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03 Growth or Recession

Inflation and deflation have already been talked about here, but they were not talked about in the context of growth and recession.

Deflation, a lowering of prices, is not in its self bad or good because there are two different causes for deflation;

Supply driven -
  • Supply volume increases - because suppliers scale up operations or new suppliers enter business, which may lead to
  • surpluses or/and price drops, which may lead to
  • Demand volume increases - through increased buying by consumers.
Hence consumers getting more. This is economic growth.

Demand driven -
  • Demand volume decreases - decreased buying by consumers, which may lead to
  • price drops or/and surpluses, which may lead to
  • Supply volume decreases - suppliers scaling down operations or suppliers leaving the business.
Hence suppliers supply less. This is economic recession.

Inflation, a raising of prices,  is not in its self bad or good because there are two different reasons for inflation;

Supply driven -
  • Supply volume decreases - suppliers scale down operations or suppliers leave the business, which may lead to
  • shortages or/and price rises, which may lead to
  • Demand volume decreases - decreased buying by consumers.
Hence consumers getting less. This is economic recession.

Demand driven -
  • Demand volume increases - increased buying by consumers, which may lead to
  • price rises or/and shortages, which may lead to
  • Supply volume increases - suppliers scaling up operations or new suppliers entering the business.
Hence suppliers supply more. This is economic growth.

Economic recession is not necessarily a bad thing in a culture of over consumption.

Economic growth is not necessarily a good thing in a culture of over consumption.

Examples

During the great depression Woodrow Wilson's Government tried to stop the price of grain dropping by reducing the supply, an inherently recessionary move that caused unnecessary hunger.

This was a mistake because the price was dropping due to lack of demand because people didn't have money, not due to over supply. This basic lack of understanding appears to be still with us.

During the 1970's the rise in the price of oil led to recessionary inflation because it was not caused by an increase in demand.

The current deflation in all but housing is the result of a huge increase in supply, however demand may decrease because demand was fuelled by loans. Thus growth deflation may turn to recessionary deflation as people can't borrow any more.

On the housing front the growth inflation has been caused by increased demand fuelled by loans, this may turn into recessionary deflation in housing only as a result of at least one of the following;
  1. Sufficient repossessions undercutting current prices.
  2. Building and inherited housing outstripping new loans.
  3. Banks reverting to 3 times salary rather then 5 times salary and other restrictions on the new loan limit.
  4. Panic selling due to concerns that prices will drop for the other reasons mentioned.
  5. A fundamental change in house buyers attitudes.a loss of confidence in the borrowing for housing paradigm. (Unlikely.)
Ultimately one must consider the supply and demand for housing and the supply and demand for loans to be the major price determining factors here. Another important factor is the belief in where future prices will go.

The Trade Web Balance

The trade chains and rings discussed before here are composed of economic bodies linked by what they supply and what they demand.

So when supply or demand change at some point in the trade web the effects will depend on the form of the interconnections in that web. Effects will feed back and forward along the trade chains. There will always be corrective forces on any link in the chain that over produces or under produces.

Over Production - As an economic body increases volume it sells it is likely to also increase the volume it buys. Its selling prices may drop due to the increased supply and its , buying prices may rise due to its increased demand.

Under Production - As an economic body decreases volume it sells it is likely to also decrease the volume it buys.Its selling prices may rise due to the decreased supply and its , buying prices may drop due to its decreased demand.

The selling less buying price is profit, which times the volume gives the overall profit for the body. There will be an optimum volume to maximise overall profit depending on the demand and supply characteristics.

(Notably although the effect of optimising profit will control the links in the chain to some extent, Ultimately psychology is a huge factor in determining demand and supply. Advertising manipulates psychology to increase demand.)

There may also be a number of local optimal volumes where a tiny increase or decrease in volume would lead to less overall profit.

In the real economy there isn't just supply and demand for basic things to be bought and sold, this is supply and demand for borrowing and lending of anything including money its self.

Profit and Loss

Profit, here described as the difference between selling and buying price, leaves the company as wages and as dividends.

Wages and dividends will be spent, saved or lent in various proportions and this will deeply effect the kind of economy that results.

Production and Consumption

There is a popular idea in economics that the higher the GDP, the more we produce and consume the better it is. Growth is seen therefore good and recession is therefore bad. An increase of under-consumption may be a good thing but so is a reduction of over consumption. The most fundamental economic problem is when needs are not met and second to that when wants are not met, but a reduction in demand may be due to a lack of want, not a lack of money and this surely is not a bad thing.

Growth feels good because it normally increases employment and profits. Recession hurts because it normally decreases employment and profits.

The Objective

We have a planet of people who need to be fed, housed and clothed and want a lot more besides. We also need these people to be able to contribute their lives to something worth while as judged by others.

Economics is a system that determines who will and who will not have their needs and wants met, even who will live or die. It also decides what contributions are considered worthwhile as people vote with their money as to which work is valued and therefore which way humanity will go.

Can economics truly serve this purpose? No, because it is undermined;
  1. The wealthier nations have argued for a free market yet ensured that the labour market was not free, that people are contained in nations and that movement of people between nations is severely restricted.
  2. Some nations persistently dominate other nations not through a fair economic process but by economic manipulation, political influence, covert action and finally war if all else fails. They justify this based on some Darwinian "Survival of the fittest" argument but they have never read Darwin who never suggested that dominance was a universal formula for success. This is another topic. See The Selfish Gene

The Consumer Economy

Victor Lebow was a 20th century economist and retail analyst who wrote;

"Our enormously productive economy demands that we make consumption our way of life, that we convert the buying and use of goods into rituals, that we seek our spiritual satisfactions, our ego satisfactions, in consumption. The measure of social status, of social acceptance, of prestige, is now to be found in our consumptive patterns. The very meaning and significance of our lives today expressed in consumptive terms. The greater the pressures upon the individual to conform to safe and accepted social standards, the more does he tend to express his aspirations and his individuality in terms of what he wears, drives, eats- his home, his car, his pattern of food serving, his hobbies. 

These commodities and services must be offered to the consumer with a special urgency. We require not only “forced draft” consumption, but “expensive” consumption as well. We need things consumed, burned up, worn out, replaced, and discarded at an ever increasing pace. We need to have people eat, drink, dress, ride, live, with ever more complicated and, therefore, constantly more expensive consumption. The home power tools and the whole “do-it-yourself” movement are excellent examples of “expensive” consumption." 

I am unclear why he picks on home power tools!

The Great Depression

Keynes wrote, in 1930, the world was;

 "... as capable as before of affording for every one a high standard of life.... But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." Keynes feared that "the slump" that he saw in 1930 "may pass over into a depression, accompanied by a sagging price level, which might last for years with untold damage to the material wealth and to the social stability of every country alike." He called for resolute, coordinated monetary expansion by the major industrial economies to "restore confidence in the international long-term bond market... restore [raise] prices and profits, so that in due course the wheels of the world's commerce would go round again."

Pages on The Great Depression by various Authors;
J. Bradford DeLong
Wikipedia



(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.





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