Longtime readers know that I have long thought a depression was inevitable for the US and the world in general because of the enormity of our debt. In the fall I wrote a guest post that took the unusual position that we embrace a deflationary deflation. The economic rationale is described succinctly in this post on Naked Capitalism that points out it is taking all the world’s financial resources to prevent full collapse, and any “improvement” in the situation would cause those resources to start chasing higher returns, which would raise interest rates and lead to more deflationary pressure, starting the cycle all over again. In short, it’d take at least a decade in order to work through our bad debt, in all that time we’d have high unemployment and zero growth, and that’s the best case scenario. Japan had the “muddle through” decade of near zero growth and many commentators thought that’s what the US would look like over the next decade. I was persuaded to disagree with this prediction because Japan had the largest global bull market in history for its decade, not a global recession. Now that there is a global recession, Japan is one of the hardest hit and its industrial output is plunging faster than any industrialized country in history, including during the Great Depression. Nearly twenty years after their bubble collapsed, growth is nowhere in sight and their long term projections for supporting their retirees makes our look rosy.

The other part of my argument for embracing a depression was that by wasting time, labor and money trying to prevent it, we would see mass homelessness and hunger, as well as be caught completely off guard when a geopolitical or major financial event caused a worldwide firestorm. I thought about how we have way more houses than we need, and can produce enough food for the entire world (well if we stopped feeding so much to animals, but even including that we have more than enough for everyone in our country); the only reason why masses of people would go homeless or hungry would be about resource allocation. The way I looked at it, we could either put all our efforts into trying to avoid a depression (which I thought had about a 10-15% chance of succeeding) but have a humanitarian crisis if we failed, or we could accept the depression and put in the social, material and financial infrastructure to minimize suffering on a fundamental level.

Of course our leaders (and country as a whole) went towards the avoidance route, and our welfare systems are quickly failing due to overload. While the reports over the last few months have primarily been about unemployment insurance funds running out, I ran across an article that talks about a developing tent city in Sacramento because the homelesss shelters are full. My initial inclination was to be skeptical and wonder if the piece was sensationalist, but then I read this:

The city’s mayor Kevin Johnson said: “I can’t say tent cities are the answer to the homeless population in Sacramento, but I think it’s one of the many things that should be considered and looked at.”

Meanwhile, the country is seeing record home vacancies. “More than 14 million housing units are vacant. That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied part of the year.” This is completely insane. And the financial system? It’s still as close to complete collapse as ever for the United States, and in worse shape in developing countries and Europe. I would be very surprised if we didn’t see sovereign bankruptcies (even Ireland and Spain are increasingly at risk) of rather important countries in the next year, bankruptcies that could potentially lock up the European and hence global financial system to the extent it was for a few days last fall — but this time for much longer. I have a feeling the tent cities are going to get a lot larger.

Addendum: I read over my post and another thought popped into my head: ignoring the social nets now may give us a higher chance of failing to keep our economy from plunging into a depression. My logic is that a lot of people are paralyzed and aren’t spending money because they fear losing their jobs. If we had a much stronger safety net (temporarily) in place, then people would be more willing to buy assets at deflated prices, knowing that if they do lose their job then they will still have their basic needs taken care of…and if they don’t then they will become considerably richer on the other side of this mess. [Note: I’m not saying that people should be sustained at a level where they could afford to keep their assets.] This post about health insurance in China links to an article that points out that the Chinese save 30-40% of their income because there are no social safety nets. I don’t want this to get into a discussion about universal health insurance, but my point is very similar; there may be a substantial number of people that would be willing to risk large purchases, or at this point even living “normally” again, there was a higher level of social support.

I wish that Congress and the President would put social services programs that would activate in case of “emergency” now, so people will have an idea of what to expect if government efforts fail. Yeah yeah I know, the mere act of doing it would cause everyone to panic, but still…