Depression? Highly Likely

economy, Insolvency Tagged with: Economic Turmoil, Effects Of Great Depression, Great Depression, hyperinflationary depression, Keynesians, Output Gap, Reserve currency

Jun 042010

It is my contention that we are already in or headed for another Great Depression. This view is not new, nor is it unique.

In Key Indicators of a New Depression Neeraj Chaudhary of Euro Pacific Capital feels the same way. He also suggests that we may end up in a worse situation, a hyperinflationary depression. Keynesians argue that an “output gap” and high inflation cannot coexist. Contrary to their belief that hyperinflationary depression is oxymoronic, it is the most likely ending for our problems.

Chaudhary summarizes the data that support the contention that we are already in a Depression. In his words:

From jobs to food to the roofs over our heads, the current period of economic turmoil is at least as bad as the First Great Depression, whether or not the financial media wishes to acknowledge it. The main difference is that unlike in the ’30s, the US dollar is now the world’s fiat reserve currency, so we are able to push our problems overseas for awhile. The plight of the rural Chinese is really our plight – we are living lavishly on the wealth they create. Were they to quit this dastardly arrangement, the full effects of Great Depression II would be felt in America.

By contrast, in Great Depression I, the US was on the gold standard like everyone else, which forced us to live within our means. This, in turn, made it easier to recognize that the economy was in decline and changes had to be made.

Unfortunately, because of the responses of the Administration and the Federal Reserve, which I believe to be deeply misguided, I remain concerned that Great Depression II could develop into something far more devastating than its predecessor, something that other countries in the world have experienced but was thought impossible in the United States: a hyperinflationary depression. As bad as the current downturn has been, inflation would make it immeasurably worse. It would require an honest accounting of the problems we face today to avert the disaster we see coming tomorrow.

I wrote a piece almost a week ago arguing how and why we are likely to end in an hyperinflationary depression. It should be published in the next several days.