Although interest rates are still relatively low by historical standards, some fear that as a result of the previous rate hikes, consumers and corporations will eventually cut back on spending, which could have a drastic effect on the economy.
Because: Y = C+I+G+NX
Income = Consumption + Investment Spending + Gov’t Spending + (Exports – Imports)
Ergo, a diminution in the right-hand side of the equation implies a diminution in the left-hand side of the equation, Income, aka, GDP, aka “the economy.”
But you see, the whole problem with Keynes’ “circular flow diagram” is just that: a circle, having by definition neither beginning nor end, indicates no cause and effect, no intertemporal relationship – all we see is that if C decreases, in order to maintain our cleverly crafted accounting identity, so too must I; c.p.
It is not at all clear why less current consumption, especially at the micro-level, but even at the macro-level, must be a cause (or even a symptom) of financial hardship.
