In sick societies problems are solved by debt. Now debt itself is not an evil, debt used for investment is very important, a necessary tool for progress. However in sick societies, debt is used to pay for consumption. It's used to pay for things for which the money has not been produced. In history there are long-term debt super cycles. A major debt super cycle began in America in 1981. Prior to 1981 and going forward from the period of the first World War, America was the greatest creditor in the world. Even as late as World War II, America was the world's leading oil exporter. Now things had changed quite drastically already by 1980: the rise of OPEC, the rise in the price of oil and the decline of America's ability to satisfy its own demands for oil. So that by the early 1970's, America was the world's largest oil importer, and at the same time, the nations of Europe and the nation Japan had recovered economically from World War II, and America's low levels of investment did not enable America to compete adequately against them. Thus it is not an accident that real wages in the United States peaked in 1973, the year of the Arab oil embargo, and today they are back to where they were in the 1960's. So the American dream per se died in 1973. The American political establishment and business establishment obviously does not want to accept that fact because their legitimacy is based on claiming the American dream is alive and well etc. etc. etc. But these are basically the statements of a failed system.


Now getting back to 1981, a very important event happened, which was that Reagan completely screwed up the government finances by having huge consumption oriented tax cuts and an enormous increase in military spending, neither of which were paid for. The fairytales about the tax cuts were that they would somehow magically generate economic growth that would lead to surpluses. This was complete rubbish. Not that investment oriented tax cuts are bad. We favor abolishing the capital gains tax rate. We favor abolishing the estate tax. And the top tax rates were too high at the time of Reagan, so not everything he did was bad. But he failed to really put in incentives for investments particularly in eliminating the capital gains and estate taxes.

So what Reagan did was create consumption oriented tax cuts and huge levels of debt. Now at the same time, while Reagan was not as bad as Clinton, Reagan completely failed to deal with a declining trade situation. So the trade deficit began to explode and the balance of payments deficit began to explode, so that by the end of the 1980's, America had become the world's largest debtor, after being the world's largest creditor at the beginning of the 1980's. Now in fairness to Reagan, Reagan did put through some trade policies such as devaluing the dollar and the restrictions on Japanese car imports that did help - so that by around 1990 or so the trade deficit had come down sharply. However with the arrival of Clinton in office you had a series of trade deals that were just flat out catastrophic and the Clinton so-called boom papered over a huge decline in America's economic health internationally.

Now going back a ways here, in 1986 Reagan passed one of the most scatterbrained pieces of legislation ever seen, which is the 1986 Local Tax Reform Act, which eliminated a lot of incentives for investment, went precisely in the wrong direction and cut more taxes on consumption. So all this was a very toxic combination and the huge decline in America's international position in the 1990's could be directly traced to a lot of the scatterbrained aspects of the 1986 tax bill. So all this was not a very happy situation.


So why hasn't there been a backbreaking crisis like the 1930's or the 1840's in America? The answer is debt. Because debt is related to the psychology of your creditors and the world has been willing to buy huge amounts of paper from America to paper things over. Now obviously there has been a series of crises since the year 2000, and these have been dealt with by just printing more money such as the Greenspan paper money printing and the huge increase in paper money expansion to paper over the results of the collapse of 2008. The 2008 situation was compounded by levels of regulatory irresponsibility in the United States that could only be considered breathtaking from the total failure to regulate the real estate market and the lunatic Bear Stearns rule put through at the insistence of people such as Sec. Paulson (who was then head of Goldman Sachs) that threw away any kind of leverage control over the financial industry on the grounds that - hey it was named after Bear Stearns and Bear Stearns was so solid they couldn't possibly go bankrupt. Well of course Bear Stearns did go into to a prepackaged bankruptcy which showed the whole absurdity of that, but since 2008 the major central banks have been just printing, printing, printing, printing to plug holes in the whole situation. This is not a really viable solution. It's not.

Meanwhile the middle class in America continues to be in a state of crisis. Indeed most of the artificial stimulation (particularly under Obama and Bernanke) has gone to the upper classes. Let's look at this. How many ordinary people can take out a 0.1% loan from the Federal Reserve Board? Well, not too many. Indeed interest rates for ordinary people out there who are in trouble have to a large extent gone up because of their reliance on credit card debt. So ordinary people are borrowing money at 25%, while the superrich are borrowing money at 0.1%. Obviously this is not a very viable situation.


