Demand? What With?

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One reason that stock market bulls offer as a justification for
a rising economy is the growth of population in America. Think of
all that new demand! Problem: rising population in China under Mao
and in India under Nehru did not translate into rising stock market
values in either nation. It translated into starvation in China
and billions of dollars of Western government-funded food aid to
India, especially the United States, under Public Law 480, which
has for decades allowed Democrats to assuage their guilt for England’s
having somehow impoverished India, and Republican agribusiness owners
to assuage their guilt for not having made enough money in the free

To translate population
growth into economic demand, mouths must be accompanied by hands
and minds.

Population in America
is still growing. Immigrants are still crossing borders: babies
cross birth canals, and foreigners cross judicial lines that are
represented on maps. Babies are mostly mouths. There is some question
regarding the hands/mouths ratio among immigrants, because of the
costs of the various governments’ welfare systems. But if you factor
in the black market, the ratio is higher than what the official
figures indicate.

The policy question
is this: In the long transition from mouth to hands, to what extent
do government programs subsidize mouths at the expense of hands?
In other words, to what extent is the government like the man-eating
plant in “Little Shop of Horrors”? When it cries out, “Feed me,
Seymour,” how long can Seymour keep supplying bodies?

You and I are the potential


Economists are divided
between demand-side and supply-side. The demand-side Keynesians
dismiss supply-side economics, which they say goes back to Jean-Baptiste
Say’s observation in the early 19th century that production creates
its own demand. It doesn’t, say the demand-siders. But, as it turns
out, neither did Say.

Say did not argue that
production creates its own demand. What he described is an economy
in which personal production creates the possibility of making a
bid for the output of another person’s production. Production creates
demand, but this demand may not be sufficient demand to obtain an

Every free-lance author
knows that production doesn’t automatically create its own demand.
The author wails: “But I worked so hard too write this book!” The
publisher responds: “But the manuscript is insufferably boring,
and you’re asking for a $500,000 advance.” Verbal demand is not
the same as consummated demand — an observation that surely applies
to other areas of life as well.

Say’s law never taught
that production creates demand, which is how Keynes misstated Say’s
Law. It says that, if markets are left free from coercion by the
government, prices will fluctuate to clear prior production. At
some price, there will be a buyer for just about anything.

It is not that production
creates its own demand. It is that lack of production fails to create
any demand. He who possesses no results of production cannot register
economic demand. He can register a robber’s demand: a gun in your
belly. He can also register a political demand: a tax official’s
gun in your belly. But he cannot register economic demand.

All people have mouths.
Most people have hands. Most people have functioning minds. By putting
together minds and hands, people feed themselves. Their mouths consume
production. The mere existence of mouths does not create demand.
Neither does hunger. Hunger creates incentives, not demand.


Keynesianism rests
on an assumption, namely, that minds and hands are insufficient
to produce wealth. Minds and hands can produce goods and services,
but this is not sufficient. It’s not enough to produce something
another person wants. The other person must have money to buy an
item that is offered for sale. For a Keynesian, the solution to
the problem of insufficient demand is the creation of money and
then the delivery of this newly created money to all those who want
to buy, and deserve to buy, but who have no money to buy, so that
they can buy.

Rarely stated is the
other Keynesian assumption regarding people’s unwillingness to buy:
“at today’s prices.” There is a glut of goods, the Keynesian says,
but he rarely ads “at today’s prices.” This glut of goods will convince
producers to stop producing “at today’s prices.” Then there will
be lay-offs “at today’s prices.” Then there will be falling demand
“at today’s prices.”

Print up some new money,
and sellers can sell their unsold goods. Somehow, if the central
bankers are trained by Keynesians, this new money will not raise
prices. Fiat money is therefore necessary to create demand. Productivity
is just not sufficient.

Once in a while, Keynes
let the ethical cat out of the bag. A self-proclaimed immoralist,
when it came to trade unions, he became a dedicated moralist, a
veritable theologian of salvation by laws. Traditional economists
asked, “If men are unemployed, shouldn’t they offer their labor
services for less money?” Keynes answered, “Perish the thought!”

Having regard
to the large groups of incomes which are comparatively inflexible
in terms of money, it can only be an unjust person who would prefer
a flexible wage policy to a flexible monetary policy, unless he
can point to the advantages of the former which are not obtainable
from the latter? (The
General Theory of Employment, Interest, and Money
,” p. 268)

In the previous paragraph,
in an almost identical phrase, Keynes described such a person as

He asked for advantages
of a flexible wage policy over a flexible monetary policy. All right,
here are a few. How about this advantage: the freedom to make an
offer? How about this advantage: living in a society in which politicians
don’t legislate price floors and therefore unemployed resources?
How about this advantage: an economy in which a legislated monopoly,
the central bank, can’t debase the monetary unit so as to favor
special-interest groups, above all, commercial bankers?

