Government Stimulus, Private Money, Credit, and Risk

[Joe Leote]

This is an outstanding talk in which Andy Constan clearly and accurately explains how the mix of government stimulus, Fed balance sheet operations, and circulation of funds via private credit market deals (I call this financial deal flow) all combine to drive the economy forward, or into inflation, or into asset price deflation during the episodes of unstable political-economic forces:

https://youtu.be/q47j40_q2fk

One topic is how to finance reshoring of strategic industry to the United States. Economist Hyman Minsky, if I understand his inflation model, would regard this as an inflationary impulse, which shifts American GDP away from consumption goods toward a mix with more investment goods. If private credit markets do not elect to finance industrial policy in the United States, and the federal government decides to reduce investment risk by picking industrial winners and losers, then we may see the emergence of State Capitalism with American Characteristics:

Risk #6: State capitalism with American characteristics | Ian Bremmer on 2026's Top Risks

I don't think the concept of State Capitalism is consistent with what we call The Rule of Law. The danger of State Capitalism, functioning without an independent legislature and independent judiciary, is that investors and citizens fear the Autocratic Ruling Party will take away their private property on a political pretext without protections otherwise provided under the rule of law enacted by the independent legislature with disputes resolved by the independent judiciary. The independent judiciary, and other government officials who act as if their oath to the Constitution restrains their worst corrupt, kleptocratic, and autocratic impulses, is what gives one the sense of individual rights and secure property rights in liberal society. Money in the bank, and other forms of property, are not secure against the whims of an Autocratic government. Autocracies don't have independent institutions, and therefore, rule of law is a sham in an Autocracy.

China's industrial policy, it's version of State Capitalism, has been quite effective at attracting industry to facilitate technology transfer and know-how from other technologically advanced countries; at enabling innovation and competition by subsidizing selective sectors of the economy at appropriate times; and now partly forcing the West, led by the United States, to play geopolitical chess on new terms or lose some of the strategic advantages in the long run.

Joe

[Joe Leote]

Around 20 minute mark Andy says spending becomes saving. The GDP equation is more comprehensive:

S (saving) = I (investment spending) + G - T (government spending in excess of taxes) + M - X (imports - exports)

Spending on consumption goods does not increase financial savings. Spending on investment goods, government deficits (fiscal stimulus policies), and net imports increase the domestic float of financial savings. If I recall correctly, Austrian school of economics argues that financial saving must precede investment spending while Post-Keynesian school argues that credit plus the decision to spend on investments creates financial savings. Financial savings (the float of financial assets and corresponding liabilities) are created as promises by what I call the financial deal flow. The commitment to spend funds combined with financial deal flow mechanisms create the financial savings and corresponding liabilities.

Joe

[William Meyer]

Will definitely watch this as I'm an Andy Constan fan.  He had left twitter (X) last time I checked after being harassed for making some bad market calls.  I guess he is back now though.

I'd have to review Theory of Money and Credit to see if it covers that but might be more a Menger question.

The round tripping that has funded a lot of the AI stuff for 2025 suggests the Keynesian take describes the modern economy better.

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[Joe Leote]

Just for clarity, a quote from Google AI Overview says: "Round tripping in AI finance refers to a cycle where major companies invest in one another and then use that capital to purchase services or hardware from the original investors, creating an artificial appearance of robust, organic demand and revenue growth. The long-term implications are significant, primarily raising concerns about economic instability, systemic risk, and market fragility."

Besides rigging financial statements (corporate self-dealing concealed as arms-length business transactions) one of the major political and financial problems caused by AI now is rising electricity costs to retail customers who may be subsidizing the build-out of grid infrastructure to service the demand for physical data centers. 

Joe

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