Wednesday, December 24, 2008

If Demand Died...

Here's a real Christmas joy post...

Denninger's thesis on 'the death of demand' happens to be mine, too; however, he takes it to the next step and postulates that Bernanke's "zero interest rate" gambit is destined for a very hard fall.

At some point the people have all the cars, IPods and flatscreen TVs they need, and their want for additional consumption becomes tempered by the pain of the debt service that came with "pulling forward" from an infinite future horizon.

In short continuing demand becomes irrelevant because debt service chokes off available free cash flow.

"Quantitative Easing" into such an environment, which we are now in, is a complete and utter waste of time because it in fact requires that additional debt be taken on in the economy in order to do anything.

That is, buying assets from banks and pumping reserves back into them so they can loan them out only boosts aggregate demand if there are in fact qualified borrowers who wish to take out a loan to buy something.

Some so-called "economists" will argue that lowering borrowing costs acts as a stimulative effect in that interest costs come down. This is only true to the extent that there is unsated demand among unsaturated (by debt) consumers

It remains to be seen if B's tactics turn into the Armageddon that Denninger forecasts. There's some doubt about that based on Japan's situation; they did the same thing but the yen hasn't turned to Milorganite.

At least, not yet.


steveegg said...

The only reason the yen didn't turn into Milorganite was because there were markets outside of Japan still buying Japanese products. Sooner or later, there are no more markets to sell to.

Beer, Bicycles and the VRWC said...

It makes quite a bit of sense, and I'vwe considered what happens when debt service exceeds the ability to buy new "stuff". We're clearly at that point and in the absense of the US making stuff that others want to buy, we're pretty limited in GDP growth. And since we are the worlds largest consumers, our unwillingness to take on new debt limits the GDP growth of just about everyone else.

Oh...Merry Christmas.

Shoebox said...

This theory fits much better with real world observations than anything else I've seen. It's also why, and I know you're here as well, believe that the running around like headless chicken act that Hank and Ben are doing, is just about useless. Until debt level comes back in line with reality consumers will be AWOL. Banks can have all the money to lend that they want but if no one wants to borrow, what's the use.

Merry Christmas!