More demand is not the whole answer

[rdean]

More demand is not the whole answer

For corporations it is. Without that, they won't create new jobs. How do we know? They told us.

 

[expat_panama]

...Its about overall debt, public and private. I'm not sure if the total actualy number has been falling, but total as a percentage of the economy has been falling off a cliff...

America- bashers love to talk like that, but actual private debt levels have fallen by a $trillion since before the '08 election. Contrast that to Federal Public Debt which has increased by $5T over the same time.

...I'm for ending the bush era tax cuts in total, including on the middle and lower class. The other 800B or so needs to come from spending cuts and the economic growth.

Before the '03 cuts revenue was falling, and since then revenue has incresed. Ending the cuts will increase the deficit. Private debt info is with the Federal Reserve and private debt info with at the Treasury. Let me know if you need help.

 

[Middleoftheroad]

...Its about overall debt, public and private. I'm not sure if the total actualy number has been falling, but total as a percentage of the economy has been falling off a cliff...

America- bashers love to talk like that, but actual private debt levels have fallen by a $trillion since before the '08 election. Contrast that to Federal Public Debt which has increased by $5T over the same time.

...I'm for ending the bush era tax cuts in total, including on the middle and lower class. The other 800B or so needs to come from spending cuts and the economic growth.

Before the '03 cuts revenue was falling, and since then revenue has incresed. Ending the cuts will increase the deficit. Private debt info is with the Federal Reserve and private debt info with at the Treasury. Let me know if you need help.

1) Looking at total debt and saying things are getting better is not bashing America. It is simply understanding how the economy works. That is a weak argument used when you really have nothing left. Coming from an expat, I don't think I have to defend my patriotism to you.

2) Your numbers don't make sense
U.S. debt load falling at fastest pace since 1950s - MarketWatch

from the article

As a share of the economy, debt has plunged as a consequence of rapid deleveraging by families, banks, nonfinancial businesses, and state and local governments. The ratio of total debt to gross domestic product has fallen from 3.73 times GDP to 3.36 times.

In the 11 quarters since the recession officially ended, total domestic debt has risen by just $702 billion, or 1.4%. By contrast, in the 11 quarters before the recession began, in those bubble years of 2005, 2006 and 2007, total debt increased by $10.7 trillion, or 28%.

Total debt has fallen by .37% of GDP in 33 months. That is massive deleveraging. Obviously if public debt has risen by over 5 trillion and private debt has fallen by 1T that would be 4T in new debt. Instead, new debt has only risen by 700B. So where is this discrepency coming from? Its coming from private debt actually shrinking by over 4T. The 700B in new debt is nowhere near fast enough to keep up with inflation. This is called deleveraging.

3) Federal revenue sharnk in 2001 as a result of a recession, it shrank in '02 from the tax cuts that were implemented in '01. The '01 cuts were larger by any means compared to the '03 cuts, and since none of this was done with spending cuts, it amounts to one thing. Government using debt to add money into the economy to help it grow. People don't really care where the money comes from, as long as they can get it. A retired person doesn't care if he gets more money from less taxes, or more money from increase SS payments, to him it means only 1 thing, more money.

 

[expat_panama]

...Its about overall debt, public and private. I'm not sure if the total actualy number has been falling, but total as a percentage of the economy has been falling off a cliff...

America-bashers love to talk like that, but actual private debt levels have fallen...

...debt has plunged...

Huh. Sounds like what you meant by "falling off a cliff" was that private debt's falling. That's good.

I'd been thinking you meant Americas handling of private debt was helplessly "falling off a cliff" into disaster. Maybe we can agree on two things. One is that American private debt's been falling even while our hired help in Washington have been running up lots of unpaid bills. The other is that so many American-bashers in the pop press love to say stuff like this -- Google Search key words "Americans going worse into debt"

 

[onecut39]

Increased demand is obviously necessary;

why would you say that when increased supply is obviously necessary?????

Was that the problem with the Great Depression? Not enough supply?

Supply has never been a problem. The problem has always been finding customers for that supply.

That's why "supply side" is such a joke!

