There are no such thing as perpetual-motion devices, Mrs. Yellen

Up until the late 1600′s, before Newton penned his brilliant “first law”, many inventors tried to create what were called perpetual motion machines.   These machines, once set in motion, would literally run forever on a single push.  Or so the theory went.  Needless to say, no one managed to create a source of infinite energy from wood, glue and magnets.

It runs forever on just one push.  Just like the magical Keynesian economy.

It runs forever on just one push. Just like the magical Keynesian economy.

Newton put an end to this nonsense with his “first law” which explained (not in so few words) “There is no free lunch” when it comes to energy.


The Federal Reserve clearly believes in perpetual motion:

Perhaps the monetary mandarins at the Federal Reserve should take a few moments out of their day spent soaking in vats of economic snake-oil, to review the wisdom of the 17th century:


Keynes would have been stumped.

Why?  Because there is (still) no free lunch.

Quantitative-Easing, as it is argued by the high-priests of the Fed’s inner-sanctum, is not the same as just “printing money”.   While it may look like “money printing” on the surface, their magical formula will (supposedly) result in the overall creation of “energy” within the system.

The Fed  argues that their money-prinitng it is only intended to be a short-term remedy:   A stop-gap measure intended merely to “prime the economic pump”.

After the “magic elixir” of monetary-stimulus is applied, the wheels of the economy are expected to turn (indefinitely) of their own accord, just like a giant perpetual-motion device.   At which point the “fuel” of QE can safely be removed and the economy will glide off into some frictionless nirvana.

InfoGraphic:  Federal Reserve Policy

InfoGraphic: Federal Reserve Policy

That’s the theory anyway.  Needless to say, it’s pure quackery.

It would be one thing if the Fed’s freshly minted stimulus-dollars all wound up chasing  productive assets, industrial infrastructure, and export industries. Of course,  they don’t.

The moment said stimulus-dollars begin to flow into housing and other non-productive assets is the moment that the lie to QE becomes evident.   These non-productive assets represent “friction” in a Newtonian sense, reducing the intended efficacy of QE.  And reducing to rubble the notion that perpetual motion is possible.

By simply looking at a graph of housing prices since the start of QE, one can quickly deduce that QE as a self-sustaining economic growth-creator cannot possibly work.  Why? Because the non-productive nature of the asset represents a loss of energy — or entropy within the system.  Money flows equally well into productive and non productive assets.

Capital doesn't differentiate between productive and non-productive assets.

Capital doesn’t differentiate between productive and non-productive assets.

And housing is not the only area where energy is lost.   There are hundreds more.

Our system is not a closed system.   Energy (or money) dissipates off-shore.  (Pardon the segue into Newtonian thermo-dynamics, but it too applies).   As liquidity rushes for the exits, the system experiences more entropy.    More not-free lunches.

Likewise, the current boom in dot-com assets is largely built around “disruptive technologies”.  These are technologies designed to capitalize on inefficiencies in existing industries.  While such new efficiencies are typically “good” from a business  sense, they are inherently deflationary in the macro sense, as the overall energy in the system decreases.   That’s more “friction”.  More energy lost.

So today we find ourselves in a world where freshly created QE dollars not only do not flow uniformly to productive asset classes, but pursue inherently deflationary avenues.   And yet the Fed hopes for “animal spirits” of capitalism to bridge the chasm of their logic.  (One must point out the fact that Keynes himself coined the term “animal spirits”.   What better proof of his logical-deficit is there, that he would resort to tribal magic to explain his theories?  But we digress.. and that is a subject for another post.)

...and then the economy goes on a tear.  Right?

…and then the economy goes on a tear. Right?

Ultimately, the Fed’s belief in Keynesian policy measures represent a belief in perpetual motion, and a belief in a frictionless system.   This belief is no different from the crackpots who tried (and failed) repeatedly to create whimsical contraptions that would run forever.  The only difference between the former and the latter, is that the latter weren’t in a position to blow up the world.

Imagine if 16th century hucksters with their rubber-band and magnets contraptions were in charge of the most important policy office in the world?   That’s where we are today.

Needless to say:  Mathematics will prevail.  And hucksters are always shown to be hucksters.