Why Government Control Is Overrated

In the early 1970s, just after President Nixon unilaterally terminated convertibility of the U.S. dollar to gold, the yield on the 10-Year Treasury Note rose above 5 percent for the first time since the Civil War. Then, for a period of roughly 30-years, the yield on the 10-Year Treasury Note stayed above 5 percent – and even topped 15 percent in the early 1980s.

And although the yield on the 10-Year Treasury Note slipped below 5 percent in the early 2000s, it has generally remained above the S&P 500 dividend yield – continuing the relationship that has been in place over the last 60 years. Currently, the 10-Year Treasury Note yields about 2.63 percent and the S&P 500 dividend yield is 1.91 percent.

What else has changed, in addition to the dollar becoming pure fiat, that has made a prior relationship, which was thought to be set in stone, reverse for such an extended duration?

By 1958, remember, the U.S. had already instituted a program of countercyclical economic fiscal stimulus, where Washington stimulated a slowing economy by spending borrowed money. By the late 1980s, thanks to the Greenspan put, the Fed was running a program of countercyclical stock market monetary stimulus, where the Fed puffed up a declining stock market with cheap credit.

At the heart of it, Keynesian fiscal policy and Friedman monetary policy are policies of control. They attempt to eliminate risk and uncertainty from the economy and financial markets. Yet the theories behind these policies never anticipated the consequences of their implementation.

That countercyclical fiscal and monetary stimulus would become permanent. That once the economy and financial markets were run down this path there was no turning back. That there is no such thing as normalizing these policies. That the perils of ever-expanding debt and financial bubbles would become a permanent facet of modern life.

Keynes, in his own words, was well aware of what he was up to:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

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