Guest Post: The Death of Demand - The Post-Consumer Debt Economy

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Death of Demand: The Post-Consumer Debt Economy

Keynesians claim more debt will goose "demand;" they're wrong. Boosting debt has distorted the economy for 40 years, and the end-game is finally approaching.

Keynesians are constantly demanding more debt be taken on to spark "demand" for more stuff. What if debt-fueled demand is dead, expired of natural causes? If so, then the Keynesians are pushing on a string.

The truth is the U.S. has long been a post-consumer economy. Everybody already had a TV, phone, car, etc. 40 years ago, which is coincidentally when wages began their 40-year stagnation and the nation's public and private debts began exploding higher as the forces of financialization took over.

In other words, the only way to get people to buy more crap was to give them vast quantities of debt.

Now that debts exceed 350% of the nation's GDP, we've reached the end of the financialization process: we can't afford any more debt unless the interest rate is near-zero.

Hey, isn't that the Federal Reserve's policy now, forever and ever, near-zero interest rates? No wonder. If the nation had to pay a historically average rate of interest on its debts, the economy would quickly implode like a supernova star.

Take a look at this chart, courtesy of the excellent Market Ticker. It shows how much GDP has been created by each additional unit of debt. In other words, if we add $1 of debt, how much did that goose the GDP? If you follow the zero line, you will find that $1 of debt rarely boosts the GDP more than $1.

I added the red lines to show the generational shift that occurred in the mid-1970s: debt no longer boosted GDP by much, so more debt had to be taken on to keep goosing the GDP.

This meant that more of the nation's income was diverted to servicing the rising debt, which also meant that wages stagnated and profits to the financial sector skyrocketed. As those profits grew to dominate the profits of Corporate America (roughly, the S&P 500), then the political power of the financial sector and wall Street rose proportionately.

Big picture, this reliance on debt for "growth" has led to the banks owning the government and the economy. This is the Dark Side of Keynesism. The "borrow more, we need more demand!" thumpings of "liberal" economists like Krugman and Reich are completely blind to the fact that the borrowing they demand is precisely what has sold the nation down the river and handed control to the banks and Wall Street.

These structural changes are why the naive bleatings of these same Keynesians to "control the banks" are failing: by making the economy totally dependent on ever more borrowing and debt, the Keynesians created the financialization monster. Now that it controls the economy, they're whining, please Mister Too Big to Fail Bank, please hand back control to us nice economists.

It doesn't work that way. Having sold your soul to the debt monster, the monster now controls you.

Here is a chart of the Keynesian model of financial pathology. As private debt has flattened out--people simply can't borrow any more, as their incomes are flat and they're already maxed out on debt--the Federal government a.k.a. Savior State has ramped up its borrowing to replace private debt.

Meanwhile, total debt continues to zoom ever higher. The Federal Reserve is playing a game of Pretend: Let's pretend that if interest rates are near-zero, we'll always be able to borrow more. Hey, what's a trillion dollars at zero interest? You and I could make the interest-only payments each month, because they're zero.

But shoving "free money" into banks and Wall Street doesn't filter down to John Q. Citizen: it simply incentivizes massive speculation in stocks, commodities, seaside resorts, empty cities in China, you name it. This is the basis of the current stock, bond and commodities booms in the global economy: push trillions of dollars in "free money" to financial players, and guess what, that hot money flows out seeking a fat return.

The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society. Like frenzied rats in a cage, they only have one lever to push to release the cocaine-laced pellets, and so they've been pushing it for 40 years.

Now they're hitting the bar with frantic energy, hoping the crazed and addled rats around them can dredge up some "demand" for more pellets to "consume." But the consumer-rats are bloated and lethargic; they've consumed so much debt-drug that they're near death.

Like a star which has expanded and now cannot maintain its grand state, the debt-based consumerist economy is now poised to experience a supernova implosion.


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So Close's picture

This is exactly what consumers did with low interest ARM, negative amt mortgages on their homes.  Assuming home prices will always go up.   The fed is assuming they can always print more money.  Echos of what Marc Faber and Jim Rogers have been saying for years.

So Close's picture

I am long silver (85%) and short the spy (15%).  My thought was that if this market cratered and took everything lower I could convert the spy gains into more PM's.  At least gold and silver are moving higher.

