[PBVBROOK]

Just stop it. The "engine" of the economy is capital (aka savings).

You need to take an economics class. You really do. You keep making statements that are nonsensical. Please google capitalism. Read the Wiki article. It is not to bad (for a change).

[DanDaMan]

Quote:
Just stop it. The "engine" of the economy is capital (aka savings).

You need to take an economics class. You really do. You keep making statements that are nonsensical. Please google capitalism. Read the Wiki article. It is not to bad (for a change).

PBV is correct. Savings is not the engine. Printing up fiat money out of thin air and devaluing the dollar is how you start a business.

[Todd D.]

You need to take an economics class. You really do.

My Bachelor's is in economics, and I disagree with your statement. Your statement is accurate under Keynesian economics, but not necessarily true for ALL economics. Austrian economics, for example, disagrees with the "Consumption is the engine" theory, as does the Chicago school (Hayek refuting the Keynesian theory as the "Paradox of thrift" in his work The 'Paradox' of Savings, and later Prices and Production).

The idea that consumption si the driver of economic growth may be popular right now, but it's certainly not universal amongst "capitalist" economic thought.

[peterm1988]

The point to keep in mind, however, is that too much capital is bad. It begins to be diverted away from productive investment and into speculation, particularly when it is held by the wealthy. This is not just because of the inherently limited number of productive enterprises to invest in but also because this accumulation drives down interest rates - safe investments are no longer particularly profitable investments. This is admittedly a very simplistic explanation, but nonetheless largely correct. That said, when you create a more equal distribution of income (perhaps through taxation) you limit the wealth accumulation of the wealthy, allowing capital to be increasingly based on the savings of ordinary people. This is both more stable and more limited - by limiting the amount of credit and raising interest rates for safe investments you, perversely, create incentives for investing in those productive assets.

In large part our current troubles were created by an excess of capital. Taxing the wealthy limits that capital.

[TropicalK]

peterm1988,
I think you are confusing capital with the money supply.

[peterm1988]

peterm1988,
I think you are confusing capital with the money supply.

I was, you're right, but then if we're going to get slightly technical about this then I'll just drop the relevant variable down a level to money velocity - either way an inequitable distribution of wealth increases the amount of money "invested" over any given time period. Look at the explosion of debt and, most importantly, the shockingly steep $:$ GDP returns curve. The key point is, is that due to the development of our financial system, accumulated wealth doesn't sit still any more (if, indeed, it ever did) - rather it moves around, constantly, and generally only investing in other investments which invest in other investments. Surprisingly little is used to fund what is so aptly termed the "real economy".

This both drives down interest rates (not necessarily good) and creates these awfully precarious asset bubbles by making various assets the only efficient investment for the very wealthy.

[TropicalK]

rather it moves around, constantly, and generally only investing in other investments which invest in other investments. Surprisingly little is used to fund what is so aptly termed the "real economy".

I don't disagree with you. I just don't put as much emphasis on inequality as the culprit, and instead place most of the blame on lack of technological advancements and useful things to invest in. The world seems to have hit a roadblock for innovation and purposeful work.

[peterm1988]

I'm not sure if that's necessarily true. I mean, after all, we've seen massive technological development over the past couple of decades. Think of the investments we can make in R&D, infrastructure, education. Infrastructure really demonstrates this - in much of the West we've privatised massive chunks of our infrastructure. But that doesn't change the fact that we're dealing with a sector that requires/demands massive state involvement and implicit or, more often, explicit state guarantees. So we're depending on the private sector to throw billions into unprofitable or barely profitable projects which support the rest of the economy. State guarantees help, but they also drive down yields massively. Who's going to invest four billion in a signals upgrade project which likely won't pay back before the next upgrade? Even if it did, who'd actively choose to put the four billion in that instead of higher yield speculation? The problem isn't that these projects won't raise the funds - with the amount of credit flowing around, they will. But there's an evident reluctance which has frustrated all but the most necessary efforts.

