It’s Demand, Stupid!Posted: 15 September 2011
Keeping with my week of jobs and the economic thing……
The Prez made his speech to the joint session of Congress and the American people, after caving in to the political BS, and we now have his plan for jobs……..“intention to lay out a series of bipartisan proposals that the Congress can take immediately to continue to rebuild the American economy by strengthening small businesses, helping Americans get back to work and putting more money in the paychecks of the middle class and working Americans, while still reducing our deficit and getting our fiscal house in order.”
First of all…..YAWN! This has about as much chance as I have being elected “Miss Teen America”…..
Now for the GOP plan for jobs creation……..a noun, a verb and tax cuts……..
Analysis…..a even bigger YAWN!
Let us try to be realistic….we need demand, not liquidity…….tax cuts will create liquidity and liquidity will create profitability and profitability creates NO jobs! Is that easy enough for you?
But wait! What is demand?………..analysis of demand with regard to consumer behavior and rationale when changes occur in variable factors such as price, income, substitute goods.
And then there is liquidity…….the ability to convert assets to cash quickly…….
Back in 2008, at the beginning of this present economic crisis I posted……
Governments in advanced countries have still not recognized this onset of a crash. They have proceeded on the assumption that the injection of liquidity into the system is all that is needed. It was thought initially that this injection could be achieved through the government purchase of “toxic” securities, but widespread opposition to that scheme has now made most governments accept the idea of injection of liquidity in lieu of equity, i.e. through the part-nationalization of financial institutions.
But injection of liquidity, even in this manner, is not enough. Credit will not start flowing simply because banks can access more liquidity. There has to be adequate demand for credit for viable projects by solvent and worthwhile borrowers. And this is not happening. First, the injection of liquidity does not improve the solvency of firms saddled with “toxic” securities, so that the risk associated with lending to them remains prohibitively high. And secondly, quite apart from this, the anticipation of a Depression makes borrowers chary of borrowing and lenders chary of lending.
This anticipation in turn derives from several factors: first, the bursting of one bubble is not necessarily succeeded by the immediate formation of another, so that some recession of a more or less prolonged duration is in any case inevitable. Secondly, the very scale of the current financial crisis is such as to entail an anticipation of a prolonged recession. And thirdly, since the recession has already started, the prospects of crisis-prevention now through the usual monetary instruments (including liquidity injection) appear distinctly dim. The scenario, in which tendencies towards increased liquidity preference on the part of private individuals and institutions and a downward slide in the real economy mutually reinforce one another, has already started unfolding itself and will continue for a prolonged period, unless governments now act to inject demand into the economy directly, apart from injecting liquidity. Until this happens on a large enough scale the Depression will persist.
ZZZZZZZZ….all that is so much mumbo jumbo, right?
I can fix that! Chuq’s economic law………demand creates jobs; liquidity creates billionaires……see it is that simple! Let us go back to another theorem…..a theorem that pertains heavily to the jobs debate in Washington…..and since our elected officials are not the sharpest pencils in the box when it comes to economics…..let me make it really, really, really simple for them……..
tax cuts creates liquidity, liquidity creates profitability, profitability creates NO jobs….one more time……PROFITABILITY CREATES NO JOBS!