Friday, August 21, 2015

Savers revolution

Since the Great Recession, America has been on a savings binge. While federal government debt-to-GDP rose from 77 percent to 103 percent in the last 6 years, non-federal government credit market debt fell from 289 percent to 231 percent. The federal government debt rose half as much as non-federal credit market debt fell! America as a whole hasn’t been less indebted since the summer of 2007, and debt-to-GDP continues to creep lower. Americans aren’t taking out loans, they’re paying off debt and saving at rates not seen since the ’90s.

What this long-term decline in debt reveals is the American people’s rejection of the consumer economy and a commitment to living for the future as much as for the present. This also has ramifications for Keynesian economists. The central concern of Keynesians is how to stimulate demand to maintain growth and employment in the face of declining demand, or “consumers” not consuming. Tejvan Pettinger summarizes this “paradox of thrift”:

Faced with prospect of recession and unemployment, people take the reasonable step to increase their personal saving and cut back on spending. However, this fall in consumer spending leads to a decrease in aggregate demand and therefore lower economic growth.

You can stimulate demand by:

  • Government spending
  • Mandating consumption
  • Cheapening the currency

We have been fully engaged in all three. Don’t let the lowest federal budget deficit since 2008 fool you. Federal and total government spending have been holding steady at $3.5 trillion and $6 trillion, respectively, since 2009. The spike in government spending coincided with the Great Recession years of 2008 and 2009. Instead of going down, crisis spending levels have been maintained, belying the “recovery.”

Don’t let John Roberts fool you, either. Obamacare is a fine on non-participation in the health insurance market. Obamacare creates demand by legislative fiat; the demand is manufactured, but it is demand nonetheless. Eight million “customers” have been added to insurance agencies’ customer base.

Finally, zero interest rate policy (ZIRP) has cheapened the cost of money and debt. Federal Reserve policy is to tempt capital investors with cheap loans and to push savers to invest their disposable income in a reach for yield, rather than watch it lose value. Easy access to money means more spending, stimulating demand, in theory.

The Keynesian economy has been going full force for 6 years. The economy should be burgeoning with demand, overflowing with purchases and money changing hands thanks to the above policies. But record low money velocity shows money is going to sumps of wealth, heretofore stocks, bullish for 6 years but finally liquidating. Why is GDP growth at a paltry 2 percent? Why is labor participation at its lowest since the ’70s? Why are worker productivity and wages stagnant? A Keynesian might point at the debt-to-GDP ratios and say Keynesianism hasn’t failed, it just hasn’t been tried enough. After all, the federal government picked up only half the slack in credit market debt.

Signs point to not a shortfall of demand, but a fundamental shortcoming of the theory of demand as the engine of the economy. The last 6 years highlight the futility of Keynesian planners in the face of the market responding to the changes in attitudes and behaviors of hundreds of millions of people acting with the newly acquired knowledge that they cannot spend their way to prosperity. Real growth and prosperity is in the supply side, the innovations people risk to bring to the market.

To be continued...

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