Charles Hugh Smith: The Death of Demands: The Post-Consumer Debt Economy

From Of Two Minds:

Keynesians claim more debt will goose "demand;" they're wrong. Boosting debt has distorted the economy for 40 years, and the end-game is finally approaching.

Keynesians are constantly demanding more debt be taken on to spark "demand" for more stuff. What if debt-fueled demand is dead, expired of natural causes? If so, then the Keynesians are pushing on a string.

The truth is the U.S. has long been a post-consumer economy. Everybody already had a TV, phone, car, etc. 40 years ago, which is coincidentally when wages began their 40-year stagnation and the nation's public and private debts began exploding higher as the forces of financialization took over.

In other words, the only way to get people to buy more crap was to give them vast quantities of debt.

Now that debts exceed 350% of the nation's GDP, we've reached the end of the financialization process: we can't afford any more debt unless the interest rate is near-zero.

Hey, isn't that the Federal Reserve's policy now, forever and ever, near-zero interest rates? No wonder. If the nation had to pay a historically average rate of interest on its debts, the economy would quickly implode like a supernova star.

Take a look at this chart, courtesy of the excellent Market Ticker. It shows how much GDP has been created by each additional unit of debt. In other words, if we add $1 of debt, how much did that goose the GDP? If you follow the zero line, you will find that $1 of debt rarely boosts the GDP more than $1.

Big picture, this reliance on debt for "growth" has led to the banks owning the government and the economy. This is the Dark Side of Keynesism. The "borrow more, we need more demand!" thumpings of "liberal" economists like Krugman and Reich are completely blind to the fact that the borrowing they demand is precisely what has sold the nation down the river and handed control to the banks and Wall Street.

These structural changes are why the naive bleatings of these same Keynesians to "control the banks" are failing: by making the economy totally dependent on ever more borrowing and debt, the Keynesians created the financialization monster. Now that it controls the economy, they're whining, please Mister Too Big to Fail Bank, please hand back control to us nice economists.

http://www.oftwominds.com/blogjune11/post-consumer-economy6-11.html