 

[Widdekind]

1929: Stock bubble, banking collapse, velocity falls, Depression.

2008: Housing bubble, banking collapse, velocity falls, depression.

Bernanke said the bank collapse was the key in his Essays on the Great Depression.

Banks made bad loans, for stock speculation. The 1929 stock-market crash wiped out wealth. The public lost confidence in banks, fearing that banks had squandered their savings. The public ran on the banks. When the public pressured banks, to pay out their deposits; banks pressured their borrowers, to pay back their debts. The entire credit market "switched into full reverse"; everybody was demanding debts back from everybody else, to pay back banks, to pay back deposits. (How does base money decline -- deposits were cashed out for gold, which fled abroad ??)

As soon as FDR stopped the bank-runs (Executive Order 6102), the credit market stabilized, and the economy began recovering. Perhaps the banking collapse, caused by bank runs, from a fearful public, "switched the economy into full reverse" -- the debt-fueled, consumer-credit-financed "roaring 20s", became the "miserly & frugal 30s", as nobody borrowed from untrusted banks; and everybody forewent spending, too, for saving, to pay down their debts from the previous decade ? Spending-beyond-means (on new debt) stopped; and then spending slowed (to save, to pay back debts). The switch from "borrowing & spending" to "saving & hoarding" can account for the collapse of nominal aggregate spending (GDP).

 

[EdwardBaiamonte]

1929: Stock bubble, banking collapse, velocity falls, Depression.

2008: Housing bubble, banking collapse, velocity falls, depression.

Bernanke said the bank collapse was the key in his Essays on the Great Depression.

Banks made bad loans, for stock speculation. The 1929 stock-market crash wiped out wealth. The public lost confidence in banks, fearing that banks had squandered their savings. The public ran on the banks. When the public pressured banks, to pay out their deposits; banks pressured their borrowers, to pay back their debts. The entire credit market "switched into full reverse"; everybody was demanding debts back from everybody else, to pay back banks, to pay back deposits. (How does base money decline -- deposits were cashed out for gold, which fled abroad ??)

according to Friedman a large part of the problem was that there was a large in flow of gold from England that the Fed did not back up with new money. This accounted for about half of the money stock that was lost immediately after the stock crash.

 

[EdwardBaiamonte]

Supply has never been a problem.

of course as a liberal you will lack the IQ to understand supply side economics. Try telling folks in the stone age that supply
of goods was not a problem when they were farming with sticks rather than a supply of John Deere tractors!! See why we are 100% positive a liberal will be slow??

The problem has always been finding customers for that supply.
That's why "supply side" is such a joke!

dear, supply creates its own demand!!!! Try supplying gasoline at $3 a gallon or and Iphone at $100 and then you begin to understand what is over a liberal's head. An economy grows when it supplys innovative goods and services. Now you know how we got from the stone age to here or how we can from the current liberal depression to a boom!! Welcome to your first lesson in economics.

 

[Rshermr]

1929: Stock bubble, banking collapse, velocity falls, Depression.

2008: Housing bubble, banking collapse, velocity falls, depression.

Bernanke said the bank collapse was the key in his Essays on the Great Depression.

Banks made bad loans, for stock speculation. The 1929 stock-market crash wiped out wealth. The public lost confidence in banks, fearing that banks had squandered their savings. The public ran on the banks. When the public pressured banks, to pay out their deposits; banks pressured their borrowers, to pay back their debts. The entire credit market "switched into full reverse"; everybody was demanding debts back from everybody else, to pay back banks, to pay back deposits. (How does base money decline -- deposits were cashed out for gold, which fled abroad ??)

according to Friedman a large part of the problem was that there was a large in flow of gold from England that the Fed did not back up with new money. This accounted for about half of the money stock that was lost immediately after the stock crash.

You are totally stupid if you believe that one.

But then.......

 

[Widdekind]

according to Friedman a large part of the problem was that there was a large in flow of gold from England that the Fed did not back up with new money. This accounted for about half of the money stock that was lost immediately after the stock crash.

