Wednesday, May 12, 2010

The collapse of effective demand (cont.)

First quarter 2010 data on the components of nominal aggregate demand show only consumption and government spending above pre-recession levels.  Investment spending is at early 2003 levels in dollars and would be lower in real terms. 


The uptrend in consumption is not supported by “real” personal income growth as pointed out by in their May note—it’s mostly coming from government transfer payments.


Consumption out of disposable income is soaring again as consumers get tired of saving.


The picture of final sales to domestic purchasers shows domestic nominal demand at 2007 levels.


Employment/population has improved slightly, it is still at early 1980s levels, and the labor market continues to be very slack, with the unemployed experiencing extreme difficulties in finding a new job.


If the government experiences any trouble at all in floating its debt, the transfers to the lower income brackets will probably be diminished, causing a collapse of consumption spending.  The lifting of the “emergency” extensions of unemployment benefits would fall into this category.

The government could kill the economy more quickly in a number of ways, including requiring 1099s to be filed for all expenses over $600 paid by any business that would kill small business; by the imposition of a VAT that would kill small business; by a tax increase on any middle- or lower-income bracket.

The rich have conspired to suck a disproportionate amount of the income from corporate America to themselves, while keeping marginal tax rates on that income at historically low levels.  There is not organic personal income growth to support a recovery.  A “classic Keynesian” prescription would be for government to debt-finance a massive government investment injection to aggregate demand, but the bond market probably won’t like that.  Keynesianism as practiced by the mainstream has ignored debt/GDP, now at record levels. 

In the coming collapse of aggregate demand, the rich will have to answer the question, “Am I my brother’s keeper?”

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