Thanks folks for the feedback on my comment above (the first on this page). Continuing the conversation, I’ll try to apply my model (which is not my conviction) to key points made in some of the replies to my comment. First I declare my absolute disgust with the current financial system and its terrible consequences for so my beneath the 1%ers. But my focus here is on the mechanics that may prevent a major stock & bond market crash greater than, say, 35%—as opposed to steadily declining quality of life for most humans.
“To keep that ballooning debt manageable in relation to the real world which cannot grow that quickly, they need to inflate it away.” Not if all that must be repaid is interest at rates near zero.
Low supply and high price of oil could cause a recession, but a crash is avoided by money printing and near zero rates. This applies to all other causes of GDP declines. A mass psychology causing a crash is averted by the fact that large and institutional investors believe my model—there no longer exist enough small investors to cause a crash.
I find the pension argument most compelling, in that I don’t see how my model could prevent pension failures. But perhaps the event of many pension failures does not lead to a market crash, but only to retirees living poorly.
Regarding Chris’s remark, “Didn’t work the first two times, why should it work this time?,” my model holds the (not new) view that only until a few years after the 2008 financial crisis and resulting QE did bankers and big investors, who are possessed of conservative mindsets and institutional traditions, finally become disposed to behave as they could have since the gold standard was abolished in 1971. That is, this time they know that central banks, whether cooperating with one another or not, will print money and set rates to zero to prevent a crash.
In summary, I haven’t seen in the above replies a refutation of the model I proposed in the first comment above.
I’m grateful for the dialogue and illumination here and through this website.
~Rob Laporte
How are we going to get “there”? Can money printing offset debt defaults in way that allows us to avoid a “crash” in the valuation of the equity markets? Can we turn into the Japanese zombie economy? Interesting theory, but is it consequential? I suppose if site were to be devoted to purely economic analysis (opps, maybe it is) and were to forget about the other E’s, it would be of passing interest in a bizzare sort of way. Can we destroy our culture and planet in a slow incremental way or will it be a series of sharp declines separated by time. Really. (Hey treebeard, stop with the emotions, get with the program).
I have long argued, that we should not be sitting around waiting for “markets” to rescue us. Maybe this insanity may be able to go on for a very long time. I think many here may be wishing for a crash, despite the personal implications, for the satisfaction of our moral outrage as Dave tagged my response. If the primary focus of our lives is how do I navigate the financial markets, then I suppose such an arguement might worth more sustained interest. However I find such reductionist thinking repugnent, and faulty in the end. Moral turpitude does eventually economic impacts. And it is a wholistic thinking that yeilds the bests results.
Where do you find pitchforks and torches in that economic formula, we may be there a lot sooner than many may imagine.
Rob,
I don’t have the time or energy to spell out a detailed rebuttal to your argument. If you think you are on solid ground, then go ahead and ride out these mega-bubbles to the bitter end. BTW, my understanding is that this is not an invest website & site membership dues have nothing to do with getting any type of investing advice in return.
The world’s financial markets have morphed into outright Ponzi schemes (not simply bubbles). The game that is now being played by most participants (governments at all levels, central banks, big banks, pensions, etc) is to obfuscate, maneuver, and jockey for position to prolong each individual Ponzi as long as possible. Ponzi’s are awesome on the very long ride up, but at the end the heros become zeros literally overnight. It’s a fools game trying to predict the timing of the downfall of any Ponzi.
I would caution trying to apply first order logic when looking at unstable systems that are temporarily stable. There are so many interrelated multiorder variables involved along with diverging exponential functions. The ultimate factor that exposes or brings down the complex systems can rarely be predicted. I hope you find the specific logical argument on the worlds financial markets you are looking for. I’m highly skeptical you’ll find it.
Cheers
"I haven’t seen in the above replies a refutation of the model I proposed in the first comment above. "
See my post above about the perfect storm that is likely to occuring i the 2020’s
Money printing isn’t going to solve an energy & demographic crisis. All the QE cannot print more energy or print skilled workers to replace retiring boomers.