From 1928-1930, the monetary base gradually contracted. Inexpertly, banks were spending their official reserves, to buy government bonds, from the Fed. (Gold & paper notes were not physically vanishing; rather they were returned to the Fed, for government bonds, and thereby removed from the economy.) Those government bonds were yielding nearly 4%, perhaps higher than bank interest-rates. The general trend, over those two years, was a (small) bubble in bond yields (pushed up to 4%), as banks began buying those bonds, evidently from the Fed; and surrendering official reserves, to the Fed, in payment. The bubble in bond yields coincided with the dip in the monetary base.

However, amidst that general trend, in 1929, bank interest rates spiked, up to 6%; and the monetary base expanded. Inexpertly, banks suddenly began selling off those bonds, back to the Fed, for official reserves, in order to lend the extra money, to speculators, on the stock-market. Funds flowed, from the Fed, through banks, onto the stock-market, pushing up prices, in bidding wars. From June to September 1929, stock-prices increased by a quarter.

http://upload.wikimedia.org/wikipedia/commons/c/c5/1929_wall_street_crash_graph.svg​

The bubble in stock-prices coincided with the bubble in the monetary base.

But, in October, the bubble burst, and the stock-market crashed. For a year afterwards, bank interest-rates plummeted, from 6% to 1%. Interest-rates are the "price" of credit; their plummet implies that public demand for bank loans plummeted. After the crash, all of the once-wealthy speculators stopped borrowing, to gamble on the stock-market. So, bank interest-rates fell to 1%. But government bonds were still paying 3%. So, through most of 1930, banks went back to buying government bonds, from the Fed, again contracting the monetary base.

Then, in late 1930, the bank-runs began. Inexpertly, the public lost confidence in banks, fearing that bankers had squandered their savings; and fearing that the US would abandon the gold-standard, to protect the bankers from having to pay back depositors in "good" gold. So the public decided to "cash out" en masse, running on the banks. Evidently, word was spreading, from October 1929 to October 1930, about plummeting stock-prices; squandered savings; bankers getting themselves off the hook, by getting "business-friendly Hoover" to abandon the gold-standard. Bank runs began.

Immediately, the Fed began expanding the money base (into banks' official reserves), as fast as the public was withdrawing cash out of banks:

The 1930–1933 increase in the monetary [reflected] the general public's flight into currency, in response to their distrust of banks. Only the currency component of the base rose; the bank reserves component declined... in response to the first bank run at the end of 1930, the public started to hoard cash. Therefore, the Federal Reserve had to constantly replenish the actual cash in circulation, thereby increasing the monetary base dramatically.

The depression continued through 1933, because of the bank-runs:

as the public lost faith in banks, people began holding their wealth in cash, rather than bank deposits, and those banks that survived began keeping large quantities of cash on hand rather than lending it out, to avert the danger of a bank-run. The result was much less lending, and hence much less spending, than there would have been, if the public had continued to deposit cash into banks, and banks had continued to lend deposits out to businesses.

The decline in the money supply resulted from bank-runs -- the public either cashed out their deposits in banks; or those deposits were wiped out when the bank failed. From 1930-33, the public withdrew $1.3B from banks into circulating currency (M0); and total public checking deposits (M1-M0) decreased by over $7B. Total public savings deposits (M2-M1) decreased by another $8B. (Thus, total public deposits, of both kinds (M2-M0), decreased by about 10x total withdrawals into cash.) Through 1933, over 9000 banks failed, wiping out $1.3B in deposits. (Thus, failed banks tended to be small, with average losses less than $150K per failed bank.) So, most of the $15B in bank deposits closed out were not the result of bank failures. Stereotypically, poorer people keep more money in checking deposits, wheres wealthier people keep more money in savings deposits. That both kinds of accounts decreased by similar amounts may imply, that all walks of life were equally affected, by the GD.

