Debt and Depression

"You hear that Mr Anderson? That is the sound of inevitability."
--Agent Smith (The Matrix)

Quick quiz. Which of the following factors is common to all economic depressions in the history of mankind:

a) Too much saving
b) A currency constrained by the gold standard
c) Deregulated industry
d) Excessive debt

The answer, of course, is d). There has never been a prolonged economic downturn in the history of the world that has not been based on too much debt. Folks borrow to live higher on the hog in the present, whether this be thru increased consumption, speculation in financial markets, or to build additional capacity.

At some point, this debt has to be paid back. This either causes folks to dial back on resource utlization while in repayment mode, or to default. These activities are deflationary.

In either case, there will be a period in which the system needs to rebalance itself. The people push out this rebalancing process, the longer and deeper the ultimate rebalancing process will take.

This is, of course, the precise path we are taking via current programs of monetary and fiscal intervention. We're prolonging and exacerbating the inevitable. Essentially, we're trying to counter natural deflationary forces with more man-made inflationary forces.

It should be noted, btw, that a), b), and c) above help combat deflationary busts. Saving, gold-backed currencies, and competition keep debt creation in check, and tug leveraged systems back toward a balanced state when debt has been taken too far.

position in gold