The more I read the more it becomes clear that the only way to clear out the debt is either through massive deflation, hyperinflation, or gigantic utilization of natural resources. They have claimed that they will never let the first happen, and the second is a real possibility because we are constrained by the third.

It's all fine and well to say that economics is a social science (it is) but that just means that the influences on the variables are largely socially determinant. At the end of the day, the entire system itself is simply a way to assign values to goods that are a result of human and physical resources. My argument is that the values assigned are wildly off and in order to correct them we either have to purge the system (either through deflation or hyperinflation) or make tons more stuff.

As a side note, while I'm putting the pieces together on this relatively independently, I'm going back and reading more and finding out that it is a long standing critique. The more I study the more it seems like our entire view of what economics tells us is has been determined by mechanization and petroleum giving such an enormous labor and energy boost that it obscured the truth I'm talking about.

Second, there is common, normal, sensible reluctance to have government intervene in this as in other matters. Why risk more harm? Does anyone in Washington know exactly what to do? No.

Third, when considering possible deflation, this is something new to the developed world other than Japan as a serious issue — we've been in an inflationary era for decades (during the later two, experiencing a dimunition of inflation to the point nobody thought of it until the recent run-up in oil prices that made the slump materialize).

Fourth, this is an uncertain thing, as J-Sat has already explained. Welcome to the world of that infamous phrase, “the social sciences.”

As a book I have puts it, better:

“… The key to the whole issue is the interaction between uncertainty and the fact that the policy of monetary expansion without limit [to cure or prevent deflation] has side-effects, costs, and risks. It has been the neglect of this aspect that explains why western economists have tended to view deflation as next to impossible in an economy presided over by a normally competent central bank. Once you realize the implications, a future including periodic bouts of deflation becomes readily imaginable.

Look at the feeble growth of the Japanese money supply, the critics say. The Bank of Japan should be creating money hand over fist! But it _has_ flooded the system with liquidity and made the banks flush with cash. The problem is that it cannot _make_ the banks lend or borrowers borrow. … The banks would much rather sit on their piles of cash, even though it earns them next to nothing. At least it doesn't expose them to the danger of bad debts.

Moreover, if the banks do not respond normally to stimulus from the monetary authorities, borrowers do not respond normally to any stimulus from the banks. Because of the recent history of excessive investment, the corporate sector is more than usually insensitive to the normal prods and incentives, while consumers are liable to be extremely pessimistic, cautious, and risk averse. …

This point can be generalized. What makes deflation difficult to shift is the ultra-important human element. Deflation gets into people's heads: their attitudes, expectations, and reactions. Things can reach a stage that you could say that deflation is all in the mind. …

… I think it unlikely that the Fed would unleash a large unorthodox monetary expansion _before_ the onset of deflation. It would not have the political or market constituency to support such a move. …

… What explains central banks' hesitance to take really bold action to head off deflation? I think the answer, as with so much else in economics, is uncertainty. If the central bank knew that a monetary expansion of a certain size would be enough to stop deflation, the costs and risks would be relatively easy to weigh up against the intended benefit of the end of deflation. But it _doesn't_ know this. The requisite amount may be 10 or 100 times the imagined amount, or a tenth of it, depending largely on the expectations of people and businesses — and that will depend a great deal on whether these people and businesses are confident that the policy will be sustained.

This means that a rational central bank will want to tread gingerly, hoping that a small dose of the treatment will do the trick and thereby minimize the side-effects, costs, and risks. … “

I have no idea what's orthodox or unorthodox in economics, let alone what's impossible, as opposed to what's merely unthinkable. So I'm not sure what to think about your diagnosis.

Thanks for the clarification.

While I agree that all the factors you state drastically affect the relationship of economic variables (and I have the same criticism of economic equations which I've mentioned on this site time and again) economics as a whole is simply an abstract model to allocate natural resources/labor across a population and forgetting that — like most economists do — is very bad.

Furthermore, merely stimulating the economy until credit can be reestablished — the proposed solution to avoiding the Great Depression — ignores natural principles that comprise the foundations of economics.

Economics in the real world has almost no principles. It is a human endeavor. It is not physics with Newtonian rules or even those of Einstein.. It more resembles chemistry, wherein the immediate environment affects what happens. Chemical reactions can vary wildly according to temperature, pressure ratio of materials to one another and other factors. In the case of economics that environment includes communications, trade, relative costs, individual psychology, group psychology, rules of law, government stability (or lack of same) and about any other influence on the flow of money or the human psyche that you can think of.