More on underconsumption and the end of excess demand
Underconsumption is the term we’re now using to describe the thesis that we are living in a world of excess supply. The novelty here – as I pointed out yesterday – is not that the world is oversupplied – and therefore lacking in developed economy private capital investment, but rather that the oversupply situation is longstanding.
We had two periods of undersupply after the two World Wars in the twentieth century. The rest of the last 100 years has been dominated by economic depression and falling real wages in the developed world. That points to a truly secular age of oversupply.
Now, I haven’t bought into this thesis lock, stock and barrel. But I find it intriguing. Let me develop it further.
This morning, a post By Matthew Klein over at FT Alphaville puts together some compelling evidence that America’s household debt binge was about income inequality. Here’s the best chart from his post.
Now, the subtext of what Matt is saying there is that America’s least wealthy consumers were trying to maintain spending that their income levels did not support – keep up with the Joneses, if you will. And all of that came to a nasty end as a result of the financial crisis that climaxed in 2008.
If you put this in the context of this secular underconsumption thesis, what it says is that a secular decline in interest rates that began in 1982 has masked the basic oversupply conditions in the developed world by allowing Americans to borrow heavily.
Why does this matter? It goes to financial fragility. Right now we are in a period of growth re-acceleration. But that re-acceleration is threatened by Fed tightening. If the Fed tightens enough to materially slow the US economy, we will then have a chance to see if the underconsumption thesis holds water. If it does, the next cyclical downturn and equity bear market will be more severe than anticipated. If it doesn’t, policy stimulus will work it’s magic and we’ll be back in business after a brief recession.