I think we have to accept the fact that everything grows and withers.We cannot expect economies to be any different.We have not seen anything approaching the Great Depression of 1929 since the banking system reacts far more quickly and effectively to a crisis than 79 yrs ago.We cannot erradicate all speculation since many good ideas/businesses are financed on someone taking a chance.It is just a matter of keeping a lid on the froth and bubble that perpetuates the illusion of productivity.

Putting too many restrictions on our economies will see very low growth of both inventions and businesses.The last thing we need on our planet is the cringe factor,when we have both environmental/economic problems that need courageous solutions ,not whimpy Govt regulation on the really productive,private enterprise powerhouse.

Yes Arjay,

but it isn't the "the really productive, private enterprise" that the author was referring to.
It is the really non-productive enterprise, the very "froth and bubble that perpetuates the illusion of productivity" (as you so aptly put it).

You are right in saying that “that everything grows and withers”. Historically with global capitalism the prevailing world order seems to last for about 30-40 years before collapsing catastrophically & renewing itself.

The ‘classical’ mode born of laissez-faire capitalism died abruptly in 1929. An excessive concentration of wealth (too much capital chasing too fewer productive assets) & excessive lending gave rise to the inevitable bubble & crash.

Keynesian economics filled the void with a more egalitarian consumer society & fiscal policy regulating the boom & crash cycle. This then faded with the emergence of “stagflation” in the 70’s.

Our current “neo-classical” model is now in the early stages of terminal decline with both a massive asset-price bubble & (more interestingly) stagflation as an emerging feature.

Bernanke’s dilemma right now is that lowering interest rates while postponing a crash (and recession) will encourage inflation.

Higher interest rates, the monetarist tool for controlling inflation is in simultaneous conflict with the desperate cry for lower interest rates which have kept the casino economies running.

In the 70’s the problem with inflation was inflation. With our debt levels the problem with inflation is the effect it has on interest rates. We have come to rely on a low inflation, low interest rate regime that was never going to last

As for the idea that “We have not seen anything approaching the Great Depression of 1929” I recommend Steve Keen’s article”

http://www.onlineopinion.com.au/view.asp?article=6528

it shows that historically, the only periods that have come remotely close to being in parallel with our current level of private debt were the periods immediately preceding the depressions of the 1890’s & 1920’s.

The banking system may better but the devil now lies hidden in the “SIVs, CDOs, hedge funds” etc. & the household sector.

And the household has never been this exposed to an investment market collapse.

-Mr Smith

But, I digress.

I really dropped in to say that the author of this article couldn’t be more right.
This “is not a crisis which just turned up yesterday because something marginal went wrong in, for example, some real-estate or energy market”

The media and financial industry would have us believe that the “sub-prime” phenomenon is a cause rather than a symptom. Their attempts at identifying this whole problem as being somehow isolated & uniquely American would be funny if they weren’t serious.

“The real economies, investing in real things and producing real goods and services” are better positioned than we are (even if the Shanghai stock market is something of an exception).

Asset-price inflation & real growth were never one & the same. Pure speculation is a poor substitute for productive investment & families with $40,000 a year incomes weren’t meant to live in $600k houses

We have created a generational wealth divide under the pretence of creating wealth and accumulated astronomical debts under the illusion of becoming “prosperous”

In terms of fiscal policy one of the first & easiest remedies for this malaise would be phasing-out of investor tax incentives for non-productive investments. Negative gearing & capital gains concessions (for established homes) are an obvious example. There are others.

In any case, I loved this article. It was a refreshing & relevant antidote to the orthodox rubbish that one is more likely to find in the mainstream press (such as The Australian or Financial Review)
While the views that the author expresses may seem exceptional now they will become all the more common as the prevailing 'wisdom' is inevitably exposed for the fallacy that it is & always has been.

Mr Smith

There is nothing intrinsicly wrong with the concept of Capitalism. While the Market is a vital part of the Capitalist paradigm, it is simply a subset of the Commons and there are some Commons which must not be privatised - ever, if the desired outcome is a stable, long-term economic arrangement.

Debt-based money (lending money into existence, at interest) is the root-cause of inflation and the 'business-cycle' of boom-and-depression (and all that goes with it).

The key is monetary reform; Do away with debt-based money. The question is whether those who have privatised Money are willing to relinquish what is arguably the greatest material prize in history. . .

TheBootstrapper: "There is nothing intrinsicly wrong with the concept of Capitalism."

Capitalism has an inherent gravitation effect on wealth. As wealth becomes more centralised, the most profitable investments shift from those of 'true' production that benefits society, to one of market control. Enron is a prime example of this, they made more money from raising prices by restricting supply than they did by being productive. These significantly more profitable (yet unproductive) actions will drive capital from productive enteprises to such market manipulation. While this creates apparent wealth, in reality the wealth is lost. This process accelerates until you have fewer and fewer people fighting for a larger share of less and less.

The only reason Enron resulted in prosecutions was because the power industry was a heavily regulated market. To take a current example one only has to look at Microsoft and their dominance in the unregulated operating system market. If you want to invest money in that market, the best ROI is to buy a share of the Microsoft monopoly rather than invest in a competitor. This results in artificial wealth creation through asset inflation rather than real wealth creation through additional products or services. The debt based money supply only magnifies this effect; it is not responsible for it. You can apply the same logic as applied to power stations and software to almost any other market.

In essence, there is plenty right about capitalism, but there is plenty wrong with it too.

"The key is monetary reform;"

The key is creating mechanisms (legislative, regulatory, social, tax, etc) that minimise market manipulation and asset inflation while maximising the investment into 'real' wealth.

Desipis, you said

"If you want to invest money in that market, the best ROI is to buy a share of the Microsoft monopoly rather than invest in a competitor. This results in artificial wealth creation through asset inflation rather than real wealth creation through additional products or services."

How does buying a share in Microsoft result in artifical wealth creation? How does buying a share in any company result in artificial wealth creation? And how would investing in a competitor (such as Red Hat) create real wealth through additional products or services?