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Market Oracle FREE Newsletter

Category: Economic Theory

The analysis published under this category are as follows.

Economics

Saturday, December 28, 2019

Hacking The Economy To Determine An Election: Is It Happening? / Economics / Economic Theory

By: Dan_Amerman

On August 27th, 2019, in an editorial published in Bloomberg, William Dudley, the former president of the Federal Reserve Bank Of New York, did what had previously been considered unthinkable. The foundation premise of the Federal Reserve is that it is supposed to be completely nonpartisan, insulated from all political considerations. However, Dudley wrote that Donald Trump was a threat to the Federal Reserve and the nation, and urged Fed officials to make decisions that would take into account the need to keep Trump from being reelected.

The freezing up of the repurchase agreement (repo) market had nearly collapsed the U.S. financial system as one part of the financial crisis of 2008, however, the market had enjoyed 11 years of relative calm since then. Three weeks after Dudley's editorial, during the week of September 16th, 2019, the repo market returned to crisis mode and was likely saved only by emergency interventions on the part of the Federal Reserve. A contributing factor was some major mistakes that were made by career officials at the New York Fed - Dudley's former staff.

If the current related crises in the repurchase agreement market and with the funding of the national debt continue and get worse (which is far from certain at this time), crossing over into the wider markets, interest rates and the economy, it could become one of the defining political events of our lifetimes.

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Economics

Monday, November 18, 2019

Intellectual Property as the New Guild System / Economics / Economic Theory

By: Frank_Hollenbeck

The standard justification for intellectual property — i.e., patents and copyrights and trademarks — is that the creative process would be significantly reduced if such protection did not exist. The underlying assumption is that the financial reward must be augmented by a grant of exclusivity enforced by the coercive power of government. Because we can freely copy an invention, innovation or other creative ideas, a financial reward is viewed as necessary for these intangible ideas unlike a tangible object sold in the marketplace.

But did inventors or artists starve before IP laws? The answer is no because they benefited from the first-to-market advantage. Boldrin and Levine  explain how during the 19th century British authors with IP protection in the UK would sometimes make more money off their non-IP protected US sales by reaching an agreement (a contract) with a US publisher and then flooding the US market with cheap original copies.1 Since any potential copycat will wait to see if an idea is successful, the gains of being first-to-market could be substantial. Many drug makers retain important market share on a drug even though their patent protection has expired and the market is awash with cheaper generic alternatives. There are also many other indirect ways to profit from creative ideas. Many artists make more money off concerts and other appearances than from the original digital sales of their song.

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Economics

Thursday, October 03, 2019

Economics Is Like Quantum Physics / Economics / Economic Theory

By: John_Mauldin

I often say a writer is nothing without readers. I am blessed to have some of the world’s greatest. Your feedback never fails to inspire and enlighten me.

My last week’s That Time Keynes Had a Point letter brought many more comments than usual. Apparently Keynes is still provocative 73 years after his death, no matter what you say about him.

But my real point was about the twisted economic thought that is having dangerous effects on us all. And we can’t blame it just on Keynes.

Today I want to share some of the feedback I received, add a few thoughts, and then show you some real-world consequences that are only getting worse. But first, let me wax philosophic for a minute.

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Economics

Thursday, September 26, 2019

Economist Mad Men in Authority - That Time Keynes Had a Point / Economics / Economic Theory

By: John_Mauldin

John Maynard Keynes once said:

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” 

While true, it doesn’t go far enough. The problem isn’t simply defunct economists or “scribblers of a few years back.”

We are in the grip of economists who, far from being defunct, hold great power. Whether they hear voices in the air (or Twitter), I can’t say, but they are indeed madmen in authority.

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Economics

Monday, September 09, 2019

Government Spending - The High Price of a "Free Lunch" / Economics / Economic Theory

By: Frank_Hollenbeck

One of the Ten Commandments is “thou shalt not steal,” and theft is generally condemned in most religions, yet our religious leaders and followers have essentially turned a blind eye to government theft.

Based on a policy of envy, Bernie Sanders, for example, has bluntly stated he intends to tax the rich to fund his programs, as though the word rich itself justifies theft. The current crop of other democratic candidates is offering a beehive of free programs without any real discussion on how to pay for them.

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Economics

Friday, August 30, 2019

The Key to a Sustainable Economy Is 5,000 Years Old / Economics / Economic Theory

By: Ellen_Brown

We are again reaching the point in the business cycle known as “peak debt,” when debts have compounded to the point that their cumulative total cannot be paid. Student debt, credit card debt, auto loans, business debt and sovereign debt are all higher than they have ever been. As economist Michael Hudson writes in his provocative 2018 book, “…and forgive them their debts,” debts that can’t be paid won’t be paid. The question, he says, is how they won’t be paid.

