>
>. 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.
Doug, you have mentioned elsewhere that this boom is among the most consumption-led in terms of consumer durable and housing spending, and I have always hoped that you would elaborate on the significance of this. As we are debating the effect consumer debt has had on this special character of the 1990s boom, it would seem that the Hayekians would emphasize the fragility and danger of a boom of this character.
They are usually quite worried that that consumption is always too large to permit the rate of capital investment required to maintain profitability in the capital goods industries.
I hope Michael and others will lend their considerable knowledge to this discussion.
But I will be primitive here. Drawing non-specific factors into the consumption goods or lower order industries (retail, clothing, food entertainment and services) and thus compounding profitability difficulties in higher order capital goods industries such as raw materials, mining and manufacturing, a consumption led boom also siphons off savings, thus raises interest rates and compounds in yet another way profitability difficulties for those higher order industries more sensitive to interest rates on account of the longer time required for them to show a profit. The eventual contraction of higher order industries diminishes employment, which then spreads the panic to the lower order industries despite the credit-reinforced stimulus they had been enjoying.
In terms of Hayekian capital theory, one would expect that a credit-backed expansion of the consumer goods industries can only result in prolonged depression due to the maladustments it has caused (Hayekian theory seems to be a variant of the disproportionality theory critiqued by Mattick in Economic Crisis and Crisis Theory). Marxians have a rival theory for why crises will tend to break out first in the so-called higher order or capital goods industries and an implicit critique of why a working class anti-savings consumption binge is not the reason for this. Obviously in over my head here.
rb