by Charles Hugh Smith, Of Two Minds:

Ours is a Wile E. Coyote economy, and now we’re hanging in mid-air, realizing there is nothing solid beneath our feet.

The story we’re told about how our “capitalist” economy works is outdated. The story goes like this: companies produce goods and services for a competitive marketplace and earn a profit from this production. These profits are income streams for investors, who buy companies’ stocks based on these profits. As profits rise, so do stock valuations.

It’s all win-win: consumers get competitively priced goods and services, workers have jobs producing goods and services and investors earn a return on their capital.

Sadly, this is a fairy tale that no longer aligns with the reality that the U.S. economy is now a decaying billboard of “producing goods and services” behind which the real money is made in financial engineering, a.k.a. legalized fraud. Take everyone’s favorite stock, Apple. The fairy tale is that Apple is in the business of making mobile phones and providing services to this customer base.

According to the fairy tale, Apple’s rise in value from $400 billion to $1.4 trillion is based on higher operating earnings, i.e. profits. But if we look at Apple’s operating earnings (see chart below), we see that they’ve been flat for years. So why is Apple worth $1 trillion more than it was a few years ago if profits haven’t risen, much less tripled?

The answer is financial engineering: Apple sells bonds that pay a paltry rate of return and then uses the proceeds from this debt (and most of its actual profits) to buy back its own shares–an astounding $338 billion over the past 7 years.

But look at the return on this legalized fraud: $338 billion added $1 trillion in “value” which can be sold by insiders to greater fools who believe the fairy tale.

All the “wealth” created by financial engineering / legalized fraud is fictitious, i.e. phantom. It’s based on leveraging debt and trickery, not on profits earned from producing goods and services. Virtually every “success” in America is not from producing goods and services; it’s based on leveraging debt, stock buybacks, asset bubbles, marketing (Facebook and Google) or skimming the thin layer of cream off the global supply chain (Walmart and Amazon).

Correspondent A.P. explained how the economy actually works in the following essay.

We humans don’t have the brain power to figure out the cause and effect of everything we do.

So, we create stories, shorthand rules of thumb that allow us, based on our previous observations, to predict how the world works.

When the predictive power of one of our stories fail, humans, being emotional rather than rational creatures, will bend over backward to make excuses for the story rather than telling ourselves that, in constructing the story, we ourselves were wrong.

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