The reason everyone here keeps reminding you that correlation doesn't imply causation is because positive economic indicators (and I don't particularly think the ones you've cited are all that informative) correlate with real recovery and with bubble formation. Even if government spending is responsible for the positive signs you've noted, you have no way of proving that we are proceeding in a worthwhile and sustainable manner. This stimulus could have the same effect that Greenspan's policies had in the early 2000's.

You need to first show that the stimulus is responsible for the improvements (or at least their magnitude since they might have improved on their own) and then go on to show that they are productive and sustainable and not just the beginning of another bubble. Until you've done that, saying that “the market went up after the government dumped a bunch of money into the economy therefor it was a good thing for them to do” is just asinine.

When a business sells bonds, it must convince its investors that the business as a whole is trustworthy of the loan and will be around long enough to pay it back. If the loan is prudently invested, the bond holders get their money back and the business gets to keep any profit made. If the loan is poorly invested both parties lose out. The important thing to remember is that at no time is the business assured it will have the money to pay back off the bond holders which is how prudence on their part is inforced.

When the government issues a bond, they know they will have the money to pay bond holders and the bond holders know this as well. The government can either get the money through taxes or by printing it. Taxes curtail future investment for dubious current investment; printing money leads to inflation. Investors can demand higher interest rates to protect against inflation, but this just means the government pays its debt, bond holders are protected from inflation and everyone else gets poorer. I say the current investment is dubious because if government knows it can get the money to pay off the bonds whether or not its investments pan out, it is more likely to cater to pet projects and special interests (not to mention the fact that even if the government was run by angels there would still be the knowledge problem).

And I'm simply saying no – that's the implication of the way I view people.

=I don't see it that way – what it does is look at how nominal prices impact the ability of real prices to equilibrate. We live in a nominal world – one way of looking at the whole Keynesian story is precisely that the disconnect between nominal and real prices drives depressions.=
Please explain in more detail if possible.

=Why would they? In a world where liquidity increases you'd expect rates to fall, not rise. Money is cheap when we're swimming in it. And that's the problem. Money is cheap but not enough people want to borrow it and nominal price floors prevent the money from getting even cheaper to the point that people will want to borrow it. So the government has to step in and borrow.=
Not necessarily. If the amount of money is increased while the amount of goods and services falls, then at some point you will see inflation. I do not see how nominal interest rates may change that.
I think the problem with your view is that you disconnect the liquidity preference (and interest rates) from the demand for goods. In your world, people may have unlimited liquidity preference. That is why you can at the same time say that (1) the liquidity preference is keeping the interest rates low and (2) that low interest rates do not allow liquidity preference to fall. But this is just circular reasoning.
=Of course – but once you take risk premiums and that sort of thing into account for other interest rates, they may very well be at their nominal lower bound. The Fed funds rate is obviously more flexible than most other rates – so it's a stark indicator when that hits zero. That truly cannot move any lower. Others MAY be able to move lower, but they're still approaching some damn near non-negotiable rigidities. Think of it like wages. When Keynesians talk about nominal wage rigidities they call it “rigidity” because obviously it's possible to move lower, but the adjustment process is still a lot more challenging. So in the case of some rates they're not zero, but once you take risk premiums into account (assuming inflation premiums are non-existent right now), they're up against a de-facto price floor – there's not too much more room for adjustment.=
But why should the risk-premium necessarily fall? Risk premium is not wholly determined by inflation. It is determined by uncertainty which even increases in a recession.

=I'll fully stipulate the imaginary-ness of the market. But you know what? My demand for a Friday donut is determined by my donut preferences, not by an imaginary market for donuts. Just like “loanable funds” there are a wide variety of donuts and I may only be in the market for one of them – but we can still conceive of a broader “donut market” where people demand and supply a specific kind of donut, but other donuts are close enough substitutes that it's worth considering them together. Or you could break it out into multiple loanable funds markets – that works just as well, it's just easier to talk about it as one market. These markets are all interconnected – they're all up against a nominal rate floor. Some of the floors are more binding than others, but they're all broadly in the same predicament.=
My point was not exactly about multiplicity of the markets for loanable funds. My point was that there is no such thing as loanable funds market(s) separate from the market(s) for goods.
As for importance for multiplicity of markets, the point is that prices are relative. That means that a price always rises or falls relative to something. As prices are relative, the concept of AD is useless.

=As for your questions 1. and 2., first I'm not sure why you would expect suppliers of funds and demanders of funds to have symmetric responses. Do we ever expect that? A lot of this is chalked up to behavioral responses – this is where animal spirits and liquidity preference comes in. I think Arnold Kling's recalculation story is relevant here too. A lot of borrowers made some very bad bets and are losing from those bets. It doesn't mean they won't make additional investments – but they'll only make additional investments if it's dirt cheap to make them. Workers are scared of losing their jobs, so they save a lot as a cushion – even if the rates they get on those savings are very low. Firms are scared of another project failing so they get conservative and won't even borrow at very low rates. That story seems pretty sensible to me!=
Again, this story only holds if there is a separate market for loanable funds. I don’t believe it exists.

