The Law of Supply and Demand


John Maynard Keynes

Paul McCulley

Bear Stern



News Home

Rolf Englund IntCom internetional

Home - Index - News - Krisen 1992 - EMU - Economics - Cataclysm - Wall Street Bubbles - US Dollar - Houseprices

"this paradox is absolutely vital to understanding macroeconomics"

The “paradox of thrift” was the most counterintuitive and, to the classically trained economist, morally, theoretically and practically objectionable idea in John Maynard Keynes’ General Theory of Employment, Interest and Money, published in 1936, in response to the Great Depression.
Martin Wolf Financial Times June 13 2005

The Paradox of Deleveraging
Paul McCulley, July 2008

Back in college, most of us took microeconomics before we took macroeconomics. In fact, at Grinnell College where I went, microeconomics was a prerequisite for macroeconomics.
The reason was simple: microeconomics begins with the concepts of supply and demand, an essential starting point for the study of macroeconomics.
' But you only know you’ve mastered both when you intuitively grasp that macroeconomics is not just the summation of microeconomic outcomes, but rather the interaction of microeconomic outcomes.

For me, a simple concept brought this realisation: the paradox of thrift.
For those of you who might not recall, the paradox of thrift posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow.

This principle is part of a whole range of macroeconomic concepts under the label of the paradox of aggregation:
what holds for the individual doesn’t necessarily hold for the community of individuals.

Understanding this paradox is absolutely vital to understanding macroeconomics and even more so to understanding what is presently unfolding in global financial markets.

Yes, that $29 billion is actually a loan to a Limited Liability Corporation (LLC) set up to hold the Bear assets, with JP Morgan providing a $1 billion subordinated loan (sometimes called the “first loss” tranche) to the LLC. But that is merely a technical detail – the bottom line is that we the taxpayers bought $29 billion of Bear’s assets.

That’s not to suggest that there is no room for coordination between the monetary and fiscal authorities. This is particularly the case when the economy is experiencing asset deflation, begetting debt deflation and deleveraging. Indeed, none other than Chairman Bernanke made this case when he was Governor, first in November 2002 in his famous speech titled
“Deflation: Making Sure ‘It’ Doesn’t Happen Here”,
and then in May 2003, in a speech titled “Some Thoughts on Monetary Policy in Japan”3.

Full text

The Fed has lost control of the money supply, because the banks it regulates no longer are the primary movers of debt creation.
Non-depository institutions and funds created massive amounts of new money based on leverage.
John Mauldin 2007-12-14