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Towards a More Nuanced View of Credit: Consumer Credit

 One of the common tropes of economists is that "Credit Creates Demand".  I claim that credit only creates demand under very unique circumstances-and Consumer Credit is not always a creator of demand.  The "Dollar Multiplier Effect" touted by Keynesians is attenuated by current prominent business models that allow retailers to sell to developed world consumers without having to pay developed world wage rates for manufacturing labor.  Absent conditions sympathetic to a "Dollar Multiplier Effect", Credit is not a universal creator of demand, but only a vehicle of existing and pending demand.  While extension of credit to consumers may create a momentary appearance of demand in consumer markets, that appearance is illusory, and will eventually result in a "demand trough" as we've seen recently with the housing market.  This phenomenon has broad implications for consumer behavior and government policy. 

When credit is merely a means for consumers to purchase goods, and those goods are frequently of questionable quality and are designed to have a limited useful lifespan, the social utility derived from economic transactions is essentially null. Keynesians may argue that the "dollar multiplier" effect stimulates dollar velocity throughout the economy, but this argument is also invalid.   When the majority of productive work that goes into the manufacturing of goods is done in foreign markets and the administration of retail functions is done remotely-as in a big box store where the majority of funds for sales are siphoned back to a central management and supply office-there is little to no community wealth or-for the Keynesians-"Dollar Multiplier Effect" derived from consumer sales at the community level.  The business models employed by many large retailers do not provide the kind of geometric economic growth dreamed of by economists, but may even act as siphons-sucking wealth out of the communities those stores inhabit.  

Without the benefit of a Community Wealth (or "Multiplier") Effect consumer transactions don't effectively contribute to the public weal, and credit is not a creator of demand, but only a vehicle of existing and pending demand. Credit has the potential to accelerate consumer demand periodically, but that periodic acceleration in demand will inevitably lead to a trough in future demand for the simple reason that use of credit instruments demands fulfillment of debt maintenance obligations in order to preserve credit market equilibrium.  Interest paid on debt maintenance obligations also goes to non-local markets and ends up mitigating any local benefits from the use of credit instruments-thereby actually reducing total potential economic demand at the community level, and leading to a general reduction in dollar velocity at that community, or "Main Street" market level.  

This post is the first in what will be a series of posts discussing various aspects of the use of credit. 

  



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