Even with the macroeconomic effects as valid the mode of thinking is so painfully backwards and entitled in so many ways.
1. The job of the producers is to produce what the consumers want, not the consumers to accept whatever they want to produce! It is not a birthright to guaranteed profit from whatever they want to produce being sold. That has never existed. It brings to mind every idiot CEo of a business which failed to adapt bemoaning "murder by millenials" and wondering why they aren't getting new customers among those they insulted for products they don't even want in the first place.
2. If credit flow is required for the economic velocity it hints at an insufficient amount of solid currency in the economy and the interest costs are deterring spending exactly as intended. Even if taken for granted that the boost is needed doesn't mean that a consumer credit bubble is the best way to do so.
2a. If saving is not desired behavior retirement must be guaranteed in spite of lack of it. Asking for changes with no viable alternative is a fundamentally an unreasonable demand in negotiation. If you don't want a population explosion as 8 kids is the accessible way to be supported in old age then provide elder's pensions or stop complaining about population growth.
2b. Even if they could keep on using credit until they die the gains would be unrealized as the music stops even after they claimed the estate the debt would be written off. Continually rising consumer debts are a bubble because they are not immortal conglomerate entities like corporations or governments.
3. A drop in demand given available means of payment or credit implies a failure to at the same provide utility and provide a pathway to payment.
Essentially the answer to the economic problem isn't more consumer debt and pretending this fine but solving the root problems in a profitable way.
Good analysis. Relying on credit to enable consumer spending happened in the mid 1920s as stagnant wages, and income inequality reduced the discretionary budget of most consumers. At best spending on credit is a temporary boost to the economy as consumers will eventually be tapped out and spending will stop.
I agree with you, consumer debt isn't the solution, more affluent consumers is the solution. Raise wages, sell better products. Its like Henry Ford said when he gave a very large and controversial raise, your employees should be able to afford your products, if they can't, you might not have a market. As leaders of companies, we should return to the value system of generosity because that will actually support more market activity.
This sounds exactly like what's happening in America today. Bring jobs back to the country, which elevates wages due to low unemployment, high worker demand. Bring manufacturing back to the country, which causes better products by them being designed closer to the people who would consume/use them.
This is the opposite of what's happening in America today. Wages have not elevated in decades, there is an odd inflation that is only needs specific (food, housing, education), even the manufacturing that comes back to the country is usually automated so there are very little jobs brought by it.
Two problems with this analysis and data. 1. These gains aren’t enough to undo the decoupling of wages from productivity that has resulted in real wage stagnation. (See here https://www.epi.org/productivity-pay-gap/ ), 2. These wage increases haven’t exceeded inflation so actual household spending power has decreased in real terms. Basically consumers have less ability to spend because more profit is being captured. The problem is this profit capture (i.e. the spread between productivity and wages) is good for companies in the short term but damaging in the long term as the market shrinks due to decreased demand. After a thirty year trend of this dynamic America is reaching a brick wall where consumers will be tapped out and growth will stagnate.
But it’s not though. There were wage increases in the 90s, mid 2000s and then the ones you site. Those relate to the business cycle and don’t undo the structural problems and trends that I highlight.
Is that happening?
USAmericans can't afford what they consume; the economics only add up when most the work is imported from subsistence workers and slaves.
(I almost said ”offshored" but Mexico and South America)
Agreed. When I read a business article that’s so far off base I have to take a moment to understand who wrote it. In this case —as is often seen with reality-challenged articles— the author has zero business experience and zero training in finance:
He is a journalist who worked for Fox and now CNN and likely doesn’t know what he is talking about.
Before someone jumps on the apparent logical fallacy, let me point out that I started by saying his argument isn’t sound or valid, as the comment I am responding to correctly explains.
> The job of the producers is to produce what the consumers want, not the consumers to accept whatever they want to produce!
