On a couple of occasions, I’ve tried to explain the vulnerability and unsustainability of our over-leveraged, debt-dependent, consumption-dependent economy.While Jon Husband was visiting with me today, he talked about the power of visualizations, and I decided it might be easier to explain this with a chart. Ideally, we need an EcoLanguage animated chart for this, but tell me what you think of the cash flow chart above for now. Here’s its explanation:
The economy depends fundamentally on the ‘consumer’ activities of taxpayers, and specifically on the willingness and ability of taxpayers to spend their money on real estate (flow 1), taxes and user fees (2), and the purchase of (now mostly overpriced, imported) products (3). The spending on real estate (1) drives up real estate prices, providing increased collateral to consumer lenders (4), allowing these lenders to loan ever-more money to taxpayers (5). This creates a self-perpetuating Real Estate Cycle (flows 1, 4, 5) that produces the Two Income Trap.
The taxes and user fees paid by ordinary taxpayers (2) fund large tax cuts to rich taxpayers (6) which are rewarded by campaign contributions to ‘friendly’ politicians (7), so that a Campaign Funding Cycle (flows 2, 6, 7) is created.
The government also rewards these campaign contributions (7) by giving large subsidies to major corporations (8) to enable them to globalize and crush smaller competitors (9), which drives up the share values of these large oligoplies (10), which in turn produces huge profits for the oligopolies and their rich taxpayers (11). The result is a Corporate Subsidy Cycle (flows 7, 8) and an Oligopoly Creation Cycles (flows 9, 10, 11).
The oligopolies invest some of their profits (a decreasing amount) in wages to domestic workers (12) to keep these cycles from running out of steam. They also invest come of these profits in financial organizations and instruments (13), and use some of the rest (an increasing amount) to make wholesale purchases of cheap imported products (14). These purchases are financed by foreign loans from the grateful struggling nation producers (15), producing an Offshoring and Trade Deficit Cycle (flows 14, 15, 8).
As taxpayers are forced (because of shrinking real wages and the elimination of domestic alternative suppliers — the Wal-Mart Dilemma) to buy the (mostly overpriced, imported) products of the oligopolies, they complete both the Price-Gouging Cycle (flows 12, 3) and the Consumer Deficit Cycle (flows 3, 13, 5).
These seven self-reinforcing ‘vicious cycles’ have led to our current economic crisis, characterized by:
The problem with these cycles is that the taxpayer outflows (flows 1, 2, and 3) are all expenses — none of them get repaid, while the taxpayer inflows are either decreasing in real terms (12) or repayable with interest (5). This means that the taxpayers are consistently spending beyond their means and getting further and further into debt. It’s a cycle of addiction.
What happens when the credit crunch comes — taxpayers have borrowed their limit and just can’t spend any more? What happens when the heavy trade deficit causes a spike in interest rates , making debts unrepayable (other than record rates of bankruptcy)? What happens when the real estate bubble bursts?
The answer is that flows (1), (2) and (3) suddenly dry up, and then all the flows that depend on them (flows 4 through 15) also dry up, or even reverse direction, exacerbating the problems. The negative flows are self-reinforcing just as the positive ones are. It’s called an economic depression.
How do you break these cycles of addiction? Each one has its own solution, none of them popular, all of them difficult:
You now know more more about the economy than some so-called economists. There are quite a few that will tell you that all these cycles are’self-correcting’ and that more deregulation is all that is needed.
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