The Ultimate Transparency for Capitalism

Barry Ritholtz is talking about the Bull market coming to an end. It is no surprise to me. My equations of effective demand may finally be cracking the code of the business cycle. But I want to say that knowing where the business cycle ends is the ultimate transparency in capitalism.

Barry, as usual, makes intriguing comments…

“Why the sudden shift, from excess bullishness and exuberant expectations of more double-digit gains, to a recognition that perhaps the party won’t go on forever? You humans seem to desperately search for a simple narrative that explains complex events of unknown causation.”

Yes, the question sounds forth… “What the heck is happening?” The answer is quite simple. The effective demand of the economy is showing its constraints. Labor share has fallen so much that we will not return to what used to be considered full employment. This limit could have been known years ago as the recovery was taking shape.

He concludes…

“Hence, a correction is not simply the random meanderings of a complex system comprised of the buying and selling activities of millions of participants, but rather must have been caused by stocks that were too pricey, or earnings that have not lived up to expectations, or the development of big trouble in China. The problem with these rationalizations is that all of these things were well understood by markets — and have been for some time. None are surprises, and none reflect information that is new or was especially unknown previously.”

Not everything was well understood by the markets. They did not understand the effect of a falling labor share. Economists don’t even understand it. Markets thought that lower wages would raise competitiveness and thus increase economic potential. No… they were wrong. Lower labor share constrains production. Economists haven’t even adjusted potential GDP yet.

If it was common knowledge where the business cycle ended, there would be less surprises, . Markets would be less volatile, less disturbing. Stock prices would be more reasonable.

The United States though is reaching the end of its business cycle. I have said that in 2014, stock markets will occasionally fall and then rebound some, until eventually they just keep falling. That is a normal pattern near the end of a business cycle, as many are led to believe there is a tremendous upside… when really there isn’t.

Society as a whole would function better if markets had a wisdom of when the business cycle ends. Actually it would be easier to maintain output at a sustainable level. So much craziness and delusion would go away.

A clear understanding of the effective demand limit upon the business cycle would be the ultimate transparency for capitalism…

and Dare say… capitalism itself would function better…

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