supply v demand

Re-examining several economic decisions, it becomes obvious the supply side proponents still dominate. That’s the reason the banks tend to be supported over the homeowners, it’s the reason the stimulus has tended to businesses instead of individuals (and more often in the form of tax breaks than direct injections), and so on and so forth.

I want to present the argument in an analogy. Place yourself in the shoes of a store owner. Someone besides you is about to get a lot of money. Would you rather that money went to your customer or your supplier?

The argument of the supply sider is that the supplier’s gain will benefit you. He will reduce prices either across the board or deeply on a couple of items to act as loss leaders. You can pass along these savings, and that will draw customers to your store. More customers is more sales is more money for you.

I will point out that this means you’re getting the money indirectly. It also relies on the hope the supplier will pass the money down.

The customer, on the other hand, does not have to guess what might or might not sell; he knows what he wants. Given enough money he will buy something from your store. Further, the money comes directly to you.

In the current foreclosure mess, much argument is made that finishing the foreclosures will restart the market. It’s false for many reasons. At heart, though, it’s false because it’s increasing supply — and actually decreasing the number of possible customers (demand) at the same time.

Excess supply drives recessions. It’s too many goods chasing too few dollars. Until that reaches some point of equilibrium little sells. That in turn slows or stops money flow. The only people getting money are those who can forcibly extract money from others, and even that is a long-term losing game.

There is a radical suggestion out there I’d like to share, knowing it cannot be done politically. That is to completely forgive all mortgage debt. Cancel it. Have the US government pay the banks for any and all for which they can prove the note, but otherwise clear the floor.

It’s not doable, of course. Not least, even if you stick with single-family owned and occupied residences that’s trillions of dollars. The increase in public debt would be dwarfed only by the surge in inflation as all the homeowners had a massive increase in spendable money.

But it tempts.


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