I love the way you presented this, Alex. I was a staunch capitalist business-minded person from a young age... until I faced the clash between my attitudes and Eastern upbringing. I knew capitalism offered a sensible and logical direction, but that so did the collectivism generally part of Eastern cultures. It was always a tug-of-war in my head and I wonder if humans will one day devise the system that survives human frailties.
If you look at it empirically, the USA, and most modern technocratic states- have mixed economies. Some sectors run by the state, some quasi- monopolies, some socialistic, some quite efficient purely capitalistic. What is interesting to me is the mix of these systems by class. The underclass gets communism; both “free” money and gulags. The working class gets socialism. The upper and professional class gets capitalism, and the oligarchs get fascism- state and corporate power fused.
Capitalism and communism are the flip sides of the same coin. Both in practice seem to evolve into mechanisms of state largesse with an exploitive and oppressive/coercive broad and deep control system over their populations. Tyranny.
David Graeber observes that throughout history states are always ambiguously a utopian project and an extortion racket. He also observes that no economic markets exist without states to sponsor and regulate them. It's bitter-sweet, but true.
Very important topic. The Left v Right paradigm is completely unhelpful in understanding what has happened under Globalisation or building a coalition against the Oligarchs.
As far as I understand, and please correct me if I am wrong, the American debt curb may soon have the skyline of Dubai's Khalifa tower and still nothing will happen, since that debt is being bought by the banks members of the FED which will be eternally financed and bailed out by the institution they own. It is like owing money to your mother... They will be less and less able to sell bonds internationally but who cares. They only problem is that those bank cannot and will not use those ressources on the country but just on regularly changing their mansions decorations. The Palatine hill sourrounded by a continental favela. And so what... On and on until the Dracula family dies. I hope.
The "debt curb" (i.e. debt ceiling) originated as a convenience for congress so they didn't have to get to granular in approving/disapproving budgets. It's not an indication that "eek! we're running out of money." We'll run out of money when the Bureau of Weights and Measures runs out of inches. See Alan Greenspan lecture Paul Ryan about this here: https://www.youtube.com/watch?v=DNCZHAQnfGU Excerpt [from Greenspan]: "there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?"
Worse than the "eek! we're out of money" panic is the public's misunderstanding of what is owed to whom in the national debt. Most people thing it's like household debt, owed to some anonymous bond holders, or perhaps Chinese exporters. It's nothing like household debt. It's like bank debt. If you have a bank account, that's your asset, but to the bank, it's a liability. Marching down to the bank to request they diminish their debt...if successful...would make your account smaller. Not very sensible.
People think "tax & spend" describes the sequence of federal fiscal events, but where would taxpayers get the dollars to pay those taxes if the monopoly provider of dollars didn't spend them first? So it's really "spend first, then retrieve some dollars in taxes." The spending is not (and cannot be) provisioned by tax revenue, but taxes make dollars something that's in demand.
And what do we call the dollars spent, but not retrieved....you know, the ones in your wallet? Answer #1: the dollar financial assets of the population. Answer #2: national debt. Both answers describe exactly the same thing.
Sucking dollars out of the economy by either raising taxes or cutting spending results in an economic downturn. Typically the advocacy for such policies is a covert way to impair social safety nets (principally Social Security and Medicare). Since those programs are typically not very generous, and 65% of US seniors have *only* those programs to fund their retirement, the object is to crush grandma and grandpa with poverty. This is called "labor discipline." The message is "you had better take whatever job is on offer, or suffer the indignities of poverty.
Another question is why do they pay the worker at all. More and more workers cannot cope with the effect of rising prices, they are not being paid enough to pay the bills. So many former workers are being put into homelessness, illness, hunger, prostitution, violence, prisons, drugs... All rampant in the US and Europe, what you called "the indignities of poverty". This is maybe the main reason the border gates are wide open, many being happy to work for a slice of pizza. Inflation together with a confiscatory tax system and a police state will do the job in America and in vassal states. We are heading to a Haitian model. Until the financial casino crashes... For instance, I can see very well a bitcoin collapse that will make trillions disappear in a finger snap.
could you elaborate or send me some links on "labor discipline" policies? I get the point but this issue is never discussed as a key subject. Of course capitalism is about sucking the workers dry but the point here is to understand what makes the money printing vulnerable. The Trillion galore run is obviously boosting the stockmarket, the financial markets, bitcoin, commodities, real state and so on. This is not going to change and cronic inflation is here to stay. The question is where, how and when will this stop.
Wonderful financial analysis . I come from another perspective as a l living creature . We are social creatures beyond any ideological borders I’d say with
The concept of belonging to a greater good an immense value.
How it’s done is the difficult question undergoing debate here.
Had a chuckle when you talk about each side (capitalism / socialism) excusing its faults by blaming 'it's the damn people' getting in the way of achieving the fantasy of pure utopia on one ideological side or the other.
