Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Consumer Spending Won't Save the US Economy from Depression

Economics / US Economy Jun 02, 2008 - 08:37 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleRegardless of the spiteful attempts of the Democrats and a corrupt media, the US economy is not going to sink into a depression. (When in 2000 Cheney observed, correctly, that the economy was in recession he was accused by the same corrupt media and the Democrats of trying "to talk down the economy"). Some economic commentators have stressed that based on a year-over-year basis GDP rose by 2.5 per cent in the first quarter of this year, most of it due the country's export boom.


That exports are booming is due to the dollar's fall against the currencies of its trading partners. The error with respect to exports is the old one of confusing GDP with economic growth. The expansion of exports means that more production is being directed to foreign markets. However, growth is capital accumulation — not exports. If a country is not accumulating capital it is not growing, no matter how much it exports.

Then we have the economic commentariat once again focusing on consumption as the cause of growth, not realizing that stimulating consumption can drag an economy down. Some readers are still puzzled by this claim. In their opinion this view not only runs against common sense but also against the current economic orthodoxy.

Before going any further allow me to stress what every economist is supposed to know: economic growth is forgone consumption. This means that investment, spending on capital goods, can only take place by directing resources away from current consumption. It therefore follows that the reverse is true. Increasing consumption at the expense of savings results in resources being redirected from investment and hence future consumption.

To avoid confusion I must elaborate further. Increased investment expands the production structure which raises real wages and increases future consumption. Hidden within this statement is the concept of balance between savings (investment) and consumption. This concept should never be lost sight of. So long as the balance is maintained living standards will continue to rise. Credit expansion disturbs the balance and generates the business cycle.

What matters for any economy is not consumer spending but total spending, particularly between the stages of production. But even this, as the concept of balance states, is not enough. So long as the amount spent on investment corresponds to the country's real savings ratio balance is maintained. The problem starts when monetary policy throws this balance out of kilter. Should monetary policy result in rising consumption the effect will be to create a profits squeeze in the higher stages of production causing manufacturing to contract.

As Hayek put it in the The 'Paradox' of Saving (1929), higher stages become unprofitable "not because the demand for consumption goods is too small, but on the contrary because it is too large and too urgent to render the execution of lengthy roundabout processes profitable". In fact, even if savings were increased their beneficial effects could be more than cancelled out by an increased demand for consumer goods.

What this amounts to is that a rise in demand for consumption goods relative to producer goods causes much of manufacturing to contract. One should be able to easily see this if one thinks in terms of relative prices, which economists do — until it comes to investment and consumption spending. Raising the demand for consumption goods relative to producer goods causes non-specific factors to shift to the lower stages of production, those close to the consumption stage.

Now these factors, like all factors, are complementary, meaning that they have to be used in cooperation with other factors. Shifting non-specific factors from one line of production to another therefore sees the abandonment of specific factors, factors that only have one function. This can cause productivity to fall and excess capacity to emerge when the shift is towards consumption. Even though employment would fall in manufacturing the employment level could still be kept comparatively steady by the increased demand for labour in the lower stages of production.

As this process gets underway labour costs in the economy rise even as manufacturing employment falls. This is the final stage of the boom. Now the final stage was so well documented in the nineteenth century that Marx used the phenomenon in his attack on under-consumptionists, those who argued that increased consumer spending would avert depression. Economics has now advanced (I should say retreated) to the stage that arguments that were rightly rejected by the classical economists, of whom Marx was one, are now unthinkingly treated as a fundamental economic truth, especially by media commentators.

The effect therefore of policies that direct economic activity to increased consumption at the expense of production is to reduce the pool of savings which in turn causes the production structure to shrink. The long term consequences for living standards if such trends continued should be self-evident. We are left with the conclusion that encouraging consumption will deepen any depression and prolong its duration. Every mainstream Australian economist would vigorously deny this proposition. Funnily enough none of them appear prepared to defend their opinions.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Pierce Randall
10 Jan 09, 21:09
Well well well...

And this article is dated June 2008? And it's saying the US economy won't fall into a depression?

Hmmm... Seems like history had a different idea about things. See you $750 billion dollars from now...


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules