Guest Post by The Zman
Something that has been brought to the surface by the recent economic shutdown is that classical economics seems to have run out of answers. More precisely, we are seeing things today that classical and neoclassical economics said were not possible, at least not in the long term. All over the West, but particularly in the United States, we are seeing contradictions for which there are no explanations. It’s as if we have crossed into a new world that operates by different economic rules.
The best example of this is the debt carried by governments. For a long time, it was assumed that debt levels approaching GDP were unsustainable. In war time or a national crisis, a nation could run up huge debts, but must immediately address those debts after the crisis had passed. This meant austerity or inflation. Today, Japan has debt over 200% of GDP. Greece is at 170% and Italy at 130%. The United States was at 110% before the recent economic calamity.
Those who cling to the old economics keep predicting that sovereign debt will be the downfall of the West, but that’s like predicting rain in Arizona. Eventually, the prediction comes true, but when is what matters. As the John Maynard Keynes famously said, “In the long run we’re all dead.” Maybe there is some point where these debt levels have to be addressed, but everyone used to know this was not possible. Within living memory, trillion-dollar Federal deficits were said to be impossible.
All around the modern economy we see things that should not be happening. America has seen 50 million people file for unemployment. The streets are empty during work days in most cities. It has been an article of faith that wide-scale unemployment would lead to unrest. Instead of marches by unemployed workers, we have riots by the delinquent children of the ruling class. They are not demanding jobs. Instead, the jobless are watching the shenanigans on television.
Similarly, the stock markets are doing the opposite of what economics has said should happen on the cusp of a long depression. Apple became the world’s first trillion-dollar public company on Thursday, as a rise in its share price pushed it past the previously unthinkable valuation. This is a company that makes luxury goods financed on retail debt. Their core market is now unemployed. How is it possible for a “Good Time Charlie” business to boom in a depression?
There may be ways to explain these and other phenomena within the old rules of economics, but those patches to the old theory just create new contradictions that have to be addressed with new patches. It may simply be that the West, having moved past scarcity, has entered into a new world of economics. Just as quantum physics takes over for classical physics at the atomic level, the new economics takes over for the old economics at the post-scarcity barrier.
An example brought up in this brilliant discussion (Video and MP3) on modern finance is the elevation of transaction-creation over capital formation. A company like Tesla has a ridiculously high valuation, despite its many problems, because it creates lots of transactions and creates potential transactions. Everything from government credits to complex financial instruments are spun off by the activity of the firm. As a result, it creates lots of downstream financial activity.
Compared to an old school car maker, Tesla makes little sense. The old school car maker was focused on building cars, which meant they focused on all of the processes to building a car, like supply chains and managing factories. As a result, they had massive balance sheets. The real value of the company was the massive array of assets it owned to build and sell cars. Tesla, in contrast, has a tiny balance sheet, as it is focused on generating economic activity.
The elevation of the transaction over capital formation is one of the unremarked aspects of the new economy. Wealth is now generated by either creating new ways to move information around the system or maintaining a gate through which information must flow to some other part of the system. In the new economy, information can be knowledge about some future transaction or the store of old information in a wealth containment vehicle, like money, assets, credit and so forth.
In the new economics, the demand for genuine innovation, the overcoming of scarcity in some way, is in low demand. Instead, the economy is dominated by middlemen who benefit from each transaction. Therefore, the innovator is one who comes up with a new way to accelerate the movement of information in the system, thus increasing the number of transactions. Facebook is worth billions not because it has a great product or service. Its value is in its ability to generate transactions.
Another aspect of the new economics that seems to contradict the old rules is the rise of credit as an asset. All over the global financial system credit sits on the books of banks, hedge funds and companies as an asset. The asset is taken at face value and often the nature of it is unknown. This was obvious in the mortgage crisis when debt holders had no idea what was in those mortgage pools. Credit is now just another store of information in the financial system.
In fact, certain types of debt are the preferred store of information. The financial system has an unquenchable thirst for US treasuries. Federal debt is now over 26 trillion, a number thought unimaginable just a few decades ago. When you add in unfunded Social Security and Medicare liability, the debt is multiples of that total. Despite this staggering debt load, United States treasuries remain the preferred collateral in the financial system. They are better than actual money.
An irony of this new post-scarcity economic order is that it seems to be evolving toward something closer to the old palace economies of the Bronze Age. All over the economy we see a great consolidation. Amazon is close to half the retail economy now. Five big banks control more than 90% of the financial system. The tech oligarchs are close to having a monopoly on the public square. In their respected spheres, everything flows into them and is distributed out as they see fit.
We have quickly moved from a situation where these new economic models were too fragile to regulate to a situation where they are too big to regulate. In fact, the phrase “too big to fail” is now just an accepted truth of the current age. Like the palace economies, these institutions are not here to serve society. American society now exists to serve these new institutions. As a result, these institutions are actively shaping our behavior to create transactions that serve their needs.
Whether or not this is sustainable is unknown. People who want to the think it cannot go on will find reasons to believe that. The answer though lies in whether this model can last in a world of informational symmetry. As automation takes over the economic system, will there be a way to create more transactions. After all, the robots will reach a point where they know the market value of all items before the market is set. No robot will be able to fool the other robots.
That is another aspect of the new economy that goes unexamined. It is just assumed that automation will idle the human assets the ruling class does not like. In realty, it will be the information class that suffers the most. In a world where financial transactions are conducted among algorithms on the block-chain, what is the need for guys working the phones in a brokerage? How would trades even happen if both sides know the future price of the item being traded?
