• This is a political forum that is non-biased/non-partisan and treats every person's position on topics equally. This debate forum is not aligned to any political party. In today's politics, many ideas are split between and even within all the political parties. Often we find ourselves agreeing on one platform but some topics break our mold. We are here to discuss them in a civil political debate. If this is your first visit to our political forums, be sure to check out the RULES. Registering for debate politics is necessary before posting. Register today to participate - it's free!

On Economic Basics: Investment and Trading; Free Trade and Regulation; Revenue and Deficits; Capital and Labor

I'm enjoying this exchange, because (hopefully) it is filling in blanks for people. JohnfrmClevelan provided a clearer explanation about how Banks see money than I could provide. I understood it all, and the questions and answers provided by others are exactly what I hoped for this thread.
 
Felis Leo said:
Yep. The misery of the victims of our predatory lending system I have seen could fill a book. But, you know, attorney-client confidentiality and all that.
Click to expand...
That’s fascinating to know what you do. I’m retired now, but my final job was working for the captive finance company of a well-known manufacturer. Specifically, I handled litigation like replevins, and bankruptcies. I didn’t handle Chapter 7’s, but every other bankruptcy imaginable. In matters where I required local counsel to represent my company, I directed counsel. Many Chapter 13’s, I handled myself, going so far as filing documents and proofs of claims myself.

So I was a creditor. While you can write a book on the misery of the victims of our predatory lending system, I can write one on the people who go to great lengths to screw over their creditors. I wish I had a dollar for every Chapter 13 petition and schedules where there was no mention of my company’s debt, security agreement, or collateral. Like magic, debtors would sell the collateral, pocket the cash, and never pay off the debt. Don’t get me started on cram downs and creative valuations. Very few debtors would ever manage to get an ounce of respect from me- just the ones reaffirming their debt.

I’m going to keep my eye on you.

EDIT: Sorry, @NWRatCon. I’ve read your whole thread here and I didn’t mean to derail your topic on economics. Please accept my apology.
 
Last edited:
Not at all, my friend. I love that you and Felis Leo, JohnfrmClevelan, etc., bring specific, real world experience that adds to the knowledge base. Ironically, I've worked on both sides of the bankruptcy field, but had no desire to make it a habit. Representing the State in a bankruptcy is interesting, because everybody wants to screw the State...
 
Whenever I start a thread like this, I learn, and that is the point. I like to create environments where the exchange of information benefits all of the participants. One of the downsides, though, is learning takes time. I've spent time away from the thread digesting some of the citations (still doing so). In the meantime, however, the thread moves on and I have to catch up!

But I also like to inject new topics to chew on and learn about - hence the lengthy thread title. I'm hoping some of the readers are preparing to post on some of the tangents touched on, or that haven't yet been addressed.

I'm going to address three points here that have been raised and are connected - but may also be a tangent: "leakage", "borrowing/lending" and "(predatory) lending/bankruptcy". I'll try to be succinct, and accurate.

We've been discussing the "circular flow of income" model of the economy. One of the terms introduced was "leakage". This was new language to me, but a familiar concept. (I used the term "parking" before this, but having read further, I'm adopting the term as a better analogy.) In sum, 'Leakage' means withdrawal from the circular flow of income (or money). When households and firms "save" part of their incomes it constitutes 'leakage' because it takes it out of circulation. This may take many forms - savings, tax payments, and imports. Leakages reduce the flow of income - at least temporarily. When those savings are spent, however, they become injections back into the economy. [A point I'm going to come back to is the detrimental impact of excessive wealth accumulation on the economy, as this constitutes huge leakage, and a genuine risk to the continued flow of income.]

A facilitator to the flow is borrowing and lending. The simplest example of this is taking out a mortgage to buy a house. The purchase of the house is an injection into the stream of commerce, and it rarely happens without the mediation of a loan. This is the benefit that banking has for the economy. It allows the builder to be paid, now, for the labor and materials that went into the building, and the borrower to participate in the purchase. For most people, their house is the biggest asset they ever own, and their biggest investment. Borrowing and lending is involved in most commerce nowadays. The old phrase "cash, check or charge?" has been replaced by "swipe or tap?". Everything goes on the plastic. It keeps the machinery of commerce lubricated.

