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Ok important new wording here: effective demand = potential demand. Tricky semantic waters. And those waters matter. See for instance:


And Nick's reply.

"unless real GDP can push effective demand higher"

I think this is problematic and confusing wording. Real GDP doesn't "push." It's a measure, not a force. ??

This is better I think:

"unless the economy finds a way to push effective demand up"

Which brings us back to recent debt discussions. This seems crux-ial to me (though I feel like it's missing something):


And this?:


The dynamics of debt seem pretty straightforward in those long, fairly steady TFUR/RGDP growth periods. It when we hit those ziggy-zaggies (like the crazy long one '95-'00) that things get dicey, and real-economy debt levels/changes/accelerations might give insights into the dynamics.

But maybe those periods are just too chaotic to understand coherently?

Nevertheless debt measures might give predictive insight on when those chaotic periods are imminent?

The semantics are important. Effective demand sets a potential for real GDP. As effective demand changes, so does the potential. But it is good to distinguish the two like Nick Rowe does with other words.

And you are right, the economy finds a way to push effective demand up.

The dynamics of debt and credit need to distinguished in the model. For example, why did productivity rise so fast after '95 with neutral change in labor and capital utilization? Was it credit opening up or the internet? We also know that labor share ticked during time. What would have happened if labor share hadn't risen?

There are lots of mechanisms affecting each other like gears in a watch. How do they articulate between each other?
I saw your email where there is a need to start laying a foundation of the model of effective demand that shows the articulations of the economy within the model.

The graph labeled 'Leading up to the 2008 Recession' seems to end at the 1st quarter of 2008 which makes sense.

The graph labeled 'Leading up to the next Recession' has 16 quarters ending at the 1st quarter of 2013.

So these graphs don't overlap.

But still it does not seem correct for 'Effective Demand' to have jumped from less than $13.5Trillion in the 1st quarter of 2008 to $16.2Trillion in the 1st quarter of 2009. Is this correct? Am I misreading something?

One of my most repeated lines over the last 5 years is that 'Consumers can not spend what they do not have.' And the second most repeated line is that 'Producers will not produce what they can not sell'.

Your work puts this into a model. Great work!

Effective demand jumped from $13.5 tr to over $16 tr because capacity utilization dropped 16.5%. Both employment and real GDP dropped by 4.7%. But capacity utilization fell much more. Eventually capacity utilization came back in line by the end of 2010 and effective demand leveled out below $14.5 tr.
So the big rise in effective demand was simply due to the huge fall in utilization capital.

Can you explain to me further how your repeated lines are explained by the effective demand model? I would like to see how you connect the dots. It helps me see what you are seeing.

By late 2007 it was obvious that a lot of home loans were in trouble and I wondered why homeowners were so willing to take on loans with such onerous terms. (Adjustable rates after 2 years which could go up 3% at a time.) I found two sets of statistics which seemed to say that consumers had slowly stopped saving and slowly descended into debt from 1984 to 2005.

From the Bureau of Economic Analysis Department of Commerce – Personal Income and Disposition:
1984 Personal savings as a percentage of disposable income was 10.8%
2005 Personal savings as a percentage of disposable income was less than -.5%
Note: The 2005 savings number was corrected to .5% some time afterward when the entire table was shifted positively.
My original link is now broken but the last page of this document seems to give the shifted historical data:

From a March 2007 study co-authored by Alan Greenspan (Line 3 + line 4 + line 33):
1991 $56 billion was taken out of the equity of homes in a year.
2005 $577 billion was taken out of the equity of homes in a year.
From: http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf

From the Federal Reserve website:
1984 Fed Funds Rate was 10.23%
2009 Fed Funds Rate was .16%
From: http://www.federalreserve.gov/releases/h15/data.htm
Note: When you see this statistic on a chart it is a stair step down at each recession and it never returns to it's pre-recession high, for each recession after 1984.

First consumers reduced their savings, then they borrowed the equity out of their homes. Finally consumers were so deeply in debt that borrowing was no longer generally possible. And the interest payments made things worse than before the debt was made. Demand for goods had to slow down or at least grow more slowly.

My conclusion was that global free unbalanced trade had kept consumer's income down between 1984 and 2005. And the Federal Reserve was masking the damage with lower and lower interest rates, all along the way.

