John Plender has an article in the FT this morning under the title 'Deflation is a rising threat for markets' with the subheading 'The world is prey to the growing problem of deficient demand'.
I could not disagree more on the second point. The world is full of demand, for education, housing, jobs, security, health and social care and so much more.
What the world is prey to is a growing refusal of politicians to meet the demand that is within their capacity to supply because to do so would require redistribution of income and wealth and a growing role for the state. We face economic problems for that reason, and no other. There is more than enough demand to go round. There is a refusal to organise economies to meet it.
And the necessary reorganisation of the economy to meet the challenges we face is the real issue of the moment.
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Spot on yet again Richard!
Surprising agreement on many points has just appeared in the telegraph (see link). They also have an excellent collection of cartoonists ‘Je Suisse Charlie’ responses.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11331694/EMU-deflation-is-the-final-betrayal-of-southern-Europe.html
Thanks
As usual you make an important distinction that is so often overlooked by the mainstream.
What is worse about it is that the so-called ‘lack of demand’ is totally self-inflicted.
It is also part of another plan – to force structural changes in markets – in other words, lower pay, worse conditions, more debt – everything the cash rich investor neeeds to make money out of money.
Saying there is no shortage of demand is like saying there is no excess of savings.
In response to either statements please answer why there is being planned to be built a giant (and unecessary) canal through Nicaragua, why foreign capital is buying up (and keeping empty) every bit of prime real estate in every global city and why enormous quantities of metal bars are being piled into warehouses to sit idle….
and I would add that China already had a go at this in 2009 – $4trn stimulus – great for miners!… it was so effective that… they’ve just announced another trillion…
http://www.ibtimes.com/why-china-launching-massive-11-trillion-stimulus-package-1774610
Germany on the other hand…
Theoretical demand is infinite. Human desire can never be satiated. When it comes to practical demand, then Say’s law of markets explains it all. Demand is the other side of the coin that is Supply. They really are the same thing. Because we can only demand things by supplying things. So the only way to increase effective demand is to increase supply.
I’m sorry – but Say’s law is utter nonsense a demand is not infinite
Stop talkg nonsense to justify exploitative economics
That is a load of codswallop. Your post is based on your ideological beliefs not what we see occurring in the real world right now.
Supply is plentiful relative to demand for pretty much everything (except housing). You can see that reflected in the unemployment rate, wage rates and falling inflation. If there was a lack of supply (real) unemployment would be falling and there would not be hidden unemployment via self-employment or zero hours contracts, as employers would be hiring full time employees to increase supply. Nor would wages be falling as employers would have to compete harder amongst each other to get those employees. Lastly, inflation would be rising as companies would be able to increase the prices they charge, as a lack of supply implies they have pricing power for what they sell.
As for housing the way to fix that is to reduce the restrictions on how and where housing can be built, coupled with a mass council house building program for those that don’t want to or can’t afford to buy (at sane prices). That would in part mean reducing green belt and planning restrictions. Strangely enough though those of the political right never seem to want to remove those blocks to supply, only the protections on workers. Why is that?
The way to fix housing is Land Value Tax. It stops land being wasted, stops land-banking and brings down the selling price. See http://www.labourland.org. There is no shortage of commercial properties because business rates collect a high proportion of land rent. Things really started to go wrong when the domestic rating system was replaced first with the Poll Tax and then with the highly regressive Council Tax. In 1977 a friend purchased a very nice property in Dorchester-on-Thames for £50k and I was shocked that his rates were £700 pa. Now the owners of a £100m apartment in Mayfair pay a measly £2143 pa – and less if a single occupant.
I didn’t say there was a lack of supply. I said demand and supply are really the same thing. Two sides of the same coin. Conceptually though, we would always like more production right? If given the option for mobile phones to fall from the sky we wouldn’t say no. And there can be no such thing as a general glut – too much stuff in general. That is what Say demonstrated.
This belief created the economic crisis of the 20s and 30s
Keynes’ achievement was to shatter it
And some still want to live in the Dark Ages of that pre-Keynesian era
Why, I wonder?
