More money in the hands of the consumer increases demand...

[imagep]

What I am saying is that you can have all the dollars in the world, but if there is no supply of actual goods and services to exchange them for they will be totally worthless. That is a fact.

Sure. But as long as customers have dollars in their pockets, companies are going to produce goods and services. There is nothing restricting companies from producing, except the ability of the consumer to purchase.

It's not that rare that I have customers come into my business, who are willing to make purchases, but the simply don't have enough money to do so. I can't produce a thing unless my customers have money.

 

[imagep]

No, nor does my argument require that assumption. I did not say an increase in demand for a specific good requires an increase in supply of that specific good. I said an increase in overall demand is only possibly by a preceding increase in the total supply of goods and services.


You are correct--the toaster company doesn't just randomly produce as many toasters as it can. Why on earth would they? That doesn't invalidate my original point.

People can only place more orders in the aggregate if the supply of goods and services has increased. Otherwise, their increase in orders for burgers will ultimately come at the expense of a decrease in orders for other goods and services. The barber cuts as many heads as walks into his shop--but the barber had to invest in a chair, scissors, razors, products, and rent space before anyone could walk into his shop and get a haircut. The cow farmer has to raise cows before anyone orders them for slaughter--unless they are willing to wait years for the cows to mature. The toaster makers have to invest in the factory to produce toasters, and the industries that create the materials used to make toasters have to invest in the equipment and labor to extract those materials. All of this happens before any final consumer product is demanded. The same is true of your other examples.

Furthermore, the meat patty company cannot just create as many meat patties as it wants. If the demand for burgers doubled overnight, that would not mean the production of meat patties would double, unless the economy has double the required supply of full grown, read to slaughter cows just sitting idle. You hold the assumption that the supply of final consumer goods can just increase or decrease instantly with the blink of an eye--that is nonsense. The full production process of most consumer goods takes many years.

Car sales have increased because demand has shifted away from oil and towards cars, or to put it another way, because production of oil expanded. Your example ironically demonstrates exactly what I am saying.

Most producers aren't constricted by agricultural time lags. I can get the raw materials that I need to produce more products overnight.

Also, typically demand doesn't double overnight. It increases slowly over a long period of time, which allows ample time to ramp up production.

Again, generally business production is only constrained by actual realized sales.

Not that I don't see your point. In a macro-economic way, investment and production does have to happen first, but only to get money into the hands of consumers. But there is no incentive on a micro-economic bases for producers to produce more than is being ordered, so an increase in orders is the catalyst that starts the growth cycle.

I once worked for a tennis ball factory, and among other things, I was in charge of the production of custom logo balls. We made balls for large corporations, for major tennis championships, and even balls for the white house with the presidential seal on them. I couldn't start producing any custom logo balls, until we had an order for custom logo balls.

When we had larger than normal orders, like if we picked up a new national vendor and had to immediately produce enough inventory to stock all their stores, we simply scheduled a sixth or seventh work day to our normal five day workweek, and in just one or two weekends, the additional production was complete. It typically does NOT take months or years to increase production, it can happen in a matter of weeks or days or even hours.

 

[Ahlevah]

Notice:

Much of the continued strength in the industry comes from higher sales of sport-utility vehicles and trucks, which benefit from declining fuel prices.

How soon we forgot about the GMC Yukons and Lincoln Navigators people couldn't give away when oil hit four bucks a gallon a few years ago. Will we ever learn? :doh

 

[DA60]

It also helps that more and more car loans are of the 'sub-prime' variety...remember those? That means harsher terms for the loans so people with lousy credit can get a car.
It also leads to more defaults.

Car Loans See Rise In Missed Payments - WSJ

Auto Loan Delinquencies Surge 18% Among Young Americans | Zero Hedge


Plus, consumer spending in December dropped the most in five years.

Consumer Spending Declined in December by Most in Five Years - Bloomberg Business

 

[SlevinKelevra]

Notice:



How soon we forgot about the GMC Yukons and Lincoln Navigators people couldn't give away when oil hit four bucks a gallon a few years ago. Will we ever learn? :doh

Holy crap, I'll take major rounding errors for $2000, alex.