Mainstream economists seemed to believe that 'demand' is ever present, that only supply side stimulus is ever needed. That worked until it didn't. Then they tried 'stimulus' in various forms, which was at best a temporary patch since it did create a sustainable demand.

As they said about the Great Depression, it was not so bad as long as you had a job. That is true today. And if we didn't have Unemployment Insurance, Social Security Insurance, and Medicare and Medicaid, we would recognize this as an ongoing Great Depression 2. And if the CPI and unemployment statistics were less misleading, we would realize that it is worse than we think now. How many part time workers are on the Supplemental Nutrition Assistance Program (SNAP) because they can not find full time work?

Mainstream economists seem to be lost. They don't understand the cause of this Great Recession, because they assume demand is ever present, and they can not admit that global free unbalanced trade is NOT a rising tide that lifts all boats. They talk about financial depressions and panics and vaguely describe the associated recoveries as slow, but they ignore their effects on the consumers of those earlier times and thus on demand and thus on the economy. Irving Fisher (1867-1947), the economist, wrote that debt caused the Great Depression, and to that you can add the bank failures which wiped out personal savings and severely diminished the ability to get credit. Taken together, these severely diminished demand.

Lastly mainstream economists believe that the Great Depression was ended by war material production during World War II. They ignore what would have happened once war material production was ended and 8 million men and their future wives were left jobless. The miracle of recovery was due to rationing and the resultant personal savings. And 8 million men were also saving money because they were in war zones with no place to spend their pay. (The personal savings rate reached 25% for 2 years and was only a little less in 2 other years.) At the end of WWII young men came home, married young working women, and used their savings to buy the things needed to set up a new household. And in 1946 they could buy a new personal automobile, for the first time since 1941. That spending created new demand which manufacturers were happy to satisfy and thus they converted from war material production to consumer goods production. That caused a regenerative cycle to be created and it was sustained. (The federal government redeemed war bonds with very high income taxes on Americans especially the wealthiest.)

So whether we want to admit it or not, we live in a demand driven economy.

I believe that your 'Effective Demand' equations state that there is a 'limit' on Real GDP which is imposed when labor's (consumer's) share drops too low.

That seems to be consistent with what happened during the Great Depression and consistent with what is happening now.

Perhaps the actual limit on GDP is enforced by the 'Velocity of Money'(VOM).

I can't find a FRED graph of VOM for the Great Depression but I did find a graph of "Gross Domestic Product / St. Louis Adjusted Monetary Base" which is a formula for velocity. It runs from 1929 to 2013.

See that graph for velocity here:

Notice the minimums at 1935, 1940, and 1946 during the Great Depression. It would seem that velocity is a lagging indicator.

Notice that velocity was increasing from 1946 until after 1981 when it began to decrease. Also notice the minimum in 2013 which seems to be lower than the minimums during the Great Depression.

One possible interpretation would be that investment dollars are not recirculated in the economy as often as consumer spent dollars.

It would be interesting to see one of your charts done with data from 1928 to 1946. (1948?)

Demand... the capacity of people to spend money and still save. We are beating a drum to raise people's incomes. The beat is growing.

One day we will have charts for effective demand going back to 1928.

One thing about WWII that people rarely mention is that labor share of income rose a lot. I have to find that information again and post it.

I am intrigued by your comment that during WWII the labor share of income rose.

The only data that I could find seems to indicate that it fell, see figure 6 on page 9.

Rationing was put in place starting in May 1942:

"The Emergency Stabilization Act was passed in October 1942, which placed wages and agricultural prices under control":

After October 1942, employers started to use fringe benefits to attract labor.

The highest personal savings rates were in 1942, 1943, and 1944.

The high personal saving rates seem to have been due to rationing.

I don't believe we can duplicate the rationing. But it is helpful to understand the reason that the Great Depression was actually ended instead of some vague reference to WWII or WWII war production.

I started to wonder if personal incomes had risen a lot during WWII.

I looked at Personal Income Table 2.1 at this website:

I set the 'Options' for Annual and All which got me the years 1929 to 2012.

It appears that Personal Income rose at very high rates from 1940 to 1944.

Year -----1940-----1941-----1942-----1943-----1944-----1945-----1946
Income---78.4 ------96-------123.4----152.1----166------171.6-----178.6
Note: Increase is my calculation.

This explains why inflation became a problem and price controls were put in place in October 1942.