The realities certainly are that fiat currency systems and fractional reserve banking, i.e. leverage and fakery, lead to concentration of wealth and government power along with endless wars. Though I would add, these sort of fake systems also lead to rapid increases in population as people have access to more resources (food, energy, housing, transportation) with mass credit expansion, than they otherwise would with unleveraged conditions. (just look at any chart of world population over the last 10,000 years and note when in the timeline, the planet instituted global fiat systems and fractional reserve banking)
The opposite effect manifests when you have credit implosion / deflation and less production of resources. Thus, you have less population through starvation and other forms of mortality such as suicide, medical and the 'Darwin effect' - death by stupidity.
As it is to capitalist & socialist economic systems to have concentration of power and wealth to those in control of things, it is intrinsic to human behavior to desire accumulation of either power / wealth.
The more fake the system, the more sociopathic the players.
In either system sociopathic tendencies emerge of course, however the behavior in each system is essentially the same. Both fail ultimately for the same reasons, with the real catalyst being the introduction of fractional reserve banking fueled by fiat currency. All following a predictable pattern, just like nature and the cosmos present us with such empirical evidence of vast cycles.
As all economic systems exist in a cyclical nature, the key point is to understand at what point of the cycle where the majority of humanity is treated most ethically and with God given sovereignty.
I believe this beneficial point of the cycle is where debt creation and banking activities are in private hands.
Private in the context of that fleeting point of the cycle where direct accountability for positive or conversely negative human action, is applied with robust enthusiasm of the market as well as justice platforms. In other words, you're a banking business and you create monetary flows by lending Paul's entrusted depository money, to Peter's economic venture to Albonia to acquire unicorns and bring them back to Wakanda for sale at the market. Should Peter's venture succeed, Peter enjoys reward right along with the bank and those that have entrusted the bank with their family savings. If Peter's economic venture to Albonia fails, the banker loses his shirt and depositor Paul is unhappy as he loses not only interest paid on his deposits, but potentially the deposits entirely.
The justice system then confiscates the banker's assets and distributes them to Paul and other creditors that entrusted the bank with their savings. Then the lucky non-dead bankers have to go down the economic ladder, quarterly bonus free of course, to cleaning poop out of unicorn stalls. This continues on until they regain capital and trust to the point where they can operate as live, breathing bankers again and be entrusted to be prudent with people's savings.
Where all systems go completely off the rails and distort not only currency, investment, economic / political activity and ultimately human population numbers, is when direct negative outcomes lack accountability for crappy decisions and are socialized / deflected. This 'off the rails' portion of the cycle where malinvestment / sociopathy occurs of course, is at the same time all gains are aggregated and concentrated into the hands of the 'smart' people in power. (privatize the gains, socialize the losses). This effect occurred in communist / socialist systems with the same flower as it did and does in capitalist / corporatist / fascistic systems. Power, influence and wealth always flow to those that control the levers of policy, currency and debt creation.
It is simply a part of the total cycle... and no, this time is NOT any different than any other time in human history. It is only magnified each time with increasing level of technological advancement in banking / fiat currency creation, thereby turbocharging production of resources, leisure and life extension through medical care.
Once these effects are set in motion and enhanced through technology, massive bubbles are created in population and economic systems. The bad part is, when a grotesquely fiat system metastasizes, it MUST continually create 'growth' in order to employ, feed and house the population bubble. If it fails to grow and then passes into deflation, population thus has less resources available, and death ensues. Once that deflation ball gets rolling, starving populations become less enthusiastic in their support for the powerful and go long on guillotines, rope and bullets.
I think we are in the cusp of winter for the fiat system in total. Be it socialistic or capitalistic, it will complete the cycle of credit expansion, flower, collapse and then begin anew.
Sorry, Alex. The description "fractional reserve lending" is completely false, and fiat money is the last line of defense against (of necessity) deflationary "barbaric relics" like the gold standard, or the new one--bitcoin.
Capitalism is a bit of an empty word. Free market is better as it more clearly states what the dichotomy is. Top down force vs leaving people alone. Unfortunately, we have indeed not seen a perfect free market, that is a utopia. But what we can clearly see is that the freer the system is the more wealth it produces. It is not an accident that a place like Switzerland is so wealthy, it has not had much state interference in the past, although it is catching up quickly now. And no, deflation is not at all a bad thing if it happens freely. It is only a bad thing if it comes from too much debt. On a free market prices naturally decline leading to a constantly rising standard of living. Short of governments prohibiting people to work there cannot really be long term unemployment as there are always lots of things to do. Only in paradise people would not find work to be done.
"Free markets" as conceived by Adam Smith were markets free of economic rent (money paid for no productive purpose, e.g. monopoly rent).
The idea of markets free of regulation and state interference is a pleasant fantasy widely promoted. The mythical origin of money in barter props up this misunderstanding of the origins of (economic) money. Archaeology has debunked this completely. The barter myth where Robinson Crusoe and Friday adopt (seashell) coins to make barter more convenient, then evolve to marking their cave's walls to keep credit score is exactly backwards--but it makes believable an economy without a state (or temple) sponsor to bless the currency.
In human history, money began with credit--archaeologists have found bar tabs from Mesopotamia, marked in clay literally millenia before the first appearance of coins. Barter is extremely rare ("never found in pure form" says one ethnologist.