If you take the model Rob is talking about to its logical endpoint, then you basically have the central banks buying everything. The price of money drops to 0%, and the central bank owns large shares of the stock and bond markets. That’s where Japan is, and so let’s imagine that the rest of the world does the same thing in response to befalls us moving forward.
What if the Fed owned half the bond market, and half the stock market? What effects would that have?
Certainly it would stabilize asset prices. Infinite money printing means infinite ability to buy stocks and bonds.
Yields would end up dropping through the floor.
Fed would have to pay IOER to keep the money from flooding into the economy. This would be a direct transfer from government to the banks. That number could get really large. Banks win. No need to take risk and lend, guaranteed income.
The number of zombie companies would increase over time. Perhaps they would end up dominating the landscape. Its hard to compete with a giant company that can never die, no matter how poorly it does, because the Fed will buy its bonds no matter what.
Savers and pensioners would be the big losers. Yields would drop to some infinitesimal value, like it is in Europe. No point in saving anymore if you can’t get yield.
Resources would get used less well over time. (see “zombie companies”, above). Cartels would get stronger (they get free money). In essence, the economy would turn into a command economy. Cartels would run everything, they would control government, they would be kept in business by the Fed, who would own both their equities and their debt, and (presumably) would send directors to board meetings. They’d have to hire a bunch of new staff to handle all those board meetings.
Basically capitalism as we know it would be over.
What are the implications of that? Utter stagnation. Large established companies are terrible at innovating. It runs counter to everything they want to do - which is basically keep their current income streams in place.
No doubt the executives would be extremely well compensated for all their hard, difficult work. And with no chance of failure, they’d stay in their slots forever.
It is possible that the Fed understands this would be the logical end state of Rob’s model, and would actively try and avoid such an outcome. Perhaps they feel preserving some of the good parts of capitalism is worth taking a little market risk for.
Or maybe that’s just my hope talking.
Resources would get used less well over time. (see "zombie companies", above). Cartels would get stronger (they get free money). In essence, the economy would turn into a command economy. Cartels would run everything, they would control government, they would be kept in business by the Fed, who would own both their equities and their debt, and (presumably) would send directors to board meetings. They'd have to hire a bunch of new staff to handle all those board meetings. Basically capitalism as we know it would be over.I think we are closer to that model now than we may think. We are kidding ourselves if we think that the Fed has the overall economy in mind with their policies and not their member banks and a handful of a few multinational corporations. I don't think their policies are evil in an outright and malicious way, but through arrogance and hubirs they believe they are the economy. Naturally what is good for them is good for everybody else. It's what Jim Kunstler calls it the Racket economy, as I am sure you are aware, which is an excelent characterization of the situation. So is capitalism dead? Sort of, if it ever was fully alive, and given the current state of human nature, is that is even possible? A fully alive "capitalism". But even zombie companies have to produce goods and services that have some nominal value. Even if the Fed is backing them, they can still fail (perhaps the banking sector is an exception to this, seems like may be true of the medical sector as well). Look at Joe Salatin of Polyface farms, under constant attack from big agra. Shouldn't "capitalism" embrace and better, healthier and more efficient way of producing foods? Ah, but I think this is as much "capitalism" as I think we have ever had. And as much as I can stomach as well.
Dave,
The scenario you outline sounds to me like the most likely, based on human nature as I see it. If true, then we would want to load up on stocks, as they would be propped up indefinetely. It seems like it would be a good idea to explore this further vs. Chris’ crash scenario.
