Daily Archives: October 9, 2014

Aggregate Demand. The holy grail of economics.

Humanity has a liking for both philias (in Greek, obsessive mental love) and phobias (in Greek, aversion, hatred). After all, if the Darwinian human evolution theories are correct, herd thinking preceded individual thinking  (my apologies to Adam and Eve believers). Philias and phobias are great for crowds. No subtle or complex thinking is required. You just follow the herd with simple binary answers. And now the herd is convinced that printing money is good. GDP growth (even prostitution and drug traffic induced) is good. Money should be lent for free (why pay the saver?). Deflation is bad (it’s better to degrade the purchasing power of your salary). Salaries should be as competitive (read low) as possible. Profits must soar to help equity price bubbles. Nowadays surely everyone must know that everything must be done to ensure the continuity and growth of the holy Aggregate Demand. If they don’t, they must be autistic (thanks Dustin Hoffman. What a film on the subject you made). They are sick -do not listen to them.

SPAIN-RELIGION-GRAILAggregate demand (AD) is the new new Holy Grail. It’s a better asset than gold, crude, water, or land. Pressed to choose an asset, I’d rather own the sovereignty of 500.000 citizens with substantial purchasing power, than a nuclear energy generation complex. All kinds of corporations would try to sell their products and services to my citizens. I’d make them pay for that. And, rest assured that they would pay me every time they tapped my  AD. Regardless of the fact they made a profit with it or not, and regardless of their nationality. AD is the best long term asset, if you learn to profit from it. Your bargaining position is exceptional.

Keynesians learnt this a long time ago. The rest of the economists were also aware of the importance of AD, but innocently thought it was the constant and gradual supply side improvement that would support it. That was naive; improving AD old style was heavy lifting. Nobody likes heavy lifting any more. Surfing in Hawaii is the new fad. So Keynesians  set up an altar to the AD god (goddess now that I think of it) instead, and prayed to the new god daily. Millions of economists and ordinary people converted to the new religion. We, non-converts, have all been declared heretic. Being burnt alive is our final destiny.

Needless to say, Keynesians are not (all) stupid. With their prayers they also offered the new god some action: daily sacrifices. Good for masses. True enough -no more ritual sacrifices of virgins at an altar. Too messy. Instead, they used monetary and fiscal policy regardless of the effects. Debt soared due to fiscal deficits, and somebody is allowed to starve every other day. After all starving by some is only an inevitable side effect. Same thing with crushing a  new generation with debt. Both effects are something like a war casualty – inevitable. Continue reading