When Paul Brodsky mentions the word “capitalism,” he gets “nostalgic.” The fact that the free market system is being silently destroyed without much public discussion “saddens” the economic strategist. In a macro world view when one force advocates repression of human desire and initiative and sees governments as superior economic arbiters, Brodsky, founder of Macro Allocation Inc., a portfolio consulting firm, prefers capitalism.

But those with a controlling bent, who think free markets can be repressed with quantitative fairy dust and negative interest rates, they are currently bending markets almost to the point of breaking. These are the people who should read Brodsky. But the topics he addresses are likely those that have also been banned from polite economic discussions.

Capitalism, Free Markets, Innovation
Photo by geralt (Pixabay)

What is the difference between “financialism” and “communism” besides the outward appearance of a free market stance?

The current economic model, termed “financialism,” is endorsed by a wide variety of political economists, Brodsky noted in an August 17 report.

With this world view firmly in place, uncomfortable information gets pushed to one side and glossed over by a world view that appears to have not properly modeled the unintended consequences of quantitative stimulus, with negative interest rates being the latest absurdity.

The effectiveness of quantitative stimulus is documented to be diminishing with each usage, but those who fly the flag of “financialism” don’t consider the implications of lopsided central bank decisions. They don’t consider how stimulus across the world has generally helped the wealthy while scoffing at revolutionary approaches that actually put money into the real economy.

Such programs create government debt and, under the flag of financialism, debt is good, computer driven automation of jobs without question helps the real economy and Internet unicorns, those where “ridiculous valuations ensure negative returns-on-investment” and make certain tech firms a “depreciating asset.” It is with this “financialism,” one where the economic masters cannot be questioned, where Brodsky appears to take issue.

Debt has an increasingly negative impact with time

There have been multiple economic thinkers who question the concept of debt and free market suppression creating a downward spiral. It is the type of system that can look so pleasant when living in the moment – raising asset prices and lowering interest rates to points that can only be accomplished through monetary repression. But the market’s price discover function has been vanquished, which in the long run can lead to trouble.

“Our economies are caught in a debt-for-debt’s-sake leverage trap where credit is issued and debt assumed merely to tread water,” Brodsky wrote. Initially debt is helpful, but as an economy and markets become more dependent on it, the stimulative impact wears off. “It is like squeezing a water balloon here to make it expand there,” he explained. “There (will) come a time when we are forced to recognize that borrowing to form capital in the form of deflationary, technologically-led productivity is the macroeconomic equivalent of borrowing to buy a depreciating asset, like a car? We get what we want now, but it is counterproductive if we cannot reinvest our savings at a higher return. This is a big, conceptual topic but one that deserves critical thought and attention from investors.”

Some of the world’s brightest economic market thinkers have noted that the “debt supercycle” is ending, the road paved with borrowing against the next generation is going to meet its limits. The can that has been endlessly kicked will kick back.

“Nominal growth increases nominal revenues, which in turn makes it easier to service debt today, but far more difficult to repay or reduce it tomorrow,” Brodsky states, noting the key consideration for objective analysis, one that increasingly gets lost in today’s highly charged partisan environment that at times even bleeds into investor thought suppression. “Investors should check their ideologies and personal politics at the door.”

Will the success of Amazon and Uber enhance GDP over time?

It is not just debt that is the issue, but the direction of the economy relative to technology. Here Brodsky wants a simple question asked:

Should the success of Amazon and Uber should enhance GDP over time?

There are those who state with confidence that the forthcoming technological revolution will be like the industrial revolution – production technology will replace old jobs and new jobs will be created. It may well result in another golden era. But it should be acknowledged that there is one problem with this overly optimistic modeling, however. Never before in history have we seen technology replace human thought process and logic as well as displace common labor across all industries.

We are living in a world where the value of human labor is being dramatically reduced, which in turn widens wealth and income gaps, Brodsky notes. Amazon is in effect eliminating jobs in stores and shuttering mall-based businesses. This will have ripple effects that will increasingly become apparent.

There are obviously positive impacts from technology. “Innovation increases productivity. It does not directly increase demand or economic activity,” Brodsky noted. But it is important to consider context:

Much of the capital stock built over the last twenty years has been capital that offers deflationary pricing. Businesses that helped streamline past inefficiencies through innovation grew revenues and employed more labor, for themselves and other businesses that exploited their innovations, but they also reduced the value of labor, which in turn widened wealth and income gaps. We have been left with economies able to economize at a rate that exceeds the natural rate of nominal growth. The debt remains and monetary policy makers have had to step into the breach, manipulating money stocks and markets to keep the whole thing afloat.

The question that investors are increasingly asking is: what happens when the game of musical chairs stops?