On the Scale of the US Crisis

So, let's look at the United States’ economic situation in September 2008. A typical deflation crisis began — along the lines of spring 1930 — which was cut short by a massive injection. But what was the reason for this deflationary — that is, linked to a fall in aggregate private demand — shock? To answer this question, let us recall some economic theory.

The normal state of economics is equilibrium. If some external circumstances, such as state policy or changing environmental conditions, drive the economic system away from a state of equilibrium, then it will naturally begin to return toward its normal state, and greater and greater efforts will be required to keep it at an unequal state. I cannot confirm that this idea is true everywhere all the time; it is possible that the “state of equilibrium” does not naturally exist, but that is not the point. As we know, in 1981 the U.S. adopted so-called “Reaganomics,” the economic program which required constant lending to stimulate demand.

Prior to the adoption of Reaganomics, the normal macroeconomic parameters of the average household looked like this: Total debt was not more than 60 to 65 percent of annual income, while savings were around 10 percent of real disposable income. By 2008, these parameters had changed as follows: The average debt was higher than 130 percent of annual income, with savings at around 5 to 7 percent. Note that the latter figure, which in 2008 had not been doubted, was neutralized in the next five years by various statistical tricks, so that in the latest official facts it is near zero. However, this has no relation whatsoever to reality. Two questions arise: How was such a major departure from the state of equilibrium achieved, and how much higher than the equilibrium is American demand today?

The answer to the first question is quite simple: At the beginning of the 1980s, the banking system allowed households to refinance their debts — that is, it became possible to repay old debts using new debts (this was a part of Reaganomics). And so that demand did not begin to fall, the cost of credit was lowered. In 1980 the U.S. Federal Reserve discount rate was 18 percent (Paul Volcker, then head of the Fed, struggled with stagflation), but by December 2008 it was practically zero. The economic system began a natural movement back toward the state of equilibrium by reducing the private demand that had been stimulated for almost 30 years.

The U.S. is now actively trying to stimulate private demand using other methods (describing these methods is not in the scope of this article), but at the same it is falling at doing this, albeit slowly. For how long will it continue to fall? On the basis of statistics, it is possible to give a rough estimate of this fall in demand. If at the beginning of the crisis savings were at 5 percent and they should have been at 10 percent, then the total demand due to the growth of savings is reduced by about 15 percent of the real income of the population in fall 2008. That value was $11 trillion. That is, increasing demand by reducing savings amounted to around $1.5 trillion each year.

Next, demand was stimulated by the increase in household debt — at the beginning of the crisis total debt was about $15 trillion, and this figure grew at about 10 percent per year. That is, here as well the scale of stimulation at the moment of crisis was $1.5 trillion per year. By the way, the coinciding of these figures serves as indirect evidence of their authenticity. The total is $3 trillion excess demand of households over their real disposable incomes.

Until someone explains to me exactly how the U.S. financial authorities plan to find the $3 trillion and give it to households, I will not believe in the natural sustained growth of the U.S. economy. Oh well. Note that I also will not believe in the idea that in the “post-modern” period (I have often written that I do not understand what this even is), the base proportions are changing and the share of household expenditure in the U.S. gross domestic product, which is at its maximum point in history, would seem to confirm this.

Of course, these $3 trillion will not disappear in an instant, but it is their decline that has caused the crisis! Because the fall in demand has caused a fall in employment opportunities and salaries, that is, a fall in incomes, which causes further falls in demand ... and so on and so forth, into a spiral of decreasing demand, toward an equilibrium between supply and demand in terms of households' real disposable income. At a very rough estimate, this point of income equilibrium is below the current income by around $4.5 trillion per year (that is, in order to overcome the crisis, the real disposable incomes of American households should be somewhere in the region of $6.5 trillion per year). Demand, also, should be more than two times less than it currently is.

Regarding the scale of the fall in demand and the incomes of the U.S. population, I am prepared to accept clarifications and debate. But remember that this calculation was made around 2002, and in the last 10 years no basis for its change have been noted. The only question was where there was a high demand — but the “bomb” itself was already placed under the U.S. economic system a few decades ago. And it is due to the above calculation that I cannot seriously evaluate any discussion of the U.S. — and the world — beginning to grow economically, if such discussion is not accompanied by a description of the mechanisms of stimulating the structural imbalance between demand and income. So far, in over a decade, no one has shown me such a mechanism.