As part of a long theme I want to push back against the notion that “confidence” is a meaningful driver of macro-economic outcomes.

I don’t mean to simply join in bashing the “confidence fairy.” I mean all notions of confidence: investor confidence, animal spirits, consumer confidence, etc.

At the heart of my position is that Aggregate Demand is not practically constrained by what people want to do. Its constrained by what people can do. Put another way, the preferences of consumers and businessmen mean almost nothing. What matters is their budget constraint.

The simply explanation is that in a world of 7 billion people and a country of over 300 million there is ALWAYS someone who wants to buy more, invest more, expand, etc.

We could be in the middle of a Great Depression, we could have marginal tax rates of 70%, we could have a police state that randomly ransacked people’s houses, stole their possessions and carted them off to jail.

Even that world, there is some outlier for whom the only thing stopping him or her from trying to build a vast business empire is that he or she can’t find the financing.

If you doubt this look at the market for criminal enterprises, where the state is explicitly trying to stop you from doing business. Not taxing you. Not regulating you. But, men with guns are coming to either shoot you or put you in a cage for the very act of being in business. Yet, crime never wants for lack of entrepreneurs, though it does sometimes want for lack of financing.

You can call this reverse Malthusianism. The desire of the expanders to expand is always exponential. In the end you only need one of them and they will attempt to take over the entire economy. What’s stops them is competition, scarce real resources and financing.

Thus if you are in a world where no one else is looking to expand, and real resources are slack, financing is all that’s holding one of these folks back.

Practically speaking the price of slack resources also matters because if they actually collapsed in price then at some point you could simply self-finance your empire.

But, there is never a shortage of empire builders. There is only a shortage of people willing to lend to empire builders.

Now, some would say, yes but don’t you need consumer demand nominal and real. That is, don’t people need to have the money to buy your stuff and doesn’t your stuff need to be worth buying.

Nominally, no because the expansion of business itself creates the purchasing power that allows people to buy your stuff.

Real, no not either. Its entirely possible that you could be running an economy where the vast majority of people were employed by businesses who were failing and then replaced by new business who also fail. What you would experience would be a decline in TFP, a rise in inflation and a fall in the real wage as most people would be producing things no one wanted to buy.

If people genuinely couldn’t find good ways to employ resources then everyone would get poorer but as long as financing is available there need be no recession.

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