 

[Lakryte]

Sure. But as long as customers have dollars in their pockets, companies are going to produce goods and services. There is nothing restricting companies from producing, except the ability of the consumer to purchase.

It's not that rare that I have customers come into my business, who are willing to make purchases, but the simply don't have enough money to do so. I can't produce a thing unless my customers have money.

That's simply not true. In order to meet production in the future, companies have to invest in production processes. This takes significant capital, and in most industries a lot of time. The supply of goods does not just expand or contract instantly with changes in consumer demand. Production comes before demand can possibly come. If you sell necklaces you craft from wooden beads, it is simply not true that the wood used to create those beads is only cut down once a customer places an order for those beads. You can have all the money in the world, but if there is no existing supply of goods to exchange it for, it will be next to worthless.

You can produce something if customers don't have money. The vast majority of companies are initially financed by loans or other types of financing (IPOs, venture capital, etc.).

The reality is that money is not wealth--it is merely a medium used to exchange wealth.

 

[Lakryte]

Most producers aren't constricted by agricultural time lags. I can get the raw materials that I need to produce more products overnight.

Also, typically demand doesn't double overnight. It increases slowly over a long period of time, which allows ample time to ramp up production.

Again, generally business production is only constrained by actual realized sales.

Not that I don't see your point. In a macro-economic way, investment and production does have to happen first, but only to get money into the hands of consumers. But there is no incentive on a micro-economic bases for producers to produce more than is being ordered, so an increase in orders is the catalyst that starts the growth cycle.

I once worked for a tennis ball factory, and among other things, I was in charge of the production of custom logo balls. We made balls for large corporations, for major tennis championships, and even balls for the white house with the presidential seal on them. I couldn't start producing any custom logo balls, until we had an order for custom logo balls.

When we had larger than normal orders, like if we picked up a new national vendor and had to immediately produce enough inventory to stock all their stores, we simply scheduled a sixth or seventh work day to our normal five day workweek, and in just one or two weekends, the additional production was complete. It typically does NOT take months or years to increase production, it can happen in a matter of weeks or days or even hours.

Most, if not all producers, are in fact restricted by time lags of some sort. And are you admitting that your theory does not apply to burgers after all? Production is ramped up due to producers forecasting future consumption patterns. They expect demand to be higher, and produce more to meet it. On a microeconomic level it is the same. How much machinery do you buy? How many people do you hire? All of this takes time and planning for any given business. No business waits for people to start placing orders before it sets all of this up, nor would any person in their right mind buy goods from a company that does not buy materials, hire labor, or find a place to do business before people start buying from them.

On a microeconomic level, increasing sales of product X will lead the company to invest in expanding production of that product. Of course--demand is directing an increase in product X. But if people are spending more on product X, they are spending less on product Y. Therefore, product Y will see less production. That is what I mean when I say demand directs production. All demand does is change what is being produced. A macroeconomic increase in total production is the result of investments that lower costs of production and increase efficiency.

 

[SlevinKelevra]

That's simply not true. In order to meet production in the future, companies have to invest in production processes. This takes significant capital, and in most industries a lot of time. The supply of goods does not just expand or contract instantly with changes in consumer demand. Production comes before demand can possibly come. If you sell necklaces you craft from wooden beads, it is simply not true that the wood used to create those beads is only cut down once a customer places an order for those beads. You can have all the money in the world, but if there is no existing supply of goods to exchange it for, it will be next to worthless.

You can produce something if customers don't have money. The vast majority of companies are initially financed by loans or other types of financing (IPOs, venture capital, etc.).

The reality is that money is not wealth--it is merely a medium used to exchange wealth.

there has to be known, or well-assumed demand for your product to get the venture capital you are talking about to start your production.

"Hey Mr Banker guy, I need $500M to build a new plant."
'Oh Hi Mr Future titan of Industry Guy, sure, just tell me your plans.'
"Well, you see, I'm going to make the world's finest supply of custom diet feed for the dodo bird"
'Security!!! Get this idiot out of here'.




