The Collapse of Effective Demand

Aggregate Demand = Consumption + Investment + Government + Net Exports

I’ve included all series in nominal dollar terms because that’s what matters in the end, whether the dollars are flowing or not. All series are relative to an index equal to 100 in 1990:1. Net exports was more volatile so it got its own scaling on the right axis (note that the index is positive, even as we ran a negative trade balance).

Investment and net exports have collapsed the most. Consumption is bravely trying to get back to where it was in early 2008, but will probably not get there. At the risk of a busy graph I’ve included wage and salary compensation of employees; it has tanked more than consumption. So there is some question what’s going on with the consumption numbers, as Contrary Investor points out, possibly transfer payments. The (ridiculously named) Permanent Income Hypothesis tells us consumers may just be adjusting to the new realities slowly. (Why couldn’t Friedman just call it an adaptation level, and fall in line with the central currents of scientific thought? Why couldn’t Shiller and Akerlof cite the most important paper published on “animal spirits” in the past twenty years? Such is arrogance and provinciality of economists.)

Investment spending is usually more responsive to my “animal spirits” measure. A technician would look at the government spending line and say “looks hyperbolic” and therefore unsustainable. Government spending has been growing at a faster than exponential rate over the past couple of years. The econophysicists have shown us that faster than exponential growth is a signature of a process heading toward a “singularity,” or phase change, or crash, in the case of stock markets. It’s reasonable to suppose a similar process must organize government spending.

Comments

[User 353732:]

Govt spending is the mechanism by which resources are forcibly shifted from the Productive Economy to the Parasitic Economy i.e. from positive value added activities and innovation to zero or negative value added activities and ossification.
Govt spending feeds the big and the useless at the direct expense of the small and the useful. As a consequence, the Productive economy is shrinking while the Parasitic economy is growing.

The manifestations of this phase shift in the US economy are :
irredeemable debt

dying dollar

structural Middle Class unemployment and underemployment

compressing Middle class net worth and after tax income

massive small and new business bankruptcies and a collapse in business start ups

unemployment amongst new entrants to the labor force, including college educated entrants, at depression levels
deteriorating quality of corporate revenues and earnings

The US Regime says that none of this matters. We have a "V" shaped recovery that no longer depends on the Productive Economy. Debt, fiat money, transfer payments, imports and Wall St bonuses are the new engines of growth in the amazing New Economy.

Unless current trends are reversed, truth and the US Regime will collide with explosive force. There will be a tipping point where the parasitic economy consumes the productive economy so voraciously that national economic regeneration and renewal is no longer possible.
Then, we will really see and know what a systemic collapse in effective demand means: it means the annihilation of the Middle class and the descent of America into moral, intellectual, cultural and financial bankruptcy.

Nov 11 06:25 AM

[JudeJin:]

the wage levels across the pacific are too lop-sided. the crash of real wages in the USA is inevitable.

the reversal of fortunes between china and usa will be the most spectacular.

Nov 11 09:12 AM

[bob adamson:]

I have the following questions for the writer of this article and for others commenting on the article:
Were the US and global economies faced with a clear and present prospect of a deflationary collapse and consequent chaos in the fall of 2008?
If so, should attempts to prevent this collapse have been made then and if so what should these have entailed?
If stimulus measures were inappropriate last fall or are inappropriate now, what is to be done?
Given that there is no public policy that doesn’t have costs and some negative effects in addition to whatever positive effects it is intended to achieve, what negative effects do people need to be prepared to accept if the measures you would propose in place of stimulus were to be implemented?

These are the questions that anyone proposing public policy (remember that withdrawing the state from attempting to influence the economy is itself a public policy) should be prepared to answer.

Nov 11 02:38 PM

[Jim Nash:]

Peak USA occured about the time Dwight Eisenhower left the
White House , or shortly thereafter but probably no later than
1967. Unpaid wars during the Vietnam era coupled with Nixon's
closing of the gold window followed by more deficits during the
Reagan years , followed by NAFTA pretty much put the the
nails is the coffin. Bush came in and just super accelerated the
process by 25 -35 years making sure there was no way of ever
reversing the trend.

Nov 15 04:38 PM