PulauHantu29's picture

Good move. My brother started reading ZH about 2 years ago and sold his house since he saw prices plunging for years.The tiny profit he took out (before it dropped another 35%) he put into gold and silveETFs.....very smart move.

As the house plunged over and silver rose substantially.

AnAnonymous's picture

Assuming home prices will always go up.


Similar stuff as the US betting there would always be indian lands to rob during the 19th century.

slewie the pi-rat's picture

rilly.  it will be 8AM here in a few.  it is too early for a pi-rat to enjoy these mixed meta-z of the cocained-addled rats feeding @ the keynesian lever getting snuffed by the collapsing supernova. 

oh!  the humanity!

IBelieveInMagic's picture

There is plenty of potential demand -- only drawback is that it is in Asia and Africa and South America. But, the global financial system is oriented to favor and support consumption in the developed economies (USD+swappable).

So, the effort is to solely keep the game going to favor the developed economies by threatening MAD. 


MiguelitoRaton's picture

Is 2007 the start of another phase shift down? If so, it could become very clear that we cannot solve a debt problem by adding more debt.

WALLST8MY8BALL's picture

Sometimes feel I'm running around.
When I'm running around,
running around. Round, round.
Sometimes feel I'm lost when I'm found.
Yes I'm lost when I'm found,
head in the ground. Boo! Hoo! Hoo!
People feel so free when they're bound.
To the circular pound after circular pound.
Wow! Wow! Wow!
I believe in death after life.
Yes in death after life. Switch off the light.
Bye! Bye!
Neo consumer! Neo consumer!
Sometimes I get lost in the mall.
Well I'm feeling so small.
No longer tall.
Insignificant and in thrall
of the force of it all.
Back to the wall.
Bang! Bang! Bang!
Shit hole made to look underground.
Where I'm buying my round.
Spending all my time buying stuff.
When I've more than enough.
More than enough.
Cough! Cough!
Neo Consumer! Neo Consumer!


baby_BLYTHE's picture

and the market screams higher

you cannot make this stuff up

economessed's picture

Blythe, I'll pick a fight with you.  It's not the market screaming higher...  because a market is the pure expression of all human optimism, fear and various yardsticks of worth discovering a clearing price where a buyer is happy and a seller is happy.  We don't have a market screaming higher, we have a small number of algorythmic machines sending ones and zeros to each other over fiber optic cables.  The market is dead.  Whatever happens now depends on coal-fired power plants to generate electricity and feed it over long distances to the silicon-based devices who will do what they have been programmed to achieve.

baby_BLYTHE's picture

alright, it is fight club after all.

All I am saying is that POMO is coming to an end, the FED may even kick off a slight 'tightening cycle' all while Americans are totally broke.

Where is all the liquidity/capital going to flow from?

Even if the FED were to target 'price fix' interest rates, like PIMPCO's Gross suggests, how  is this ultra bullish for stocks? yes, for bonds I suppose. But stocks and the general economy?

Concentrated power has always been the enemy of liberty.'s picture

Were you sitting in the lotus position while you wrote that?  Blythe's post was better written.

SheepDog-One's picture

Must pump.....bubble stawks....must keep.....DOW 12,000.....must pump.....stawks....

the not so mighty maximiza's picture

Nice and concise.  You should have a PhD.


I did it by Occident's picture

But most PhDs I know aren't "concise" at all!  they like to wax eloquent and all that.

Note to self's picture

So how do we go about getting a Jubilee declared?

Cassandra Syndrome's picture

It will passively happen, the tipping point is past, debt can no longer be mathematically serviced with the declining incomes. Either it is inflated away or written off.


Dr. Richard Head's picture

I forced my unsecured creditors to take a 50% haircut on part of the debt that I "supposedly" incurred and then a 73% (or so) haircut on another - Citi and JP Morgan respectively.

Tried to force a haircut on my mortgage and car, but my bank actually owns the note for the car and home like the banks of yore.  I guess I could challenge it on lack of consideration, but I decided against it.  Instead trying to arbitrage dollars in silver and gold, along with hopefully taking advantage of the inflationary pressures that is raising the wage boat that I am in right now. 

Zero debt is the goal for me , hence the jubilee.

disabledvet's picture

you're not celebrating?  i don't understand...

economessed's picture

Another excellent article, Charles, but I much prefer to label the scenario you've outlined as "Post Growth" rather than Post-Consumer Debt.  Japan is the new model for a post growth economy, and if we're ever lucky enough to rid ourselves of the Federal Reserve, we'll benefit from the deflationary force that is the incoming tide of a Post Growth lifestyle.