"Hey Mr Banker guy, I need $500M to build a new plant."
'Oh Hi Mr Future titan of Industry Guy, sure, just tell me your plans.'
"As you can see in this demonstration, I just found discovered a material that is a room temperature superconductor"
'Sounds interesting, but I need to know more'.
"A room temp superconductor would essentially solve issues like making nuclear fusion possible, electronic devices more power efficient, MRI's cheaper to operate, etc etc"
'My god son, you mean it's a product that 7Billion people would benefit from? Let's start signing the papers'.

 

[Lakryte]

there has to be known, or well-assumed demand for your product to get the venture capital you are talking about to start your production.

That's right. The businessman has to convince investors/lenders that demand will exist in the future for what is being produced. Then, depending on if the businessman accurately predicted the demand that actually occurs once he invests in labor, capital equipment, space, etc. he will either be profitable or suffer losses. But all that investment happens before anyone actually places and order to buy his product.

 

[soot]

It's not that typical that the worker/consumer class finds themselves with a few more bucks in their pockets, but this is what happens when they do. It's called economic growth.

Gasoline costs at the pump are down about 33% YOY leading to average 2015 household gasoline expenditure forecasts being down by about $500, or $41 per month.

When you consider that gas prices bounced $0.20 over the past week I think it's a fair assumption that we've found bottom and prices have no place to go but up.

I wouldn't be surprised if we're back up to ~$2.50 a gallon by the summer peak.

That isn't the kind of "economic growth" that could reasonably account for mass new vehicle purchases, and most certainly not the kind of growth you'd need to see in order to explain a 25% to 30% increase (according to the article, and depending upon make) in the purchases of $30,000+ vehicles.

There's a correlation there for sure, but little more.

Unless the American people are really, really stupid, which given how many mortgages are underwater might actually make sense.

Something tells me that there's a subprime auto loan bubble that's about to pop somewhere.

 

[soot]

It also helps that more and more car loans are of the 'sub-prime' variety...remember those? That means harsher terms for the loans so people with lousy credit can get a car.
It also leads to more defaults.

Car Loans See Rise In Missed Payments - WSJ

Auto Loan Delinquencies Surge 18% Among Young Americans | Zero Hedge


Plus, consumer spending in December dropped the most in five years.

Consumer Spending Declined in December by Most in Five Years - Bloomberg Business

Just saw this.

Well there ya go.

 

[imagep]

Most, if not all producers, are in fact restricted by time lags of some sort. And are you admitting that your theory does not apply to burgers after all?....

The food cycle example you used is pretty much just limited to food, and is based upon the assumption that we would instantly double food consumption overnight. That's simply not realistic in most situations.

Almost every producer can handled a temporary increase in demand just by working existing workers and equipment longer. Almost every producer, if they have a reason to suspect that the increase in demand will be long term, has enough unutilized capacity to meet demand while striving to increase their capacity for the future.

I think we are just going to have to agree to disagree on this, because neither one of us is willing to give in.

 

[imagep]

Gasoline costs at the pump are down about 33% YOY leading to average 2015 household gasoline expenditure forecasts being down by about $500, or $41 per month.

When you consider that gas prices bounced $0.20 over the past week I think it's a fair assumption that we've found bottom and prices have no place to go but up.

I wouldn't be surprised if we're back up to ~$2.50 a gallon by the summer peak.

That isn't the kind of "economic growth" that could reasonably account for mass new vehicle purchases, and most certainly not the kind of growth you'd need to see in order to explain a 25% to 30% increase (according to the article, and depending upon make) in the purchases of $30,000+ vehicles.

There's a correlation there for sure, but little more.

Unless the American people are really, really stupid, which given how many mortgages are underwater might actually make sense.

Something tells me that there's a subprime auto loan bubble that's about to pop somewhere.

I would assume that there was some pent up demand, which was released. Whether it was all due to lower gas prices, no one knows, but I bet that was at least a major contributor to it.

Even if that was just a one month spike, it still is positive for our economy. Auto producers will likely work a few more shifts to replace the inventory, workers (and auto sales companies and the auto manufacturers themselves) will have a few more bucks in their pockets, which they will use for additional spending and savings. This additional spending will create a little more demand in other industries, who will then repeat the cycle.