David Graeber's magisterial "Debt: The First 5,000 Years" documents this, and Graeber proclaims no market economy has ever existed without a state to create and regulate it.
As for the "deflation is not all a bad thing" declaration...Yep, it's swell as long as you're not a debtor.
Someone once asked Einstein what was the most powerful force in the universe. Without hesitation, he declared "Compound interest." Debts inevitably become unpayable. Deflation makes that doubly true--hence debt jubilees and bankruptcies (or debt peonage/slavery). When I pointed out this inevitable outcome for some debts, an acquaintance told me that it might be true for ancient economies, but modern economies don't need jubilees. Then I showed him the result of compounding. If one invested 1¢ at Jesus' birth at 5% interest, compounded, it would be worth more than 600 spheres of gold, each the size of the earth. Clearly unpayable.
I'll agree about the inevitability of union between capitalism and socialism as described with two caveats:
First "crowding out" assumes a zero-sum economy. The Federal reserve says the US economy is only at ~75% of capacity. There are unemployed people and plants. Could the government's spending employ idle assets? Could government contribute to creating goods and services that wouldn't otherwise exist? Obviously the answer is "yes." If nothing else, government is responsible for funding roughly 80% of the basic research that shows up in an iPhone, for one example. The internet, touch screens, GPS, etc. are all thanks to the contribution of government. No one was "crowded out" in the sense we typically think when analog electronics were supplanted by digital, but government made that possible. See https://www.ted.com/talks/mariana_mazzucato_government_investor_risk_taker_innovator?language=en for the details here.
The big problem in "capitalist" economies is that, as Marx and other economists observed, truly competitive markets tend to shrink profitability as firms compete for market share (Tesla has begun lowering prices as more EV manufacturers come online). The answer from capitalist firms is to pursue monopoly or (unproductive) military production led by profits not purpose. (see https://medium.com/@monetarypolicyinstitute/austerity-for-the-people-and-keynesianism-for-the-war-6ae2ba741875)
Cogent and clear-headed brilliance Alex. Ideologies aren’t going to save us because they are the fundamental problem. Human life in all its aspects is simply too complex to be defined by an ideology. Ideas are critical but even more so are human values and humanity itself. I’m reminded of my epiphany well over a decade ago. I was drifting toward being a chunky middle-aged guy with fatty liver disease, the typical aches and pains, and low energy. I realized I was on a path that I had to change. Rather than nibbling and tinkering around the edges with tweaking my diet and exercising, I embraced a new paradigm of low carb - paleo and fasting. I lost weight and feel better now than I did before I started well over a decade ago.
We need a new paradigm and as you say, we have to get currency right. That’s a first step. But embracing human values and being willing to toss out the status quo thinking is absolutely essential. Bravo sir. I am sick and tired of arguing left and right. We have to move deeper into a whole new approach. And the sooner the better. We’ll done Alex.
Hi Alex, wonderful and clear what you write. I saw the interview of you and, Tom Luongo, Gordon Dimmack on/with Crypto Rich and you and Tom touching briefly on the also possible 'religious' grander story behind happenings in the world. Somehow this video that Mathew Ehret just shared ties into that a little bit more. Here is the link: https://rumble.com/v4kclel-breaking-history-ep.-37-1200-pm-et-.html. Have a great day!
I saw that interview too and although I really like your analysis, it does not account for the influence of the City of London, the corruption bankers, and their manipulation of markets (and other social institutions of all kinds). I don't think economic theories and approaches that do not take real world corruption and money based on nothing into account are looking at the whole picture. All of our economic theories developed during the same time frame as this bigger picture corruption was operating behind the scenes as Tom said, for many centuries. To develop theories that don't take those powerful and manipulative forces into account, seems naive to me. I am currently watching the Rising Tide Foundation's Escaping Calypso's Island series, and I think they have some relevant points about human creativity and cooperation. It's time to get out of the Game theory mindset and look at the whole picture of what is going on. Economic theory is too limited by game theory. Too many assumptions of 'all other things being equal' which they never are.
Thank you Shannon; it's all one article at a time and I try hard to make them digestible, so I try to write around a single point. Of course, the City of London has played a major role and still does, and the complexity of our challenges is very considerable - but that would be a book. Or many books...
It seems also naive to assume that in one video or article it is possible (or wanted) to be totally complete, especially if it is a deeper dive into one aspect, and assume that the one's doing the talking or the writing do not also hold other perspectives/pieces of the puzzle. Plus, and more importantly, there is maybe the most real life outside of this damned puzzle anyways? :-D
is fractional reserve financial system really a main culprit here? I could imagine that the deflationary gap would appear even when using gold backed money too? Would it not?
