The world economy is being held back by debt and bad investments. Personal Debt. Deceitful monetary practices by lenders or investors. (ie real estate brokers encouraging debt) Corporate Debt. Government Debt. (city, county, State, Country, etc) Economies based on sky-high commodity prices. (prices relative to cost of living and relative to debt) Commodity producers financed by lots of debt.
Basically, many people and entities have financed growth by massive debt. The US is now comparatively better and has reduced QE and increased interest rates. This has caused commodities to plunge. (minus the fear-buying precious metals) A strong US dollar and faltering global markets have caused commodities to sink. Oil producers continue to produce in hopes that they can continue to finance their debt obligations.
In my opinion, the economic outlook will get worse-- especially in domestic and international markets where shale oil and tar sand oil is produced. These resources are much more expensive to extract and refine than traditional oil wells. Once these economies fall further (corporate and personal forclosures), the economic outlook will worsen.
The biggest problem is investing in expensive resources, financed by large debts.
This is why companies are socking money away at astounding rates- debt is crippling the global economy.
When talking about debt, keep in mind that all our money is debt.
There is no money without an equal amount of debt. All debt created can be repaid by the money created in the same process.
One person saving money is equal to another person struggling to pay back debt. One person taking on debt is equal to another person being able to save money.
Is debt crippling the global economy? No, debt is running the global economy. It's the saving of money which dries up the lake of debt repayment. The problem is that those who can take on debt have money and those who need money have maxxed out their credit and cannot take on more debt. In total, we have a lack of new debt (=fresh money).
This thinking is exactly what's wrong right now.
Everything is debt and debt is a constant drain.
Debt wasn't running the economy, it was propping it up - consumption was increased by taking on debt.
That bs is in a death corner now - how long can you lower interest rates? Are you going to PAY people to take on more debt? Or force them to take it?
Would be nice if some dose of reality was brought in.
Do you understand that all paper money is generated by taking on debt?
What I can agree on is that there are different qualities of creditors - yet, the money they generate is traded equally.
Corporations have largely stopped taking on more debt. Usually lowered interest rates have helped here to stimulate growth by lowering the interest rate below the expected profits. But today corporations like Microsoft, Google and Apple, for example do not take on more debt. Instead, they hoard money.
Instead of stimulating growth by giving people more money e.g. through increasing the wages and forcing the companies to take on debt, we're doing it ass-backwards. The population goes into debt, student debt, credit card debt, consumption credit in addition to housing debt to prop up consumation. You are right. That method is not good and it stops working at some point.
You are wrong though, in that debt as such is what brought us into this situation. It is the wrong kind of debt growth which is being stimulated.
The government is already stepping in by taking on large sums of debt in order to keep the system running. How that will turn out is to be debated.
Well, I think we mostly agree. I don't think debt was the original issue ("what brought us into this situation").
What I personally think is that the whole debt-money creation is just a broken, arbitrary system that the world outgrew (Just like we outgrew classical mechanics - it was sufficient and then turned out to be incomplete)
How it will turn out? Painfully, because the assumptions are out of touch with reality. (cough Alan Greenspan cough)
More worthless money will be pushed in, rates will remain stuck (or go down!), more "busywork" nth order financial derivatives, the can will be a little further down the road.
Debt is a symptom, not the disease. Excessive debt is a method of not dealing with problems and kicking the can down the road. Of course it makes things ultimately worse, but why do people need to go into debt they can't get out of, and why do people finance loans to people who can't pay them off in the first place? The central problem lay in that direction.
The problem is utilized industrial capacity has been falling for decades. Companies are not employing the invested capital and machinery they already own at anywhere near full capacity. So why invest more?
Even with capital utilization rates falling for decades, there is still overproduction - or underconsumption, depending on the angle. Corporations are flush with cash reserves. Naval Ravikant turned down a $600 million blank check from Chinese investors. Meanwhile wages have been moribund for a long time. Inflation-adjusted hourly wages were higher in the U.S. 45 years ago. Real hourly wages aee lower, yet more capital equipment exists and productivity has risen. It is trying to sell more to people who have less.
The economic report of the president (US) has US industrial capacity utilization rates- over 87% from 1967 to 1969. By 2011 it was below 77%. (table b54 of the economic report of the president 2013).
that is what "more capital equipment exists" means. Its utilization of 87%+ in the late 1960s to below 77% in 2011 is the problem.
> inflation-adjusted hourly compensation has never been higher
The chart you refer to is very obviously NOT inflation adjusted. Adjusted for inflation it was higher in the early 1970s - it has fallen over 45 years.
> making up random facts
I am citing data correctly. You are pointing to charts showing hourly wages are 10 times what they were 50 years ago and saying they are not adjusted for inflation.
My mistake, thanks for the correction. It's still going up.
The claims that wages have not risen are based entirely on cherry-picked data, carefully choosing endpoints, and ignoring non-wage compensation as well as the fact that CPI wildly overstates inflation in the long run [1].