My point in creating this thread is that it shows how more money in the pockets of consumers can lead to additional business expansion. I'm fairly confident that the reason that auto sales increased isn't simply because auto companies increased production - but now that inventory levels have shrank, they WILL increase production, even if only for a limited amount of time. Business expansion is the result of increases in demand.

It's certainly not a bad thing to have an increase in demand, even if it's just temporary.

 

[Lakryte]

The food cycle example you used is pretty much just limited to food, and is based upon the assumption that we would instantly double food consumption overnight. That's simply not realistic in most situations.

Almost every producer can handled a temporary increase in demand just by working existing workers and equipment longer. Almost every producer, if they have a reason to suspect that the increase in demand will be long term, has enough unutilized capacity to meet demand while striving to increase their capacity for the future.

I think we are just going to have to agree to disagree on this, because neither one of us is willing to give in.

I was simply using an obvious example of your theory failing (food) and an extreme situation to illustrate the point more clearly (doubling demand). That producers are wise and typically buy materials and machinery in excess of what they need doesn't change the overall point.

Let me state it another way. If people are suddenly buying more of product X than before, then that increase in demand can be caused by only two things:
1. A decrease in demand for other goods and services, in which case demand has merely shifted.
2. An increase in the supply of other goods and services, leading to lower prices and increased purchasing power, in which case demand increased only because supply increased first.

I think the confusion lies in conflating dollars with actual wealth, and that someone the existence of more dollars means there will be more wealth. This is simply not true. But yes, it appears we will once again agree to disagree, as we do every time this discussion arises.

 

[imagep]

...

Let me state it another way. If people are suddenly buying more of product X than before, then that increase in demand can be caused by only two things:
1. A decrease in demand for other goods and services, in which case demand has merely shifted.
2. An increase in the supply of other goods and services, leading to lower prices and increased purchasing power, in which case demand increased only because supply increased first.

A tax cut could easily put more money into the hands of consumers, who would then purchase more goods and services.

An increase in wages could do the same.

A redistribution of money from those who have excess to those who don't have enough could also increase realized demand. This doesn't even have to be by a government, it could be by people with excess lending to those with a shortage. Or it could be caused by my great uncle Herb passing away and me inheriting all the money that he had been hording.

Or even foreign demand for US products could increase (maybe a weaker dollar), and that would cause an increase in business sales.

There are probably dozens of other scenarios which could cause an increase in realized demand that I'm just not smart enough to think of, but any of the above would cause an increase in production.

I think the confusion lies in conflating dollars with actual wealth, and that someone the existence of more dollars means there will be more wealth. This is simply not true. But yes, it appears we will once again agree to disagree, as we do every time this discussion arises.

No, I absolutely understand that money isn't wealth.

You are thinking that if people spend more money, inflation will be created as a result, which would wipe out 100% of the additional purchasing power. That typically doesn't happen, although it can happen if there is some sort of restriction in the production of goods and services. Your agriculture example would probably one of those situations. But if my business increased in 2015 over 2014, unless all my competitors increase their prices, and unless there is some sort of cost-push inflation, I would have no reason to increase prices, because my business, like virtually every other business, has the capacity to produce more, without increasing capital investment. I can simply hire more workers, or work longer hours myself, or work my few employees longer hours.

I think where a lot of people get confused is two things:

1) people assume that every business operates at full capacity all of the time. That's simply not true. Any well run business operates below capacity most of the time, so that it can meet demand when it has a temporary increase in demand. I've held a dozen or so jobs in my life, I've never worked at a place that couldn't produce more.

2) economics is boring for most people, and so is math. In our high school economics class, the football coach tells reads out of the textbook that "inflation is caused by too much money chasing too few goods". But we tend to zone out after hearing the first few words, so all we really comprehend is "inflation is caused by too much money". And since we are already assuming that no more goods can be produced (at least without a significant capital investment and time), we ignore the fact that producers strive to meet demand. There is really never "too much money". I've never had "too much money", have you? The only time that more demand results in higher prices is when production can't meet demand, which really isn't that common. When was the last time you went into a Walmart and their shelves were bare? When was the last time that the car dealer sold out of cars and couldn't get anymore? When was the last time that China refused to sell us trinkets? Particularly when unemployment is above the full employment level, an increase in demand does not cause inflation.

