Why Economists Ignore the One Chart That Predicts Every Crash

Mainstream economists often mistake 'credit' for 'debt,' focusing on the total amount owed rather than the change in borrowing. Their models treat banks as mere intermediaries, ignoring their role in creating money and thus directly adding to aggregate demand. This fundamental misunderstanding prevents them from anticipating financial crises like the 2008 global financial crisis.

Money is created when individuals take on private debt to spend, often on things like hiring employees. Therefore, as private debt increases, unemployment tends to decrease. Conversely, when people pay down debt, less money is circulating, leading to less hiring or layoffs, causing unemployment to rise. This creates a strong inverse correlation between private credit and unemployment.

In Schumpeter's model, entrepreneurs with good ideas but no money approach banks for funding. Banks create money to finance these new ventures, which drives an increase in demand and an economic boom. When the new technology is developed and implemented, it undercuts existing industries, leading to a slump during which the technology permeates society.

The AI bubble is characterized by massive overinvestment, with many companies having revenue that is only about one-tenth of their costs. This enormous gap is unsustainable. The expectation is that many AI companies will fail, leading to a significant bust and potentially a recession for America within the next one to two years.

China's model involves the state providing long-lived, essential facilities and infrastructure (like power stations and transport) that benefit the entire economy, without the need for profit. Meanwhile, the consumer goods sector is highly competitive, with provinces and companies vying for market dominance and innovation. This blend aims to achieve both stability and rapid growth.

Many people have a caricatured view of Marx, associating him with collectivism, state control, and the abolition of private property. However, Marx was primarily a critic of capitalism and not an architect of socialism. His ideal of communism was more of a poetic fantasy, and his actual arguments often align with what is now called social democracy, advocating for universal education and healthcare.

An excessively financialized economy leads to too much private debt and booms and busts driven by speculation on assets like houses and shares. Instead of banks financing productive investment in industry, they finance gambling on asset prices. This creates unproductive activity and makes the economy susceptible to bubbles and crashes, as seen more frequently since the 1970s.

America's education system is criticized for being overly expensive and largely privatized, leading to a 'best education money can buy' scenario. This contrasts with systems in countries like Germany, where education is free, merit-based, and prevents the 'dumbing down' that occurs when students feel entitled to a degree after paying high fees. The balance between public and private sectors in education is seen as flawed.

Steve Keen contends that governments issuing debt in their own currency effectively create money, rather than borrowing it like a private entity. They can always service their bonds by creating more money, making the level of public debt less of a concern than private debt. The real danger for a government is running a trade deficit that requires selling bonds in foreign currency, as this necessitates earning export revenue to service the debt.

Contrary to common belief, Steve Keen argues that government deficit spending is not the primary cause of inflation. While government spending does create fiat money, bond sales often effectively cancel out this money creation. He posits that most inflation, especially in the US over the last 40 years, has been caused by private sector money creation through private lending, not government deficits.

During the Great Depression, the New Deal saw government spending and deficits peak at about 5% of GDP. In contrast, during COVID-19, the government deficit reached 20% of GDP. This dramatically higher level of spending during COVID-19 was crucial in preventing widespread bankruptcies and economic collapse due to lockdowns, showcasing the government's role in stabilizing the economy during crises.