Cool-Aid drinkers like the Keynesian bozos at The Atlantic (The Most Overlooked Statistic in Economics Is Poised for an Epic Comeback: Household Formation) have been gumming ever since the 2009-2010 bottom that household formation will come springing back. Recall that during the decade before the financial crisis new household formation averaged about 1.5 million per year, but has since dropped by two-thirds to about 500k. Its obviously all about student debt serfs who have moved back into mom and dad’s basement and who flip hamburgers on weekends for enough change to get by on.
Yet this condition was held to be a transient artifact of the financial crisis and the recession which followed—an aberration that went unexplained but which was also firmly dismissed as a 100-year flood type event. So the blustering insistence that kids would soon leave mom and dad’s basement and that the household formation rate would leap out of the sub-basement of its historical trend line actually crystalizes the circular illogic of the whole Keynesian case.
The supposition was that we function in a timeless and ever repeating business cycle which fiscal and monetary stimulus inexorably (and magically) arouses from its slumping phase. Accordingly, it is always and everywhere only a matter of time before a “stimulated” economy achieves “escape velocity”, thereby causing the growth of jobs, income and spending to accelerate.
The latter, in turn, always has and would again fuel “normal” household formation rates. From there it would be off to the races—with a subsequent virtuous cycle of more households generating more demand for new housing starts, construction jobs, income, spending and all the rest of the magic.
But this whole happy scenario is really just another case of the legendary economist who proposed to ascend from a 50 foot hole by announcing, “assume we have a ladder”.
The Keynesians did not explain why an economy with $59 trillion of credit market debt and stranded at peak leverage ratios across all sectors— households, business and public sectors alike—would suddenly break into a sprint, and thereby pull along a food chain of earners, spenders and household formers. They didn’t address that crucial matter, of course, because the Keynesian models contain no balance sheets—just flows of what in cycles past were freshly minted household credit and spending power, and which now amount to some mysterious ether called “accommodation”.
Stated differently, what the Keynesian models resolutely ignore is this cardinal fact: After 40-years of a giant debt party in America, damage has been done! There is no escape velocity because there is no escape from a condition in which too much consumption, borrowing and get-rich-quick speculation has led to a drastic impairment of capitalism’s ability to generate genuine economic growth and new wealth.
In any event, the Q1 numbers are out, and the household formation rate has taken another turn south—to a gain of less than 200k over the past 12 months or barely 15% of its heyday average. Indeed, in contrast to the sizzling snap-back to 2 million or more annually expected by the Keynesian modelers, the current rate is now at a 30-year low!
Yes, immense damage has been done. And monetary planning is only making it far worse.