Meanwhile, $40B of private-sector debts were repaid. Repaying bank loans may contract the money supply. The ratio of total private-sector debts repaid ($40B), to total bank deposits closed out ($14B), was nearly 3:1 ("businesses paid back bond-holders $2, who paid back their banks another $1"). The deep drop in deposits in banks, to pay back loans from banks, plausibly (partly) reflects the public fighting off home foreclosures, by rapidly repaying their mortgages; many Americans "didn't make it", and were evicted. The "switch" from borrowing & spending, in the "roaring 1920s"; to saving & repaying, in the early 1930s, diverted a third of aggregate spending (GDP).




web-references
Debtwatch No. 42: The economic case against Bernanke | Steve Keen's Debtwatch
December 1930 and October 2008 | The Economic Populist
FDIC: Learning Bank
Great Depression - Top Five Causes of the Great Depression
http://www.paecon.net/PAEReview/issue58/Koo58.pdf
Prof

 

[EdwardBaiamonte]

according to Friedman a large part of the problem was that there was a large in flow of gold from England that the Fed did not back up with new money. This accounted for about half of the money stock that was lost immediately after the stock crash.

From 1928-1930, the monetary base gradually contracted. Inexpertly, banks were spending their official reserves, to buy government bonds, from the Fed. (Gold & paper notes were not physically vanishing; rather they were returned to the Fed, for government bonds, and thereby removed from the economy.) Those government bonds were yielding nearly 4%, perhaps higher than bank interest-rates. The general trend, over those two years, was a (small) bubble in bond yields (pushed up to 4%), as banks began buying those bonds, evidently from the Fed; and surrendering official reserves, to the Fed, in payment. The bubble in bond yields coincided with the dip in the monetary base.

However, amidst that general trend, in 1929, bank interest rates spiked, up to 6%; and the monetary base expanded. Inexpertly, banks suddenly began selling off those bonds, back to the Fed, for official reserves, in order to lend the extra money, to speculators, on the stock-market. Funds flowed, from the Fed, through banks, onto the stock-market, pushing up prices, in bidding wars. From June to September 1929, stock-prices increased by a quarter.

http://upload.wikimedia.org/wikipedia/commons/c/c5/1929_wall_street_crash_graph.svg​

The bubble in stock-prices coincided with the bubble in the monetary base.

But, in October, the bubble burst, and the stock-market crashed. For a year afterwards, bank interest-rates plummeted, from 6% to 1%. Interest-rates are the "price" of credit; their plummet implies that public demand for bank loans plummeted. After the crash, all of the once-wealthy speculators stopped borrowing, to gamble on the stock-market. So, bank interest-rates fell to 1%. But government bonds were still paying 3%. So, through most of 1930, banks went back to buying government bonds, from the Fed, again contracting the monetary base.

Then, in late 1930, the bank-runs began. Inexpertly, the public lost confidence in banks, fearing that bankers had squandered their savings; and fearing that the US would abandon the gold-standard, to protect the bankers from having to pay back depositors in "good" gold. So the public decided to "cash out" en masse, running on the banks. Evidently, word was spreading, from October 1929 to October 1930, about plummeting stock-prices; squandered savings; bankers getting themselves off the hook, by getting "business-friendly Hoover" to abandon the gold-standard. Bank runs began.

Immediately, the Fed began expanding the money base (into banks' official reserves), as fast as the public was withdrawing cash out of banks:

The 1930–1933 increase in the monetary [reflected] the general public's flight into currency, in response to their distrust of banks. Only the currency component of the base rose; the bank reserves component declined... in response to the first bank run at the end of 1930, the public started to hoard cash. Therefore, the Federal Reserve had to constantly replenish the actual cash in circulation, thereby increasing the monetary base dramatically.

The depression continued through 1933, because of the bank-runs:

as the public lost faith in banks, people began holding their wealth in cash, rather than bank deposits, and those banks that survived began keeping large quantities of cash on hand rather than lending it out, to avert the danger of a bank-run. The result was much less lending, and hence much less spending, than there would have been, if the public had continued to deposit cash into banks, and banks had continued to lend deposits out to businesses.