I was also thinking about the savings. In my opinion, savings would get spent over time in addition to being used as investment so perhaps they only contribute to short term deflationary gap which then I could say that it is not so important. This then leads to the conclusion that increasing the purchasing power through debt is not so bad as long as it is managed properly by financial resets perhaps. If the simplified economic module, mentioned in the article holds true, then it appears to me that it is impossible not to have this problem in an economic system based on money ( I am not quite sure how international balance of payments affects this system). Perhaps, this is then the problem which is why "socialist" and "capitalist" systems do not deliver as advertised. The other way to avoid it, I think, is to constantly recycle everything via wars and burying loads of stuff in the Pyramids (if you assume that Pyramids are indeed tombs build by Egyptians) or having personal debt jubilees as was happening in the ancient near east. Then, it is occurring to me, that one could, theoretically, expand into space in almost an unlimited way which would then negate the deflationary gap forever.
One thing missing from the "closed system" model is that you can have growth without fiat inflation if you mine new gold. Additional efficiencies and products can offset the savings factor. Finally, a savings rates can be safely lower in a non-inflationary money system.
Yes, you are right. In fact, I had a passage about this in my article but took it out to keep it shorter. In fact, you don't even need gold - any economy can have a growth cycle driven by private demand for credit, with genuine improvements in productivity and wealth creation. However, as soon as the cycle levels off, you're back to deflationary depression, so in "fullness of time" governments will still step in and never step out.
America after the civil war and prior to the progressive cancer of the early 20th century, with no central bank, enjoyed consistent economic growth of 21-28% every decade as measured by GNP, while "suffering" 2% deflation. There was no welfare state and no 3 letter agency regulatory nightmare. 55% of the federal debt resulting from the civil war was paid off and there were 36 surpluses and 11 deficit. And then Wilson became president.
Thank you Peter - yes, I appreciate that; indeed, periods of endogenously-driven economic growth is very much possible; it can also tolerate limited deflation (productivity growth should produce some deflation). I believe that this is the kind of economic growth we should strive for.
I was thinking about all the intricate details and possibilities of measuring inflation, growth etc. and I got stuck. It seems somewhat arbitrary.
The Austrians argue that price inflation is largely a function of money supply growth. This money supply growth may not show up in CPI, PCE, core PCI, super duper core PCE etc ... but it shows up somewhere. Artificially low bond rates? S&P 500? Bitcoin? NVDA? House prices? Car prices?
It seems to me that these contrived inflation gauges are intended to measure price moves as they relate to human contentment/discontentment for lower middle class income groups, while simultaneously keeping a lid on social security increases. Hence you get alternate measurements like shadowstats to counter this slight of hand manipulation.
GDP is another confounding measure. The left really like to argue that California is some sort of economic paradise because its like the 5th largest economy in the world or some such. But everything costs way more there so the GDP number is inflated compared to other economies.
If I pump a gallon of gas in California vs. Libya vs. Hong Kong, I affect GDP growth vastly different in each of these cases - yet - objectively - I have consumed the same physical asset. So what does GDP really tell us when all its measuring is prices paid?
I’m not an economist but I play one on TV ... sorry ... read von Mises and I’m generally sympathetic to his arguments. I would have to go back and find the section in Human Action but as I vaguely recall I don't think either von Mises or for that matter Rothbard or Selma Hayek would characterize any of the modern "progressive" economies as free market capitalism. More like hybrid socialism. Government intervention appears to be the problem in your examples of capitalist shortcomings.
The criticism of the Austrian school of economic thought is misguided. Indeed, there are no 100% examples of it in reality. However, the deviation from it is proportional to economic deterioration, ceteris paribus. Austrian economic theory is an “a priori” kind of science - just like the ideal mathematics can’t describe the real world, because there’s always some friction of other disturbance involved, Austrian theory is never seen in practice because ceteris are never paribus. But that does not deny its validity because good/bad or right/wrong are valid ideals. In practice, the perfection doesn’t exist, but that does not mean that we shouldn’t strive for it. Even on the individual level, we know and accept that it’s good to do good things and bad to do bad ones. There is no 100% good human, but we still maintain that doing good is the right thing to do and should always be done. No reason to be different on the collective level.
“However lofty the goals, if the means be depraved, the result must reflect that depravity. Therefore, the eventual outcome of the collectivistic way of life may be accurately predicted by anyone who understands the means which must be employed.”
I disagree. Free market capitalism happens all the time. e.g. Craigslist, Farm stands, lemonade stands, grey market, black market etc. etc. These are all 100% examples in reality. All done with practically no police state coercion. The Austrian school simply observes, theorizes, and predicts what the best course of action should be and what the consequences of government coercion are.
I love the way you presented this, Alex. I was a staunch capitalist business-minded person from a young age... until I faced the clash between my attitudes and Eastern upbringing. I knew capitalism offered a sensible and logical direction, but that so did the collectivism generally part of Eastern cultures. It was always a tug-of-war in my head and I wonder if humans will one day devise the system that survives human frailties.
Thank you, sir! =)
If you look at it empirically, the USA, and most modern technocratic states- have mixed economies. Some sectors run by the state, some quasi- monopolies, some socialistic, some quite efficient purely capitalistic. What is interesting to me is the mix of these systems by class. The underclass gets communism; both “free” money and gulags. The working class gets socialism. The upper and professional class gets capitalism, and the oligarchs get fascism- state and corporate power fused.