But that is the current general practice of software, especially online interconnected software, to force acceptable product preferences to the consumer without regard for consumer demand or competition. Developers typically dictate the choice of architecture and framework and then specify acceptable ranges of performance and design allowed by that framework utterly without regard for what the user wants or willing to pay for. That is developers putting their personal technology preferences before the user concerns or business revenue goals. When you point out the nature of ethics violation the developers most concerned by those technology preferences get really emotional, perhaps hostile. I have seen this at every software job I have held and it’s not limited to any language or class of technologies.
No one forces you to buy or use software. How is software different than any other product? It's engineered a certain way, and offered to customers, who either buy it or do not.
Companies who develop products without regard for consumer demand or the competition are eventually unemployed. They may have a defacto monopoly for a time, but it inevitably ends.
Competition is not only real, but fierce in software, as anyone in corporate IT management will tell you. Because my damn phone never stops ringing with hungry software salescritters vying for my attention.
> How is software different than any other product?
Software is unregulated.
> Competition is not only real
You are imagining an unstated opinion. I never claimed competition is absent from software but that software developers make decisions without regard for that competition and impose those decisions upon their products without regard for their users or business revenue.
> Companies who develop products without regard for consumer demand or the competition are eventually unemployed.
That sounds like hyperbole. Advertising companies, as an example, do very well without regard for competition or the end user. Companies will continue so long as they are cash flow positive.
Bitch about people who didn’t save for an emergency expense or for retirement. Bitch about people who spend frivolously. And now, miraculously, bitch about people who are saving.
This is not a complex problem. If you want people to spend money you must give them a proper safety net. That means pensions and health care.
From talking to others, a lot of people are saving money whether they want to or not.
People are eating at home, preparing their own food. Nobody is driving and spending money on gas and tires. No living large with nights out on the town or big travel plans.
I think lots of folks with their modest indoor activities or dog walking aren't spending just because, not because it is premeditated.
Though a lot of my friends who are thrifty are complaining about nothing being on sale anymore.
Not where I live. I'm seeing take-out restaurants thrive.
My family usually eats out twice a week (plus a date lunch for wifey and I), but since corona we've upped it to 3 meals a week to help the restaurants. I think others might be doing similar things.
I think there'll be a shakeout. Restaurants that serve takeout well will survive and eventually thrive, those that rely on sit-in will suffer and maybe close.
People should save even in a healthy economy. You should always have emergency fund + additional saving to reach your goals.
Investors do save as well. Much more than average consumers. The difference is that average consumer doesn’t have enough to buy assets or diversify their saving as much as investors can do.
Profligate spending has been good for the consumption based economy, and bad for the vast majority of Americans who lack rainy day savings. Let alone something more serious.
If self-reliance and personal fiscal responsibility is a "threat to the economy" then the economy is part of the problem.
We've gotten efficient enough of producing the basics that we don't need everyone or maybe even half of the available labor market to do it.
That means either a good chunk of people have to be employed doing stuff driven by unnecessary spending, or they don't have employment. And we aren't great at distributing necessities to those who don't have employment.
You could say the economy is part of the problem.
Or you could just say demand drives employment, which means when demand for non-necessities drops, so does employment.
Demand doesn't necessarily have to be US demand, though.
For the past few decades US consumer demand has done a lot of heavy lifting for the global economy. Why can't more of this come from other big markets like Germany or China?
If you want germans and chinese to import your production, you'll need to raise standards to meet theirs. For pork, this has already started happening: Hormel, JBS, and Tyson are no longer taking ractopamine-dosed hogs, even though they're still legal to sell to US consumers.
To be quite clear, I'm not saying that only US goods need to be bought by Germans and Chinese. Those consumers are generally thrifty overall relative to their share of the global economy, and a global economy based on one country's consumer demand is simply not going to be a healthy one.
High German savings was one of the things that led to the Euro crisis, since you cannot simultaneously run trade surpluses with all your neighbors and then be surprised when they are running deficits as a result. In the same vein, Chinese over-saving has led to a domestic property bubble that is a house of cards waiting to fall apart once people can invest their savings in something that isn't an apartment.
