Getting to the Big Debt Crisis

I do not know if this information was missed by Dalio or the summary, but it needs to be mentioned either way.

The genesis of 2008 was 1965, when the JFK tax cuts began to take effect. The top marginal rate went from 91% to 70%. Lower rates gave the CEO class an incentive to cut labor costs and workers more money to spend on the same goods.

In the late 70s, Burns and Volker attempted to use monetary policy to control inflation, however the tax cuts on the CEO/donor class exceeded the cuts given to others, decreasing the top marginal rate to 50%. The CEO class cut labor costs and union rights. Investors received a normal profit so the CEO/Donor class received the lion's share of the savings.

On the fiscal side, record spending fueled GDP while deficit bond sales dampened speculation, although trade policy that favored consumption over production ate less of the tax cuts than a closed system would have, so assets inflated. Note that GDP investment has little to do with asset speculation, although asset inflation fueled household debt.

In 1986, marginal rates declined further and tax benefits were eliminated, save for second mortgage interest, which was a central precursor to 2008. Too much money for investors began to chase too few investments, so savings and loan instruments, fed by liquidity freed up by the tax cuts, crashed. Austerity on the spending side increased funds available for investment, contributing to the bubble.

Bush rationalized the tax rates, which increased marginal rates at the top from 28% to 31%. His failure to emote, however, cost him the election. Clinton increased marginal rates on the wealthy, which decreased savings at the expense of asset inflation as the peace dividend savings were absorbed by higher taxes. The capital gains cuts, repeal of Glass-Steagall and the decision not to regulate dividends fueled the tech boom, which was more about IPO offerings than innovation.

This gave Bush 43 an excuse to cut marginal tax rates, followed by a second round of tax cuts on capital gains and dividends. The rich had an incentive to invest, or rather to inflate or create assets that required the Fed to expand money so that second mortgage holders could use debt as the illusion of income.

In 2007, bad NYMEX oil bets crashed when Congress looked under the hood, forcing speculators to tap mortgage securities and CD Is, showing the car had no engine. Bailouts helped banks, but did not get to household debt, with Resistance from investor/brother populism rather than the real thing. Obama's failure to let tax cuts expire kept the deflation and depression at the household level alive until ATRA put limits on wealth concentration, allowed spending to increase as baseline discipline was shredded.

Trump has tried to take credit for the Obama recovery, but current growth does not come from the Tax Cuts, which hurt workers. CEOs again tried to keep a lid on wages. It is the increased spending which is leading to much needed wage growth while related bond sales mute asset inflation. This put the brakes on Bitcoin, our latest scam. The Fed is loosening the brakes. It should not. We have learned nothing from 2008.