Mainstream economic models leave this problem to “the invisible hand of the market,” assuming trends will self-correct over time. But while the market may indeed correct, it does so at the expense of the debtors, who become progressively poorer as the rich become richer. Borrowers go bankrupt and banks foreclose on the collateral, dispossessing the debtors of their homes and their livelihoods. The houses are bought by the rich at distress prices and are rented back at inflated prices to the debtors, who are then forced into wage peonage to survive. When the banks themselves go bankrupt, the government bails them out. Thus the market corrects, but not without government intervention. That intervention just comes at the end of the cycle to rescue the creditors, whose ability to buy politicians gives them the upper hand. According to free-market apologists, this is a natural cycle akin to the weather, which dates all the way back to the birth of modern economics in ancient Greece and Rome.

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Economics

Tuesday, July 23, 2019

U.S. Recession Watch: The Six-Cycle Forecast / Economics / Economic Theory

By: F_F_Wiley

It’s usually a bad idea to stand too close to something—whether an object, a problem you’d like to solve or any number of other things—which could mean seeing all of the pixels but none of the patterns. That’s why we populate albums, frames and holiday cards with bird’s eye views and sweeping vistas. It’s why every city that aspires to “destination” status advertises this or that Tower, Arch, Needle or Eye.

But if we look from too far away, we run a different risk of missing important information. That’s why we send probes, ships and occasionally scientists into outer space. It’s why we don’t Facetime our doctors, we hop on the examination table and show them exactly what’s bothering us.

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Economics

Sunday, July 14, 2019

The Problem with Keynesian Economics / Economics / Economic Theory

By: John_Mauldin

In The General Theory of Employment, Interest and Money, John Maynard Keynes wrote:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

I think Lord Keynes himself would appreciate the irony that he has become the defunct economist under whose influence the academic and bureaucratic classes now toil, slaves to what has become as much a religious belief system as an economic theory.

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Economics

Friday, July 05, 2019

Modern Monetary Theory – Applications in the 21st Century / Economics / Economic Theory

By: Andy_Sutton

Perhaps one of the biggest frauds perpetrated on the citizens of the world in the 20th century was Keynesianism. For those of you who are new to the discourse, Keynesianism was essentially the ramblings of a well-respected (at the time) economist named John Maynard Keynes and it dealt with deficit spending at the level of the federal government. It was a justification for something governments around the world were beginning to do anyway. The point of Keynes’ work was to give this very dangerous and ill-advised practice legitimacy. Sadly, it worked, and 85 years later, the developed nations of the world are mired in debt the likes of which the world has never before seen and may well never see again.

Before we get to the true purpose of this paper: an analysis of MMT, we must lay some foundational work. Please bear with us. If you have been an active reader of our previous articles and research, feel free to proceed directly to the portion where MMT is addressed.

Interestingly enough, the topic of this paper; (another consequence of treating economics as a debating society instead of a science) the foundations of modern monetary theory (hereafter MMT) actually originated long before Keynes wrote his seminal work in 1936. MMT as it is being rehashed today was actually first described by a German economist name Georg Friedrich Knapp in 1905. Originally coined ‘chartalism’ by Knapp, this perversion of economics was pushed in Knapp’s 1905 ‘State Theory of Money’. The term comes from the Latin root charta, which means ‘token’ or ‘ticket’.

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Economics

Sunday, June 16, 2019

Why Hedge Fund Manager Ray Dalio Is Wrong on Capitalism / Economics / Economic Theory

By: John_Mauldin

Ray Dalio is the thoughtful, somewhat controversial founder of the world’s largest hedge fund, Bridgewater Associates, which he started in 1975.

While much of his writing is private, I (and many others) peruse every word we can of his and the Bridgewater team’s thinking. I find it to be some of the most interesting market commentary I read.

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Interest-Rates

Thursday, May 30, 2019

This Is Why US Monetary Policy Is So Ineffective / Interest-Rates / Economic Theory

By: John_Mauldin

Back in the 1980s and 1990s, many people thought excessive government spending and the resulting debt would bring inflation or even hyperinflation.

We wanted a hawkish Federal Reserve or, better yet, a gold standard to prevent it. Reality turned out differently.

Federal debt rose steadily, inflation didn’t. Here’s a chart of the on-budget public debt since 1970:

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Economics

Thursday, May 23, 2019

Capitalism Works, Ravenous Capitalism Doesn’t / Economics / Economic Theory

By: Raymond_Matison

For more than a century, capitalism has proven to be successful in expanding the efficient manufacture of goods and agricultural products, increasing jobs and incomes, promoting technological innovation, decreasing poverty and improving the general welfare of humans globally.  By contrast, socialism and communism with its centrally planned economy and collectivism historically have produced misery, war, need and poverty through oppressive totalitarian governments.

Super hedge fund manager Ray Dalio, the president of Bridgewater Associates, the very successful and largest hedge fund in America recently released a thoughtful and timely report stating that “capitalism is broken” - pointing to, among other things, the gross income disparity between high and low earners. Ray Dalio’s judgment of broken capitalism relates to his observation that the vast majority of wages going to the top 5% wage earners does not benefit the overall economy, destabilizes society and is destructive to capitalism.  The fact that a true-blue capitalist wrote the article should alert industrialists, globalists, bankers and all capitalists that perhaps “capitalism with American characteristics” has veered off its previously successful course.  Capitalism does work; but ravenous capitalism is indeed self-destructive.  The bounty of capitalism must be shared not only with its owners or investors, but also with its other “significant partners” – the nation’s workers.

