Ponzi Economy Will Lead to Next Financial Crisis

The comments below are an edited and abridged synopsis of an article by GoldCore

Consider two economic systems:

In one, consumers work for employers to produce products and services. The employees are paid wages and salaries, and business owners earn profits. They use much of that income to purchase the goods and services produced by the economy. They save (or invest) the remainder.

The second economic system is dysfunctional. Consumers work for employers to produce goods and services, but because of labour market slack, weak bargaining power and other factors, they are paid less than they need. The government also runs massive deficits.

Meanwhile, lopsided corporate profits generate a great deal of saving for individuals at high incomes, who use these savings to finance government and household deficits through loans.

This creation of new debt is required so the economy’s output can be absorbed. Businesses use much of their profits to repurchase their own shares, and engage in a massive debt-for-equity swap with public shareholders.

The first of these systems is self-sustaining: Income from productive activity is used to purchase the output of that productive activity in a circular flow. Debt is used primarily as a means to intermediate the savings of individuals to others who use it to finance productive investment.

The second of these systems is effectively a Ponzi scheme: The operation of the economy relies on the constant creation of debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy.

Up for discussion: Why this time feels different, and the Ponzi economy.