But not all borrowing is beneficial. A significant player in commerce - and bankruptcy - is the predatory lender. (The "vulture capitalist" plays a similar role in the corporate world.) The "payday loans", "pawn shops" and "loan sharks" have given way to entire "legitimate" business model of "short term loans" that take advantage of distressed consumers. By charging exorbitant fees, they extend that distress, and are a significant contributor to the bankruptcy epidemic. Bankruptcy, rather than constituting "leakage" from the flow, is destruction/reduction of value. It takes it permanently out of circulation. That is not to say the availability of bankruptcy is not a benefit to the overall economy - it actually is - but the fact of becoming bankrupt means permanent loss of value. That destruction of value has a significant role in many aspects of the economy, which will be the basis of further discussion. (Think, "trade war".)
 
Earlier JohnfrmClevelan and I got into a discussion about "productive" investment vs "non-productive" investment. Along that line, he pointed out that "Buying stocks secondhand - not real investment. Buying an IPO - real investment." I agree, and to follow up on that point in connection with "leakage" and, as I promised, "the detrimental impact of excessive wealth accumulation on the economy, as this constitutes huge leakage, and a genuine risk to the continued flow of income." Along the way, I am going to touch on "Capital Gains", and more specifically, the special tax treatment that capital gains get (that I think is wholly unjustified and warps the entire tax process).

First, "why is the stock market not part of the productive economy?" With the exception of IPOs (initial public offerings), and similar activities which I will aggregate under that term, most stocks are purchased second hand - hence the "stock market". Both IPOs and corporate bond issuances, however, inject money into a productive venture - that is, one is giving the company money toward initiating or expanding their business. Stock represents an ownership interest and bonds represent a loan. Buying stock on an exchange, on the other hand (or various derivatives, like futures, takes and puts, and mutual funds) is "net neutral" for the business (we'll discuss things like "stock buybacks" later). The business gets nothing directly out of it, or makes anything with it. It merely represents a measure of what "the market" thinks a fractional share is worth. Other financial markets similarly do not contribute to the "production" economy directly - things like bitcoins.

They do, however, represent "investments", in that one buys them expecting that they will increase in value or provide returns in the form of "dividends" or "yields". Many of us directly or indirectly make such investments through 401(k)s, pension plans, or mutual funds. In 2025, about 62% of U.S. adults, or roughly 162 million people, "own" stock. This includes both direct stock ownership and ownership through retirement accounts like 401(k)s and IRAs (Gallup). The distribution of such ownership, however, is uneven. "The percentage owning stock is highest among adults in households earning $100,000 or more (87%)"; but only "28% among those in households earning less than $50,000". (More on that later.) Because secondhand purchases of stocks do not contribute directly to production, parking income in such investments represents a drain of potential productive investment from the flow of commerce - leakage.

From a tax perspective, buying stocks is a net-neutral tax activity - the presumption is it is an exchange of value (money) for an equal value (stock) when the exchange occurs (not always an accurate presumption, but not relevant here). But, one expects that investment to result in income. That income is taxed when a "taxable event" occurs. Thus "dividends" and "interest" are taxable when paid out, but "yield" only occurs when the stock is sold. If it is sold for more than it was purchased for (its basis), that is a "capital gain". Until stock is sold, its increase or decrease in value is only a "paper" gain. (Paying taxes, as JohnfrmClevelan pointed out earlier, is also a "leakage" from the flow of commerce. It only becomes an "injection" when the government pays that money out, in the forms of purchases from the productive economy or payouts to citizens in the forms of employment checks, Social Security benefits, and various safety net programs.)