I am enjoying your exposition and Q&A of this topic with Aleks at Black Mountain Analysis now: https://bmanalysis.substack.com/p/economics-and-empires-with-alex-krainer
Capitalism and communism are the flip sides of the same coin. Both in practice seem to evolve into mechanisms of state largesse with an exploitive and oppressive/coercive broad and deep control system over their populations. Tyranny.
David Graeber observes that throughout history states are always ambiguously a utopian project and an extortion racket. He also observes that no economic markets exist without states to sponsor and regulate them. It's bitter-sweet, but true.
Very important topic. The Left v Right paradigm is completely unhelpful in understanding what has happened under Globalisation or building a coalition against the Oligarchs.
Hope you will return to this topic. Best wishes.
As far as I understand, and please correct me if I am wrong, the American debt curb may soon have the skyline of Dubai's Khalifa tower and still nothing will happen, since that debt is being bought by the banks members of the FED which will be eternally financed and bailed out by the institution they own. It is like owing money to your mother... They will be less and less able to sell bonds internationally but who cares. They only problem is that those bank cannot and will not use those ressources on the country but just on regularly changing their mansions decorations. The Palatine hill sourrounded by a continental favela. And so what... On and on until the Dracula family dies. I hope.
Yes, you got it right.
The "debt curb" (i.e. debt ceiling) originated as a convenience for congress so they didn't have to get to granular in approving/disapproving budgets. It's not an indication that "eek! we're running out of money." We'll run out of money when the Bureau of Weights and Measures runs out of inches. See Alan Greenspan lecture Paul Ryan about this here: https://www.youtube.com/watch?v=DNCZHAQnfGU Excerpt [from Greenspan]: "there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?"
Worse than the "eek! we're out of money" panic is the public's misunderstanding of what is owed to whom in the national debt. Most people thing it's like household debt, owed to some anonymous bond holders, or perhaps Chinese exporters. It's nothing like household debt. It's like bank debt. If you have a bank account, that's your asset, but to the bank, it's a liability. Marching down to the bank to request they diminish their debt...if successful...would make your account smaller. Not very sensible.
People think "tax & spend" describes the sequence of federal fiscal events, but where would taxpayers get the dollars to pay those taxes if the monopoly provider of dollars didn't spend them first? So it's really "spend first, then retrieve some dollars in taxes." The spending is not (and cannot be) provisioned by tax revenue, but taxes make dollars something that's in demand.
And what do we call the dollars spent, but not retrieved....you know, the ones in your wallet? Answer #1: the dollar financial assets of the population. Answer #2: national debt. Both answers describe exactly the same thing.
Sucking dollars out of the economy by either raising taxes or cutting spending results in an economic downturn. Typically the advocacy for such policies is a covert way to impair social safety nets (principally Social Security and Medicare). Since those programs are typically not very generous, and 65% of US seniors have *only* those programs to fund their retirement, the object is to crush grandma and grandpa with poverty. This is called "labor discipline." The message is "you had better take whatever job is on offer, or suffer the indignities of poverty.
See https://www.huffpost.com/entry/the-federal-budget-is-not_b_457404
Another question is why do they pay the worker at all. More and more workers cannot cope with the effect of rising prices, they are not being paid enough to pay the bills. So many former workers are being put into homelessness, illness, hunger, prostitution, violence, prisons, drugs... All rampant in the US and Europe, what you called "the indignities of poverty". This is maybe the main reason the border gates are wide open, many being happy to work for a slice of pizza. Inflation together with a confiscatory tax system and a police state will do the job in America and in vassal states. We are heading to a Haitian model. Until the financial casino crashes... For instance, I can see very well a bitcoin collapse that will make trillions disappear in a finger snap.
could you elaborate or send me some links on "labor discipline" policies? I get the point but this issue is never discussed as a key subject. Of course capitalism is about sucking the workers dry but the point here is to understand what makes the money printing vulnerable. The Trillion galore run is obviously boosting the stockmarket, the financial markets, bitcoin, commodities, real state and so on. This is not going to change and cronic inflation is here to stay. The question is where, how and when will this stop.
The source of that phrase is Michal Kalecki's "Politics of Full Employment" essay (1943!... https://delong.typepad.com/kalecki43.pdf)
Wonderful financial analysis . I come from another perspective as a l living creature . We are social creatures beyond any ideological borders I’d say with
The concept of belonging to a greater good an immense value.
How it’s done is the difficult question undergoing debate here.
Thank you!
Great analysis Alex.
Had a chuckle when you talk about each side (capitalism / socialism) excusing its faults by blaming 'it's the damn people' getting in the way of achieving the fantasy of pure utopia on one ideological side or the other.
The realities certainly are that fiat currency systems and fractional reserve banking, i.e. leverage and fakery, lead to concentration of wealth and government power along with endless wars. Though I would add, these sort of fake systems also lead to rapid increases in population as people have access to more resources (food, energy, housing, transportation) with mass credit expansion, than they otherwise would with unleveraged conditions. (just look at any chart of world population over the last 10,000 years and note when in the timeline, the planet instituted global fiat systems and fractional reserve banking)
The opposite effect manifests when you have credit implosion / deflation and less production of resources. Thus, you have less population through starvation and other forms of mortality such as suicide, medical and the 'Darwin effect' - death by stupidity.
