>Thanks to Doug and Jordan for the patient and helpful replies to my
>queries. What I don't understand is how consumer debt can increase
>effective demand in the long term or how the credit card has become a proxy
>for Keynesian programs.
Consumer credit is a way of transforming money capital into consumer demand. As long as the debt/income level is increasing, and there's no debt servicing problem, it's unambiguously expansive.
>Obviously all consumer debt (credit cards,
>installment plans) does is increase present purchasing power by deducting
>both the principal and interest payments over so many periods from future
>purchasing power. Over the long term then consumer debt engenders financial
>flows to those rentier classes with a presumably lower marginal propensity
>to consume and should thus have the effect of increasing savings, no?
Not if the borrowers are dissaving as fast as the savers are saving.
>That is, the interest payments, which are counted as a personal outlay, of
>course undermine the ability of those households that most need to save to
>set income aside; but from this it does not follow that the use of credit
>has decreased the total amount of national savings.
Savings and investment, as Keynes said, are two names for the same thing, consumption foregone. People who moralize about a low national savings rate rarely mourn the equally low investment rate, which is no surprise, since moralizing about savings is both a form of social discipline, and a way of selling tax breaks for the top 1%.
Consumer credit may not have decreased the amount of national savings - if it gooses demand and thereby pushes up incomes higher than they would be otherwise, then you could argue that it increases savings and investment - but it does alter their allocation. Instead of savings being channeled into capital investment that results in higher growth and profits, they're used to finance consumption. The flow of funds accounts treat the purchase of consumer durables as an investment, but that's mainly because its conceptual apparatus requires that debts be offset against investments. But consumer durables only provide a stream of utility over time, not profits. There are some who argue that easy mortgage finance also encourages "overinvestment" in housing, at the expense of more "productive" assets.
>What is agitating me is the idea drummed into us that the working class in
>this country does not save enough. Well, yes, income employed workers may
>have saved is instead expended to pay off interest charges but that's a
>contribution the working class makes to the savings of the rentier class.
>The working class is saving more than recognized but not for itself.
"What the speculating trader risks is social property, not his own. Equally absurd now is the saying that the origin of capital is saving, since what this speculator demands is precisely that others should save for him" (Marx, Capital vol. 3).
Jordan Hayes wrote:
>I think that's at least part of the reason that the sharp increase
>in consumer debt hasn't correlated directly with a decrease in
>personal savings
A rise in interest paid means a rise in expenses, which, all other things being equal (like income) means a decline in the savings rate by definition.
Yoshie Furuhashi wrote:
>When enough debtors begin thinking like Doug & Michael and start saying
>'fuck the rentiers!' politicos will start fretting and begin yammering
>about the lack of personal responsibility and the evils of greedy lawyers.
>They might think of bringing back debtors' prisons, in their moments of
>Dickensian excess. At least they would try to make it more difficult to
>file personal bankruptcy, wouldn't they?
The credit industry is trying to do exactly that. Their dream bankruptcy reform would be to put everyone into a repayment program rather than discharging debts.
>So what's gonna happen when the next recession comes (which should be
>pretty soon, I think) in the USA?
If we have a full-blown recession in the U.S. without the Fed having pushed up interest rates, it'd be highly unusual. That happened in 1990-91, when the private credit machinery choked and sputtered even though the Fed had been lowering rates. If it happened again, then lots of assumptions about how the world works would have to be rewritten.
>Doug never tires of reminding us that the US economy is, yes, doing quite
>nicely, but the post-70s recovery + recent boom of the US economy has been
>mainly manufactured by removing stabilizers both on the consumption front
>(union busting, the 'welfare reform,' high indebtedness, etc., that is,
>beating back workers) and on the state regulation front (e.g. deregulation
>of the financial sector), right?
>
>And suppose the next recession in the US will conincide with giant economic
>and political turmoils in Asia + Russia?
That would be the downside of the New Paradigm that Wall Street and its house intellectuals love to celebrate - the late 19th century with fiber optics.
Michael Perelman has argued - right, Michael? - that deregulation and the increase in competition have unleashed the naturally deflationary tendencies of an unregulated capitalism. It may be that the U.S. inflation rate, celebrated as an economic wonder as it continues to fall 7 years into an expansion, is actually a symptom of underlying deflation. Asia looks that way, the commodity charts look that way. The only things that don't look that way are U.S. wage rates and the stock market.
Doug