Economist Steve Keen's models show that as private debt levels ratchet up, a larger portion of GDP is diverted to the banking sector. This transfer of wealth comes directly from the workers' share of income, not the capitalists' share, a counterintuitive finding confirmed by US data.
Mainstream economists mistakenly focus on the *level* of private debt. The critical metric is the year-over-year *change* in debt, or credit. This single figure drives aggregate demand and its collapse from +15% to -5% of GDP directly caused the 2008 financial crisis, a crash foreseen by those tracking this data.
Contrary to textbook models, banks aren't intermediaries for savers and borrowers. They create new money and debt simultaneously when issuing a loan. This new credit directly adds to aggregate demand, making it a primary driver of economic cycles rather than a neutral facilitator.
Neoclassical economics operates like a religion, ignoring empirical data that contradicts its core tenets. The crucial role of bank-created credit in causing financial crises is dismissed because accepting it would unravel their entire equilibrium-based model. This willful ignorance is why they consistently fail to predict crashes.
China's economic model blends the "best of socialism" with the "best of capitalism." The state provides long-term, profit-agnostic infrastructure like transport and power, reducing costs for businesses. Simultaneously, it fosters hyper-competitive markets in consumer goods, driving relentless innovation and efficiency.
The current AI boom follows Schumpeter's classic model of technological change: massive, credit-fueled overinvestment causes a boom. This will be followed by a bust and recession as the new technology displaces old industries and most AI firms fail. Only then will the technology fully permeate society during the subsequent slump.
Modern capitalism has become a gambling system that conflates speculation with investment. Borrowing money to bet on rising prices of existing assets like stocks and houses is unproductive. True investment creates new goods, services, and productive capacity. An economy dominated by finance is inherently unstable and destructive.
Stock market valuations are not driven by fundamentals but by the change in margin debt. Economist Steve Keen shows a stunning 0.8 correlation between the change in margin debt and the change in the cyclically adjusted price-to-earnings (CAPE) ratio over 100 years. Speculative leverage, not earnings, creates bubbles.
The Soviet economy failed because it was supply-constrained; every sector received fewer resources than needed. This created a powerful incentive to avoid risk and innovation, simply reproducing last year's models. In contrast, demand-constrained capitalism forces firms to innovate constantly to capture market share from rivals.
Contrary to popular belief, government debt is not the primary cause of economic instability; it's the response. Private debt drives booms and busts. When a private debt bubble bursts, government deficit spending is the essential mechanism that injects money into the economy, preventing a full-blown depression.
The argument that developed nations can thrive by outsourcing manufacturing and focusing on services is a fallacy. True value is added in manufacturing. The only service sector that truly expanded was finance, which primarily fuels unproductive asset speculation, leading to inevitable booms and busts.
Marx's most profound insight was that all production inputs, including machinery, could create surplus value, not just labor. However, he suppressed this realization because it contradicted his claim that socialism was inevitable, which depended on a falling rate of profit caused by increased machinery use.
The American political system produces "the best politicians money can buy" because expensive, privately funded campaigns make politicians beholden to their financial backers. Banning private donations and moving to a 100% government-funded model is the only way to guarantee politicians cannot be bought.