Deflationary Spiral Depression Description Fed Illusion Current Update

New York, NY – An apt description of the current economic climate of a deflationary depression spiral.

Recent positive GDP numbers lay bare the extent to which the supposed recovery is based on government paper-hanging and wishful thinking and is, in the end, non-sustainable. The New Depression began in 2007 and will run through 2011 or longer depending on policy. Semantic back flips, such as calling our condition the Great Recession to avoid using the word depression, will not change this fact.

Economics has no formal definition of a depression, but they are distinct from recessions and financial panics. Recessions are business-cycle-related and triggered by shocks, disintermediation, higher interest rates or combinations of these and other factors. They are sometimes severe, but typically brief, and can result in robust growth from the bottom. Financial panics are even more brief and often unrelated to the real economy as seen in the crash of 1987.

Depressions are different. They are often long and characterized by persistent high unemployment, widespread deflation, and extended lags before former highs are achieved in stock prices and output. The U.S. experienced depressions in 1837, 1873, 1893, 1920 and 1929. Their distinguishing feature is severe asset liquidation. Money borrowed in the boom is misallocated, followed by liquidation and price declines that are the consequence of wasted investment. If this sounds familiar, it should, because it’s what we’re experiencing now.

U.S. policy in 2009 successfully masked the symptoms of a depression. But masking symptoms of a depression is not the same as preventing one. Policy has power to cause timing differences, bringing some demand forward. Policy can socialize losses, moving them from the deserving losers, the banks, to undeserving losers, the taxpayers. The Fed and Treasury have done this well. Future growth has been stolen and bankers have prospered at the expense of citizens. Alas, depressions cannot be papered over. Asset price declines and general deflation are relentless even in slow motion. And deflation is the condition most feared by central bankers.

Read More: dailycaller.com/2010/02/01/the-new-depression-and-the-feds-illusion/