As with anything new, there are more unknown things than known things. The new field of quantum economics is an effort to take methods and ideas from quantum physics to model economic activity. It starts from the observation that something like the efficient market theory contradicts the assumption that humans are rational and will attempt to maximize their utility. People know the odds, but they keep going to the casino anyway, buying sports cars and following new trends.
There’s also the possibility that reality has simply gone on holiday and will return to put all of this back in order. Some unknown crisis will reveal the massive cracks in the foundation of the current economic model. Everyone will suddenly snap out of the fog of plenty and rush for the exits. After all, the Bronze Age economic model was unable to hold up under the pressure of the Sea People. The current economic model may simply collapse under the weight of a billion Africans.
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal
-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)
You cannot seriously think it’s gonna be ok. It’s early still.
Put yourself in Wyle E. Coyote’s place in a Roadrunner cartoon where he’s just overrun the cliff’s edge…
I was an Old School math major and never could make much sense of loony New Math which has lots of useless terms and rules, no application, was invented and pushed to give an advantage to girls. New Economics makes it’s own loony rules by shear force of printed cash, was invented to enrich the super-rich, and will destroy the American Economy like the New Math destroyed American high school math.
I’m a girl who suffered under the New Math, it screwed me up for years. New Math is New Speak and Black is white, up is down, the Ministry of Truth is full of lies and the Ministry of Peace is awash in wars and blood.
Said by a writer who obviously knows nothing about economics or the history of it. First, classical was Smith…and was left behind because it didnt fit nicely into Keynesian or Neoclassical econ. If you want to know the difference in short… Keynesian is aggregate demand stimulation through govt debt spending, neoclassical is aggregate supply stimulation through interest rates (inflation control) but these both rely on Govt and Central banks and are what all countries use today. These same basis are also where Marx drew his inspiration but that came more from Ricardo and his microeconomics theory. The classical econ is from which Austrian and free market theory came from and could be used as the basis for global free trade, however, it has been bastardized in globalism and neoclassical beliefs. Regardless the world doesnt run on classical econ…its neoclassical and Keynesian thought. The over simplification and incorrect assumptions/conclusions in this article should suggest not writing on a topic you clearly havent done any research on.
A little harsh Anon, IMO. I acknowledge the many schools of economic thought and they all have their shortcomings, like everything else, there is no perfection in man’s systems.
But i do agree that our present dilemma is driven by a seriously failed economic and financial structure that has been bastardized (as you say) by those with the power to divert global wealth into their own pockets at scale.
I view Zman’s articles as ruminations of a thinking man.
It’s not so complicated. The whole thing runs on finacial fraud. Think Enron or Madoff but on global scale with the politicians paid off. That’s the core of the problem.
Exactly so, General. IMHO there can be no solution to our ills until the system crashes and burns and those responsible are hanging from the proverbial lampposts. This article offers 10 possible reforms that might help:
“The current economic model may simply collapse under the weight of a billion Africans.”
Good article, Zman, thank you. I follow your speculations and conclude the the current economic model is indeed fatally flawed and due to be re-invented through a resolution of the coming crisis.
This article, I have found, lays out the true logic of how and why this is happening and what the outcome might be; and it does so in a readily understandable way, avoiding the common gobbledygook often used by the academic economists to obfuscate true meanings:
The article was referenced by my good friend, Dr Tim Morgan, who spends his time promoting the proposition that we are in an energy based system, not a financial one, and which is gaining traction as our economies descend the rabbit hole of oblivion:
https://surplusenergyeconomics.wordpress.com/ The comments are instructive.
Most of the supposed “failings” of classical economics emerge from poor use of words.
The most specific illustration of this is debt. Those who try to use classical economics without a proper understanding of physical reality often conclude that the observed debt ratios are unsustainable and cannot last.
The problem here is, debt, traditionally, is something where, a lender agrees to provide resources to a borrower, on the promise that the borrower will return the principle with interest. However, in the modern day, the “banks” that provide this “debt” are legally required to lend their “assets” to the government. Furthermore, these “banks” don’t actually have “assets” to lend to the government, and instead simply type money into existence as needed.
While the government technically does repay the loan with interest, it can only do so by taking out new loans. As a result, the debt merely grows exponentially. However, since the lender has infinite “assets”, and is legally required to loan them out to the government, the government will never go bankrupt, and will always roll its debt. Furthermore, even if 99.99999% of gdp is bank and government juggling debt, it will have no effect on the physical economy, as the entire thing is merely show money on virtual ledgers. This also means the supposed money supply can approach infinity without any damage to the economy at large.
Basically, if you’re going to understand the modern economy, and the government’s role within, you need to get rid of the fiction that’s used to obfuscate the modern banking system. The vast majority of government spending power is neither taxed nor borrowed, but simply typed into its accounts.
It’s best to just look at spending without paying heed to taxes and etc, as the ledgers aren’t accurate or meaningful. With that said, every time governments requisition resources, those resources have to come from somewhere. And, in turn, the results of the modern day look entirely as expected from the perspective of where physical resources come from, and where they’re going.
As spending increases, privileged groups become more privileged, and in turn, the number of separate businesses shrinks while the gap between the rich and the poor grows, but there’s really no “collapse” that occurs. This process can continue all the way down to North Korean standards and it’s still “sustainable”.
You never hear of hyper-inflation from money printing and what that does?
Economic activity is the production, growing, manufacturing and selling of products people need for survival. This has not changed for thousands of years. The stock market is like going to a casino in Vegas, it truly is false economy.