Here's the real rub: the ultra-wealthy "park" a lot of their excess wealth in investments and overseas, representing a huge "leak" from commerce, the economy and society in general. Moreover, much of it is never taxed. On average, the wealthy pay a lower percentage of income toward taxes than others; the result of a lot of "special" treatments. For example, there is a cap on FICA taxes - Social Security, primarily - meaning above that level no tax is paid; "capital gains" are taxed at a lower level than "ordinary income" (the wealthy derive more of their income this way than the average taxpayer); and much inheritance("Gift and Estate" tax) is never taxed at all, through personal exemptions and special treatment. (The new bill moving through Congress would eliminate the federal inheritance tax altogether, and reduce the income tax rates permanently.) For example, the Annual Gift Tax Exclusion is presently $19,000.00 per person. Married couples can effectively double this amount by "gift splitting" to $38,000.00 and doubling it again if the recipient is married by gifting the spouse as well, making it $76,000/year of untaxed income for the recipient couple. The lifetime exclusion from the Gift and Estate tax is presently $13.99 million per individual (doubled for a married couple).
 
I knew going into this that I was biting off a LOT regarding such a broad subject as economics. We've gone trippingly down a particular path - which I am thoroughly enjoying - but may have neglected some of the other branches. In addition, my personal situation (no, I'm not in jail!) have kept me from having the time necessary to keep up and bring more to the discussion. I'm hoping to touch on some of the other topics listed in the Thread title. But first, a step back to a very basic concept: Supply and Demand.

The basic notion of supply and demand is simple, but largely inaccurate because of the complexities of the real world. It states that price for an item will vary based upon the supply of, and demand for, that item. In a theoretical world, they would be in equilibrium. If demand exceeds supply, the price will go up. If supply exceeds demand, the price will go down. We can see this in operation, for example, in the world oil supply on a nearly daily basis.

But, this simple formula is complicated by a variety of influences, both internal and external, that disrupt this process and complicate the calculations. Using the world oil supply as an example: First, there is the internal influence of monopoly/collusion. The Organization of the Petroleum Exporting Countries (OPEC) controls a significant portion of the world's oil supply. Working in conjunction, the 12 member nations of OPEC can significantly affect the price of oil by increasing or decreasing supply, and do so regularly. Further, outside influences, such as wars, criminal activities, and even supply of carriage capacity can greatly increase the cost of the product. More global influences can also affect the "market", such as the popularity of electric vehicles and the push to adopt alternative, sustainable energy sources (wind, solar, geothermal, etc.).

Often, as in the above simple example, internal and external influences can swamp the simple formula requiring the adoption of more and more complicated models to take various factors into account.

Prior to 1936, conventional "classical" economic theory was based upon the concept of markets first introduced by Adam Smith in his Wealth of Nations in 1776. "The fundamental message in Smith's book was that the wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This income was in turn based on the labor of its inhabitants, organized efficiently by the division of labour and the use of accumulated capital, which became one of classical economics' central concepts." This new approach displaced the previous conventional theory now referred to as Mercantilism.

I mentioned 1936 because that was the year John Maynard Keynes introduced his concepts in his The General Theory of Employment, Interest and Money, upending conventional theories of then-classical economic theory. "It introduced the concepts of the consumption function, the principle of effective demand and liquidity preference, and gave new prominence to the multiplier and the marginal efficiency of capital." To say it was influential would be a profound understatement. "It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular." It is often (even by its author) described as the Keynesian Revolution.

I provide all of this to introduce these concepts and players.
 

Yeah, supply & demand works at the commodity level, but it doesn't seem to have much to do with retail pricing. We saw just how much pricing power "the market" actually had over egg producers and all of the retailers who were raising prices based on what they thought consumers would accept.
 

I probably have a less-favorable view of IPOs than you do, because today’s IPO isn’t necessarily your grandpa’s IPO. Today, companies tend to stay private longer than they did a generation or two ago. They get their seed and expansion capital not from IPOs, but from venture capital and private equity firms. By the time a company makes the decision to go public, it likely went through several rounds of VC funding. There are at least 1,500 “unicorn” companies worldwide with a valuation over $1 billion. The IPO may provide capital to the firm for various capital expansion or operational plans, but just as often it’s a way for early investors and company insiders to get their payday. The money goes to them, not the company. For that reason, I generally do not invest in IPOs. And if you do it often pays to wait until some point after the lockout period (the time insiders have to wait before selling shares), when anyone who wants to cash out can and the hype has died down.
 
