Austerity vs Supply Side

Supply side economics: If you make it, they will buy.
In your dreams.

"Everybody wants more money, right?" -- TV commercial

   It's ironic that austerians fail to see the consequences of cutting demand, even as the doctrinarians preach increased supply.
   Supply side economic theory still dominates GOP thinking (if those last two words don't constitute an oxymoron). In a way, supply side theory is behind the Federal Reserve Board's "quantitative easing" policy of increasing the supply of money. Increase the available cash supply to entice borrowers to invest and expand, and to raise their spending.
In turn, as producers make more stuff, consumers buy more stuff.
   Except that it's not working. The money supply is increasing, but prices are steady. And it remains a question as to where that extra cash is going. Increased wages? More jobs? Offshore bank accounts for the One Percenters?
   So which comes first? Supply or Demand? Chicken or Egg? Put as much stuff on the market as you like, but if no one wants it or can't afford it, there are no sales.

   It's one thing to increase the supply of money, but what does that do to increase the demand for money? Sure, everybody wants more money, and in a theoretically perfect world, demand and supply counterbalance each other and, as the textbooks put it, "the market clears."
   That may be true in a perfect world at a moment in time, but we don't live in a perfect world and we can't stop time.

   Another worry is that inflating the amount of money available results in higher prices. But that's not happening, either, even as the Fed -- in its latest move -- says it add $85 billion a month to the U.S. money supply.
   Yet another fear is based on the "rational expectations" theory, which says that people are rational, and assumes that they always act rationally. Second assumption: Everyone has equal access to information that could move a market. Third assumption: Accessible information is complete. Fourth assumption, and perhaps the most heroic of all, is the ceteris paribus assumption, that other things are and remain equal -- that none change while the various parties act rationally on the complete and accurate information that everyone has.
   Theoretically, and assuming all premises are correct, no one gains an advantage.
   Dream on.

   Interest rates are at historic lows and headed downward. Yet companies are not investing in new equipment and expanding production, which would "normally" be the case as they take advantage of cheap borrowing costs. Apple is drowning in cash, yet rather than borrow money to expand, it is borrowing cheap money to pass on to shareholders, rather than dole it out from company cash accounts. Why? They get a better tax break.
   It's a variation on the "liquidity trap" described decades ago by economist John Maynard Keynes: People and companies hold onto cash rather than spend it, waiting for prices to go down further, or firms stall investment for expansion, citing low demand.
   And so around we go.