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."

Counting the costs

This story in The Australian ties in rather well with my current reading, and helps bridge the gap of the decade since it was written.

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $US3trillion ($3.3 trillion) compared with the $US50-$US60-billion predicted in 2003....

Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $US500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.

The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.

The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.

Professor Stiglitz, an academic at the Columbia Business School and a former economic adviser to president Bill Clinton, said a further $US500 billion was going to be spent on the fighting in the next two years and that could have been used more effectively to improve the security and quality of life of Americans and the rest of the world.

The money being spent on the war each week would be enough to wipe out illiteracy around the world, he said.

Just a few days' funding would be enough to provide health insurance for US children who were not covered, he said.

The public had been encouraged by the White House to ignore the costs of the war because of the belief that the war would somehow pay for itself or be paid for by Iraqi oil or US allies.

"When the Bush administration went to war in Iraq it obviously didn't focus very much on the cost. Larry Lindsey, the chief economic adviser, said the cost was going to be between $US100billion and $US200 billion - and for that slight moment of quasi-honesty he was fired.

"(Then defence secretary Donald) Rumsfeld responded and said 'baloney', and the number the administration came up with was $US50 to $US60 billion. We have calculated that the cost was more like $US3 trillion.

"Three trillion is a very conservative number, the true costs are likely to be much larger than that."

This is just the kind of thing Shutt is going on about in this book. (My reading in it is currently far ahead of my posting about it.)

Afterthought (added 03-01): I might also point out that that sum comes to around $10,000 for every man, woman, and child in the United States. Enjoy your tax cuts!