The Death Of Keynesian Economics

Alarm bells went off last week when "consumer" confidence fell to its lowest level since 1980. For those who aren't regular readers of DOTE, I should note that I always put the word "consumer" in quotes in so far as that term denigrates American citizens. In the animal kingdom, a consumer is a complex metazoan with a mouth, a gut and an anus, something like a primordial worm. Human beings are a bit more complex and interesting than that, and should be treated as such. And now it seems that American citizens are not very confident about their prospects.

Consumer sentiment, which hit its lowest since 1980 when the economy was in recession, fell on fears of a stalled recovery combined with gloom from partisan bickering over government debt, the Thomson Reuters/University of Michigan’s consumer sentiment survey reported.

The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and has fallen for three months. The August reading was well below the median forecast of 63.0 among economists polled by Reuters...

Bad economic times were expected by 75 percent of all consumers in early August, just below the record peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession-level lows.

You can't see it in this graph, but sentiment hasn't been this low since 1980. Sentiment in August is below the early 2009 levels, which was the Great Recession bottom. Graph from Tim Iacono.

As the story goes, sentiment fell because of recent events.

High unemployment, stagnant wages and the protracted debate in Congress over raising the government debt ceiling alarmed consumers in the University of Michigan survey even before the downgrade of United States sovereign debt by Standard & Poor’s. The consumer sentiment index registered most of the decline before the credit rating downgrade on Aug. 5.

“Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” the survey director, Richard Curtin, said in a statement.

Consumer Sentiment is the Keynesian measure of economic happiness par excellence. When "consumers" are confident, they buy more stuff. When they buy more stuff, everybody is presumably better off. Jobs are added to provide that stuff, which increases income, which enables everybody to buy more stuff. This is the best of all possible worlds according to those who worship John Maynard Keynes.

When "consumers" lose confidence, they stop buying more stuff. When they stop buying more stuff, incomes and prices fall, a phenomenon called deflation. Jobs are lost, for there is no longer a need to provide more stuff to buy. When jobs and income fall, confidence falls some more, as does the cost of stuff. And so it goes, spiraling ever downward. This downward spiral is called The Paradox of Thrift. This is the worst of all possible worlds according to those who worship John Maynard Keynes.

But as I pointed out in my post The Paradox Of Thrift, it is only sensible for Americans to cut spending and reduce their financial risks, especially (but not exclusively) when they have little confidence in the future. Nonetheless, Keynesians will urge them to spend money anyway, to throw caution to the wind. This patent absurdity is made far worse when people are urged to "consume" far beyond their means, to borrow money and spend it to buy more stuff.

This is the missing element in all debates about how to "stimulate" the economy to create jobs and increase income to spur spending. Most ordinary Americans don't have any extra money to spend, even when they have jobs. They are barely making ends meet as it is. We were reminded of this simple but inconvenient truth in Most Americans can't afford a $1,000 emergency expense.

NEW YORK (CNNMoney) — When the unexpected strikes, most Americans aren't prepared to pay for it.

A majority, or 64%, of Americans don't have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling, or NFCC, released on Wednesday.

Only 36% said they would tap their rainy day funds for an emergency. The rest of the 2,700 people polled said that they would have to go to other extremes to cover an unexpected expense, such as borrowing money or taking out a cash advance on a credit card.

"It's alarming," said Gail Cunningham, a spokeswoman for the Washington, DC-based non-profit. "For consumers who live paycheck to paycheck — having spent tomorrow's money — an unplanned expense can truly put them in financial distress," she noted...

Many respondents, 17%, said they would borrow money from friends or family. Another 17% said they would neglect other financial obligations — like a credit card bill or mortgage payment — in order to free up some funds.

Alternatively, 12% of the respondents said they would have to sell or pawn some assets to come up with $1,000 and 9% said they would need to take out a loan. Another 9% said they would get a cash advance from a credit card, according to the NFCC.

Cunningham finds that particularly troubling. Neglecting other debt obligations — or worse piling on more debt — "really exacerbates the problem," she said.

An earlier study by the same organization found that 30% of Americans have zero dollars in non-retirement savings. A separate study by the National Bureau of Economic Research found that 50% of Americans would struggle to come up with $2,000 in a pinch.

