Collective Conscious

Ygle­sias:

A tran­sient period of some­what ele­vated unem­ploy­ment could reflect a change in tastes—people decide they want fewer apples and more pears and var­i­ous ele­ments of the eco­nomic sys­tem need time to reshape them­selves to fit the new con­di­tions. But a pro­longed period of wide­spread mass unem­ploy­ment paired with a col­lapse in over­all spend­ing reflects some­thing else. Peo­ple haven’t decided they want fewer apples and more pears, they’ve decided they want fewer goods and ser­vices and more safe liq­uid finan­cial instru­ments. What has to hap­pen in response is that gov­ern­ments need to cre­ate more safe liq­uid finan­cial instruments—more dol­lars, more euros, more Swiss & British sov­er­eign debt—until peo­ple decide they’ve had enough and want to increase their demand for goods and services.

The excess demand for money, how­ever, needs some explain­ing (via):

Some 23 per­cent of home­own­ers owe more than their home is worth on the mar­ket, and their demand for goods is restrained by the need to pay down debt. This is the essence of a balance-​​sheet reces­sion, and is what under­lies the so-​​called Key­ne­sian liq­uid­ity trap.

Okay. This is the stan­dard account, and it accu­rately reflects the imme­di­ate cause of the balance-​​sheet reces­sion. We need to go one step deeper, though, and ask our­selves what cir­cum­stances allowed house­hold finances to get into such awful shape.

Think­ing in terms of a labor-​​capital divi­sion, we can argue that cap­i­tal brought in too great a share of the nation’s income. The dynamic pro­ceeds like this: busi­ness inter­ests want to take as much as pos­si­ble out of the eco­nomic pie, and so they fight for gov­ern­ment poli­cies that allow them to do just that (finan­cial dereg­u­la­tion, etc, as hap­pened through­out the Clin­ton and Bush years). Their poli­cies suc­ceed, and finan­cial prof­its soar while house­hold income falls as a share of the econ­omy (stag­nat­ing in real terms). Then house­hold bor­row­ing kicks in to fill the gap:

And there’s your bub­ble form­ing — with­out the debt, you really don’t have the bub­ble. When it bursts, house­hold are left with tat­tered bal­ance sheets and need for cash to cover their debts. But you can’t buy more money, so excess demand for cash causes a gen­eral dis­e­qui­lib­rium — a recession.