As it is to capitalist & socialist economic systems to have concentration of power and wealth to those in control of things, it is intrinsic to human behavior to desire accumulation of either power / wealth.
The more fake the system, the more sociopathic the players.
In either system sociopathic tendencies emerge of course, however the behavior in each system is essentially the same. Both fail ultimately for the same reasons, with the real catalyst being the introduction of fractional reserve banking fueled by fiat currency. All following a predictable pattern, just like nature and the cosmos present us with such empirical evidence of vast cycles.
As all economic systems exist in a cyclical nature, the key point is to understand at what point of the cycle where the majority of humanity is treated most ethically and with God given sovereignty.
I believe this beneficial point of the cycle is where debt creation and banking activities are in private hands.
Private in the context of that fleeting point of the cycle where direct accountability for positive or conversely negative human action, is applied with robust enthusiasm of the market as well as justice platforms. In other words, you're a banking business and you create monetary flows by lending Paul's entrusted depository money, to Peter's economic venture to Albonia to acquire unicorns and bring them back to Wakanda for sale at the market. Should Peter's venture succeed, Peter enjoys reward right along with the bank and those that have entrusted the bank with their family savings. If Peter's economic venture to Albonia fails, the banker loses his shirt and depositor Paul is unhappy as he loses not only interest paid on his deposits, but potentially the deposits entirely.
The justice system then confiscates the banker's assets and distributes them to Paul and other creditors that entrusted the bank with their savings. Then the lucky non-dead bankers have to go down the economic ladder, quarterly bonus free of course, to cleaning poop out of unicorn stalls. This continues on until they regain capital and trust to the point where they can operate as live, breathing bankers again and be entrusted to be prudent with people's savings.
Where all systems go completely off the rails and distort not only currency, investment, economic / political activity and ultimately human population numbers, is when direct negative outcomes lack accountability for crappy decisions and are socialized / deflected. This 'off the rails' portion of the cycle where malinvestment / sociopathy occurs of course, is at the same time all gains are aggregated and concentrated into the hands of the 'smart' people in power. (privatize the gains, socialize the losses). This effect occurred in communist / socialist systems with the same flower as it did and does in capitalist / corporatist / fascistic systems. Power, influence and wealth always flow to those that control the levers of policy, currency and debt creation.
It is simply a part of the total cycle... and no, this time is NOT any different than any other time in human history. It is only magnified each time with increasing level of technological advancement in banking / fiat currency creation, thereby turbocharging production of resources, leisure and life extension through medical care.
Once these effects are set in motion and enhanced through technology, massive bubbles are created in population and economic systems. The bad part is, when a grotesquely fiat system metastasizes, it MUST continually create 'growth' in order to employ, feed and house the population bubble. If it fails to grow and then passes into deflation, population thus has less resources available, and death ensues. Once that deflation ball gets rolling, starving populations become less enthusiastic in their support for the powerful and go long on guillotines, rope and bullets.
I think we are in the cusp of winter for the fiat system in total. Be it socialistic or capitalistic, it will complete the cycle of credit expansion, flower, collapse and then begin anew.
Thank you King2Savanah - excellent commentary! 👏👏👏
Sorry, Alex. The description "fractional reserve lending" is completely false, and fiat money is the last line of defense against (of necessity) deflationary "barbaric relics" like the gold standard, or the new one--bitcoin.
If you don't believe my discounting of fractional reserve lending, see the Bank of England's analysis, which says exactly what I'm saying: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Capitalism is a bit of an empty word. Free market is better as it more clearly states what the dichotomy is. Top down force vs leaving people alone. Unfortunately, we have indeed not seen a perfect free market, that is a utopia. But what we can clearly see is that the freer the system is the more wealth it produces. It is not an accident that a place like Switzerland is so wealthy, it has not had much state interference in the past, although it is catching up quickly now. And no, deflation is not at all a bad thing if it happens freely. It is only a bad thing if it comes from too much debt. On a free market prices naturally decline leading to a constantly rising standard of living. Short of governments prohibiting people to work there cannot really be long term unemployment as there are always lots of things to do. Only in paradise people would not find work to be done.
"Free markets" as conceived by Adam Smith were markets free of economic rent (money paid for no productive purpose, e.g. monopoly rent).
The idea of markets free of regulation and state interference is a pleasant fantasy widely promoted. The mythical origin of money in barter props up this misunderstanding of the origins of (economic) money. Archaeology has debunked this completely. The barter myth where Robinson Crusoe and Friday adopt (seashell) coins to make barter more convenient, then evolve to marking their cave's walls to keep credit score is exactly backwards--but it makes believable an economy without a state (or temple) sponsor to bless the currency.
In human history, money began with credit--archaeologists have found bar tabs from Mesopotamia, marked in clay literally millenia before the first appearance of coins. Barter is extremely rare ("never found in pure form" says one ethnologist.
