How Debt Drives Everything. Stocks, Economies, Policy.

Why everyone has become economically uneasy
 
In 2008 the Fed created $29 Trillion debt, or around 9 years of total tax revenues.
 
It matters little that Dow Jones revenues have declined over the last 5 years.
 
S&P 500 has nothing to do with S&P 500 revenues. 
 
With a big enough debt stream and cheap credit, buying securities can be made to work for stocks, no matter growth fundamentals or valuation.
 
Americans can spend more than they earn for 9 straight months, as income declines and savings tumble.
 
“Why our system is broken”
 
How about moving the power to create money from the apex of the pyramid down to its lowest level?”
 
Economists and Madmen
 
“Post-Real Economics. Eventually, evidence stops being relevant.”
 
Profound significance of understanding how debt drives everything
 
 
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Why everyone has become economically uneasy
In 1968 the US changed its economic system from capitalism, to a debt allocation system. At first it was hard to notice the change. The debt level was still low, and it took some time before the new system changed incentives throughout the economy. However, by 2008, debt had metastasized to the point that it was by far the dominant factor.
Policy makers were forced into a choice in 2008, and not surprisingly they made the easy choice, that continues to this day.
In 2008 the Fed created $29 Trillion debt, or around 9 years of total tax revenues.
Now the only economic variable that correlates with the Dow is Debt.
The Dow Jones is simply driven by debt and an article below explains how this is done.
It matters little that Dow Jones revenues have declined over the last 5 years.
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S&P 500 has nothing to do with S&P 500 revenues. 
A broad based measure of Price to revenues for the S&P500 index shows that on this measures the S&P500 has simply broken away from any link to revenues to a degree never before seen.
With a big enough debt stream and cheap credit, buying securities can be made to work for stocks, no matter growth fundamentals or valuation.
 
The chart below shows that despite the lowest interest rates in history and the biggest debt infusion in history the 8 year “recovery” has been the weakest in history.
 

But don’t stop there.
Americans can spend more than they earn for 9 straight months, as income declines and savings tumble.
 
 
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“Why our system is broken”
 
“You want to fix the economic system, reduce political bribery and reduce rising income inequality? Shut off the cheap unlimited credit spigot to banks, financiers and corporations.”
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How about moving the power to create money from the apex of the pyramid down to its lowest level?”

Impossible, you say? Not at all. We now have a new form of symbolic capital called cryptocurrencies–“money” that can easily be created in the accounts of people doing useful work, as opposed to being created in the accounts of the already-obscenely wealthy, as we do now.

Rather than trickle down, money would trickle up the pyramid, if the wealthy actually produced goods and services of value.

So what would a labor-centered economy look like?

1. New money would be created at the bottom of the pyramid, in the accounts of people doing useful work in their communities. (The usual global corporations would continue making billions of dollars in profits from doing whatever highly profitable work was available.)

2. Being productive in terms of creating and sustaining cultural and infrastructure capital would be compensated; consumption of corporate goods and services would take care of itself without subsidies like guaranteed basic income.

3. Labor would be paid for being productive, and capital would serve labor.”

http://www.oftwominds.com/blogjan17/labor-economy1-17.html

Economists and Madmen

“The problem in economics is that not only economists but politicians and people in general take economic models and the academics who create them seriously. After all, the people offering these dictums are the best and brightest among us. They give each other degrees and go to conferences where they confirm their brilliance. Sadly, they are often what Nassim Taleb describes as “intellectuals yet idiots.” Seriously, how do you argue with a PhD economist, especially when he has a Nobel prize to back up his pronouncements? He looks down on you as a naïve child who doesn’t have the understanding of a mature adult.

How can the very people who claim to understand how the economy works be so bad at predicting and managing it? The quick answer is that the real economy is far more complicated than they’re willing to admit. I can imagine this is hard medicine to swallow when you have spent years trying to simulate an almost infinitely complex system with computer models that are necessarily limited as to inputs, variables, and algorithmic sophistication. But if your model tells you very little about reality, what good is it?”

http://www.mauldineconomics.com/frontlinethoughts/post-real-economics

“Then we come to the concept of general equilibrium. Pretty much every economist accepts some variant of the concept of general equilibrium. I have come to the point where I completely reject the notion: it’s utterly false. There is no general equilibrium of any kind.”

“Post-Real Economics. Eventually, evidence stops being relevant.”

“The conditions for failure are present when a few talented researchers come to be respected for genuine contributions on the cutting edge of mathematical modeling. Admiration evolves into deference to these leaders. Deference leads to effort along the specific lines that the leaders recommend. Because guidance from authority can align the efforts of many researchers, conformity to the facts is no longer needed as a coordinating device. As a result, if facts disconfirm the officially sanctioned theoretical vision, they are subordinated. Eventually, evidence stops being relevant. Progress in the field is judged by the purity of its mathematical theories, as determined by the authorities.”

Profound significance of understanding how debt drives everything

1. The whole system only functions in a highly deformed way and is clearly unsustainable.

2. Classic Economic Fundamentals and Value won’t help you in the short term.

3. It will be very difficult to tell when the system has begun to break down, let alone forecast when it will happen.

4. Risk is completely mispriced as never before.

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http://blog.gavekalcapital.com/?p=12660

5. An optimal investment plan needs to be automatically adaptive, preferably with multiple dynamic systems.

It is highly unlikely, otherwise, that investors will be able to react in a timely and effective manner.

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