Heinz
Exactly correct. Economists across Wall Street have been saying for the last several months that the consumer is going to "save" the economy. By their reckoning, the consumer will keep spending until corporate capital spending is able to go positive again, and recession will be averted. These economists, I hate to say, have economic relationships precisely backward, and should re-examine their copies of Keynes' General Theory of Employment, Interest and Money (1936). If I may quote:
“The traditional analysis is faulty because it has failed to isolate correctly independent variables of the system. Saving and Investment are the determinates of the system, not the determinants. They are the twin results of the system’s determinants, namely, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest. These determinants are, indeed themselves complex and each is capable of being affected by prospective changes in the others. But they remain independent in the sense that their values cannot be inferred from one another. The traditional analysis has been aware that saving depends on incomes but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment.”
Keynes' central insight here is that the CAUSAL CHAIN in capitalism runs from INVESTMENT to INCOME to SAVINGS, not the other way 'round. Which is to say that the ability of the consumer to "hang in there" currently is no more than the lagging effect of the last several years of corporate investment and the consumer income that it generated. With investment outlays falling like a rock, it surely follows that consumer income will shrink (it is slowly starting to show up now, as tax with-holding receipts are now finally flat yr-yr (adjusted for the change in with-holding thanks to the tax break) after being up 2-4% for most of CY01) and subsequently the consumer will re-trench. The consumer shoe will drop, as surely as night follows day.
Cheers |