So incomes rose while labor share fell. Companies must have been making huge profits.

Nonetheless, it was rationing which forced personal savings rates to levels which could support a changeover from war production to consumer production.

It truly is fascinating how much income for labor rose during WWII.
Labor share looks to have risen from 1943 till after the war.

Here is inflation from the Bureau of Labor Statistics


Year -----1940-----1941-----1942-----1943-----1944-----1945-----1946
% Increase--0.7------ 9.9-------9.0------3.0------2.3-------2.2------18.1
Note: % Increase is Dec-Dec from the table.

You see the high increases in the CPI during 1941 and 1942. This chipped away at the income increases for those 2 years.

Price controls were implement in October 1942, then there low increases in the CPI for 1944 and 1945.

Most rationing appears to have been lifted by the end of 1945, and in 1946 there was an increase in the CPI of 18.1% . This was the beginning of personal savings being spent and it caused inflation.

The income increases were balanced by high inflation.
There is an equation for labor share.

labor share = unit labor cost/price level

When price level goes high, labor share goes down.
Do you have the data for unit labor cost during WWII?

I believe that the data for the 'unit labor cost' during WWII would be at BEA's website:

Unfortunately I can not give you a direct link to the Table 1.15 Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business (A) (Q)"

1. Click on the bea.gov link above.
2. In mid screen (horizontal) in the "National" category, click on "Corporate Profits"
3. On 5th line, click on "Interactive Tables: National Income and Product Accounts Tables"
4. In mid screen (vertical), click on "Begin using the data"
5. In mid screen (vertical), click on "Domestic Product and Income"
6. Scroll down and select "1.15. Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business (A) (Q)"
7. In mid screen (vertical) and right side, select "OPTIONS"
8. Select the A for Series (for annual)
9. Check "Select All Years"
10. You will now see data beginning at 1929 and ending 2012.
11. Read the Legend while you are here and it is downloaded.
12. In mid screen (vertical) and right side, select "DOWNLOAD"
13. Click on button for "Download XLS File"

This is a royal pain, but I don't know of any other way to get to the appropriate data. The bonus is that you can download the data for a local spreadsheet. Things can go quickly, once you get used to this scheme.

Please let me know if this works and the data is appropriate.

This table 1.15 as described in my last message seems to need some explanation.

Look here on page 13-38 (Last page):

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Data as of 3rdQ-2017
Effective Demand = $17.424 trillion
Real GDP = $17.157 trillion
Productive Capacity is rising to next business cycle = $23.558 trillion
UT index is falling= +1.1%
Effective demand limit = 73.9%
TFUR = 72.8%
ED Fed rate rule (down from a peak of 3.8% in 2014) = 2.2%
Estimated Natural Real Interest rate = 2.2%
Short-term real interest rate (fallen from 2.8% peak in 2014) = -1.7%

There is no recession for 3rdQ-2017. Chance of recession is growing as economy heads toward 2nd effective demand limit in this business cycle. I am forecasting economic contraction in 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):

The UT Index



z derivatives in terms of labor & capital:

z derivatives in terms of labor & capital

Effective Demand, real GDP & Potential GDP:

ED, real GDP & pot rGDP

ED Output Gap:

ED Output gap

Corporate profit rate over real cost of money:

Corp profit rate over real cost of money

Exponential decay of Inflation:

Corporate profits impact Inflation

Measures of Inflation:

Measures of Inflation

YoY Employment change:

YoY employment change

Speed of consuming slack: yoy monthly:

Speed of consuming slack

Speed of consuming slack: quarterly:

Speed of consuming slack quarterly

Real consumption per Employee:

real consumption per employee 2

Will real wages ever rise faster than productivity?:

Productivity & Real Wages

Real Wage Index:

real wage index



Productivity against Effective Demand limit:

Prod & ED limit

Bottom of Initial Claims?:

Initial claims

Tracking inflation expectations:

Fisher effect?

M2 velocity still falling:

Measures of Inflation

All in one:

All in one

Double checking labor share with unit labor costs & inflation:

My Photo
Edward Lambert: Independent Researcher on Effective Demand.
Some links for economic analysis
Fed Views - San Francisco Fed, around 10th of each month.
Well's Fargo monthly - around 10th of each month
Well's Fargo weekly
Well's Fargo Interest rate report
Well's Fargo Economic indicators
T. Rowe Price weekly market wrap-up
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