The decline in the money supply resulted from bank-runs -- the public either cashed out their deposits in banks; or those deposits were wiped out when the bank failed. From 1930-33, the public withdrew $1.3B from banks into circulating currency (M0); and total public checking deposits (M1-M0) decreased by over $7B. Total public savings deposits (M2-M1) decreased by another $8B. (Thus, total public deposits, of both kinds (M2-M0), decreased by about 10x total withdrawals into cash.) Through 1933, over 9000 banks failed, wiping out $1.3B in deposits. (Thus, failed banks tended to be small, with average losses less than $150K per failed bank.) So, most of the $15B in bank deposits closed out were not the result of bank failures. Stereotypically, poorer people keep more money in checking deposits, wheres wealthier people keep more money in savings deposits. That both kinds of accounts decreased by similar amounts may imply, that all walks of life were equally affected, by the GD.

Meanwhile, $40B of private-sector debts were repaid. Repaying bank loans may contract the money supply. The ratio of total private-sector debts repaid ($40B), to total bank deposits closed out ($14B), was nearly 3:1 ("businesses paid back bond-holders $2, who paid back their banks another $1"). The deep drop in deposits in banks, to pay back loans from banks, plausibly (partly) reflects the public fighting off home foreclosures, by rapidly repaying their mortgages; many Americans "didn't make it", and were evicted. The "switch" from borrowing & spending, in the "roaring 1920s"; to saving & repaying, in the early 1930s, diverted a third of aggregate spending (GDP).




web-references
Debtwatch No. 42: The economic case against Bernanke | Steve Keen's Debtwatch
December 1930 and October 2008 | The Economic Populist
FDIC: Learning Bank
Great Depression - Top Five Causes of the Great Depression
http://www.paecon.net/PAEReview/issue58/Koo58.pdf
Prof

so you agree with Friedman and Bernanke that the money supply shrunk by 1/3 because of Fed inaction and that caused the Depression????

 

[Rshermr]

according to Friedman a large part of the problem was that there was a large in flow of gold from England that the Fed did not back up with new money. This accounted for about half of the money stock that was lost immediately after the stock crash.

From 1928-1930, the monetary base gradually contracted. Inexpertly, banks were spending their official reserves, to buy government bonds, from the Fed. (Gold & paper notes were not physically vanishing; rather they were returned to the Fed, for government bonds, and thereby removed from the economy.) Those government bonds were yielding nearly 4%, perhaps higher than bank interest-rates. The general trend, over those two years, was a (small) bubble in bond yields (pushed up to 4%), as banks began buying those bonds, evidently from the Fed; and surrendering official reserves, to the Fed, in payment. The bubble in bond yields coincided with the dip in the monetary base.

However, amidst that general trend, in 1929, bank interest rates spiked, up to 6%; and the monetary base expanded. Inexpertly, banks suddenly began selling off those bonds, back to the Fed, for official reserves, in order to lend the extra money, to speculators, on the stock-market. Funds flowed, from the Fed, through banks, onto the stock-market, pushing up prices, in bidding wars. From June to September 1929, stock-prices increased by a quarter.

http://upload.wikimedia.org/wikipedia/commons/c/c5/1929_wall_street_crash_graph.svg​

The bubble in stock-prices coincided with the bubble in the monetary base.

But, in October, the bubble burst, and the stock-market crashed. For a year afterwards, bank interest-rates plummeted, from 6% to 1%. Interest-rates are the "price" of credit; their plummet implies that public demand for bank loans plummeted. After the crash, all of the once-wealthy speculators stopped borrowing, to gamble on the stock-market. So, bank interest-rates fell to 1%. But government bonds were still paying 3%. So, through most of 1930, banks went back to buying government bonds, from the Fed, again contracting the monetary base.

Then, in late 1930, the bank-runs began. Inexpertly, the public lost confidence in banks, fearing that bankers had squandered their savings; and fearing that the US would abandon the gold-standard, to protect the bankers from having to pay back depositors in "good" gold. So the public decided to "cash out" en masse, running on the banks. Evidently, word was spreading, from October 1929 to October 1930, about plummeting stock-prices; squandered savings; bankers getting themselves off the hook, by getting "business-friendly Hoover" to abandon the gold-standard. Bank runs began.

