Paul Krugman wrote a post today called, What’s the Matter with Europe? He cites that Industrial Production is stalling out there. Now this is a sign that Europe is against the effective demand limit. Something we already knew from productivity numbers. So there is no surprise.
However, Mr. Krugman states that the US is not doing so badly…
“But now the news is looking grim, with industrial production stalling out and good reason to fear yet another slide into recession:… This comes as many though not all US data points are suggesting stronger growth. So why has Europe done so badly?”
Well, Europe hit the effective demand limit before the US, mostly because real wages there have lagged behind much more. Yet, the moment of the effective demand limit is coming for the US, and apparently Mr. Krugman does not see it.
Now Mr. Krugman does not make predictions of the stock market. That is understandable, since the markets are so, well, “unpredictable”. Yet, once you understand the effective demand limit, you can predict the stock markets. Last year I was saying that the stock market would hit its highs this year as the effective demand limit was coming. In April I said the Dow would rise to 16,800 and hover up and down around that point. The Dow has done just that. I see the Dow working its way back up to 16,800 again. Eventually the Dow will decline into an economic contraction.
Yet, Mr. Krugman sees data that suggests stronger growth. Does he not see consumption by capital spending being reduced as labor increases their consumption? Does he not see the net effect stalling growth? As time goes by in the US, industrial production and capacity utilization in the US will also stall out. This is a direct effect of the effective demand limit. But Mr. Krugman cannot see that yet, because he does not have a model for an effective demand limit, even though Keynes suggested the concept.
Europe has hit the effective demand limit. We are seeing the signs. A European Recession is in the air. We will see signs developing over the next 6 months that the US has hit the effective demand limit too. How will Mr. Krugman explain the US economy stalling out even as he sees growth now? He will have an explanation later, but he cannot verify a US problem just yet.
But the coming US problem has been visible and predictable because the ultimate effective demand limit can be seen years in advance.