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Aggregate demand
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==Debt== A [[post-Keynesian]] theory of aggregate demand emphasizes the role of [[debt]], which it considers a fundamental component of aggregate demand;<ref name="dw41">''[http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/ Debtwatch No 41, December 2009: 4 Years of Calling the GFC]'', [[Steve Keen]], December 1, 2009</ref> the contribution of change in debt to aggregate demand is referred to by some as the '''{{visible anchor|credit impulse}}'''.<ref>[http://ssrn.com/paper=1595980 Credit and Economic Recovery: Demystifying Phoenix Miracles], Michael Biggs, Thomas Mayer, Andreas Pick, March 15, 2010</ref> Aggregate demand is ''spending'', be it on consumption, investment, or other categories. Spending is related to income via: :Income β Spending = Net savings Rearranging this yields: :Spending = Income β Net savings = Income + Net increase in debt In words: What you spend is what you earn, plus what you borrow. If you spend $110 and earned $100, then you must have net borrowed $10. Conversely, if you spend $90 and earn $100, then you have net savings of $10, or have reduced debt by $10, for a net change in debt of β$10. If debt grows or shrinks slowly as a percentage of GDP, its impact on aggregate demand is small. Conversely, if debt is significant, then changes in the dynamics of debt growth can have significant impact on aggregate demand. Change in debt is tied to the ''level'' of debt:<ref name="dw41" /> if the overall debt level is 10% of GDP and 1% of loans are not repaid, this impacts GDP by 1% of 10% = 0.1% of GDP, which is statistical noise. Conversely, if the debt level is 300% of GDP and 1% of loans are not repaid, this impacts GDP by 1% of 300% = 3% of GDP, which is significant: a change of this magnitude will generally cause a [[recession]]. Similarly, changes in the repayment rate (debtors paying down their debts) impact aggregate demand in proportion to the level of debt. Thus, as the level of debt in an economy grows, the economy becomes more sensitive to debt dynamics, and credit bubbles are of macroeconomic concern. Since write-offs and savings rates both spike in recessions, both of which result in shrinkage of credit, the resulting drop in aggregate demand can worsen and perpetuate the recession in a [[vicious cycle]]. This perspective originates in, and is intimately tied to, the [[debt-deflation]] theory of [[Irving Fisher]], and the notion of a [[credit bubble]] (credit being the flip side of debt), and has been elaborated in the Post-Keynesian school.<ref name="dw41" /> If the overall level of debt is rising each year, then aggregate demand exceeds Income by that amount. However, if the level of debt stops rising and instead starts falling (if "the bubble bursts"), then aggregate demand falls short of income, by the amount of net savings (largely in the form of debt repayment or debt writing off, such as in bankruptcy). This causes a sudden and sustained drop in aggregate demand, and this shock is argued to be the proximate cause of a class of economic crises, properly [[financial crises]]. Indeed, a fall in the level of debt is not necessary β even a ''slowing'' in the rate of debt growth causes a drop in aggregate demand (relative to the higher borrowing year).<ref>"However much you borrow and spend this year, if it is less than last year, it means your spending will go into recession." Dhaval Joshi, RAB Capital, quoted in [http://www.smh.com.au/business/noughty-boys-on-trading-floor-led-us-into-debtladen-fantasy-20091222-lbs4.html Noughty boys on trading floor led us into debt-laden fantasy]</ref> These crises then end when credit starts growing again, either because most or all debts have been repaid or written off, or for other reasons as below. From the perspective of debt, the Keynesian prescription of government [[deficit spending]] in the face of an economic crisis consists of the government net ''dis''-saving (increasing its debt) to compensate for the shortfall in private debt: it replaces private debt with public debt. Other alternatives include seeking to restart the growth of private debt ("reflate the bubble"), or slow or stop its fall; and [[debt relief]], which by lowering or eliminating debt stops credit from contracting (as it cannot fall below zero) and allows debt to either stabilize or grow β this has the further effect of redistributing wealth from creditors (who write off debts) to debtors (whose debts are relieved).
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