Sunday, February 1, 2009

A theory of boom bust

  • 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.