A land value tax would certainly help but it’s not the full solution. Our current planning system acts as a huge hurdle to the building of homes where they are needed. You can see this reflected in the price of land with or without planning permission. An acre of run of the mill farmland increases in price 50-80 fold if you can get permission to build on it granted. This wouldn’t be happening if planning permission was easy to get.
Thus I see the two as being complimentary. An LVT dampens speculation, reduces the amounts rentier capitalists can extract, and encourages builders to build on their land banks. Planning reform would be the other bit and solve the shortage of buildable land.
Supply and demand are categorically not the same thing. You say they are two sides of the same coin, and they are, but that is not the same as them being the same thing.
Lets take this example to illustrate. You hold down wages, you worsen employment terms shifting costs onto employees, you break up unions or make them harder to form, you do all the things that the political right believes increases “supply”. As a result more of the nations (and worlds) income goes to the owners of capital. Now you probably think that then would result in more supply but you would be wrong. By reducing workers incomes you have reduced the effective demand for goods and services within the economy, and without that demand why would capital invest in increasing the supply of goods and services? It’s obvious that they won’t. Instead you see what we have seen over the last few decades, capital increasingly going into speculation, hoarding, and rentier type activities. Then we have governments trying to make up for that lack of economic demand via lowering interest rates and pumping up asset bubbles.
But I’m not saying anything new this process has been understood by economics for a long time now. It’s just that the worlds economic elites promote their version of the truth rather than reality, because accepting the truth means vastly reducing their wealth/income and thus their power. This happened after the great depression, and they will fight tooth and nail to prevent it happening again.
Marriner S. Eccles, who served as Franklin D. Roosevelt’s Chairman of the Federal Reserve from November 1934 to February 1948 on the cause of the great depression –
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. [Emphasis in original.]
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers’ loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.
The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.
Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.”
Does any of that sound familiar? It should. It’s 2008. And now the world is slowly sliding into the depressionary phase, as the elites refuse to give up any of their income/wealth, and we have no statesmen of the stature of F.D.R to force them.
Thanks
Alexw, your theory implies that lots of consumer goods get produced and then don’t get bought by the masses. This means that either these goods sit in warehouses forever, or are accumulated by the very wealthy – hoarding iphones and the like by the thousand. Where can we see this happening? I don’t think it does. The price mechanism ensures it doesn’t.
I pill be interested to read Alex’s response
I cannot see anything like that in what he said
It does not imply that. No company is going to produce goods/services it cannot sell and in the process keep workers employed and paying them a wage without the income to pay them from. That would be an exceedingly fast route to bankruptcy (as opposed to the slow route that comes from grinding deflation). The only exception to this rule is in china where the state literally fears its population, and so keeps people employed and therefore producing to minimize unrest. Though corruption is another driving force for it too. Thus they have a massive oversupply of steel products, copper, and a host of other tradable goods. But that just drives competing companies in other nations into bankruptcy as those goods are dumped on international markets.
Rather the lack of demand which is in reality what is occurring, manifests itself as higher unemployment and higher hidden unemployment (zero hours contracts and the like), as companies reduce their workforces. You can see this exemplified most prominently in europe, though it’s also apparent in the UK if you understand the underlying economic mechanisms as I’ve described them.
Hence the conservatives blew a SE housing and credit bubble to stimulate demand when what was really needed was higher “average citizen” wages both here and abroad (via reducing returns to capital/the wealthy), as credit based demand will always be temporary while wages won’t be. It also begs the question what happens when due to high inequality this newly created money flows inevitably flows into the hands of capital/the wealthy. We know they won’t spend it on consumption and so it won’t cycle back round the economy. Instead it’ll be added to their savings making the (capital)oversupply vs demand balance even worse. Does the government then try and pump out even more credit? It should be obvious the more we keep pushing the economy in this direction the closer we will come to complete collapse.
Oh and it is not “my” theory but is one that is understood by many economists. It is simply not spoken of by most mainstream economists because they are not going to bite the hands that feed them. They also have too much invested and much to gain from how things currently are to question their current world view. Too many consultancy fees, university endowments, financial sector employment opportunities, and sheer pressure from on high and so they self-justify. A few do speak out Michael Pettis being one of the few influential economists who does (btw I recommend reading this link as it explains so much of why the world econony is currently so disfunctional, though it is a long read) –
http://blog.mpettis.com/2014/03/economic-consequences-of-income-inequality/
Money is going to the wrong place. It is mostly going into speculative derivatives and the currency markets.