Look at Joe Salatin of Polyface farms, under constant attack from big agra. Shouldn't "capitalism" embrace and better, healthier and more efficient way of producing foods? Ah, but I think this is as much "capitalism" as I think we have ever had. And as much as I can stomach as well.This is a key observation. Capitalism-the-system celebrates competition, since competition is the theoretical force that underpins why capitalism allegedly provides the greatest good to the most people. However, participants within the capitalist marketplace are motivated - by the structure of capitalism itself - in exactly the opposite direction. We hear a lot about the first part, and almost nothing about the second. Participants themselves essentially abhor competition. In fact, participants observably, regularly, and quite predictably strive very hard to eliminate competition wherever possible, through corruption of regulators and government, through mergers and acquisitions, and through price-fixing and collusion. That's because participants seek to maximize profits for the enterprise. Competition from other participants is extremely costly to the participant, and it clearly damages profits. Therefore, participants are incentivized to innovate solutions to get rid of competition in any way they possibly can. As a result of this incentive structure built into the system itself, I believe the ultimate outcome of any market system is for the number of companies to shrink to a small handful, and for these companies to control government (in one way or another) so that the laws get changed in order to maximize their profit and minimize competition. In short, absent any countervailing force, I claim it is the ultimate destiny of any free market/democracy economy to turn into an oligarchy/monopoly, given the passage of enough time. If we want to keep "the good parts" of capitalism intact, we really need to understand the strong distinction between "capitalism-the-system" and what it wants, and the motivations of the individual participants, all of whom are incentivized to seize control of, and ultimately destroy the very system in which they operate. Bet you didn't learn that in your Econ 2A class. I sure didn't.
Look at Joe Salatin of Polyface farms, under constant attack from big agra. Shouldn't "capitalism" embrace and better, healthier and more efficient way of producing foods? Ah, but I think this is as much "capitalism" as I think we have ever had. And as much as I can stomach as well.This is a key observation. Capitalism-the-system celebrates competition, since competition is the theoretical force that underpins why capitalism allegedly provides the greatest good to the most people. However, participants within the capitalist marketplace are motivated - by the structure of capitalism itself - in exactly the opposite direction. We hear a lot about the first part, and almost nothing about the second. Participants themselves essentially abhor competition. In fact, participants observably, regularly, and quite predictably strive very hard to eliminate competition wherever possible, through corruption of regulators and government, through mergers and acquisitions, and through price-fixing and collusion. That's because participants seek to maximize profits for the enterprise. Competition from other participants is extremely costly to the participant, and it clearly damages profits. Therefore, participants are incentivized to innovate solutions to get rid of competition in any way they possibly can. As a result of this incentive structure built into the system itself, I believe the ultimate outcome of any market system is for the number of companies to shrink to a small handful, and for these companies to control government (in one way or another) so that the laws get changed in order to maximize their profit and minimize competition. In short, absent any countervailing force, I claim it is the ultimate destiny of any free market/democracy economy to turn into an oligarchy/monopoly, given the passage of enough time. If we want to keep "the good parts" of capitalism intact, we really need to understand the strong distinction between "capitalism-the-system" and what it wants, and the motivations of the individual participants, all of whom are incentivized to seize control of, and ultimately destroy the very system in which they operate. Bet you didn't learn that in your Econ 2A class. I sure didn't.
It will be in mine. Permission to steal and integrate into my lesson on “basic economic systems?”
Sure thing. I wish I could give this to everyone.
Dave - I feel like what you are suggesting as the opposite of competition is still just a continuation of more of the same competition. Participants within the capitalist game are competing to win - and as long as the rules of the game allow collusion, price fixing, and lobbying governments for regulations in their favour, this is how they will compete and win … for a time. For a time because the hierarchy grown out of this game ultimately becomes stale and inefficient (bloated, top heavy…we could go on…)
I tend to agree that the trajectory of our free market capitalist hierarchy is toward something like monopoly. I believe the way Bret Weinstein (Evolutionary Biologist) has put it makes sense in this TEDx talk: (link) - he discusses the “central flaw” in our system is the positive feedback loops that exist between wealthy corporations and power over regulatory frameworks, and such a loop will necessarily run away to collapse. He argues if we are to rescue our system, we will need to put a firewall between these entities, and to figure out how to properly assign the negative costs of business actitivies insted of socializing those costs. Let’s revisit the rules of the capitalist game, because i don’t think its a bad game overall.
On another note, Dave thanks for all you contribute at Peak Prosperity. I have learned a lot from you,
Best,
Karin
Karin-
Yeah the trajectory is definitely towards monopoly, and the feedback system is just as he describes.
