- Anti-progressive policies allow wealth to accumulate more quickly at the top of the economic spectrum.
- The wealthy save most of the money and much of the wealth gets lent to the middle classes keeping interest rates low.
- The middle classes have less income but are able to borrow cheaply to support the same standard of living.
- Higher amounts of leverage, profit growth and more capital accumulation pushes asset prices higher leading people to believe their wealth is higher than it really is. This creates a wealth effect which supports debt-supported spending.
- Eventually, the debt cannot be serviced and the process goes into reverse. Asset prices fall. Debt goes bad. The middle classes stop consuming beyond their income.
- Ultimately the wealth accumulation reverse as social unrest forces the government to adopt more progressive policies and wealth redistributes more equally.
Sunday, February 1, 2009
A theory of boom bust
Posted by David at 10:13 AM