Cassandra Syndrome's picture

Good article and charts. Sums up the Keynesian Kamikaze Policies of the last 80 years. The Extend and pretend and pray and delay games are over.

writingsonthewall's picture

...and your in danger of sparking nonsens like this.

"Sums up the Keynesian Kamikaze Policies of the last 80 years"

Keynes? - for the last 80 years? It wasn't implemented anywhere until post war - and it's not been used by any right-centre Government.


In fact Keynes has the 'honour' of being the theory everyone turns to after it all goes wrong.


You should really read about your subject before talking like you know what you're on about.

...are you suggesting Reagan was a Keynes man? - ha ha ha ha ha ha. you'll be blaming "the crash" on Obama.


Raynja's picture

1930s to 2011 is about 80 years.

Gdp = c + g + i + ex-im is the basis for keynes
FDR increased g to keep the economy going before wwii.

Yes govt ramps up spending after the crash based on above model, what's your point?

writingsonthewall's picture

"1930s to 2011 is about 80 years"

I don't deal in 'roughly' - JMK wrote his theory in 1936 (that's 75 years already) - and unless you have some wierd ideas about the connection between educational establishments and the state - nobody tried to adopt the policy until after the war (they were a little busy)

Keynesian economics was adopted by some countries but when monetarism became popular and Keynes couldn't explain the rising unemployment in the 70's - this was adopted in most western countries - until the next crash when they all returned to keynes to solve their problems.

So the original claim of 'keynesian policy for the last 80 years' is crap - at best it was about 30 out of the last 80 - and not much in America who have always resisted any form of Government stimulus (except after the great depression) - which is the FDR to which you refer.

...and my point is (apart from the inaccurate claim) is that.

a) You cannot pin this mess of Keynes (despite how desperate you are, the facts don't support it)

b) None of this current 'plan' has got anything to do with Keynes - he did propose borrowing, but he also proposed Government saving in the boom (as I mentioned before)


It seems that simple concepts are quite difficult to get across - I can see the appeal of inaccurate (but easy to remember) phrases like "disasterous keynsian policies of the last 80 years" for simple people - but it doesn't help you identify the root cause of the problem.


Have you never seen a panic before? What happens is people try anything and when it doesn't work they start blaming everything - except (usually) the very thing that is at fault.


I came on ZH for a better class of blogger - some of you are very disappointing.

(p.s. I am well versed Gdp = c + g + i + ex-im - you only need to raise g when i and c are low - but George Bush decreased taxes (raising i) and raised g when i and c were already booming - hence the crash)

Kayman's picture


Long before Keynes published the General Theory "keynesian" economics was practised under JMK's advice.

If you want a better class of blogger, why not start your own site.

P.S. The only thing of any intelligence you have to offer, is that JMK is turning over in his grave over the spendthrift spending occurring in his name.

Hacked Economy's picture

Read your history, Fozzie.  John Meynard Keynes died in 1946, so he couldn't have wondered about anything in the 1970s.  And he published his theory long before that year, the leaders of the major world powers were already actively using his theories.  You really do need to figure out what you're talking about before spewing.

Keynes was a socialite in the early 1900s, and he was able to directly tickle the ears of a number of elite people in power as early as the 1910s.  He can't be blamed for the entire shift of the world off of the gold standard, but he was whispering in the conductor's ear as the train was switched to a different set of tracks.

The century from 1830 to 1930 is now known as the Classical Gold Period in the U.S.A., and by the turn of the century (1900), most of the modern world was on the gold standard.

By 1930, most of the world had reversed itself and removed from it (with the U.S. not quite there yet), as the Great War needed to be paid for with newly printed money, among other reasons.  But Keynes had already sown the seeds of his theories, in which the removal of the gold peg and the encouragement of debt were the foundations of a "healthy" move toward forced growth.  He also convinced TPTB that they would be able to successfully soften the effects of the boom/bust cycles through manipulation.

FDR himself began implementing full Keynesian philosophy - at Keynes' own urging - in the early/mid 1930s to facilitate his New Deal aspirations, well before the post-WWII period.

Kayman's picture

Hacked Economy

Read your summary after sending my response.

Thank you. Nuff said.