Immediately, the Fed began expanding the money base (into banks' official reserves), as fast as the public was withdrawing cash out of banks:

The depression continued through 1933, because of the bank-runs:

as the public lost faith in banks, people began holding their wealth in cash, rather than bank deposits, and those banks that survived began keeping large quantities of cash on hand rather than lending it out, to avert the danger of a bank-run. The result was much less lending, and hence much less spending, than there would have been, if the public had continued to deposit cash into banks, and banks had continued to lend deposits out to businesses.

The decline in the money supply resulted from bank-runs -- the public either cashed out their deposits in banks; or those deposits were wiped out when the bank failed. From 1930-33, the public withdrew $1.3B from banks into circulating currency (M0); and total public checking deposits (M1-M0) decreased by over $7B. Total public savings deposits (M2-M1) decreased by another $8B. (Thus, total public deposits, of both kinds (M2-M0), decreased by about 10x total withdrawals into cash.) Through 1933, over 9000 banks failed, wiping out $1.3B in deposits. (Thus, failed banks tended to be small, with average losses less than $150K per failed bank.) So, most of the $15B in bank deposits closed out were not the result of bank failures. Stereotypically, poorer people keep more money in checking deposits, wheres wealthier people keep more money in savings deposits. That both kinds of accounts decreased by similar amounts may imply, that all walks of life were equally affected, by the GD.

Meanwhile, $40B of private-sector debts were repaid. Repaying bank loans may contract the money supply. The ratio of total private-sector debts repaid ($40B), to total bank deposits closed out ($14B), was nearly 3:1 ("businesses paid back bond-holders $2, who paid back their banks another $1"). The deep drop in deposits in banks, to pay back loans from banks, plausibly (partly) reflects the public fighting off home foreclosures, by rapidly repaying their mortgages; many Americans "didn't make it", and were evicted. The "switch" from borrowing & spending, in the "roaring 1920s"; to saving & repaying, in the early 1930s, diverted a third of aggregate spending (GDP).




web-references
Debtwatch No. 42: The economic case against Bernanke | Steve Keen's Debtwatch
December 1930 and October 2008 | The Economic Populist
FDIC: Learning Bank
Great Depression - Top Five Causes of the Great Depression
http://www.paecon.net/PAEReview/issue58/Koo58.pdf
Prof

so you agree with Friedman and Bernanke that the money supply shrunk by 1/3 because of Fed inaction and that caused the Depression????

Nice try, ed. You might try being genuine once, just to shock us all. Widdekind actually said nothing of the kind, as you probably know but do not care. You are simply a tool, ed.

 

[Widdekind]

The Great Depression resulted, from many effects, all co-occurring. After the stock-market "crash" of 1929, the public began to distrust banks, amidst rumors that the US would abandon the gold-standard. By October 1930, the public had begun running on banks in earnest, in order to get their gold back, whilst banks still had gold in reserves; and, were still required to pay out gold on demand. Afterwards, nobody was borrowing from banks, reducing spending. And everybody was hoarding gold, fearing abandonment of the gold-standard ("if they gave out gold, today, they might never get any back, tomorrow"), reducing spending further. With nobody spending money, and everybody hoarding money, the amount of money in circulation ('in the stream of spending") plummeted. That caused prices to plummet ("fewer dollars chasing goods"), i.e. deflation. Dollars were spent less often, hoarded more of the time; mathematically, MV = PQ (equation of exchange), and the "velocity" of spending (V) fell, on the LHS, pulling down prices (P), on the RHS.

Now, the "roaring" 1920s had been funded by borrowing. Total private-sector debt had increased by $50B (from $110B in 1921, to $160B in 1929). And, debts are not adjusted for inflation / deflation. So, when prices plummet, real debt (D/P) sky-rockets. (Cp. real wages (W/P), or real money balances (M/P), also sky-rocket, during deflations of price levels.) And so, as soon as prices began deflating, everybody saw their real debt balances sky-rocketing. And so everybody stopped spending, to pay down debt. Again, reducing spending further still. (From 1930-1933, total private debt declined by about 25% -- from about $160B to $120B, at rates equivalent to a quarter of GDP -- stabilizing afterwards. Meanwhile, price-levels declined by about 25%, stabilizing afterwards. The two data series -- declining nominal private debt, deflating price level -- are strongly correlated, corroborating that deflation motivated debt repayment, per Irving Fisher's "debt-deflation" explanation.)