As far as your point about global goods, I don't think that China, a place where hundreds of thousands of infants were poisoned due to illegal substitutions in baby formula, and people get told to look for reused "gutter oil" in street food, has a leg to stand on when it comes to food safety.
You can start shorting chinese real estate: I was just reading the other day that WTI going negative had badly burned many chinese retail investors. (as for germany, I'd call that an argument against currency unification ... but that's an entirely different thread)
If a country saves too much forex, one can slap sanctions on them for being a "currency manipulator". If a firm saves too much cash on hand, one can find a corporate raider (which the germans and chinese also have) to make a hostile LBO.
However, for thrifty households, there don't appear to be any similar sticks, only carrots. How would you propose to incentivise german and chinese households to consume more than they do?
see https://en.wikipedia.org/wiki/The_Space_Merchants for a 1952 prediction of where "the consumption based economy" winds up. the original CNN article is not far removed from the initial attitude of the protagonist...
It's only a problem if you subscribe to (in my opinion, the flawed and incredibly destructive) modern economic theory which is largely a continuation of the Keynesianism of the mid-20th century. Ask any economist why deflation is a bad thing and they will generally tell you that it is because they want to avoid a deflationary spiral with collapsing prices and high unemployment, which is why they want to ensure that consumers mindlessly consume and ensure that prices are kept "stable" (in their opinion, stable prices mean a positive inflation rate of 2%, which in my humble opinion does not make sense in pure mathematical terms).
However, there are two fundamental and overlooked errors in the assumptions that underlie this theory:
a) there is an assumption that consumers/agents are homogenous in their preferences and that people would rather starve to death than give up the opportunity to spend their money when it is worth more in the future. No sane person is going to wait one year to wait out some insignificant appreciation in the value of the money. People will still need to consume food and many of them would prefer to buy things now than in the future (consumer time preference, i.e. the desire to want things now rather than later, is always positive). For some inexplicable reason, time preference is completely ignored in the foundations of the theories that underpin modern monetary policy.
b) the second main assumption is that money saved is money that is unproductive. This is false: savings lead to investment in the economy as resources that would otherwise be consumed are redirected into lengthening production structures in the economy. Put simply, this means that if more people put money in the bank, the bank will have more money to lend out and interest rates would fall, allowing entrepreneurs and companies to invest in production structures which in the long-run will lead to higher quality goods and cheaper prices.
Of course, in the current highly distorted economy, deflation is disastrous as companies which are addicted to debt will need to be liquidated as there is no longer a steady stream of money coming in through inflation. This will likely lead to a severe recession, but this is not a bad thing as in the long-run the economy is better off as inefficient businesses who are addicted to debt and cheap money will no longer be able to operate, and clever entrepreneurs will be able to take their place.
It is savings that build up capital structures in the economy, not consumption which largely distorts and even destroys said structures, and the faster we stop this destructive inflationary monetary policy the faster we return to sustainable, fair, and real economic growth.
> b) ... this means that if more people put money in the bank, the bank will have more money to lend out and interest rates would fall
This is not how lending works for banks in the western world. Banks do not lend out their customers savings.
Basically banks are legally allowed to create money out of thin air. They are only limited by their equity in how much money they can create as they have to reserve a certain amount of equity for each unit of created money.
They don’t lend out their customer’s savings directly per-se but you have to have deposits in order to have assets to lend against. Otherwise, why wouldn’t you be able to create a bank out of thin air and loan money? Customers cost money, why even have them?
I think what you missed in the article you linked is the concept of reserve requirements. What the person you’re responding to said is actually correct, again otherwise why wouldn’t a small regional bank be able to lend the same amount of money as JPMorgan Chase? The more deposits you have, the more you can lend.
Lending is tight to a banks equity. Prior to Basel II (early 2000s) this was some 8% per loan. So the more equity you have, the more loans you can provide. As small regional banks are unlikely to have the same amount of equity than JPMorgan Chase, they cannot provide the same amount of loans.