Last edited:

Earlier you were talking about about markets, the role of supply and demand, and how they’re influenced by the “complexities of the real world.” One of those “complexities” is how government distorts markets through well-meaning but ill-considered, paternalist initiatives to “help” people. Government’s response to payday lenders is a perfect example of it paving the road to hell with good intentions.

What do payday lenders do? They provide money to people now in exchange for a fee later. Is it bad when a willing buyer and a willing seller achieve a meeting of the minds on this? Isn’t that what free markets are supposed to be about? Should a well-meaning, paternalistic government make a valuable service unavailable or more costly to everyone, say, by limiting the number of payday operators in a town, because some people are self-destructive or financially illiterate? Because if government caps what these firms can charge, it will limit the availability of credit, and the only option to borrow for these people will be loan sharks, with no chance for redress in the courts.

Let me give another example. I recently took advantage of a credit-card offer to defer interest for 18-months. I’m using it to charge a $14,000 Italian cruise for myself and my wife. I don’t have to begin coughing up that money until the Fall of 2026 and ending sometime in 2027, since I’m paying a portion each month. The rate on this card is 35%. It’s that rate and the bank’s expectation that a certain percentage of borrowers will be late paying their “free” loans back that allowed the bank to extend me these terms. My wife and I have the money to pay for this cruise. But I decided a no-fee, interest-free 18-month loan was too good to pass up. I can now take that $14k and earn 3.8% risk-free in a U.S. Treasury money market fund in a brokerage account. That’s $828, compounded monthly, enough to pay for souvenirs in Naples. Should we be denied that benefit because some people can’t properly manage their finances and will be hit with huge interest costs? No. I should just thank them for borrowing money they either can’t repay without incurring a significant cost or because they can’t keep track of a calendar.
 
Last edited:

Government regulation is what keeps companies in line, at least theoretically. Without it, you always get monopolies, price collusion, and other predatory practices. In the case of payday lenders, capping rates and/or profits is a response to predatory practices.

In a perfect market, you would see competition to lend, even to these payday borrowers. There is still money to be made at lower rates, but where are the lower rates? Where is the competition for low-end, high-risk borrowers?

There is no true meeting of the minds in cases like this. Payday lenders have all of the power. They write the contracts; borrowers probably don't even read them, let alone understand the pitfalls. And redress in the courts takes both money and time, neither of which these borrowers have. All that people have is the government, and our government is probably taking campaign contributions from payday lenders. The deck is stacked against the borrowers.
 

First of all, you are picking up on a complicated concept very quickly. I have written about the circular flow of income in a lot of threads, here and elsewhere, and I can't remember anybody else really grasping it. So, kudos. What I say from here is just going to be sanding down some rough patches.

The saving from income that most of us do, saving for retirement, probably comes pretty close to netting out every year. Retirees draw down their savings as younger workers net save. It really is the dynastic savings that is the problem, even if most of it isn't in the form of dollars. Demand is still lost.

I don't bother splitting up tax receipts and government spending, because the govt. always spends more than they take in, but your explanation is absolutely correct.

Leakages are more or less permanent, though, because we always net save. Injections are also more or less permanent, because when things are good, lending doesn't decrease, it increases. That new income sets the income floor and doesn't decrease unless we go into a recession. i.e., When businesses borrow to increase production, that increased production generally stays at that level, or it grows further; the income (GDP) stays higher, too.


The treatment of real estate on GDP is complicated, and interesting. New construction counts, buying a used home does not, because you are basically exchanging an investment on the secondary market, like stock trades. But rent, and imputed rent, both count towards GDP. (Maybe a good future topic.)