Now today the entire structure of the American economy is artificially inflated by the money printing, and that's a very scary situation. That's also true in Japan. It's also true in Europe. Now there has been a certain amount of money printing and a certain amount of scaremongering about China, and China has its problems, but see there is a big difference between China and the West, which is first that China is a totalitarian dictatorship, and second that China has huge levels of savings and it has used a lot of the money printing for investment while in the West has used that money to prop up holes in a sick system, to engage in a lot of paper shuffling on Wall Street. One of the particularly troubling aspects of the whole situation since 2008 is a resumption of pouring money into stock buybacks and debt-based takeovers, and leveraged buyouts, rather than investment. So this does wonders for Wall Street, but it's basically frittering away and burning up long-term capital. Obviously this is not a viable situation.


Now comparing various situations around the world, Europe is still - in spite of the incompetence of Angela Merkel and her mismanaging of the Greek bailout, and her mismanagement of refugees, and her mismanagement of starting a new Cold War - Europe is still in better shape the United States, because they have a functioning social welfare state. America is a sociological chamber of horrors, and if the roof falls in on America, the social results are going to be catastrophic. The crisis of the middle class in America is reflected in the support for people like Sanders and Trump in the most recent election, and you've got to understand the American economy is still horrendously artificially inflated. What happens when the whole bubble bursts? Who knows? Now Wall Street with its usual brainlessness is automatically assuming that low interest rates are going to be here for all intensive purposes for eternity and so on and so forth, and that's also scary because once Wall Street wakes up and finds out that's crap, that's another situation.


In Japan you have horrendous money printing and another situation which is definitely not good, which is not that adequately discussed among a financial analysts, which is the Fukushima disaster, where that is still too a large extent unresolved and what will happen if there is another earthquake? Who knows? Or another Tidal Wave? You have zillions of pounds of nuclear waste now being stored outdoors? Obviously this isn't good. And we don't even discuss the fact that Tokyo is ripe for another earthquake, sitting on top of a huge earthquake zone. So the situation in Japan is very precarious and if all that's not bad enough, you have the growing trend towards war with Obama's restarting a Cold War with Russia, helping to push Russia and China together, and a very confrontational situation between China and America in the Pacific, and the South China Sea, which is starting a new arms race all around the world. Because one of the things that was a big boom in the 1990's was the geopolitical collapse of the Soviet Union and the reduction in military spending. Now those trends are reversing.


So you have a very troubled world situation. In our view, the U.S. market is extremely artificially valued. What we see is interesting is certain emerging markets because of all the doom and gloom and the energy markets. That looks interesting. That looks interesting because those have been to a large extent oversold. But the whole situation is very problematic and we see virtually no sign on the political horizon - with the possible exception of something like Mike Bloomberg - of the politicians in America coming to terms with this. If you look at the Democratic and Republican presidential candidates you see a complete disconnect from reality. In the Republican side you're talking about trillions of dollars of new debt for tax cuts that can't be paid for. On the Democratic side, Mrs. Clinton is probably the least bad of the situation for what you have are in terms of the budget, but even there you have a total failure to come up with a plan for the budget deficit, and Sanders, while well-intentioned, has come up with the plans that will just totally balloon the deficits. So this is a not a good situation.



This situation is very similar to France before the revolution, where you also had a dysfunctional government that did not deal with debt problems. You could make an interesting analogy of the way that France and England dealt with the huge debts from the Seven Years War. England raised taxes and that caused a tax revolt here in America due to the corruption of the British political system which wouldn't let the colonies have seats in parliament. But England did emerge successfully as a world superpower in the 19th century because it had dealt successfully with its debt. France by contrast had one collection of gimmicks after another; very similar to the way America has dealt with debt since 1981. It's particularly troubling in the year 2000 that when after a bloody cost, Clinton finally got the deficit back to about zero, which was still not good in light of all the debt that been piled up, and then Bush just dropped a hydrogen bomb on the whole U.S. federal budget with more idiotic consumption oriented tax cuts, and $3 trillion for a war in Iraq that was a total disaster. Meanwhile Obama expanded intervening around the world with all sorts of imperial delusions. So again this is not good. So the point is to be prepared for trouble. That's the point. To be prepared for trouble. Yes. And to think through what will be the implications of that, which we'll discuss in future lectures.