The sickcare system is my “favorite” example: they have made it illegal to import cheaper drugs from Canada “to protect us”; you see, you just can’t trust those sneaky Canadians, heaven only knows what they’ll pull if given half a chance. Meanwhile, US drug companies sell albendazole, a 50 year old drug, at $100 per pill. In Asia it’s $1. With sickcare, “we’re here already.” The participants have reached their perfect plane of “harvesting-the-people” nirvana.
Of course when this pinnacle of success is finally reached, and the “laws” of the country protect and support criminal behavior, the “competition” aspect of capitalism vanishes, and you have something that is as inefficient as communism, but is vastly more predatory. Perhaps that’s what you meant: the “predatory” part of capitalism remains - but it is focused entirely on the “customer”. Rather than competing for business using the best product and lowest price, they are colluding to fix prices at the maximum the market will bear - and then increasing it by 10% each year, rain or shine.
How long can that continue? I dunno. Maybe a long time. They utterly control government. Have you seen sickcare system stop increasing prices? What happens when it is 50% of GDP and our lifespans are half what the other countries are? The mind boggles.
Sickcare is - to my mind - vastly worse than what the Fed does. These people should just all be in prison. Given the number of people they’ve killed…poverty being one of the largest killers known to man…
Anynow. Thanks for your kind words. 
On a different forum I frequent, someone said this:
Hi All,
Just tuned back in here after a week away, and I’m grateful for the many illuminating perspectives.
A few crucial points:
I don’t want my model to be true. I would much prefer it were not true because it would enable better financial planning–which in turn would result in my being able to do more community work and charity beyond the ample percentage of my income I devote now.
Agreed that market models are a small subset of the concerns we all (should) have. This site well addresses the big picture well beyond the question of market crashes.
The model (again not mine, just what I cam to understand somewhat) does not say that quality of life won’t decline. It is focused on whether markets will crash soon. That topic does come up a lot in this website (and by David Stockman among plenty of others), and that’s my singular focus here.
Now I reply to some great points above.
Central banks avoid owning everything because the printed money goes down the line to the banks and large institutional investors. The huge amount of cash and debt produces ever less in the real world but Friedman’s MV = PT is kept in balance. Yes (to DaveFairTax), “Savers and pensioners would be the big losers” and “Resources would get used less well over time” and “Basically capitalism as we know it would be over.” But regarding stagflation, the model holds that incredible efficiencies in, for example, AI compensate for the (semi-)zombie cartels. Also, rhyming with DaveFairTax again, in some cases competition increases inefficiencies—big topic here, and DaveFairTax’s 10/18+ posts address it brilliantly.
I’d be eager to hear what David Stockman thinks of the model I posited at the outset of these comments.
By the way, on and off for years I’ve developed a web-based model for using civil disobedience to begin the needed revolution here in the US. Hope to find time to broach it here with a month or two. It depends on now particular ideology.
Anyway, with the possible exception of the pension problem–PBS Frontline publishes a major documentary on this in a few days–I still see no refutation to the model’s view that a market crash is not inevitable soon. Sure, it must happen within, say, 30 years, but not soon, according to the model. I was hoping that someone would break that model. Chris came the closest, I think, in that the only good refutation to his reply is that this time is different: bankers and big investors now know, as they never did before, that central banks and their downlines will keep MV = PT in balance, give or take 20% market swings.
~Rob Laporte
Per Mark_BC’s comment, here is a link to one Rob Kirby video that discusses the Exchange Stabilization Fund and what he believes its role is, “ROB KIRBY: SLUSH FUNDS, Washington Stealing Billions, PUBLIC OUTRAGE COMING!” Kirby’s discussion on the ESF starts around 22:07.
At 31:04 Kirby explicitly points to one of his main sources of information on the ESF, Eric deCarbonnel’s website MarketSkeptics.com. In particular, Kirby points to a link to deCorbonnel’s 5-part video series on the ESF: What I have been afraid to blog about: THE ESF AND ITS HISTORY (Part 1-5)
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