It's just as true to say that depositors create money or creditors create money. Perhaps more true to say that the FDIC creates money by insuring deposits.
The whole system creates money. And it's not some weird sort of stealing (unless a creditor defaults, of course), it's a lubricant and catalyst of economy, and why I don't have to maintain a herd of cows just for use in trading my computer software for your pickles. Money (currency) is only useful when it moves, so creating it is good for people.
Anyone can create money. If I write "IOU a chicken, redeemable by whoever holds this paper" on a sheet of paper, I just created money (but not US legal tender fiat currency)
On balance this is a good thing but any trend taken too far is a problem.
That being said the time to safe is when the economy is good not in the heart of a crisis. It’s sad that human cognition is so short sided and blind to long term risk. It’s sad that 20 year olds ignore retirement and lose compound interest and then scramble to save in their 50s.
As bad as it is, I feel like this is our chance to do some large scale norm changes. Eg. Shorter standard work week, more time off. No as some liberal/socialist agenda but as a way to reach full employment again. I don’t think we’re ready for basic income, but whatever the right stepping stone is, I think govt has a big enough reason to address it now.
Another thing is to stop tying healthcare to employment via tax benefits for employers.
So many people are stuck in less than ideal jobs because the employer-provided healthcare system is nuts. On top of that many of these plans aren't even that great any more.
It seems that giving free healthcare, a free place to live, enough food and internet to everyone would be a good idea to stimulate the economy. Jobs would be generated by themselves if people then want a higher standard of living but no longer have to fight to survive.
> No as some liberal/socialist agenda but as a way to reach full employment again.
You know that this is bascially the same reason socialists are in favor of shorter working weeks, right? Their "socialist agenda" is virtually the same as your reasoning.
I made that comment more so because normally our extremely polarized bipartisanship would prevent these types of changes from being made. Even if someone like Bernie was president, no way his agendas make through legislative branch.
This depression will test our country’s ability to rally and cross political lines for the good of the people the way we have in the past. Something that previously was far left may seem viable to right leaning constituents when they’re struggling to meet basic needs.
The trick is framing. Simply frame it as "put America back to work" and "making it easy to work" and you sidestep most of the red scare trigger words.
Part of the decline of the American left in formerly blue collar areas, IMO, is simply that it has become more academic and less attempts at sloganeering or actually doing work to reach out to disaffected people; polls keep revealing that Americans actually like the nitty gritty of the policies but that the marketing of it sucks.
So stim everyone again. That's just a tax on the entire population that will give the poorest some spending power. Stim everyone really hard. Consumer-level QE, HM, whatever. Apply stim to forehead.
1. The job of the producers is to produce what the consumers want, not the consumers to accept whatever they want to produce! It is not a birthright to guaranteed profit from whatever they want to produce being sold. That has never existed. It brings to mind every idiot CEo of a business which failed to adapt bemoaning "murder by millenials" and wondering why they aren't getting new customers among those they insulted for products they don't even want in the first place.
2. If credit flow is required for the economic velocity it hints at an insufficient amount of solid currency in the economy and the interest costs are deterring spending exactly as intended. Even if taken for granted that the boost is needed doesn't mean that a consumer credit bubble is the best way to do so.
2a. If saving is not desired behavior retirement must be guaranteed in spite of lack of it. Asking for changes with no viable alternative is a fundamentally an unreasonable demand in negotiation. If you don't want a population explosion as 8 kids is the accessible way to be supported in old age then provide elder's pensions or stop complaining about population growth.
2b. Even if they could keep on using credit until they die the gains would be unrealized as the music stops even after they claimed the estate the debt would be written off. Continually rising consumer debts are a bubble because they are not immortal conglomerate entities like corporations or governments.
3. A drop in demand given available means of payment or credit implies a failure to at the same provide utility and provide a pathway to payment.
Essentially the answer to the economic problem isn't more consumer debt and pretending this fine but solving the root problems in a profitable way.