Last week I wrote about the US economy ending up in a Depression. Karl Denninger has a hard-hitting piece about our economic future that reaches a similar conclusion.
He believes that our economy could contract as much as 40%. While that might be difficult to accept, his points are well taken. If I were to object, it would be regarding the magnitude rather than the direction. But his number might eventually be correct. This economy is about to implode.
There is no question that we are in for a massive change in our lifestyles. As I wrote in Worse than a Depression:
We are witnessing the death of democratic socialism. No politician wants it to happen, but none can prevent it. We are at the point where the Ponzi concept of “extend and pretend” has been extended beyond social commitments and banking systems to entire economies. We are approaching what Ludwig von Mises described as “the crack-up boom”:
There is no means of avoiding the final collapse of a boom brought about by credit [debt] expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
The economic risk goes well beyond the United States as recent events in Europe have suggested. Once the dominoes start to fall, it is difficult to see even what appear to be sound economies not taken down.
Mr. Denninger and I are in agreement that we are headed into a Depression. There may be disagreement regarding the route we take to get there, but, if there is, that is understandable. The Depression forecast is relatively simple, albeit it politically incorrect. It is simple because it is based on mathematics. It is politically incorrect in the sense that Washington does not want you to understand how badly they have mucked things up.
The route that leads to the Depression is not deterministic because it involves behavior variables that are beyond forecasting with any high degree of probability. These behavioral variables primarily involve politicians. Specifically, how will they react as events begin to spin out of control?
From my reading, and I hope I am not misinterpreting Mr. Denninger, he seems to suggest the politicians will halt the stimulus at some point. That would put us into an economic downturn almost immediately, as he points out. My understanding of Mr. Denninger’s view of the political class, however is such that it is difficult for me to accept that he believes that politicians would do the right thing. Thus, if I am misinterpreting him somewhat, I apologize. From a substance standpoint, it really has little bearing.
At this point, there are only two options for the political class: stop the stimulus immediately and face the music, or try to bluff through one more time. The best thing for the country, especially if it were accompanied by necessary cut-backs in government at all levels (unlikely until markets force it) would be the first option.
The second option is clearly not possible, but “possible” is no deterrent to politicians. We have passed the tipping point where additional debt can be either useful or possibly even obtained. Per Mr. Denninger:
This is unavoidable, and no amount of bleating will change it. I wish there was a solution to this problem, but there is not. The promises made cannot be kept, not due to lack of political will but inability to continue to compound debt upon debt upon debt any longer.
I believe that politicians will not willingly cut stimulus spending. Eventually markets will force that action on them, but probably not before we are on the verge of, or actually in, a hyperinflation. Like cornered, wounded animals the politicians will do everything to save themselves and their government. Concern for the “good of the nation” left Washington years ago.
Thus, I expect us to end with a hyperinflationary Depression. This ending is more damaging than entering a Depression with a functioning price system. It is so because hyperinflation causes markets to fail. More importantly, it wipes out all savings (read the middle-class).
This piece appeared on American Thinker
RChavez: 
HappyinHowell: 
Mr Misno: 
Marsha: 
Brian Wilson: 
Steve: 
Larry Crouse: 
Brian Wilson: 
Monty Pelerin: 
Bob Snyder: 
During WWII the B-17 was experiencing sudden airborne disintegration during non-combat operations. They finally figured out that at certain altitudes (where the air was thinner) the aircraft would have to speed up to keep enough air flowing over the wings to maintain enough lift to maintain flight. The pilot would have to keep going faster until the plane reached its ‘red-line’ airspeed which was the maximum airspeed the airframe could structurally maintain flight without the wings coming off.
If the pilot didn’t accelerate, the plane would lose lift and fall out of the sky and crash. If he nosed the plane over to gain enough airspeed to keep enough lift, he would pass the red-line airspeed and the wings would come off and crash.
Thus, ‘Coffin’s Corner’ was being in a position that no matter what you did, you crashed. The only way to survive was to not to have gotten in that position in the first place.
My question is: At what point does the U.S. reach Coffin’s Corner with regards to deficits and debt?
So, where does the middle class put its savings?
Like Kelly, I would like to know what the direction to take NOW. Reading about all the doom & gloom (which actually may be the truth) but just like the politicians nobody is giving us an answer on actionsto take or prepare for, other than “sky falling” principles in which you sell everything, quit your job and move to the wilderness to farm. Not too practical to put all your eggs in that basket! I’m not sure how I stumbled on to this site so could someone email me the answer? Thanks. [email protected]
I am glad to see you are reading Mr. Denninger, he’s the most clear-headed writer on these subjects I have yet found. One point he has often made, that bears repeating: Hyperinflation requires a wage-price spiral. In Weimar and Zimbabwe this was accomplished by the government issuing debt denominated in foreign currencies. In the USA there is no linkage between wages and inflation (aside from wage contract negotiations, which are not anywhere near flexible and responsive enough to create hyperinflation).
Before predicting hyperinflation, you need to explain how any extra printing then translates into extra worthless paper in people’s pockets. If you can not do that, you are left with the conclusion that the money gets printed and the currency devalues but people still have the same absolute quantity in-pocket. Which means that their actual wealth collapses, quickly. If the printing is on a hyperinflationary scale, this just means people run out of money by the end of the week and then have to think hard about what they’ll do to feed their kids for the rest of the month.
That way lies Mad Max.
Rollory,
I would like to respond to your comments in more depth than I can at this time. Perhaps when I return from vacation, I can address the hyperinflation issue in more depth.
Monty