Also, the graph I provided is industrial production, which is going up. You might be right that capacity grew faster than production (cite?), but production has also gone up.
[1] See, e.g. Boskin commission, the lack of hedonic adjustments in healthcare, and the variable basket of goods used in chained CPI which prevents it from actually being a long term inflation measure. (I.e., inflation from 1970->2015 should only include goods invented in 1970, but chained CPI adds new goods yearly in order to accurately measure 1983->1984 inflation.)
Debt, in and of itself is not necesserily a bad thing, at least at the micro level. If that debt is at a low interest rate, and used to finance something that stimulates economic growth then that is a net positive.
One problem with debt is the long-term effects caused by the method in which much modern debt is created: I.e the bank creates capital out of 'thin air' and it costs them nothing other than some liability for the value of that debt, and conversely when money is paid back to the bank, that money (minus a small cut) is effectively destroyed. Usually you can only pay back that money by receiving money from someone else who has gone into debt in order to raise that capital.
At the macro level, this means that effectively all money is debt. It is very hard (some would say impossible) to make any sizable reduction in levels of debt without causing a recession.
The pessimist in me has some sympathy for the viewpoint that bailing out the banks in 2008-2009 only served to delay an inevitable and long overdue correction in the global economy.
What happened when the amount of money was tied to gold? I do sometimes look at fractional reserve banking and see a giant ponzu scheme. I'm not sure ever increasing levels of debt are sustainable, but then I'm not an economist...
Fractional reserve banking began under the gold standard or before.
"What happened" is the Great Depression in the interwar period. Some say various nations "cheated" on the gold standard - rigged conversion rates to hoard gold.
In principle all debt could be repaid - BUT only if nobody saves money. That money which is saved cannot be used to repay debt. It is this money which requires new debt to pay back old debt.
Some entity (the state) needs to ensure that nobody saves a lot of money in order for the system to work long term.
A weak state would rather take on new debt on its own instead of taking the money out of the hands of its citizens. This creates a temporary relief but in the long run it creates an increasing amount of money saved which in turn worsens the problems.
As another commenter observed, debt in and of itself isn't a bad thing - but it rather depends on what the nature and purpose of that debt is.
Monetary debt is one thing, but technical debt is what is actually killing us, in my view.
I think there's something else going on that hasn't really been considered or identified, and it's that cycles of adoption and innovation now overlap so tightly with ever increasing levels of technical prerequisites to adopt that we are now in a state that by the point a new technology or new means of efficiency is adopted, it is obsolete.
I've been thinking more about this over the last months as a result of watching governmental IT projects where they are adopting unsupported software, as when they started their projects a decade or more ago, it was new.
That doesn't seem so bad on the surface of things, but it leads to a few outcomes:
Incumbent organisations tend to be the ones funding R&D, producing innovation. Massive incumbent organisations can take advantage of their own innovations as they have sufficient mass to sustain a lengthy adoption cycle, and can afford the capital outlay. This builds vast multi-sector monopolies which self-sustain and block out competition through sheer inertia. As time progresses the incentives to innovate decrease for these guys, as they own the entire market, so need not compete on utility, nor even price.
Smaller incumbent organisations, however, end up saddled with technical debt, and the only way out for them is tabula rasa - i.e. to write off sunk costs, and start with new tech - or go bust.
New organisations start with a blank slate, and can thrive for a while - but unless they have a strong strategy for stemming technical debt, they end up as a "smaller incumbent organisation".
This boom-bust cycle of profitability followed by obsolescence accelerates as the evolution of new technology accelerates, and the overheads and complexity of adoption increase. Complexity increases as the sum total of moving parts in society and technology always grows, and overheads increase as more advanced technologies tend to require a larger capital outlay to implement.
Where this leads is ultimately to a deadlock type situation, where innovation ceases to be profitable as adoption is too slow to allow a new tech to flourish before it is superseded, and ultimately stagnation, and collapse.
So... if I had to point to one thing that could make a big difference to how the global economy functions, it would be a complete revamp of patent law around the globe. I'd love to also think that we could move away from the idea that Everyone Must Work, and actually start to realise the benefits of the vastly increased efficiencies of the last several centuries, but the ideology is so entrenched at this point that the only thing likely to allow a change will be outright collapse of our current system of the world.
Basically, many people and entities have financed growth by massive debt. The US is now comparatively better and has reduced QE and increased interest rates. This has caused commodities to plunge. (minus the fear-buying precious metals) A strong US dollar and faltering global markets have caused commodities to sink. Oil producers continue to produce in hopes that they can continue to finance their debt obligations.
In my opinion, the economic outlook will get worse-- especially in domestic and international markets where shale oil and tar sand oil is produced. These resources are much more expensive to extract and refine than traditional oil wells. Once these economies fall further (corporate and personal forclosures), the economic outlook will worsen.
The biggest problem is investing in expensive resources, financed by large debts. This is why companies are socking money away at astounding rates- debt is crippling the global economy.