The Return of The Great Depression by Vox Day

Author:Vox Day
Language: eng
Format: epub, mobi
Publisher: Wnd books
Published: 2009-08-20T16:00:00+00:00

Figure 7.1. The Limits of Demand

It must be understood that this is very different from the Keynesian concept of underconsumption. There is no shortage of consumption, in fact, the problem is rooted in the credit-based creation of demand in consumers that could not otherwise afford to be buying the consumer goods they are purchasing. It should be obvious that in the real world of economic scarcity and finite resources, there will always be material limits on consumption.144 Once the artificially enhanced demand limits are reached, or even worse, consumers cannot afford to service their debt on the goods they previously purchased, the boom will come to a hard and fast end. It is important to understand that this is not a fluctuation limited to a single market, it is merely the way in which the general expansion of credit plays out in all of the specific markets to which the credit expansion is directed. The focus on the aggregate economy should not blind us to the fact that the distribution of credit is never uniform throughout the entire economy.

Consider a hypothetical example of an economy in which there are 100 cars being driven every year. Assume that a car lasts for ten years, while every year 10 cars wear out and are replaced. The economy is healthy, people are getting wealthier, and so five households buy second cars. Ten cars wear out, the three car makers each sell five cars, which represents half their maximum productive capacity, and now there are 105 cars in the economy. In the second year, however, there is a brief stock market panic due to the failure of the cashew harvest in Madagascar, so the central bank gets nervous and slashes interest rates. The credit expansion begins, and one sector in which it is focused is the car industry. The auto makers are seeking to expand their market, which they do by taking advantage of the cheap credit to provide inexpensive leases that will allow those who don’t have the purchase price of a car to buy one. These leases are so affordable that twenty more households decide to buy second cars. Ten cars wear out and are replaced, so there are now 125 cars in the economy. The car manufacturers are now running at their full capacity of 10 cars apiece, so in order to keep up with the growing pace of demand, each year they invest in new capital goods that allow them to produce 5 additional cars apiece. Pleased by the wealth-creating results of its actions and leery of any action that might bring an end to this period of prosperity, the central bank keeps rates low, consumers continue to take advantage of the inexpensive car-financing offers, and three years later there are 275 cars in an economy that five years earlier required only 100. Instead of 1 vehicle per household, there are now 2.75 cars in every garage and driveway, which is getting perilously close to the maximum number that the members of the various households either want or need.

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