 

[Ahlevah]

Holy crap, I'll take major rounding errors for $2000, alex.

Obviously, I meant "gasoline" in the post. :doh

 

[JP Hochbaum]

That's simply not true. In order to meet production in the future, companies have to invest in production processes. This takes significant capital, and in most industries a lot of time.

You can't get capital without sales, or a forecast of future sales to obtain loans as capital. Sales always comes first.

 

[Declan]

You can't get capital without sales, or a forecast of future sales to obtain loans as capital. Sales always comes first.

Sure you can. One can use existing assets as collateral. Stocks are not the exclusive creators of capital.

 

[JP Hochbaum]

Sure you can. One can use existing assets as collateral. Stocks are not the exclusive creators of capital.

Yes you can use assets as collateral.

 

[imagep]

Sure you can. One can use existing assets as collateral. Stocks are not the exclusive creators of capital.

Regardless, no one is going to invest capital in a business which they don't expect to have sales.

No business will expand beyond the capacity that they project they will need. No one will start producing products that they don't believe they can sell. Sales, or the expectation of sales, drive our economy. Capital, is just a necessary resource, but it's not the driver (motivator) of our economy.

 

[imagep]

Sure you can. One can use existing assets as collateral. Stocks are not the exclusive creators of capital.

Only if people believe that you will have the income to repay the loan. If someone is starting a new business, and they get a second mortgage on their house to fund that business, the bank will still want to know what they intend on doing with the money, and will want to be insured that the person will be able to repay the loan. If the person says "I'm going to quit my job and start making cow poop flavored peanut butter and that my ability to repay the loan will be based upon how much cow poop flavored peanut butter I sell, not many lenders are going to be willing to make that loan.

A real life example of this is when I sought to borrow $70k to purchase a new underwear printing machine a couple of years ago. I provided my financials, and the bank realized that even if I didn't sell any more printed underwear, I could still afford to make the payments, because I already had enough sales from which I already reaped enough profit from to pay for the machine. If I didn't already have enough income to make the payments, and I had told the bank that I thought that just buying more underwear printing equipment would magically increase my sales, they would have laughed at me.

The ability to produce something doesn't prove that sufficient demand for the product exists - only evidence of actual realized sales does.

 

[imagep]

Apparently Fox News believes that more money in the hands of consumers increases business sales also...

Week Ahead: Retail Sales and Consumer Sentiment | Fox Business Retail sales in January are expected to have ticked higher primarily because consumers have more money in the wallets as a result of cheaper gas.

 

[Econ4every1]

I was simply using an obvious example of your theory failing (food) and an extreme situation to illustrate the point more clearly (doubling demand). That producers are wise and typically buy materials and machinery in excess of what they need doesn't change the overall point.

Let me state it another way. If people are suddenly buying more of product X than before, then that increase in demand can be caused by only two things:
1. A decrease in demand for other goods and services, in which case demand has merely shifted.
2. An increase in the supply of other goods and services, leading to lower prices and increased purchasing power, in which case demand increased only because supply increased first.

I think the confusion lies in conflating dollars with actual wealth, and that someone the existence of more dollars means there will be more wealth. This is simply not true. But yes, it appears we will once again agree to disagree, as we do every time this discussion arises.

I think we're all missing something here....


This entire argument rests on the idea that people don't know what they want until they see it. So no one ever wanted an iPhone before they saw one and it's introduction is what created the demand.....Sort of, but to stop here is an overly simplistic view of human nature and ultimately fails.

Demand is driven by human wants and desires. I'm going to take a poke at a few, but this is by no means an all inclusive list....

Humans desire (in no particular order) Heath and well-being, happiness, comfort, style, safety, security (both financial and personal), excitement, acceptance, intimacy, self esteem, friendship, power and influence just to name a few. Some of these can be categorized under others and this is by no means an all inclusive list.

Now not everyone has all of these, but everyone has some of them. These wants and desires is what fuels demand. When you create a product that is designed to keep someone safe, it can address a whole range of wants and desires. The question is always how does the decision to purchase an item that promises make you safer conflict with you're desire to maintain fiscal security, happiness, acceptance ect.....