Banks make their profits on mortgages, like always. But our investment in our homes are not financial at all, until we sell. We get deep into debt (which is fine) and the costs are greater than renting, at least for a number of years. The best part of that long-term investment is when our mortgages become cheaper than rent, but it is just because less money is flowing out, not in. We are still renting from the bank until the completion of the mortgage. Financially, we hold very little money.
 

Interesting subject. Yes, bankruptcy is a destruction of value and/or equity. The bankrupt debtor usually loses equity in their house and/or car, and the asset usually sells at a discount. The lender will often take a loss unless they can recoup what they are owed through the sale of attached assets. Then somebody comes along, buys up the asset at a discount, and some equity has transferred from the borrower to the buyer. The GFC saw a large shift of homes from individuals to big institutional buyers.

Value often returns; homes went back up in value eventually. If you were in position to buy, you probably did very well.

A note on loan defaults - while money isn't technically destroyed, the bank loses equity, and bank equity is basically their own checking account. Bank equity is not counted as part of M1, but it probably should be. On the books, it belongs to shareholders. In practice, equity is what banks use to pay their expenses.
 

The accumulation of wealth isn't a demand leakage. The leakage comes from saved income. A lot of that money that keeps shuffling around in the financial sector has already been out of the real economy for some time - past savings from income.

When the stock market goes up, it's because there are more buyers than sellers. There only needs to be *enough* money available to lubricate trades - the money doesn't disappear, it just changes hands. So while an increase in cash held by these buyers (more saved income) normally means more buying, it's not always the case. When the market goes down, all of that money is still there, waiting. The (net) contribution of normal people saving for retirement keeps things steadier, as most don't mess with their 401(k)s, and we pretty much take whatever the price is when we are ready to cash out. People get upset when I say this, but there is a real Ponzi element to the stock market that we all depend on. The money used to cash out comes from new investors who buy our stocks, usually indirectly. Again, pretty much a wash when it comes to normal investors. The saved income they use to buy stocks gets spent by retirees.

NWRatCon said:
Here's the real rub: the ultra-wealthy "park" a lot of their excess wealth in investments and overseas, representing a huge "leak" from commerce, the economy and society in general.
Click to expand...

Again, it's important to focus on income, and not wealth here. As a whole, people don't (net) spend out of savings. While the accumulation itself is aggravating, as is the tax treatment, it's not hurting GDP. Closing tax loopholes would lower federal deficits, and therefore would lower the growth of the national debt, but that wouldn't affect GDP unless the government decided that they could now spend more because of those tax receipts (they can spend as much as they wish already, but we are all familiar with the psychology of government spending by now).
 

By “keeping companies in line,” what you really mean is using government coercion to ensure a desired outcome. The problem is it rarely achieves that outcome. I call it the Reverse King Midas Touch: whatever government touches turns to shit. For example, I’ve noticed a tendency among politicians to believe that by regulating and subsidizing something they’ll somehow make it better or cheaper. So whether it’s education, medical care, housing, food—all of life’s basic necessities—people and society are finding them increasingly unaffordable despite massive governmental expenditures.

JohnfrmClevelan said:
In a perfect market, you would see competition to lend, even to these payday borrowers. There is still money to be made at lower rates, but where are the lower rates? Where is the competition for low-end, high-risk borrowers?
Click to expand...

Yes, there is money to be made at lower rates. However, each rate should be set according to the level of risk assumed by the lender, and not government edict. Because if it’s not, loans will not be made. I mean, why would you lend to two different borrowers, one with high risk and one with low, at the same rate? You would not. For example, years ago, before the days of rewards perks when credit card issuers used more discretion in issuing lines of credit, the lowest rates could be found among banks in Arkansas thanks to that state’s usury laws. However, the credit lines generally were small and only granted to the most credit-worthy borrowers. Anyone else had to find another source of credit, almost always at a higher rate.

So, yes, lenders can still make money, but only under terms where the math makes sense.
 

Well, most other countries make it work. The difference between America and other civilized countries is that in America, Big Business runs the government. They finance politicians, they write the laws. If you don't like the way our government works, blame the money pouring into elections. Blame lobbying and the system that allows it.
 

