7/30/2023 0 Comments Death spiral![]() But there is actually another step that precedes and facilitates the others. These seven steps take an otherwise healthy and growing economy and transform it into a sluggish, stagnant, overindebted, low-growth, low-rates, low-inflation, dysfunctional, politically and financially polarized society. In the original piece, I outlined seven steps in the Monetary Death Spiral. Image Source The Seven (or Eight) Steps of the Monetary Death Spiral In what follows, I review the MDS theory, discuss the endgame of this process, and highlight a few takeaways for investors. ![]() The Monetary Death Spiral (or "MDS") is what happens when government policies continuously and unsuccessfully try to initiate economic growth by boosting aggregate demand, even when it comes at the cost of ever-higher debt loads and shrinking private savings. But if private savings initiates the progression of economic growth, then sacrificing it for spending will throw a wrench in the cogs and prevent the growth sequence from functioning properly. What sets the process in motion? If it's more consumer spending, then it won't matter if private savings are sacrificed in the short term in order to get the process going. It's almost the same flow of events, but a lot changes depending on where one begins. Higher savings > increased investment > more capital formation > higher productivity > higher wages > more consumer spending > even more investment > even more capital formation > a growing economy It emphasizes the supply side of the economy: private savings, investment, and capital formation. The alternative view, which I believe comes closer to reality, may seem only slightly different on the surface but has profoundly different implications. ![]() Higher consumer spending > higher business profits > more investment > more productivity > higher wages > more consumer spending > a growing economy Since consumer spending makes up ~70% of GDP, economic growth can be generated by policies that boost aggregate demand. The standard theory, to which most economists adhere in one form or another, emphasizes the demand side of the economy. To understand the theory, one must first understand the two competing theories of what causes economic growth. In September, 2019, I put out an article titled " The Monetary Death Spiral" attempting to explain why interest rates, inflation, productivity, and economic growth have been sliding downward over the past 35 years. ![]()
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