Meanwhile, with nobody spending, nobody was buying, nobody was selling, nobody was hiring, everybody was firing. UE increased by over 20% (from 3.2% in 1929, to 25.5% in 1933). Rising UE implies falling incomes, reducing spending even further. That plummets price-levels further. According to Philipps Curve, on average, +2% UE generates -1% in-flation; so +20% UE probably de-flated prices by 10%. Also, according to Okun's Law, on average, +2% UE generates -4% reduction in real GDP; so +20% UE "should" have reduced real GDP by -40%. Indeed, real GDP fell by 30%.

So, public distrust of banks (no borrowing); public hoarding of gold (no spending); debt repayment (saving); unemployment (no buying, no selling, no hiring, firing); all reinforced each other, generating a deflation in prices (P) of over -20% (perhaps half from hoarding, half from UE; "everybody was holding what they had, and earning nothing new"); a "crash" in aggregate spending (nominal GDP) of nearly -50%; a "crash" in production (real GDP) of about -30%.

Note, rising UE can (easily) account for all of the fall in production (real GDP), but can account for only half of the fall in prices (P). I.e. there was an actual decrease in the propensity to spend; the "velocity" of spending decreased; not only were people earning less, and so spending less (Philipps Curve), but also people were spending what they were earning even less than before. Note, too, that production (Q) fell twice as much as prices (P). In the short-term, potential aggregate supply is steady. So, a falling aggregate demand curve "falls back along" the aggregate supply curve, on an AS/AD plot. Ipso facto, in the early 1930s, the US aggregate supply curve was fairly flat, having an elasticity of aggregate supply, of about 1.5 (dQ/dP = (-30%)/(-20%) = 3/2). (If you acknowledge only the fall in price level, of -10%, attributable to the rise in UE; then the elasticity of aggregate supply "for constant spending propensity" would compute to 3. Propensity to spend reflects psychological perceptions of money, of the general public, not physical production capacity, of businesses & workers. Indeed, from 1933-1937, at the new lower spending propensity, the US economy recovered to pre-crash production levels, with negligible inflation in prices, implying a nearly horizontal ASC.) Perhaps that's why J.M.Keynes argued that aggregate supply curves are flat, i.e. prices are "sticky downwards" ?

The "Great Crash" from 1929-1933 altered Americans' psychological perceptions of money, dramatically decreasing their propensity to spend (increasing their propensity to hoard). Recovery afterwards occurred under dramatically different monetary conditions: at lower prices (P), at lower velocity (V), with much more money (M) required, to motivate the same amount of production (Q), as compared to pre-crash conditions. The rate of spending per dollar per year (V) was nearly a third less, and half again more money (M) was required, for the same amount of production (Q) to be purchased. The profound psychic impact, of the GD, amongst the minds of Americans, is reflected, in the sudden shift, of the relations between those macro-economic variables; and especially in the speed of spending (V), which is the most subjectively psychological of those variables.​

 

[Widdekind]

Obama has spent 14-15 trillion dollars in his 1st term, where's the demand?

Please consider total

• personal income (Y)
• disposable personal income (Y - Tpaid)
• disposable personal income less transfers (Y - Tpaid - welfare)
• disposable personal income less transfers less consumption (Y - Tpaid - welfare - C)

That total is large, growing, and negative. The US public can only afford to buy, as much as the public is buying, because of welfare:

http://research.stlouisfed.org/fredgraph.png?g=8vY​

The ratio of that "public consumption deficit", to total welfare transfers, is about two-thirds. The US public now spends two-thirds of all public welfare received, thereby "over-spending" by about $1.2T per year, up about a quarter trillion dollars per year, since Pres. Obama took office.

http://research.stlouisfed.org/fredgraph.png?g=8vZ​

Inexpertly, over 4 years in office, perhaps Pres. Obama could be credited with up to $1T of extra "stimulated" consumer demand, in-so-far as "stimulus" money has increased welfare transfer payments to the public.

