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some "common sense" economic stuff

https://www.hussmanfunds.com/comment/mc180604/

 

A wee bit more complicated than fables about capitalist and socialist cows but a pretty straightforward and simple description of our current economic system and cyclical bubble dynamic.

 

Whether you agree with his ultimate conclusions or not.

 

"Consider two economic systems.

In one, consumers work for employers to produce products and services. The employees are paid wages and salaries, and business owners earn profits. They use much of that income to purchase the goods and services produced by the economy. They save the remainder. A certain portion of the output represents “investment” goods, which are not consumed, and the portion of income not used for consumption – what we call “saving” – is used to directly or indirectly purchase those investment goods.

There may be some goods that are produced and are not purchased, in which case they become unintended “inventory investment,” but in a general sense, this first economic system is a well-functioning illustration of what we call “circular flow” or “general equilibrium.” As is always the case in the end, income equals expenditure, savings equal investment, and output is absorbed either as consumption or investment.

The second economic system is dysfunctional. Consumers work for employers to produce goods and services, but because of past labor market slack, weak bargaining power, and other factors, they are paid meaningfully less than they actually need to meet their consumption plans. The government also runs massive deficits, partly to supplement the income and medical needs of the public, partly to purchase goods and services from corporations, and partly to directly benefit corporations by cutting taxes on profits (despite being the only country in the OECD where corporations pay no value-added tax).

Meanwhile, lopsided corporate profits generate a great deal of saving for individuals at high incomes, who use these savings to finance government and household deficits through loans. This creation of new debt is required so the economy’s output can actually be absorbed. Businesses also use much of their profits to repurchase their own shares, and engage in what amounts, in aggregate, to a massive debt-for-equity swap with public shareholders: through a series of transactions, corporations issue debt to buy back their shares, and investors use the proceeds from selling those shares, directly or indirectly, but by necessity in equilibrium, to purchase the newly issued corporate debt.

The first of these economic systems is self-sustaining: income from productive activity is used to purchase the output of that productive activity in a circular flow. Debt is used primarily as a means to intermediate the savings of individuals to others who use it to finance productive investment.

The second of these economic systems is effectively a Ponzi scheme: the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy. Notably, since securities are assets to the holder and liabilities to the issuer, the growing mountain of debt does not represent “wealth” in aggregate. Rather, securities are the evidence of claims and obligations between different individuals in society, created each time funds are intermediated.

So it’s not just debt burdens that expand. Debt ownership also expands, and the debt deteriorates toward progressively lower quality. The dysfunctional economic system provides the illusion of prosperity for some segments of the economy. But in the end, the underlying instability will, as always, be expressed in the form of mass defaults, which effectively re-align the enormous volume of debt with the ability to service those obligations over the long-term.

This is where we find ourselves, once again."

2 Replies
BA Deere
Honored Advisor

Re: some "common sense" economic stuff

A wiseman used to say "be careful when mixing your economics and your politics" .  Well, that second economic system is the favored by the swamp and what was formerly known as the "deep state".   The only way that "second economic system has worked was cheap foreign goods coming into this country, that held labor costs down.  The Walmarts and Dollar stores thrived by offering cheap foreign produced goods for worker/consumers faced with a stagnant paycheck.  

 

 

Flat wages and those in the ivory towers see "no inflation!"  so they send the Dow NASDAQ and S&P to record levels.   Enter a "swamp drainer" in the white house and observe the hand wringing among the deep statists on the increased possibility of their money changing table in the temple being overturned.   No more wetbacks keeping labor costs down and a tariff on the cheap foreign produced crap coming in this country.   They are hissing like a bunch of roaches after the Orkin man gassed them.   

 

 

But of course if you share the intense dislike of the swamp drainer that the deep state has....then carry on....Stormy Daniels!.....Russia collusion!....gay wedding cakes!....Trump pardoning himself!...went you run out, rinse and repeat.

rsbs
Esteemed Advisor

Re: some "common sense" economic stuff

I never pay any attention to the financial musings of someone that started out on second base and has managed somehow to get back to first base. That backwards steal maneuver is not uncommon, though.