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I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008

I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets. In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases. Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.

ddingus 11y ago
>>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...
JamesBarney 11y ago
So it seems to me that we both agree that changes in perceived wealth can alter demand. We both agree this change in demand leads us to produce less than we are capable of producing. Why shouldn't we increase demand to so that we produce as many goods as we are capable of producing and exit the recession?
- AngrySkillzz 11y ago
  We do, that's what monetary policy is for (and fiscal stimulus, when warranted). The purpose is to target aggregate demand in an attempt to shift GDP towards its estimated potential. But that doesn't mean that the pre-recession level of output is sustainable, and that it corresponds to the demand level we should be targeting. As an example, with housing prices so high there was a surge in homebuilding. No one really needed or wanted all those homes, so the demand for ex. shingles was artificially high. It would make no sense to introduce some kind of stimulus program to prop up the shingle market to its housing bubble peak. Nobody needs or wants that many shingles at that price. The issue I take with the article is that their study compares growth levels during recovery to growth levels right before a market crash. It's not sensible; of course the latter will be higher, that's how market psychology works. It doesn't make sense to think of "potential growth" as "the highest growth we've seen."

ddingus 11y ago

>>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...

JamesBarney 11y ago

So it seems to me that we both agree that changes in perceived wealth can alter demand. We both agree this change in demand leads us to produce less than we are capable of producing. Why shouldn't we increase demand to so that we produce as many goods as we are capable of producing and exit the recession?

AngrySkillzz 11y ago
We do, that's what monetary policy is for (and fiscal stimulus, when warranted). The purpose is to target aggregate demand in an attempt to shift GDP towards its estimated potential. But that doesn't mean that the pre-recession level of output is sustainable, and that it corresponds to the demand level we should be targeting. As an example, with housing prices so high there was a surge in homebuilding. No one really needed or wanted all those homes, so the demand for ex. shingles was artificially high. It would make no sense to introduce some kind of stimulus program to prop up the shingle market to its housing bubble peak. Nobody needs or wants that many shingles at that price. The issue I take with the article is that their study compares growth levels during recovery to growth levels right before a market crash. It's not sensible; of course the latter will be higher, that's how market psychology works. It doesn't make sense to think of "potential growth" as "the highest growth we've seen."