So, let’s look at the situation that happened in the US economy in September 2008, that time it began as a typical deflationary crisis (similar the crisis of the spring of 1930) and eventually had been halted by a massive monetary emission. But what was the cause of this deflationary (i.e., associated with a decrease demand consumer) shock? Let us recall some of the theses of our economic theory to answer this question.
The theory defines equilibrium as the norm in economy. If some external circumstances, for instance governmental policies, disrupt the state of equilibrium, then the market begins to naturally move back to the equilibrium so that it would require more and more effort to keep economy in a state of disequilibrium. Of course, this is not always true everywhere as there is a possibility that the “equilibrium” simply does not exist. However, whether equilibriums are present in every situation is not the scope of this discussion. Here notion of the equilibrium is needed in respect to the so-called “Reaganomics”, adapted in the United States in 1981, an economic program, which involved credit based demand stimulation.
Prior to adoption of the “Reaganomics”, the equilibrium macroeconomic stats of the US household looked like this: total debt was no more than 60-65% of the annual income and savings were about 10% of real disposable income. By 2008, these parameters changed as follows: the average debt rose up to 130% of annual income and savings dropped to 7.5%. Note that the latter statistical figure of 2008, in the next 5 years has been “compromised” by various statistical manipulations, so that the latest official reports it is close 0%. However, statistics have nothing to do with the real situation. Now two questions arise. One, what are the reasons for such a major “departure” from the equilibrium, and, two, how much higher than the equilibrium is the American household demand today?
The answer to the first question is simple. In the early 80’s of the last century, the banking system allowed Americans to refinance their debts, that is, it became possible to repay their old loans with the new ones (which was a part of the “Reaganomics” policy). However, the credit cost must be lowered first to make credit refinancing possible. In 1980, the rate of Federal Reserve was 18% (Paul Volcker, who then was the chairman of the Federal Reserve, struggled with stagflation at that time), by December 2008, the rate practically reached zero. Once this happened, the economic system began a spontaneous movement towards the equilibrium by reducing the consumer demand, which was “artificially” stimulated for nearly 30 years.
The United States are now most actively trying to stimulate consumer demand by other means (description of which is not the subject of this article), yet the demand still continues to fall, albeit at least more slowly. Now the question is for how long this will continue and at what level it is going to stop? A rough estimate of the scale of this recession is as follows: at the beginning of the crisis, the savings were about minus 5%, yet they should be 10%, thus the total demand due to the reduction in savings is about 15% of the population’s real income as of the fall of 2008. This turned into US dollars equates to 11 trillion, that is, the overestimation of demand by a reduction in savings amounted to about 1.5 trillion dollars a year.
Furthermore, the demand was stimulated at the expense of the ever increasing US debt, which at the time of the crisis reached about 15 trillions of dollars and continued to grow by about 10% a year. That is a deficit of about 1.5 trillions of dollars each year which is equal to the amount of overestimation in demand. Thus, there is a total of three trillions in excess of the demand over the real disposable incomes in the US economy.
As long as no one explains how exactly the US authorities will come up these three trillions of dollars and then distribute them amongst the US households, there is no reason that there will be any growth in the US economy. Note that within the “post-modern” societies the fundamental rates such as the rate of household expenditure are quite difficult to change and in the United States the proportion of household expenditure rate relative to the GDP is at its historic height.
Of course, these three trillion will not disappear momentarily; however, expenditure of this money is the cause of the crisis! This happens because the fall in demand causes a reduction in employment and wages. Falling incomes cause a further decrease in demand, and so on. This cycle should lead to the equilibrium between supply and demand in real disposable income. At a very rough estimate, the equilibrium is lower than approximately 4.5 trillion per year relative to the current level of income (that is at the end of the crisis, the real disposable incomes of American households will be somewhere around 6.5 trillion dollars per year). The demands, on the other hand, more than two times lower than that now.
The topic of the scale of decrease of income and consumer demand in the United States is still a debatable topic and requires a lot of clarifications. Even though the research about its scale had been completed about ten years ago in 2002, there is no reason to believe that much changed since. The only difference today may be a relative increase in demand in one industry accompanied by a decrease in another industry. This systematic ongoing crisis occurs because the mechanisms that cripple today’s economy were created several decades ago and taking it into account, an argument that the US (and the world) economy is going to recover and begin to grow cannot be taken seriously. To take such arguments seriously, first, they have to be supported by a description of mechanism, which would normalize the structural imbalances between demand and income. So far no one could come up with such mechanisms in the past ten years.
Тranslated by Anton Toukaev. All rights reserved.
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