[Insert Here] Causes Aggregate Demand Crises
I’ve got a new theory to try out. Here it is:
If households accumulate too much wealth, an aggregate demand crisis must inevitably follow. There is a simple causation: when households become very rich, they slow down their spending. Because one household’s spending is another’s income, aggregate spending (income) will then subsequently fall.
My theory is perfectly consistent with the UK data, in which the 2008 recession directly followed an unprecedented rise in total household net wealth to £6.8tn in 2007 (Source: ONS Blue Book), a doubling of wealth in just ten years. If you owned £6.8tn would you carry on working? No, you’re not stupid. And UK householders are not stupid either – you don’t get to own £6.8tn of wealth by being stupid.
The recession was not good for UK households, with their total wealth falling by a cool £1tn in 2008. UK householders were not happy. By 2009, they had resolved to step up and get back to spending more money so they could build up their wealth again.
By 2011, the recession was long gone, and UK households had built up their total wealth to a staggering £7tn. Can you guess what happened next? Yup, that’s right. Boom. Another recession. The data are clear. If aggregate UK household wealth rises to around £7tn, the people of the UK kick back and stop spending as much.
Yes, that is a pretty silly theory. But this type of theory is what got me interested in macro. If you replace “assets” with “debt” in my story… does it make more sense? Or is it a confusion of correlation with causation? And if debt in the UK (and US) caused an AD crisis, why is Australia different? What if debt merely correlates with the level of nominal spending, and does not cause it?
This post is a roundabout way of saying that Nick Rowe’s post on who controls the size of the Sun is one of the most enlightening things I’ve read this year. If you’ve not read it, I recommend it to you very highly indeed.