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To: CalculatedRisk who wrote (52058)	6/5/2006 3:08:30 AM
From: shades	Respond to of 116555

marginally employed people (those facing the next round of layoffs) will start increasing their cash reserves fearing their own layoff From what I saw in south georgia - as the poor rednecks were faced with layoffs or worsening financial conditions - it was party time. La vida loca baby. They went heavier into debt, took on more payday loans or started them - took more trips to disney and bought more red lobster dinners on credit. Your assumption they went into SAVE and CONSERVE mode does not match my real world experience - as the financial end got nearer they became more unstable in thier financial life as well as other parts of thier life. I remember my mom watching suze orman and suze talking about her crazy insanity when she came to the end of her finances and job and blew up before becoming the conservative person she claims to be today. I would walk into my friends payday loan store - divorce after divorce was cited as a reason for needing the quick cash - as I got to talking to many of these customers I say what happened? Why the marriage failed - in time I came to conclude many of the spouses - man and wife started having affairs - claiming they wanted to have thier fun and screw the consequences. As the end approached for thier job and finances calculated - thier risky wild behavior increased - it did not go down as you claim. They started spending and consuming in ways they never would have done had thier financial doom not seemed eminent to them. I just saw a simpsons episode tonight where grandpa simpson became a bull fighter - ate salt water taffy and took risk after risk since he was in the end years of his life - I was watching this in the critical care section of the local hospital - funny! hehe tv.com Million Dollar Abie Episode Number: 372 Season Num: 17 First Aired: Sunday April 2, 2006 Prod Code: HABF09 Grandpa goes La vida Loca calculated - he doesn't go conservative: Homer spearheads the effort to get pro-football to bring a new franchise to Springfield. The football commissioner, on his way to officially award the franchise, stops at the Simpson house where Grandpa (mistaking him for a burglar) attacks him. Springfield loses out and Abe becomes the town’s pariah. After trying and failing assisted suicide, Abe decides to live his life without fear and when the town decides to reuse their football stadium as a bullfighting ring, he volunteers to be the toreador. Ever the activist, granddaughter Lisa protests his new profession.

To: CalculatedRisk who wrote (52058)	6/5/2006 11:33:56 AM
From: gpowell	Read Replies (2) \| Respond to of 116555

However, I think the evidence suggests, in times of crises, capitalism tends toward underconsumption. You might as well say, “in a time of crisis socialism tends towards underconsumption.” A given capital structure exists to supply a physically and temporally heterogeneous stream of consumption goods, and any shock will tend to change planned consumption and necessitate a period of adjustment to the capital structure, regardless of whether that structure was created through socialism or capitalism. Or as Krugman wrote: "A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time." The reason appears obvious: during a slowdown, marginally employed people (those facing the next round of layoffs) will start increasing their cash reserves fearing their own layoff. This is somewhat of a self-fulfilling response. As people consume less, more people lose their jobs ... and another group of marginally employed increases their cash reserves. It appears you are equating a tendency towards underconsumption with recessions – that is an error. There is quite a large gulf between the primary adjustments induced by a change in planned consumption patterns and a tendency towards underconsumption. Pigou quickly refuted this aspect of Keynesian economics and it is generally accepted that a spiral into depression (tendency towards underconsumption) is not at all likely from an autonomous change in cash holding preferences. That being said, a recession can easily result from an unanticipated change in cash reserves if the capital structure cannot adjust instantaneously (which is likely). That, combined with shocks (both positive and negative) to the supply side is really the heart of most business cycle theories. However, in our post WWII economy most recessions are induced by the central bank and are not the result of autonomous changes in cash reserves. What does Krugman have to say about that? And what would you say is the remedy? Its how we respond to this cycle that separates the Austrians from the Keynesians. No. The differences are contained in what is assumed about the economy, such as what determines the rate of interest, heterogeneous or homogenous capital, indivisible factors of production, expectations, determinants of money demand, is monetary velocity endonegenous, etc.