Inequality, Consumer Credit and the Saving Puzzle
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Inequality, Consumer Credit and the Saving Puzzle

Christopher Brown

Providing much needed context for current events like the sub-prime mortgage crisis, this timely book presents a vision of an economy evolved to greater dependence on consumer credit and analyzes the trade-offs and risks associated with it. While synthesizing the Keynesian theory of consumption with the Institutional theory of habit selection (brought up to date with new knowledge from evolutionary biology and neuroscience), this book represents an in-depth treatment of the macroeconomic dimensions of consumer credit and implications of recent financial innovations from a non-traditional economic approach.
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Chapter 5: Macroeconomic Aspects of Consumer Credit Dependence

Christopher Brown


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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