The Weiner Component #94 – Consumption Equals Production

Comparison of real GDP using BEA Deflator vs r...

Comparison of real GDP using BEA Deflator vs real GDP using Money Supply (Photo credit: Wikipedia)

Much has been stated and written during the 20th Century about the production of goods, about how production brings about the consumption of a particular product, there are theories about how a finished good will find its own market.

How valid are these beliefs? If the product or products are highly desired as those produced by a company like Apple then the theory would seem to be valid. Apple, while not a monopoly, produces unique items. But if the product is an automobile like a Ford, Chrysler, Volkswagen, or Honda then the theory is limited. First off there are a number of national and international companies competing for the sale of their product. Automobiles are expensive items. Only a certain number is needed on the market or can be afforded; and these can be new or used. If a seemingly endless amount are produced by the assorted companies then at some point the price will decrease and will continue to do so until the cost of producing the vehicle could be greater than the price for which it can be sold. What we have here is a question of demand and supply, not a theory of production; and even that is an anomaly because supply is engendered by demand.

The term supply and demand is actually the opposite of what it should be: Demand determines Supply. An entrepreneur will produce and market virtually any product from which he can make a profit. He is, after all, in the business of making money; profit is his major goal as an entrepreneur.

It would seem that the ability to purchase, having the funds to pay for goods and services, determines the extent of the production of wealth. After all free access of money determines the production of all goods and services.

In the period leading up to the Housing Bubble of 2008 a goodly percentage of homeowners used their homes as bank accounts, freely remortgaging again and again, in order to acquire whatever they wanted. There was essentially full employment and everyone was doing well, that is both consumers and producers. When the bubble exploded, because of the abuse of the banks, and housing values collapsed like lead weights many consumers were suddenly left underwater, owing more on their homes than they were worth. Consumption of both goods and services came to screeching halt and the economy tanked. There was suddenly massive unemployment. Generally outside of absolute necessities the public could not afford to consume and we were headed for a massive depression which the federal government was able to forestall by massive loans to some industries.

What happened here was that consumption of goods and services stopped when the money supply dried-up. It was the massive sudden termination of consumption that brought about the extent of the crash. Limited consumption had engendered what was largely the end of a production boom and unemployment suddenly became massive.

What suddenly happened in the economy was that consumption determined production. The ability of people to freely spend money had suddenly ended and unemployment almost instantly rose to phenomenal heights. The same people who could no longer spend were those who mainly suffered from the lack of spending. An interesting note of irony!

Money, currency was and is a tool issued by the government of the nation. It has no intrinsic value and can be freely issued by the central government. All that is required for an additional release of this paper is for the government to print it and issue it.

The problem is that if too much of this paper is released into the general society, if the people have more currency than the amount of goods and services that can be produced then the cost of the materials that can be produced within the society will be bid up and mad inflation can be the result. If, on the other hand there is too little money in circulation the public will be limited in what they can buy and a recession and large-scale unemployment will result. The government, in issuing currency has to keep a constant balance between these two positions.

The basic problem or problems here is that the government has to keep a balance and distribute this money, the national income, on the widest possible level throughout the society for maximum demand.

The principle here is that Demand Equals Production. And for maximum demand to occur the money, the national income, must be distributed throughout the entire society.

Unfortunately what is currently happening is the opposite of what should be occurring. Since 2009 a greater and greater share of the national income is and has been moving up to the upper twenty percent of the society. They are currently earning far more than they can possibly spend and their surplus funds in the millions are being stored while the bottom twenty percent is getting less and less of the national income, and the middle class is, in most cases, just barely maintaining itself or just about shrinking in size. There has been a redistribution of income continually going on.

In order for the economy to grow and for everyone to reach a level of prosperity the federal government has to take control of the national income and widen its distribution to include the entire economy. One way this can be done is through tax and entitlement policies. Another way would be by fiscal policies, Congress passing legislation to upgrade the infrastructure of the United States and bring it into the 21st Century. Of course a combination of the two would be even more effective.

The 2014 Midterm Election will give the country an opportunity to decide in what direction it wants to go for the next two years: with the Republicans toward continued gridlock or with the Democrats attempting to move toward fiscal policy, possible tax reform, and toward full employment.

The Republican conservatives who represent the well-to-do CEOs and successful entrepreneurs are generally representing congressional gridlock. They don’t want any changes in the economic system. But if they were to look closely at the system they would discover that their economic base is slowly shrinking. As more and more people are slowly being forced from the middle class to the lower class their ability to consume goods and services is slowly also shrinking. As the percentage of the poor goes from 20% to 22% to 25% to 30% their shrinking incomes will be able to buy less of the goods and services this society is capable of producing and the GDP will decrease at a greater rate than these people’s incomes. The profits possible will also shrink and so will the incomes of the upper 20%.

In essence these people are contributing millions of dollars in political elections to support an economic system that in the long run will significantly reduce their profits and shrink the GDP.

If they were to reverse their positions and support the Democratic positions of fiscal spending and reform of the tax system then they would be engendering a phenomenal growth in the GDP which, in turn, would massively increase their profits and incomes. By fairly paying taxes and encouraging the Federal Government to bring the infrastructure up to standards in the 21st Century the upper 20th percent could multitudinously increase their profits and income far beyond what they would be paying in increased taxes.

It’s a wonderful piece of irony, having the upper echelon of our society fighting tooth-and-nail against their own long-term economic interests.

English: Changes in US Money supply based on F...

English: Changes in US Money supply based on Federal Reserve historical data. Source code is in File:Components of US Money supply.svg (Photo credit: Wikipedia)