 

[editec]

Is there a shortage of STUFF?

Is that what caused the meltdown of 2008...a STUFF shortage?

Or did this economy start to falter because it was poised to falter (through dereivative debt instruments) the moment a shock (like the run up in gas prices of 2007) came to the system?

Here's what's going on...the working middle class has been losing purchasing power roughly for the last 40 years.

That class can no longer use disposable income to offset shocks (like the spiking in energy prices) because it no longer has disposable income.

I'll leave it to you geniuses to figure out what has been happening in the last 40 years to explain WHY the middle class is broke.

But I will give you one hint -- it isn't because taxes are too high

 

[Widdekind]

Inexpertly, inflation-adjusted real wages per worker (W/P/N) fell in the 1970s, coinciding with the OPEC oil embargoes; recovered by the 1990s; and are still rising (more slowly) since 2000:

i have seen no statistics actually indicating declining worker wages, incomes, purchasing power, etc.

 

[itfitzme]

Inexpertly, inflation-adjusted real wages per worker (W/P/N) fell in the 1970s, coinciding with the OPEC oil embargoes; recovered by the 1990s; and are still rising (more slowly) since 2000:

i have seen no statistics actually indicating declining worker wages, incomes, purchasing power, etc.

That is interesting. The US Census tracks household income. That did start to fall in 2000. There is some utility in both and the fact that both are trending differently suggests demographic or social changes in the work force since 2000. It seems like the economy started to return to the single income household after decades of the two income household.

It's an interesting complication.

It might be more useful if the individual income one was split up into quintiles as well. Also, it would be useful to look at that wages per capita. Someone is supporting everyone that isn't working. It gets a bit difficult because we'd like to remove institutionalized and transfer payment recipients so we get income per able bodied and dependents. It becomes pretty significant if the shift has been for children to remain at home longer or there has been a shift in the mean or median.

What I noticed, anechdotally, was a rise in stay at home husbands and there is some indication that the economy shed more men than women during the recession. That seemed to be the result of women having equal capability and slightly lower income level. I recal two news reports, at seperate times during the recession, where that men vs women newly unemployed demograph shifted. That is my unverified sense of it.

US Census historical

http://www.census.gov/hhes/www/income/data/historical/household/2010/H01AR_2010.xls

 

[Widdekind]

Inexpertly, inflation-adjusted real wages per worker (W/P/N) fell in the 1970s, coinciding with the OPEC oil embargoes; recovered by the 1990s; and are still rising (more slowly) since 2000

The US Census tracks household income. That did start to fall in 2000

http://www.census.gov/hhes/www/income/data/historical/household/2010/H01AR_2010.xls

So, since 2000, real income per household has stabilized (or even slumped slightly); whilst real wages per worker has steadily risen ("obliviously"). The ratio of the former (constant), to the latter (increasing), represents "workers per household" (decreasing).

Meanwhile, the "employment to population ratio" has also stabilized, since about 2000. The ratio of "workers per household" (decreasing) to "workers per capita" (constant) represents "people per household" (decreasing). Evidently, family units are breaking apart, with each income earner forming their own legal "household", making more money individually, comparable to what the whole family had been earning previously.

 

[editec]

When some of you realize that MONEY (hence accouting of debt) is largely artifical, and entirely subject to forces that really do NOT bear any relationship to REALITY, then you'll realize that your fears about the DEBT are rather silly.

You doubt me, of course, because the opposite is what you have been told, and because that is the way the SCAM is played, too.

But do this mind experiment for me....


In 2008, when the entire economy worldwide began collapsing, what prompted that collapse?

Did all the reources go away?

How about all the laborers?

Did the factories fall down?

None of those things happened, yet the economy collapsed.

Why?

 

[Widdekind]

naively, the collapse of the housing bubble wiped out allot of (perceived) wealth. People panicked, and started trying to pay themselves back out of debt, causing a deflation & depression