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Interest-Rates

Wednesday, May 08, 2019

How Fed Interest Rate Cycles Exponentially Reduce Long Term Wealth Creation / Interest-Rates / Economic Theory

By: Dan_Amerman

The most historically reliable way to create long term wealth is the reinvestment of cash flows over time, as earnings are earned on earnings, which are earned on earnings.

Compound interest is the best known example, but the same principle of compounding cash flows is also the most powerful and stable source of wealth with the stocks and real estate over the long term as well.

Reinvested (and increasing) dividends are a more important and stable source of stock market wealth than price gains.  Reinvested (and increasing) net cash flows are the most stable and important source of wealth with real estate and REIT investments as well.

However, what was taken for granted for many decades - is no longer available. As a result of Federal Reserve policies, only a small fraction of the historically average power of this wealth building engine still remains. In this analysis we will examine the mathematical implications of publicly stated Fed intentions if there is another recession, and look at the extraordinary implications for investors.

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Economics

Friday, May 03, 2019

Universal Basic Income Would Be a Social and Economic Disaster / Economics / Economic Theory

By: Jared_Dillian

I am never going to retire. Oh sure, I say that now, but what about when I am 80? No. I will never stop working.

Every morning, I get out of bed when the alarm goes off, take a shower, put on dress clothes (a suit, usually), and drive 35 minutes to work in an office that I rent in an office building.

I write newsletters. I can just as easily do that on the couch, in a pair of gym shorts, with a cup of coffee. Why spend over an hour a day commuting and dealing with all the brain damage of putting on a suit and going to work?

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Economics

Friday, April 12, 2019

America Has a Monopoly Problem / Economics / Economic Theory

By: John_Mauldin

Without realizing it, we’ve become a nation of monopolies. A large and growing part of our economy is “owned” by a handful of companies that face little competition.

They have no incentive to deliver better products or to get more efficient. They simply rake in cash from people who have no choice but to hand it over.

This would be impossible if we had true capitalism.

Even if we admit some businesses are natural monopolies, most aren’t. Most of them found some non-capitalistic flaw to exploit.
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Economics

Wednesday, March 27, 2019

The Fed Broke This Economic Cycle—and It’s a Game Changer for Investors / Economics / Economic Theory

By: John_Mauldin

Here’s a quote from my friend Peter Boockvar that has drawn an enormous amount of interest:“We no longer have business cycles, we have credit cycles.”

Let’s cut that small but meaty sound bite into pieces. What do we mean by “business cycle,” exactly? Well, it looks something like this.

A growing economy peaks, contracts to a trough (what we call “recession”), recovers to enter prosperity, and hits a higher peak. Then the process repeats.

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Politics

Tuesday, February 19, 2019

Here’s Why The Left’s New Economic Policies Are Just Stupid / Politics / Economic Theory

By: Jared_Dillian

Somewhere in the last 30–40 years, we have become economically illiterate.

Elizabeth Warren wants wealth taxes that would impose asset forfeitures of 2–3% on households with more than $50 million in assets.

There are practical and legal problems with their implementation. But she wants to implement them anyway.

Alexandria Ocasio-Cortez wants a 70% income tax rate on incomes over $10 million. This would be the highest income tax rate in the OECD. And yet, it would affect only 16,000 households and only return marginal rates to historical levels, anyway.
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Economics

Thursday, February 14, 2019

Capitalism Isn’t Bad, It’s Just Broken / Economics / Economic Theory

By: John_Mauldin

The Soviet Union’s collapse ended the socialism vs. capitalism argument.

Semi-free markets spread through Eastern Europe. Collectivist economies everywhere began turning free. Capitalism seemingly won.

Even communist China adopted a form of free market capitalism. Although, as they say, it has “Chinese characteristics.”

With all its faults and problems, capitalism generated the greatest accumulation of wealth in human history. It has freed millions of people from abject poverty.

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Economics

Wednesday, July 11, 2018

Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril / Economics / Economic Theory

By: Dan_Amerman

Would you have appreciated a single number that could have given you a clear and unmistakable warning before the tech stock bubble collapsed? How about an unequivocal mathematical warning in 2006 that major financial trouble was on the way, well before the problems of 2007 and 2008?

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Economics

Sunday, June 17, 2018

The Corruption of Capitalism / Economics / Economic Theory

By: Harry_Dent

I call it “killing the golden goose.”

David Stockman, a speaker at this year’s Irrational Economic Summit, calls it “the corruption of capitalism.”

Andrew O’Hehir, a contributor for Salon, recently interviewed Yanis Varoufakis about the story behind Greece’s financial crash. He was the prime minister during the height of the Greek crisis, elected in early 2015 in response to the Greece debt default crisis.

And in July of 2015, Varoufakis resigned after the ECB (European Central Bank) and IMF (International Monetary Fund) forced a bailout package that went against what he and his SYRIZA party had promised the Greek people.

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