That is not good enough
for the Keynesian economist. Nor is it good enough for the monetarist,
who says that the goal of central bank policy should be a stable
price level (measured, or at least announced, by some unnamed official
agency), which can be achieved by a steady increase of the money
supply by 3%. Well, maybe 4%. On the other hand, possibly 5%. Anyway,
from between
3% to 5% per annum

When Milton Friedman
said in 1965, “We are all Keynesians now,” he wasn’t whistling Dixie.
He meant methodologically,
but so do I. Methodology involves certain assumptions about the
way the economy works, and the monetarists, despite their commitment
to the free market in other areas, call for a central bank that
can set national monetary policy. They just want it to set policy
their way.


Without improved tools
of production, there will not be economic growth. Even a forecasting
genius who can figure out a way to beat the futures market needs
savings to buy the futures contract that will make him rich if his
theory is correct. A genius without capital is like a race track
tout who is out of cash and who can’t get another bettor to put
his money where the tout’s mouth is. The tout will have no effect
on the race’s odds.

Thrift requires future-orientation:
a willingness to forfeit present consumption for the sake of greater
future consumption. It’s a philosophy of “pay now, buy later.” This
phrase is not heard often with respect to Americans. Domestically,
the personal savings rate is around 3% of disposable income. This
is not enough to keep the expansion going strong.

Does America have investors?
Yes: foreigners. Foreigners are buying up American assets equal
to America’s payments deficit: officially, about $500 billion a

Those who predict a
rising stock market are assuming that (1) foreigners will continue
to take their profits from selling Americans trinkets and invest
the money in America; (2) if they don’t, Americans will then pick
up the slack left by foreigners who have decided to sell to consumers
whose long-term prospects look better; or (3) the Federal Reserve
System will print up enough money to buy up all of the stock markets’
listed shares, thereby purchasing America’s productive capacity.

No, no, optimists say:
the FED buys only debt, not equities. There is no such legislative
restriction on the FED, but, officially at least, the FED buys only
government debt. But the FED is also universally regarded as the
lender of last resort. If so, then it is the creditor of last resort.
To become the creditor of last resort is to become the potential
forecloser of last resort.

Either way, as a buyer
of equities or as the lender of last resort, the FED has legal ways
to become the owner of America’s capital assets. This is the long-term
implication of every central bank. If the central bank creates money
in order to forestall or overcome a recession that was caused by
its prior policy of monetary inflation, then there is no limit to
its ability to purchase assets.

This is what the FED’s
counter-cyclical policies imply: the owner of last resort. It is
so easy for the FED to purchase income-producing assets. It doesn’t
have to save; it merely has to print.

The FED can pay now
and buy now. In fact, this is the only way it can add reserves to
the monetary base. It must pay when it buys. By buying government
debt, it is buying time by allowing politicians to buy votes. By
forcing down short-term interest rates, it is buying time for corporate
insiders, time to unload their shares onto the investment funds.

Of course, the nave
taxpayers and nave savers will pay later. When the dollar declines
in purchasing power, there will be mostly losers and a few winners.
The winners will be those people who did not trust the dollar and
unloaded it on the trusting souls who believed the FED’s blarney
and the politicians’ promises.


It can happen. The
FED stands ready to pump in new money. But if it continues to do
this, then the dollar will not be so attractive to foreign investors.
This will precipitate a sell-off of dollar-denominated assets. Bond
yields will rise; bond prices will fall.

Can the stock market
boom while bonds are being decimated? Why should a falling bond
market create optimism regarding the stock market? It is possible,
but I don’t foresee this. Most stocks are owned by pension funds
and by rich investors: the top quintile (20%) of wealth owners in
America. They are also holders of bonds. They have been hammered
hard by the fall in bonds over the last six weeks. Why should this
encourage them to buy stocks? As a last resort, yes, but there are
other stock markets, other bond markets.

Why buy American shares
when the mortgage market is facing rising rates? The housing market
has been “the engine that could” ever since 2000. If its continuing
growth is threatened by rising mortgage rates, which segment of
the economy will replace it? John Schaub, my real estate advisor,
says that the housing market is very close to the top. He tells
me that his trainees around the nation say the same thing regarding
their regions.

Rising rates for mortgages
means a falling supply of borrowers whose incomes make them eligible
for loans. Yes, there is a steady increase in population in the
United States. But this doesn’t mean that they can buy homes. Remember
Say’s Law: empty-handed demand doesn’t count.

Have you checked the
income prospects of recent college graduates? I have two of them
among my children: one is unemployed (computer programmer), and
the other is employed in a low-level job that barely provides enough
income to rent an apartment. Both were good students, and both have
been out of school for several years. Their generation faces competition
from India and China. So will all subsequent generations.


I hear forecasts of
rising demand based on an increase in the number of mouths. I prefer
to hear about rising demand based on creative minds and busy hands.

State taxes are rising.
Government deficits are rising. The deficit in the balance of payments
is rising. Corporate insiders are selling their shares.

Where are the new jobs?
Where are the savers? Where is hunger becoming a motivator to increased
production? In Asia.

Where are the layoffs?
Where are the borrowers? Where is hunger becoming a motivator for
increased government benefits? In America.

Japan is inflating,
China is inflating, and America is inflating. The race is on to
see which nation can avoid depression on the one hand and a collapse
of currency purchasing power on the other. “Place your bets.”

They never admit this:
no matter which nag you bet on, the payoff will be in fiat money.

9, 2003

North is the author of Mises
on Money
. Visit
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