Demand? What With?

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 market.

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 bodies.


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 exchange.

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 foolish.

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 year.

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 naïve taxpayers and naïve 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.

August 9, 2003

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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