Abstract: Insufficient demand can lead to comprehensive disruptions in socioeconomic development. Severe insufficient demand can cause a rapid halt in market economies, while less severe but prolonged one can damage the economic foundations.
There are many initial triggers for insufficient demand, such as cyclical adjustments in the real estate market, sudden changes in international markets, large-scale infectious diseases, or worsening income distribution. However, once insufficient demand happens, it becomes a new and independent problem. The essence lies in the formation of a negative cycle between “spending—income—credit.”
In the short term, the key to address insufficient demand is to reverse the fast variables in the negative cycle: investment, corporate profits, and credit while consumption and income are the slow variables. Once the fast variables are resolved and the negative cycle is broken, the slow variables will improve as well.
Lowering policy interest rates and increasing government spending through borrowing are the most effective policy tools to break the negative cycle. The key is that the measures must be strong enough; if not strong enough, they would lead to counterproductive results. When faced with the insufficient demand, efforts should be concentrated on addressing the biggest threat first, to avoid the compounded economic vulnerabilities. Once this issue is resolved, many following damages will be reduced, which creates more room to address other long-term and structural issues.
