demandAfter several years of forced austerity, there is usually a large pent up demand for consumer goods. This was certainly the case after the end of World War II in the U.S. In that instance, people also had almost one year’s worth of salary in savings. So pent up demand met spending power and increased war-induced productivity to create an economic boom.
Recently, there have been signs of pent up demand leading to strong U.S. consumer spending, even though some economists fear that consumers are “broke” because they have little or no savings, and their incomes are declining. Can several years of forced austerity (since 2008) lead to pent up demand under such circumstances? Or are consumers actually in better shape than these economists fear?
Another theory is that the AGGREGATE spending is now being driven by wealthy individuals, after a two-year hiatus even though the “average” American is “broke.” Could this be the case?
No, there can’t be pent-up demand when people are broke: demand only exists if there’s the means to pay for it; otherwise it’s just wishes.
Note that in large parts of the world, the much-proclaimed “forced austerity” has barely begun. Consumers still have a lot of assets, in much of the developed world, and so it’s not true that consumers are broke - hence the observed demand manifest through consumer spending.
The “austerity” programmes of some countries, including the UK, predicate the economic recovery on a reduction in public-sector borrowing, but a much larger increase in private-sector borrowing: in this case, further consumer borrowing is intended to stimulate demand.
Noting @EnergyNumbers comment that "demand only exists if there's the means to pay for it; otherwise it's just wishes". However, it is possible to "store" up demand (and supply) if the price-point that would trigger conversion to trade is unmatched.
The buyer has demand for a good at a price which the seller is unwilling (or unable) to offer. There can be a whole host of reasons (including rationing, as during WWII). In the current economic environment, the barrier to spending (or lowering prices and investing) is one of risk aversion. Since there is a great deal of external and seemingly uncontrollable risk neither buyers nor sellers are sufficiently confident to agree a price.
Consumers have an expectation of achieving their price-point, failing that resolution they delay their purchases and make do. They can do this indefinitely, however, if an opportunity presents (such as Black Friday), they may undertake rather alarming signalling behaviour in order to secure the good at the price they want.
If the price-point demand remains unsatisfied, and there is an expectation that this is being done deliberately and from a position of strength (i.e. price making) then this could lead to protest movements such as Occupy Wallstreet.
This is happening on the side of producers as well. Since they are not sure there is sufficient market demand to support their sales, and they are not certain if they would be able to borrow to cover investment needs or earnings shortfalls, they look to increase their margins through layoffs, spending freezes and price increases (to target their least price sensitive clients).
These two approaches become mutually reinforcing. Both buyers and sellers would like to find agreement but are too scared to do so. If confidence can be restored then trade will follow.
And, yes, as soon as the price-point at which consumers wish to trade is reached then a large amount of pent-up demand will be resolved since it is based on the expectation of a favourable trade.
I will assume “broke” means insolvent – i.e. debts exceed assets. In equilibrium this condition is not possible since for every debtor there is a creditor. The sum total of debts exactly balances the total amount lent.
Therefore the expression “people are broke” cannot be part of a coherent question.
All content is licensed under CC BY-SA 3.0.