Cross-posted from Smirking Chimp
Why The Crash of 2016 Will Happen... The next big financial crisis is already on its way.
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The denial of fundamental economic principles is setting the world up for another Great Crash.
Although wages have been flat or declining since the West started following Thatchernomics and Reaganomics in the late 1970s and early 1980s, the stock market has risen to all-time highs. Billions -- hundreds of billions -- have been made by individuals on Wall Street.
Meanwhile over 60,000 factories have closed in the United States just in the past 14 years, and over 50 million Americans are either unemployed or underemployed.
In Europe, with the exception of the Scandinavian countries who are ignoring our economic advice, the situation is very similar. Other than Germany, which is becoming a major extractor of wealth from the rest of the EU, European countries and Great Britain are following the same fallacy that has been driving US economic policy for more than 30 years.
On June 29, The Financial Times with reporting by Sam Fleming and Claire Jones, led its front page with the warning that "Bank for International Settlements warns 'Euphoric' Markets."
The article notes that capital markets are "extraordinarily buoyant," according to the Bank of International Settlements (BIS), and argues that central banks around the world "should not fall into the trap of raising rates 'too slowly and too late.'"
They correctly point out how low interest rates have caused an explosion worldwide of corporate debt.
Meanwhile, not noted in the article, for-profit corporate banks have discovered that instead of lending money to working-class people to buy homes or cars, it has become more profitable to simply borrow from central banks at very low interest rates, often less than 1 percent, and then park that money in government treasuries which pay 2 or 3 percent, in effect loaning the country's money back to the same government at a profit.
Similarly, huge transnational corporations from tech companies to pharmaceutical companies, are hoarding cash in offshore tax havens where it's not available to stimulate local economies, or they're making acquisitions based on fiscal strategies rather than how to best manufacture the best product.
Completely lost in the debate between the BIS and the IMF over simulative central-bank strategies is a simple economic fact. Economies are driven by demand, and the principal component of demand is wages.
Instead, The Financial Times noted that the Bank of International Settlements is "calling for policymakers to halt the steady rise of debt burdens around the world and embark on reforms to boost productivity."
This echoes the old Reaganomics line that increased productivity equals a growing economy. Make more things and people will buy more things.
Productivity has been rising steadily in the United States since the 1930s, but since the early 1980s it has become uncoupled from wages, which have remained flat or fallen.
Even as individual companies become more productive, producing more goods with lower costs and less labor, the economy has been stagnant because there is little demand for those goods. And that's because of the simple Econ 101 maxim, which dates back to Adam Smith, that demand is what drives economies, and that wages are the principal driver of demand.
The majority of American workers spend 100 percent or more (they go in debt) of their wages, and all but the top few percent of American workers save anything close to even 10 percent of their wages. It is their spending that creates demand.
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