New Directions in Modern Economics series
Chapter 5: Macroeconomic Aspects of Consumer Credit Dependence
I fancy that over-conﬁdence seldom does any great harm except when, as, and if, it beguiles its victims into debt. Irving Fisher (1933, p. 341) That the market, industrialized economies have become increasingly reliant on consumer credit for the maintenance and growth of eﬀective demand would seem to be conﬁrmed by several statistics, including the secular rise in the ratio of household non-mortgage debt to consumption. The simulation performed in Chapter 4 (section 4.4) illustrated how consumer credit expansion may, at least for an unspeciﬁed time interval, mitigate or countervail the (potentially) detrimental impact of rising inequality with respect to aggregate spending. This chapter explores the macroeconomic pitfalls arising from the structural condition of ‘consumer credit dependence’. Achieving something approximating full employment of resources necessitates expenditure ﬂows adequate to give running validation to the preponderance of ﬁrm ‘liability structures’ and equity prices. The continuous extension and renewal of consumer loans is, in the context of the credit-dependent economy, a virtually irreplaceable gear in the machinery of eﬀective demand. It is therefore important to identify and explicate a miscellany of phenomena that hold the potential to unsettle the pace of consumer borrowing or lending. 5.1 CONSUMER CREDIT AND THE ‘ANIMALSPIRITED’ CONSUMPTION FUNCTION Much of life’s drama originates in what G.L.S. Shackle labeled ‘crucial’ decision-making (Shackle 1979, p. 58). Decisions frequently have irreversible consequences because to act (and, sometimes, not to act) is irrevocably to alter the decision-making environment. Consider a lost hiker who must choose between...
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