Is that why Trump was elected? Because the Establishment wanted him elected?

The American people hold all of the cards. They’re the voters. They’re the consumers. If they’ve seeded that power to anyone, it’s because they collectively decided to do it. Most people on this planet don’t have that power. They don’t have the consumer choice Americans have. What they have is a survival existence under an autocrat.
 
But what happened to Depreciation?

The Laws of Physics do not care about the economy and machines wear out. Businesses can file depreciation with the IRS and economists have something called the NET Domestic Product which they do not mention much. There is something funny with the algebra.


There were 200,000,000 motor vehicles in the United States in 1995. ChatGPT says 80% are owned by consumers. There were 650+ million cars made in the United States since 1950.

So where is the data on all of that Demand Side Depreciation? Are Economists claiming that it is irrelevant to economics.

Oh yeah, they just don't mention it and we are not supposed to notice.

"All warfare is based on deception." - Sun Tzu

Including economic warfare.
.
 
Economics makes more sense if you think of it as a Power Game. The traditional social structure has decided that most people are supposed to be losers. The US could have easily made accounting mandatory in high schools since 1950.

Who even thought of it?

How Corporate-Friendly Accounting Rules Create a $30 Trillion Transfer from Consumers into Wealthy Pockets - Chevan Nanayakkara

This essay reveals how accounting rules systematically block wealth-building for middle-class families while concentrating profits in wealthy pockets. When businesses depreciate equipment, they get tax benefits, but when your smartphone or car loses value through planned obsolescence, you get no...
chevan.info
 
Consumers don't hold the cards.

Refuse to consume and see who lasts longer. You mostly just put other worker/consumers out of work.

Accounting/finance should have been mandatory in the schools since 1950. Now we have had 75 years of planned obsolescence with economists ignoring Demand Side Depreciation.


Years ago I asked a PhD economist to explain how a gas engine worked. He couldn't even start but he drove a white SUV. The Depression was not preceded by 70 years of Planned Obsolescence. That would have been the American Civil War. No cars back then.
.
 
Last edited:
psikeyhackr said:
Consumers don't hold the cards.
Click to expand...

Yeah, they do. Walk into Sak’s Fifth Avenue and tell me who’s in charge. The comely sales ladies batting their eyelashes behind the perfume counter, or the wealthy matron with the wallet.

psikeyhackr said:
Refuse to consume and see who lasts longer. You mostly just put other worker/consumers out of work.
Click to expand...

The matron with the wallet.

psikeyhackr said:
Accounting/finance should have been mandatory in the schools since 1950. Now we have had 75 years of planned obsolescence with economists ignoring Demand Side Depreciation.
Click to expand...

I would say just basic financial literacy: how to budget and balance a checkbook; the importance of planning and setting goals; saving and investing; the power of compound interest; etc. I’ve taken college courses in accounting, economics, statistics, business management, and have degrees in political science and business administration. But, honestly, the best education I got was observing people’s behavior in casinos as a dealer for almost three decades.


What would I know? I drive a 21-year-old Toyota. I’d rather put money into something that appreciates, like stocks or my house. I’m thinking about buying a Cherokee—an older one, like 2000 or so, not the expensive Stellantis crap with all of the sophisticated electrical systems and sensors that fail. We have an event here in South Mississippi called “Jeeping the Coast,” and these people look like they have a lot of fun. I could put a sound system and hydraulics kit in it and do “Scraping the Coast.” Then in October there’s “Cruisin’ the Coast,” which has something like 9,000 entrants. So I could do three events without ever leaving home.



 
What would I know? I drive a 21-year-old Toyota. I’d rather put money into something that appreciates, like stocks or my house.
Click to expand...

And how much CO2 in the atmosphere is the result of unnecessary manufacturing for all of the people who do not have 21-year old Toyotas.

People who think that they are smart are still stuck on the same planet with the stupid.

So why shouldn't economists report the Annual Depreciation of Automobiles?
 
You must log in or register to reply here.