I suppose what I'm saying is, is that the disproportionate levels of wealth provide created this speculative obsession which then fed even greater concentration of wealth. I mean, 1980-2008 we were seeing a speculative system which created increasingly illusory values for things. It got to the point where almost the entire economy only made sense on the basis rising asset prices and we've only just begun to do the books. Consumers consumed on the back of credit which was (largely) only reasonable due to the assumption of rising house prices. Companies piled up debt to expand through acquisition, credit which was justified on the basis of rising asset prices. The key thing which created this distortion was wealth inequality, because this massive pool of wealth pushed down productive investment yields at the same time as driving up speculative yields based on rising asset prices. We created a situation where we had to funnel ever greater amounts of money into increasingly useless speculative investments in order to stop the whole system grinding to a halt.

It was lunacy, utter lunacy.

[PBVBROOK]

^^

Well done.

[DanDaMan]

I suppose what I'm saying is, is that the disproportionate levels of wealth provide created this speculative obsession which then fed even greater concentration of wealth. I mean, 1980-2008 we were seeing a speculative system which created increasingly illusory values for things. It got to the point where almost the entire economy only made sense on the basis rising asset prices and we've only just begun to do the books. Consumers consumed on the back of credit which was (largely) only reasonable due to the assumption of rising house prices. Companies piled up debt to expand through acquisition, credit which was justified on the basis of rising asset prices. The key thing which created this distortion was wealth inequality, because this massive pool of wealth pushed down productive investment yields at the same time as driving up speculative yields based on rising asset prices. We created a situation where we had to funnel ever greater amounts of money into increasingly useless speculative investments in order to stop the whole system grinding to a halt.

It was lunacy, utter lunacy.

I agree.
Should we join forces to end the Fed's manipulations and the bailout of the "gamblers" that never loose because the government rescues everyone?

[peterm1988]

I agree.
Should we join forces to end the Fed's manipulations and the bailout of the "gamblers" that never loose because the government rescues everyone?

No. As unpalatable as I find the bailout, I'm not willing to throw millions and millions out of work for nothing. We don't even have a system to replace it with - what's the point of going through massive pain and not really changing anything? The bailout didn't really change anything except stop a collapse. It's bad enough now that people have properly realised that things can go down as well as up, it would have been utterly catastrophic if we hadn't prevented, say, 60-70% of all our wealth being destroyed over a a few years.

[DanDaMan]

No. As unpalatable as I find the bailout, I'm not willing to throw millions and millions out of work for nothing. We don't even have a system to replace it with - what's the point of going through massive pain and not really changing anything? The bailout didn't really change anything except stop a collapse. It's bad enough now that people have properly realised that things can go down as well as up, it would have been utterly catastrophic if we hadn't prevented, say, 60-70% of all our wealth being destroyed over a a few years.

Watch the news.. we're still on the road to destroying all that wealth.
In fact, if you're a young person the debt WILL destroy 60-70% of your wealth because you will be working to support city, state, government, GM and union retirement plans that have and or will fail.
Not to mention all the baby boomers about to retire. They too will need your money to cover what has been spent.

How about we shrink the government and taxes and create another Roaring Twenties?
Or shrink the government like we did after WWII and create another post war boon?

[peterm1988]

Or, alternately, we could default...

[DanDaMan]

Or, alternately, we could default...

The objective is to keep some wealth. Not destroy all of it.

[NYYS]

Or, alternately, we could default...

We won't default, we'll just suffer outrageous inflation. We can't default.

The key thing which created this distortion was wealth inequality, because this massive pool of wealth pushed down productive investment yields at the same time as driving up speculative yields based on rising asset prices.

I'm not really with you here. Yes, an excessively large money supply creates asset bubbles, but what does wealth inequality have to do with that? This last asset bubble (housing) was bought into pretty universally. The poor bought houses they couldn't afford. The middle class tried to flip homes. The rich bought CDOs.

I'm not sure how wealth inequality caused any of that. I suppose the argument could be made that the government wouldn't be pushing home ownership on the poor if they weren't so poor relative to everyone else, but that issue can be resolved by higher interest rates from the Fed (or getting a time machine and hanging Barney Frank in 2002), it's not necessary to decrease inequality.

[killim]

It was lunacy, utter lunacy.

I am not really sure if it is "utter lunacy". Look at the opposite costs. Depending on the point of view you can call it a clever move for the benefit of the USA.