It should be diverted towards where it is needed; housing, infrastructure and public services.
It was done after world war II. It can be done again.
“Dealing with poverty is nothing new. The question became ‘how does poverty still exist in a world with sufficient resources for a decent quality of life for everyone?’ The answer was that we have yet to develop any economic system capable redistributing finite resources in a way that everyone has at minimum enough for a decent life: food, decent housing, transportation, clothing, health care, and education. The problem has not been lack of resources, but adequate distribution of resources. Capitalism is the most powerful economic engine ever devised, yet it came up short with its classical, inherent profit-motive as being presumed to be the driving force. Under that presumption, all is good in the name of profit became the prevailing winds of international economies – thereby giving carte blanche to the notion that greed is good because it is what has driven capitalism.
For New Labour it seems, the answer is pre-distrbution:
https://www.linkedin.com/pulse/20141210100005-3207079-the-international-covenant-on-economic-social-and-cultural-rights
Have you read Progress and Poverty, An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy. Written in 1879? It outsold Marx’s Capital.
No I haven’t Carol. We determined to act instead. In 2003, we were focussed on preventing terrorism where poverty was seen as the root cause.
https://www.linkedin.com/pulse/tackling-terrorism-through-compassionate-economics-jeff-mowatt
Capitalism along with a credit-based [i.e. debt-based!] monetary system works in the emerging and developing stages of an economy. But in a mature consumer-led economy the debt in the system, private and public, if not corporate, eventually compounds exponentially and will prove unsustainable – or rather it already has!
There is no viable non-debt based economy we know of
We have to accommodate debt
I agree we are not
I agree with the premise, but what I can’t get my head around is that the State is the solution. The “State” is the Establishment, a ruling clique or cliques. It has
its own interests which are often not the same as the populace’s interests. It is the ultimate monopoly, how can it be better than the present oligopoly system(s)?
By creating proper democracy
It and the associated changes will eventually be forced upon us anyway! Either sooner, constructively albeit reluctantly in banking and investment spheres or later, explosively, catastrophically – and still reluctantly!
A successful home-owning consumer economy is in no way compatible with [a] breadline wages [b] widepread inequality and [c] an overload of both private and public debt [=high taxation].
Capitalism along with a credit-based [i.e. debt-based!] monetary system works in the emerging and developing stages of an economy. But in a mature consumer-led economy the debt in the system, private and public, if not corporate, eventually compounds exponentially and will prove unsustainable – or rather it already has!
The only realistic way forward is a change in the monetary system back to pre 1970 levels of debt-free sovereign money [then 50% of M3 @ £100bn] against the pre QE scenario of 98% credit-based commercial bank money [i.e. debt] @ £1,700bn.This can only be achieved by progressively hiking up commercial bank capital reserve requirements and at the same time progressively dissipating the treasury bond system of finance – eventually 100% QE and sovereign money infrastructure spending in a balance budget – i.e. no PFI and it’s ilk!
It will not be easy! – and will be made much worse with the advent of robotic mechanisation and 3D printing construction methods. It seems inevitable that we shall have to progress towards some sort of Basic Income system otherwise the alienation and radicalisation of muslim societies will seem like a storm in a teacup compared to what might happen if whole populations become side-lined.
It will be resolved if only because wealth can only be created alongside an expansion in the money supply and this must be in the hands of the consumer not the entrepreneur. We have already seen that this money can no longer be created as debt at the level appropriate for a successful economy so monetary/financial change is ultimately inevitable – or WW3?
http://www.zerohedge.com/news/2015-01-07/oil-economy-limits-finite-world-2015-16
With the movement towards ¨world government¨ (and you need to look at how many EU laws/directives originate from UN organisations) I am of the opinion that democracy, even the imitation kind we have now, is doomed.
At least they will then be able to sort the problem of too many elderly people, and too few productive people (that´s me being sardonic).
I always wondered how the green party was/is going to get the ¨sustainable 13 million UK population¨.
We´ll see.