[My note: I've posted on Americans living paycheck to paycheck and the NBER report showing Americans could not come up with $2000 in an emergency. Also see my post Don't Think, Spend Money.]

How does this situation match up with The Paradox of Thrift? And the answer is: it doesn't. The majority of Americans need to save money—if only they could—to buffer themselves against emergencies that may arise at any time. These emergencies may arise by random chance, or as a consequence of events dictated by the corporate or political world, events the hapless victims have no control over.

Yet, Keynesian economists want Americans sacrifice their own well-being by spending money they don't have to avoid deflation. And that's what Americans did all the way through the debt-based consumption binge of the Bubble Era (1995-2007). Those bubbles were designed (consciously or not) to get people to spend money they didn't have, to keep the Keynesian Consumption party going even though disposable income didn't justify that spending.

And thus we arrive at the real meaning of the lowest "consumer" sentiment measurement since 1980. Whatever way America's economy goes forward—or backward, as the case may be—it won't be based on people spending money they don't have to support ever-greater Final Demand. There's an old saying we're all Keynesians now. Maybe that seemed true in the Good Old Days, but it's dead wrong now.

Thrift is not a threat to the economy. As the old saying goes, thrift is a virtue, and it always has been.

Bonus Video — From the CNN Money report.

 

Comments

[CB]

Yes in the current US system individuals are considered "consumers" while corporations are considered "citizens." Hence the sentiment.

[adam]

I am not surprised by the lack of $1000 in emergency money. Americans badly need to save, they need capital, but on the one hand you have people who literally have nothing to spare and on the other a "keep up with the Joneses" attitude. Debt is used to fill in the cracks.

Debt is the next best thing to slavery for keeping people down, and our system is built on people living off debt. I for one think this is at least partly intentional. Most people are just modern-day serfs, they are dependent on their employers for nearly everything. Living in debt means they will do anything to hold onto that job, no matter how they are exploited.

[Mr. Roboto (formerly Loveandlight)]

Thrift is not a virtue in an economic system that depends upon growth in order to be healthy. But you can't have infinite growth on a finite planet. Therefore any system that depends on growth in order to be "healthy" is actually unhealthy, isn't it?

[Dennis]

The CNNMoney video seems...well, absurd. Save and invest in a mutual fund, a Wall Street product? If any non-insider hasn't figured out that shell-game by now and chooses to invest in a pump-and-dunp bubble, that's an example of Natural Selection in action.

Sure, in a rational economy, one not based on a fiat currency, saving increases personal security and propels the economy. But where is the incentive for an individual to save dollars with inflation at two-and-one-half times the rate of interest on savings and certain to increase? Sensible saving, these days, means two things: first, taking advantage of a dip in the price of gold and, second, spending the rest on measures to insulate oneself and one's family from the effects of economic collapse. Get ready for the time when chickens and firewood will be the medium of exchange.

[Gail]

Good point Adam. Maybe instead of the "consumers" Dave puts in quotes, we should all start calling ourselves "indentured servants"!

[Tim]

As the previous comment noted, savings does not make much sense in today's world. Cash gets taxed by inflation. Banks do not pay much better than cash. Money markets and mutual funds are a ponzi.

Gold and silver are the answer but at the moment they are bullion products, not money.

Hugo Salinas Price has suggested a solution. Make a silver coin with a quoted monetary value. The quoted value stays the same until costs of making the coin increase and then it ratchets upwards. At no time does the quoted value decrease.

Holding this kind of a monetary gold or silver coin would provide an effective way to save money. At no time would you lose your investment but at the same time, you would be protected against inflation.

With bullion, every trade is a barter and two prices must be negotiated. With money, only one price is involved in the discussion and this convenience is a great savings and an aid to commerce.

The problem right now is that our money is no good and is getting worse by the day. We need gold and silver *money* NOW to circulate along with the Federal Reserve Notes.

[db]

It's striking, but hardly surprising, that consumer confidence is at it's lowest since 1980...It of a piece with my memory of Carter-era economic "malaise," the hostage crisis and the election of Reagan.

[Nowell_Sukkar]

I am an optimist but after reading so many Direr pridiction I think its a little too late. This recent quote is pretty scary !!
"Naked ambition & political cowardice have sentenced the once-great USA to AN ECONOMIC ARMAGEDDON of biblical proportions". Martin D. Weiss