A picture of the collapse of effective demand

Aggregate Demand  = Consumption + Investment + Government + Net Exports

I’ve included all series in nominal dollar terms because that’s what matters in the end, whether the dollars are flowing or not.  All series are relative to an index equal to 100 in 1990:1.  Net exports was more volatile so it got its own scaling on the right axis (note that the index is positive, even as we ran a negative trade balance).

Investment and net exports have collapsed the most.  Consumption is bravely trying to get back to where it was in early 2008, but will probably not get there.  At the risk of a busy graph I’ve included wage and salary compensation of employees; it has tanked more than consumption.  So there is some question what’s going on with the consumption numbers, as Contrary Investor points out, possibly transfer payments.  The (ridiculously named) Permanent Income Hypothesis tells us consumers may just be adjusting to the new realities slowly.  (Why couldn’t Friedman just call it an adaptation level, and fall in line with the central currents of scientific thought?  Why couldn’t Shiller and Akerlof cite the most important paper published on “animal spirits” in the past twenty years?  Such is arrogance and provinciality of economists.)

Investment spending is usually more responsive to my “animal spirits” measure.  A technician would look at the government spending line and say “looks hyperbolic” and therefore unsustainable.  Government spending has been growing at a faster than exponential rate over the past couple of years.  The econophysicists have shown us that faster than exponential growth is a signature of a process heading toward a “singularity,” or phase change, or crash, in the case of stock markets.  It’s reasonable to suppose a similar process must organize government spending.