Party like it's 1999

 The lyrics to one of the late Prince’s songs, “Party like it’s 1999,” seem more appropriate today as writers applaud new tech companies. In the late 90s, all an entrepreneur had to do to raise money for an idea was attach the suffix “dot com” to his company name and hot money would rain on him. That enthusiasm for tech stocks drove the NASDAQ to the stratosphere where the lack of oxygen makes people hallucinate. The crash that followed in 2000 punished the dreamers severely.

A similar euphoria is gelling around the fintech, or financial technology, that intends to transform finance. One fintech company is SoFi, a San Francisco based company whose founder claims it will do to banking what Uber has done to taxis. You may have seen its Super Bowl 50 ad, “Great loans for great people.” 

Macro-Prudential regulations have failed for 90 years

Mainstream economists, excluding those at the Bank for International Settlements, have stuck with their ancient superstition that recessions are random events, each with its own special cause, known technically as shocks that send the economy spinning out of equilibrium. Central bankers and politicians along with the mainstream media have rounded up the usual suspects, bankers, and sentenced them without a trial.

The general opinion seems to be that bankers were either too stupid or dishonest while making loans in the past so they made a lot of bad loans and conjured from hell the worst recession since the Great Depression. The guilty verdict requires that Basel and Washington control even more of the decision making process in what has come to be called “macro-prudential” regulations.

The Fed's Zombie Apocalypse

Economists are trying to figure out why the Fed hasn't generated higher inflation. According to Gavin Davies, "In most countries, headline CPI inflation has been falling significantly since the end of 2011, and it has now dropped to less than 1 per cent in both the US and the euro area." Here's a graph of inflation in the US and UK from Davis:

Five years after Lehman - Jobless Recovery Explained

Like a calf staring at a new gate, mainstream economists are mystified at the unemployment data that has given the US a jobless recovery for the past four years, five years after the collapse of Lehman Brothers.  Creative manipulation of the money supply by the Fed, massive bailouts of banks and other corporations, and historic federal spending have failed to lift aggregate demand. Why? Because all aggregate demand isn’t the problem.

Aggregate demand in mainstream economics has two sides, consumer spending and business spending, or investment. Mainstream economists forget that definition of demand. Also, they think that consumer spending drives aggregate demand because it makes up about 70% of GDP. However, GDP leads them astray because of the highly stylized and weird way it calculates business revenues. In reality, it is net domestic product, not gross, but that is a different post.
Austrian economics demonstrates that the investment side of aggregate demand does the driving, not the consumer side. Economist Robert Higgs uses net domestic investment to explain the jobless recovery in a recent article “The Sluggish Recovery of Real Net Domestic Private Business Investment"The Sluggish Recovery of Real Net Domestic Private Business Investment.”

“From these data, I have constructed the following index of real net domestic private business investment from 2005 to 2012, where the 2007 value equals 100:”

2005	81
2006	98
2007	100
2008	68
2009	26
2010	20
2011	36
2012	59