AnAnonymous's picture

Sums up the Keynesian Kamikaze Policies of the last 80 years.


The US 19th century policies were just as Kamikaze. And when they matured, they gave 2 WW and several severe depressions.

 Keynes might have failed but in providing an alternative to the current scheme used that is the expansionist scheme.

Existed, used way before Keynes was born.


Expansionists would like to deflect the storm on someone else. But the current situation is nothing new and corresponds with expansion scheme. 

shortus cynicus's picture

This article underestimates the progress made in electronic printing technology.


10kby2k's picture

ZIRP has far reaching effects. These are extreme times. Rationality is at a minimum.

sixmil's picture

40 years of papering over failed trade and labor policy

Mad Cow's picture

The problem is usury, world-wide. It's fairly simple. You can't have a currency with debt attached to it, at its creation, along with fractional reserve banking. Fraud.

Now that we understand the problem, is it possible the usury addled pushers of debt will stop? Not a chance. These psychotic children with matches would burn the world down before giving up usury, and their megalomaniac vision of a planetary-wide, centrally-planned, slave-plantation. We're stuck on Mr. Toads Wild Ride doing 150 MPH into a dead end street. Enjoy joy your day.

gwar5's picture

Frightening to realize that the US is the consumer is (was) the engine of the world and 70% of our own economy is the consumerism. We all know what is going to happen now that the US consumer is broke and credit is gone.

China knows too, and they are hurrying to create their own domestic consumption to make up for loss of US consumption. They're at least doing a better job reconciling with reality than our own central planners are. 

youngman's picture

And there are Economists and Politicians that still think we will grow our way out of this depression....that are high wage costs are no problem to the rest of the manufacturing world...that are business killing regulations are no problem...that our high coporate taxes are competitive with the rest of the world...that our schools are teaching what we need to succeed...teaching Rap vs engineering...that our social saftey net is not killing us....or breaking our bank...oh well...I watch from the sidelines now...

Fix It Again Timmy's picture

Money is freedom, debt is slavery - and your choice is...?

Charley's picture

Debt doesn't have to increase; only spending.

buzzsaw99's picture

during the inflation of the 70s everyone thought the dollar was doomed but it somehow survived. we must assume this time is different, that they intend to debauch without end and steal as much as they can from all of us along the way.

Dr. Richard Head's picture

I tend to believe that thought process, but there is something else that is going on that was not as pervassive in the 70's, which is the global asset shifting between countries through proxy currencies and trade balances.  To me it looks like this shell game could go on for much longer as all fiat currencies are going throuh the same manipulation. 

I wish it would end, but the music keeps playing.  That breaking point seems so ellusive to me.

hedgeless_horseman's picture

...the global asset shifting between countries through proxy currencies and trade balances.

1)  Get in front of the wave and surf it

2)  Paddle back out

3)  Repeat

Kayman's picture


1970's inflation ended when Volker raised rates into the high teens.  I can't even see rates in the high single digits, with all the debt overhang we have.

I personally think Bernanke got his nuts sheared off in the printing machine; now we have Chairman Eunuch.

History can guide you or blind you. Bernanke chose the latter.

WineSorbet's picture

Yes, another well written article that is absolutely correct.  Denninger also is correct.  Yet if we listened to either and invested based on these excellent anaylises, we'd be broke.  Don't junk me.  I'm as frustrated as all of you. :)

disabledvet's picture

look girls!  a man in need of a kiss!

WineSorbet's picture

I'll turn into a prince :)

DaveyJones's picture

you mean the avatar formerly known as prince

writingsonthewall's picture

"The Keynesians and other economists have no ideas for confronting the reality of a post-consumerist debt economy and society"

That's not really fair - the Keynsians were only asked to assist after the shit hit the fan. The monetarists led the boom - and they have turned to Keynsians is their desperation.

As I have said many times before - Keynes would have advocated Governments SAVING in the booms (i.e. raising taxes George, not cutting them you dolt) in order to provide the funds for the stimulus now (and not having to borrow so heavily)

This is like blaming the man who comes to fix the boiler and reveales it's going to cost $500 to repair - due to the original man who fitted it incorrectly.

The attack of Keynes is unwarranted and demonstrates a lack of understanding of Keynes's theory of employment.


I have noticed, sometimes we get 'intelligent and balanced Tyler' and sometimes we don't.


You don't suppose he's schizophrenic do you?