But the point is the deflation of 1921 – like the deflation of 1981 (which is why I think that's an even better comparison than 1987) was completely man-made. The recession was generated to stop the preceeding inflation. If you look at a chart of inflation for 1918-1940 or so, you'll see a high spike up, then a sharp deflationary spike down in '20-'21, then almost no change in the price level through a lot of the 20s, and then a gradual deflationary slope down through the thirties. In the 30's we essentially fell into a deflationary spiral from practically unchanging prices and zero interest rates – so when the economy started to collapse the Fed had much less recourse. Think of 1920 like the 1970s. Inflation was high and rates were high, so the Fed had a lot of latitude to put on the breaks with a sharp, short recession – and they did.

Re: “It basically looks just at the symptoms (nominal variables) and as such does not allow to say when the deflationary process will end or whether the economy will contract to a point where people cannot reduce spending any more which is absurd.”

I don't see it that way – what it does is look at how nominal prices impact the ability of real prices to equilibrate. We live in a nominal world – one way of looking at the whole Keynesian story is precisely that the disconnect between nominal and real prices drives depressions.

Re: “I believe that what requires explanation in your story is why interest rates do not rise even if the economy is awash with liquidity.”

Why would they? In a world where liquidity increases you'd expect rates to fall, not rise. Money is cheap when we're swimming in it. And that's the problem. Money is cheap but not enough people want to borrow it and nominal price floors prevent the money from getting even cheaper to the point that people will want to borrow it. So the government has to step in and borrow.

Re: “And what interest rates? The fact that the fed funds rate is low does not mean that other rates are at the lower bound. There are lots of interest rates in the economy.”

Of course – but once you take risk premiums and that sort of thing into account for other interest rates, they may very well be at their nominal lower bound. The Fed funds rate is obviously more flexible than most other rates – so it's a stark indicator when that hits zero. That truly cannot move any lower. Others MAY be able to move lower, but they're still approaching some damn near non-negotiable rigidities. Think of it like wages. When Keynesians talk about nominal wage rigidities they call it “rigidity” because obviously it's possible to move lower, but the adjustment process is still a lot more challenging. So in the case of some rates they're not zero, but once you take risk premiums into account (assuming inflation premiums are non-existent right now), they're up against a de-facto price floor – there's not too much more room for adjustment.

RE: “And what is more important is that interest rates are ultimately determined by intertemporal preferences, not by imaginary market for loanable funds.”

I'll fully stipulate the imaginary-ness of the market. But you know what? My demand for a Friday donut is determined by my donut preferences, not by an imaginary market for donuts. Just like “loanable funds” there are a wide variety of donuts and I may only be in the market for one of them – but we can still conceive of a broader “donut market” where people demand and supply a specific kind of donut, but other donuts are close enough substitutes that it's worth considering them together. Or you could break it out into multiple loanable funds markets – that works just as well, it's just easier to talk about it as one market. These markets are all interconnected – they're all up against a nominal rate floor. Some of the floors are more binding than others, but they're all broadly in the same predicament.

As for your questions 1. and 2., first I'm not sure why you would expect suppliers of funds and demanders of funds to have symmetric responses. Do we ever expect that? A lot of this is chalked up to behavioral responses – this is where animal spirits and liquidity preference comes in. I think Arnold Kling's recalculation story is relevant here too. A lot of borrowers made some very bad bets and are losing from those bets. It doesn't mean they won't make additional investments – but they'll only make additional investments if it's dirt cheap to make them. Workers are scared of losing their jobs, so they save a lot as a cushion – even if the rates they get on those savings are very low. Firms are scared of another project failing so they get conservative and won't even borrow at very low rates. That story seems pretty sensible to me!

Especially, because we are not discussing mormative issues here, as normatively I would be against stimulus even if it worked because I am not a utilitarian, and because the long-term counsequences of the stimulus for economic freedom for me outweigh any short-term gains a stimulus might bring.

Still, the subject of our discussion is the mechanism.

In this regard, I see several problems with your theoretical explaination.

Even if interest rates were high at the beginning of the 1921 recession, it was still highly deflationary. So the actual supposedly destructive process at work was the same as in the Great Depression. Or was not?

And what prevented inflation to fall even further in 1921-22 to reach the point where disinflation becomes destructive?

This brings us to the main problem with the Keynesian thinking. It does not explain the underlying process at work. It just says that if in a low-inflation environment, AD starts to fall, it turns into a deflationary spiral and so on. It basically looks just at the symptoms (nominal variables) and as such does not allow to say when the deflationary process will end or whether the economy will contract to a point where people cannot reduce spending any more which is absurd.

I believe that what requires explanation in your story is why interest rates do not rise even if the economy is awash with liquidity.

And what interest rates? The fact that the fed funds rate is low does not mean that other rates are at the lower bound. There are lots of interest rates in the economy. There is not a single market for loanable funds. It is just an abstraction.

And what is more important is that interest rates are ultimately determined by intertemporal preferences, not by imaginary market for loanable funds. And in terms of intertemporal preferences, the Keynesian story is self-contradictory.

1. On the one hand it says, that as interest rates are so low, consumers are willing to forego current consumption.

2. On the other, hand it says that despite low interest rates investment projects, even the long term ones, are not profitable.

But I do not understand the explanation for (2).

Instead, you choose to pick random fights about Keynesian Reuters/NYT/AP stories (actually, you don’t even do that, because you’re too slow) and minutiae, which is incorrect. You cite them, because you think they’re “correct.”

You’re wrong, and so are they.

You are a walking case study endorsement of libertarian economic beliefs.

First one is never going to happen.

We are in complete agreement with the second. The best way to get rid of corporate and special interests is to have a smaller government. Less to give out means less people trying to get the stuff.