Yves Smith (http://www.globalstrategywatch.com/independent-insight/990e5c20df26aa346d093495f659e026/) writes, “I’ve been meaning to discuss how increased income disparity is bad for economic growth, because in the end you wind up with insufficient labor income to fund consumption . . . and too much capital chasing too few investment opportunities. . . . It turns out I was beaten to the punch by nearly 50 years [since]. . . former Fed chairman Marriner Eccles . . . links the consumption shortfall directly to a shift in wealth towards the top. And some of the other patterns of the Twenties, such as debt-fueled growth, are worryingly familiar.” Strange how Robert Reich and other economists should be pointing this out now, especially since the shift in wealth towards the top and debt-fueled growth have been going on for at least three decades. What good are economists who don’t raise policy issues before their disastrous effects happen?

What Fed chairman Eccles described are simple mathematical results. An economy, regardless of the economic theory that governs it, consists of workers employed by enterprises that produce goods and services for sale either domestically or internationally. The value of the products and services sold must equal the sum of the wages paid to workers, the overhead of the enterprises, and their profits. If all the products and services are sold, the sum of the incomes of the buyers must equal or surpass the value of the products and services, for if the sum is less, the products and services could not have been bought (unless the shortfall were met by borrowing), in which case the economy would have to shrink. If the shortfall were met by borrowing, the future incomes of the buyers would have to be sufficient to both buy additional products and services and service the debt. The result is that in the absence of growing wages, buyers will eventually reach a point where they can neither continue their levels of consumption nor service their debt, and the economy ceases to function.

The American economy has been characterized over the past several decades by policies that were bound to produce this result. First American companies shifted a great deal of manufacturing offshore. Second, they created conditions designed to hold down wages. Third, they made borrowing easy but expensive.

The first of these made consumption the economy’s driving force (perhaps 70% of the economy is consumption driven.) If the borrowing had not been made easy, consumption, and the economy as a whole, would have collapsed because of the restraint on wage growth that resulted from the second policy. But given that restraint, the debt assumed by consumers had to eventually reach a level that made it unserviceable. The only possible result of these policies is an economic collapse.

That economists could not have foreseen this consequence is incredible.

© 2008 John Kozy

Watch the video related to economic collapse

I went from being a DVD junkie to a causal blu-ray fan who understands that storing food and water is more important than wasting endless amounts of money on junk. My Priorities are now: 1. Water 2. Food 3. Protection (Guns and Ammo) 4. Medicine 5. Networking 6 Women 7. Movies (blu ray)

Help answer the question about economic collapse

Will I be able to pay my bills?

What happens if I have a fixed interest rate? What happens if I have a variable interest rate?

Will the bank have the power to take my house? And if the bank does have the right to take my house, will they have the power to enforce their claim?

My friend is telling me that the banks tried to take peoples houses during the Civil War when this happened.

This is one question of a series I'll ask concerning a possible economic collapse. Please try to be academic with your answers!
Thanks folks!
Will banks just be stirred into too much chaos to collect on their loans?

About Author

John Kozy -
About the Author:

Retired professor of philosophy and logic who blogs on political, social, and economic issues at http://johnkozy.mindsay.com and at http://www.jkozy.com.
Tends to avoid writing propaganda by insisting on facts and evidence.