David Graeber's magisterial "Debt: The First 5,000 Years" documents this, and Graeber proclaims no market economy has ever existed without a state to create and regulate it.
As for the "deflation is not all a bad thing" declaration...Yep, it's swell as long as you're not a debtor.
Someone once asked Einstein what was the most powerful force in the universe. Without hesitation, he declared "Compound interest." Debts inevitably become unpayable. Deflation makes that doubly true--hence debt jubilees and bankruptcies (or debt peonage/slavery). When I pointed out this inevitable outcome for some debts, an acquaintance told me that it might be true for ancient economies, but modern economies don't need jubilees. Then I showed him the result of compounding. If one invested 1¢ at Jesus' birth at 5% interest, compounded, it would be worth more than 600 spheres of gold, each the size of the earth. Clearly unpayable.
Fully agree, thank you.
Great article to be shared far and wide.
Thank you Luke!
I'll agree about the inevitability of union between capitalism and socialism as described with two caveats:
First "crowding out" assumes a zero-sum economy. The Federal reserve says the US economy is only at ~75% of capacity. There are unemployed people and plants. Could the government's spending employ idle assets? Could government contribute to creating goods and services that wouldn't otherwise exist? Obviously the answer is "yes." If nothing else, government is responsible for funding roughly 80% of the basic research that shows up in an iPhone, for one example. The internet, touch screens, GPS, etc. are all thanks to the contribution of government. No one was "crowded out" in the sense we typically think when analog electronics were supplanted by digital, but government made that possible. See https://www.ted.com/talks/mariana_mazzucato_government_investor_risk_taker_innovator?language=en for the details here.
Second: "Fractional Reserve Lending" is still taught in conventional economic classes, but it's not practiced by banks. Even the Bank of England is on board with banks extending credit rather than lending deposits (see https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy).
The big problem in "capitalist" economies is that, as Marx and other economists observed, truly competitive markets tend to shrink profitability as firms compete for market share (Tesla has begun lowering prices as more EV manufacturers come online). The answer from capitalist firms is to pursue monopoly or (unproductive) military production led by profits not purpose. (see https://medium.com/@monetarypolicyinstitute/austerity-for-the-people-and-keynesianism-for-the-war-6ae2ba741875)
Cogent and clear-headed brilliance Alex. Ideologies aren’t going to save us because they are the fundamental problem. Human life in all its aspects is simply too complex to be defined by an ideology. Ideas are critical but even more so are human values and humanity itself. I’m reminded of my epiphany well over a decade ago. I was drifting toward being a chunky middle-aged guy with fatty liver disease, the typical aches and pains, and low energy. I realized I was on a path that I had to change. Rather than nibbling and tinkering around the edges with tweaking my diet and exercising, I embraced a new paradigm of low carb - paleo and fasting. I lost weight and feel better now than I did before I started well over a decade ago.
We need a new paradigm and as you say, we have to get currency right. That’s a first step. But embracing human values and being willing to toss out the status quo thinking is absolutely essential. Bravo sir. I am sick and tired of arguing left and right. We have to move deeper into a whole new approach. And the sooner the better. We’ll done Alex.
Thank you!
Hi Alex, wonderful and clear what you write. I saw the interview of you and, Tom Luongo, Gordon Dimmack on/with Crypto Rich and you and Tom touching briefly on the also possible 'religious' grander story behind happenings in the world. Somehow this video that Mathew Ehret just shared ties into that a little bit more. Here is the link: https://rumble.com/v4kclel-breaking-history-ep.-37-1200-pm-et-.html. Have a great day!
Thank you Mik!
I saw that interview too and although I really like your analysis, it does not account for the influence of the City of London, the corruption bankers, and their manipulation of markets (and other social institutions of all kinds). I don't think economic theories and approaches that do not take real world corruption and money based on nothing into account are looking at the whole picture. All of our economic theories developed during the same time frame as this bigger picture corruption was operating behind the scenes as Tom said, for many centuries. To develop theories that don't take those powerful and manipulative forces into account, seems naive to me. I am currently watching the Rising Tide Foundation's Escaping Calypso's Island series, and I think they have some relevant points about human creativity and cooperation. It's time to get out of the Game theory mindset and look at the whole picture of what is going on. Economic theory is too limited by game theory. Too many assumptions of 'all other things being equal' which they never are.
Thank you Shannon; it's all one article at a time and I try hard to make them digestible, so I try to write around a single point. Of course, the City of London has played a major role and still does, and the complexity of our challenges is very considerable - but that would be a book. Or many books...
Pardon me for saying but i had to laugh a bit.
It seems also naive to assume that in one video or article it is possible (or wanted) to be totally complete, especially if it is a deeper dive into one aspect, and assume that the one's doing the talking or the writing do not also hold other perspectives/pieces of the puzzle. Plus, and more importantly, there is maybe the most real life outside of this damned puzzle anyways? :-D
https://risingtidefoundation.net/2024/02/27/sugar-and-spice-and-everything-vice-the-empires-sin-city-of-london/ give it a read. reality of economic theory without this?
is fractional reserve financial system really a main culprit here? I could imagine that the deflationary gap would appear even when using gold backed money too? Would it not?
