This excellent piece on Say’s Law makes a powerful point in plain language: the only way aggregate demand can exceed aggregate supply is if new credit is created, thereby enabling spending before income or consumption before production. In the short-run, the Keynesian rebuke to Say’s law works because balance sheets of households, businesses and the state can be leveraged-up on a one time basis, and Keynesian policy has been doing essentially that since the 1930s—but especially since the reign of monetary central planning 25 years ago.
The trouble is that on an intermediate basis the monetary stimulus to credit expansion can be over-done, and we get the boom-bust cycle that central banks have made the patented feature of their baleful craft. But the central banks can only ignite the boom-bust cycle so many times because it is linear, not circular and timeless. We do not go back to “go” and restart. Instead, with each boom-bust cycle we use up more of our balance sheets to borrow and spend without first producing. At length, we hit “peak debt”, which is where the US economy, Europe, Japan and even China are today.
At the point, the Keynesian witch doctors, like Prof. Larry Summers, sputter that the state’s fiscal and monetary branches are not “stimulating” enough and that we therefore need more in order to attain “escape velocity”.
Well, no. In fact, the arc of official GDP, which purports to measure aggregate demand, is simply being pulled down to the level of aggregate production and income. There is no balance sheet left by which artificial current demand can be stolen from future production. The Keynesian Interregnum is over. Say’s Law is back!
Say’s Law and the Permanent Recession
Mises Daily: Friday, February 28, 2014
Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economy ipso facto has recovered. Or it’s just about to recover, any time now.”