“We’re not in Adam-Smith-Land anymore, Toto”

In these modern times ya gotta work fast.

Back in the eighteenth century Adam Smith said that the “invisible hand” of market forces would always bring the economy back into long-run equilibrium (page 1239 of his “The Wealth of Nations,” 1776). In other words, if for some reason supply was excessive during Period A prices would trend downward. Profits would temporarily suffer. During Period B firms would lay off employees and the economy would contract. Then, during Period C, low prices would stimulate demand. The extra demand would buy up the excessive supply during Period D. Profits would rise, motivating increased production and hiring of labor. Economic growth and supply/demand equilibrium would be restored during Period E (‘E’ for equilibrium!).

https://courses.lumenlearning.com/boundless-economics/chapter/long-run-outcomes/

The Great Depression inspired the Great Economist John Maynard Keynes to say: “Well, in the long run we’re all dead . . . so fuck that shit” (page 1239 of his “The General Theory of Employment, Interest and Money,” 1936).

This perspective became the prevailing wisdom after WWII. Can’t wait for Adam’s “long run” . . . government must engage in deficit spending when the economy starts to contract. The government can and should immediately provide the extra demand to buy up the excessive supply.

It took a while to get used to the idea that the government shouldn’t live within its means. Like you and me and everybody else the government used to try to spend no more than it had in the bank. After the Great Depression liberals readily embraced Keynesian deficit spending policies, but conservatives tended to be . . . conservative. The Great Economist Milton Friedman said: “Let’s keep government spending to a minimum and always try to balance revenues and expenditures” (page 1239 of his “Capitalism and Freedom,” 1962). That seemed to make sense to Ronald Reagan and Alan Greenspan. Ronald appointed Alan Chairman of the Federal Reserve in August 1987.

Two months later the Dow Jones Industrial Average went down 20% in a single day. For perspective: On the worst day of the Worst Depression the stock market fell 11%. On October 19, 1987 it fell almost twice that much. There were predictions that Alan would be presiding over a new depression. In the immediate-term he and many other conservatives got short-term religion.

During the ’90s there was a thing called the “Greenspan put.” At the slightest sign of economic contraction or market reversal Alan would inject monetary liquidity into the system and encourage risk-taking in the markets to avert further deterioration. The monetary stimulus would enable the government to fund expanded deficits.

https://en.wikipedia.org/wiki/Greenspan_put

This pattern became generalized into the enlightened policies that we enjoy today during the era of The Great Fed Put. Nonetheless, after 2008, in the wake of the Great Recession, interest rates went so low and deficits went so high that we all figured limits had been reached. When the Fed failed to normalize its policies during the expansion of recent years we sat around scratching our heads wondering “what in the world will they do in the event of a new downturn?”

Now we know (and we should have guessed all along): Each round of extreme stimulus emboldens them to Go Further. After all, in the long run the conservatives are all dead and their complaints from the grave are muffled. So each new generation can boldly go where the Smiths, Keynes, Friedmans, and Greenspans have never gone before:

https://en.wikipedia.org/wiki/Post-Keynesian_economics

The policies associated with the the Great Put involve printing, buying, spending, and spewing. The stimulation is immediate.

In these modern times ya gotta work fast.