Yes indeed, it would. However, gold backed money would severely limit government's ability to borrow and spend.
I was also thinking about the savings. In my opinion, savings would get spent over time in addition to being used as investment so perhaps they only contribute to short term deflationary gap which then I could say that it is not so important. This then leads to the conclusion that increasing the purchasing power through debt is not so bad as long as it is managed properly by financial resets perhaps. If the simplified economic module, mentioned in the article holds true, then it appears to me that it is impossible not to have this problem in an economic system based on money ( I am not quite sure how international balance of payments affects this system). Perhaps, this is then the problem which is why "socialist" and "capitalist" systems do not deliver as advertised. The other way to avoid it, I think, is to constantly recycle everything via wars and burying loads of stuff in the Pyramids (if you assume that Pyramids are indeed tombs build by Egyptians) or having personal debt jubilees as was happening in the ancient near east. Then, it is occurring to me, that one could, theoretically, expand into space in almost an unlimited way which would then negate the deflationary gap forever.
America's debt-based currency insures that inflation will be constant to fund the interest on the debt.
One thing missing from the "closed system" model is that you can have growth without fiat inflation if you mine new gold. Additional efficiencies and products can offset the savings factor. Finally, a savings rates can be safely lower in a non-inflationary money system.
Yes, you are right. In fact, I had a passage about this in my article but took it out to keep it shorter. In fact, you don't even need gold - any economy can have a growth cycle driven by private demand for credit, with genuine improvements in productivity and wealth creation. However, as soon as the cycle levels off, you're back to deflationary depression, so in "fullness of time" governments will still step in and never step out.
Hayek photo !?!? -- ;-))
America after the civil war and prior to the progressive cancer of the early 20th century, with no central bank, enjoyed consistent economic growth of 21-28% every decade as measured by GNP, while "suffering" 2% deflation. There was no welfare state and no 3 letter agency regulatory nightmare. 55% of the federal debt resulting from the civil war was paid off and there were 36 surpluses and 11 deficit. And then Wilson became president.
Thank you Peter - yes, I appreciate that; indeed, periods of endogenously-driven economic growth is very much possible; it can also tolerate limited deflation (productivity growth should produce some deflation). I believe that this is the kind of economic growth we should strive for.
Hi Alex.
Thanks for the reply.
I was thinking about all the intricate details and possibilities of measuring inflation, growth etc. and I got stuck. It seems somewhat arbitrary.
The Austrians argue that price inflation is largely a function of money supply growth. This money supply growth may not show up in CPI, PCE, core PCI, super duper core PCE etc ... but it shows up somewhere. Artificially low bond rates? S&P 500? Bitcoin? NVDA? House prices? Car prices?
It seems to me that these contrived inflation gauges are intended to measure price moves as they relate to human contentment/discontentment for lower middle class income groups, while simultaneously keeping a lid on social security increases. Hence you get alternate measurements like shadowstats to counter this slight of hand manipulation.
GDP is another confounding measure. The left really like to argue that California is some sort of economic paradise because its like the 5th largest economy in the world or some such. But everything costs way more there so the GDP number is inflated compared to other economies.
If I pump a gallon of gas in California vs. Libya vs. Hong Kong, I affect GDP growth vastly different in each of these cases - yet - objectively - I have consumed the same physical asset. So what does GDP really tell us when all its measuring is prices paid?
I’m not an economist but I play one on TV ... sorry ... read von Mises and I’m generally sympathetic to his arguments. I would have to go back and find the section in Human Action but as I vaguely recall I don't think either von Mises or for that matter Rothbard or Selma Hayek would characterize any of the modern "progressive" economies as free market capitalism. More like hybrid socialism. Government intervention appears to be the problem in your examples of capitalist shortcomings.
The criticism of the Austrian school of economic thought is misguided. Indeed, there are no 100% examples of it in reality. However, the deviation from it is proportional to economic deterioration, ceteris paribus. Austrian economic theory is an “a priori” kind of science - just like the ideal mathematics can’t describe the real world, because there’s always some friction of other disturbance involved, Austrian theory is never seen in practice because ceteris are never paribus. But that does not deny its validity because good/bad or right/wrong are valid ideals. In practice, the perfection doesn’t exist, but that does not mean that we shouldn’t strive for it. Even on the individual level, we know and accept that it’s good to do good things and bad to do bad ones. There is no 100% good human, but we still maintain that doing good is the right thing to do and should always be done. No reason to be different on the collective level.
“However lofty the goals, if the means be depraved, the result must reflect that depravity. Therefore, the eventual outcome of the collectivistic way of life may be accurately predicted by anyone who understands the means which must be employed.”
- Leonard Read
I disagree. Free market capitalism happens all the time. e.g. Craigslist, Farm stands, lemonade stands, grey market, black market etc. etc. These are all 100% examples in reality. All done with practically no police state coercion. The Austrian school simply observes, theorizes, and predicts what the best course of action should be and what the consequences of government coercion are.