Creating stuff was only ever done in response to a combination of the things listed above. Supply/ demand are only about how many of these wants and desires can be fulfilled without conflicts in the mind of between different and sometimes conflicting wants and desires.

Wrapping up, the designers of the iPhone, and their genius was not "creating" demand where none existed before, it was recognizing the demand (human desire) that already existed how their product addressed these desires in a unique an innovative way.

 

[imagep]

...
Wrapping up, the designers of the iPhone, and their genius was not "creating" demand where none existed before, it was recognizing the demand (human desire) that already existed how their product addressed these desires in a unique an innovative way.

The invention of the smart phone largely just shifted demand away from competing products, such as home phones, computers, calculators, stop watches/watches/clocks, stand alone gps systems, maps, newspapers, magazines, pda, pagers, pens, pencils, paper, printed material, fax machines and supplies, computer printers, etc.

When the amount of money in the hands of consumers limits consumption, new products don't increase demand, they just shift demand.
,
Now let's say that I open a new fast food joint in my town. Do I create a significantly larger market for fast food, or am I just picking up a chunk of the already existing market share from my competitors (including the grocery store)?

 

[Lakryte]

A tax cut could easily put more money into the hands of consumers, who would then purchase more goods and services.

An increase in wages could do the same.

A redistribution of money from those who have excess to those who don't have enough could also increase realized demand. This doesn't even have to be by a government, it could be by people with excess lending to those with a shortage. Or it could be caused by my great uncle Herb passing away and me inheriting all the money that he had been hording.

Or even foreign demand for US products could increase (maybe a weaker dollar), and that would cause an increase in business sales.

There are probably dozens of other scenarios which could cause an increase in realized demand that I'm just not smart enough to think of, but any of the above would cause an increase in production.

A tax cut shifts demand from government projects to private projects. An increase in wages (I assume you mean nominal) is also just shifting demand from employers to employees. Redistributing money in the way you describe is also merely shifting demand. On a global scale, foreign demand increasing on U.S. sales would mean demand would be decreasing for other country's sales. Every one of your examples illustrates my point. Demand can only increase in the aggregate if supply has increased first. Otherwise, demand is just being shifted away from X and towards Y.

No, I absolutely understand that money isn't wealth.

You are thinking that if people spend more money, inflation will be created as a result, which would wipe out 100% of the additional purchasing power. That typically doesn't happen, although it can happen if there is some sort of restriction in the production of goods and services. Your agriculture example would probably one of those situations. But if my business increased in 2015 over 2014, unless all my competitors increase their prices, and unless there is some sort of cost-push inflation, I would have no reason to increase prices, because my business, like virtually every other business, has the capacity to produce more, without increasing capital investment. I can simply hire more workers, or work longer hours myself, or work my few employees longer hours.

I think where a lot of people get confused is two things:

1) people assume that every business operates at full capacity all of the time. That's simply not true. Any well run business operates below capacity most of the time, so that it can meet demand when it has a temporary increase in demand. I've held a dozen or so jobs in my life, I've never worked at a place that couldn't produce more.

2) economics is boring for most people, and so is math. In our high school economics class, the football coach tells reads out of the textbook that "inflation is caused by too much money chasing too few goods". But we tend to zone out after hearing the first few words, so all we really comprehend is "inflation is caused by too much money". And since we are already assuming that no more goods can be produced (at least without a significant capital investment and time), we ignore the fact that producers strive to meet demand. There is really never "too much money". I've never had "too much money", have you? The only time that more demand results in higher prices is when production can't meet demand, which really isn't that common. When was the last time you went into a Walmart and their shelves were bare? When was the last time that the car dealer sold out of cars and couldn't get anymore? When was the last time that China refused to sell us trinkets? Particularly when unemployment is above the full employment level, an increase in demand does not cause inflation.

What I am arguing is that any increase in demand for product X will be possible only if there is a decrease in demand for something else. The only instance where this is not the case is if there is an increase in the supply of goods, making each unit of currency relatively more valuable, and thus allowing demand in real terms to increase. This is true regardless of what capacity businesses are operating at.