Thursday, March 20, 2008

The Trouble With Capitalism: more Market Saturation

Picking up where we left off, we get right into some of that material that nicely describes our current market situation, on pp. 36 & 37

This danger was one governments began to discover from around 1970, as they resorted to stronger than ever doses of fiscal and monetary stimulus to sustain growth.

And right now, we're hearing a lot of talk about whether the Federal Reserve even has enough power to keep things afloat. Lots of talk about "how many bullets do they have left."

This was reflected both in higher state budget deficits (reaching the equivalent of 1.1 per cent of GDP in the OECD area in 1970, compared with a surplus equal to 0.7 per cent of GDP ten years earlier) and sharply accelerated expansion of bank lending (see Chapter 4 [The Illusion of Orthodoxy]). Moreover, to the extent that such artificial boosting of demand was achieved by making consumer credit more readily available, it was simply serving to make future recession even deeper.

High US budget deficits: check. Accelerated bank lending: check. Readily (overly, even!) available consumer credit: check.

Deeper future recession: Well, we'll just wait and see about that.

This is because, by increasing the level of consumer debt relative to current income, it was making it more inevitable that a greater proportion of future income would have to be devoted to debt repayment in later years — to the obvious detriment of the level of consumption....

Naturally an important consequence of the slowing growth of consumer demand was that competition for market share intensified, leading to a drive to cut costs and hence in turn to a squeeze on staffing levels and higher rates of unemployment in most OECD countries in the late 1960s and early 1970s — that is, even before the end of the boom. Yet predictably this process, by squeezing purchasing power, did nothing to reverse the decline in the marginal propensity to consume of the population as a whole.

That squeeze is getting tighter and tighter these days. As the companies are racing each other to win that almighty investor dollar, they're throwing first the "dead weight" overboard, then the rudder, then the motor.... And demand is down, even though credit is way up, for now. In the end, of course, it might be worth pointing out that the net effect of the debt repayment Shutt mentions is to take more money from the lower classes, and transfer it to the investors. That goes not only for private, personal debt, but also for public government debt. When they talk about a $3 trillion cost for the Iraq war/occupation, a big chunk of that is for debt service. And that money doesn't just go up in smoke; it goes to whoever has enough money now to lend some of it to the government. China will get a big chunk of that, as has been pointed out, but of course there are private investors who will be making a shiny penny off of it, too.

This "marginal propensity to consume," by the way, is closely related to one of my own especial hobby-horses. There's another concept, the velocity of money, that I think needs an extra twist (added to it as it now stands, not replacing it). The best term I have for this idea so far is "specific velocity of money." The idea being, that it's a measure of how quickly a particular group of people (how they're grouped is irrelevant; could be by income quintile or percentile, by occupation, or by age, etc.) spends the wealth which they possess. It should be equal to annual expenditures divided by worth (net or gross? I'm not sure, but I lean towards net). It's certainly closely related to this "marginal propensity."

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