far more likely to deny, and keep denying, anything is wrong to begin with no matter how blatant).