When people are using their income to service debt they are not using it to buy the goods and services that sustain demand and grow the economy. If we continue on the path we're on the small elite that have the wealth to make the loans will receive most of the national income. Inequality will continue to increase, spending on goods and services that drive growth will diminish, and the economy will go into another depression. It's really not that hard to understand. We need to reduce taxes on earned income and increase tax rates on investment income to rebalance the economy and strengthen the middle class that creates the demand and generates growth.
A productive economy that furnishes goods and services and employs people requires credit to finance capital formation that is necessary to accommodate the increase in population and the advancement of technology.
But, there is another kind of credit that is parasitic on the productive economy, namely credit that is used to bid up of the price of assets through speculation.
Credit is always accompanied by debt. If credit for investment does not contribute to productivity increases and employment of a growing population, its accompanying debt becomes a drag on the economy. If earnings are used to pay interest on debt and retire principal they are not available to buy the goods and services an economy produces. Only if the economy benefits more from the investment than it loses from this drag on the economy, is the investment valuable to the economy.
If laws are enacted that advantage capital formation beyond what is necessary for productive investment, investors turn to speculation to sustain their return on investment. So there must be a balancing of taxes on income earned from investment and income earned from production of goods and services.
In the past several decades lower taxes on investment income have led to capital accumulation beyond what is necessary to finance production growth and investors have turned to speculation, primarily in real estate and stocks. As more loans are made to finance asset purchases at a lower interest rates, prices of assets like real estate and stocks are bid up. The increasing price trend reinforces this type of speculative investment. Investors use increasing leverage to take advantage of the opportunity until a point is reached where risks are being taken which jeopardize the entire enterprise. Finally, it comes crashing down, as prices stagnate and borrowers find themselves unable to service the loans. This is the financial crisis we have just experienced.
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