This article makes a very strong and cogent case: we are in a depression and will be for some time to come. The underlying problem is debt. But I’m not totally convinced. Not every relevant fact is included in Mr. Harrison’s brilliant analysis.

First, the standard definition of “savings” (as opposed to the common sense definition) does not include money set aside in pension funds, 401Ks, or ordinary investments. Assets have bearing on what constitutes a reasonable debt level. I am less concerned about savings rates than asset levels. With the collapse of housing prices, homeowner assets have shrunk. It is also true that the collapse of the stock market hurt investments, another blow to asset levels. But the stock market has been recovering and house prices are starting to stabilize. Is our debt overhang still too large? I simply don’t know, but I haven’t seen evidence one way or another.

Second, the idea that public debt is needed to offset the liquidation of private debt is true, but only so long as there are lenders. Ever increasing debt is sustainable only if there is growth in underlying assets and the ability to service debts. It’s not clear that government can tax itself out of debt, especially since higher taxes will lead to increased unemployment and social unrest. It is not clear that the government can continue borrowing for too much longer.

In the end, we either have manageable debt levels (public+private) or we don’t. If we don’t, then liquidation is the inevitable response. This can occur indirectly through inflation, taxation, or massive decreases in government spending. It can also occur directly as we see Chicago doing by selling it’s parking garages, highways, and (maybe) an airport. The feds could liquidate as well. It’s not unthinkable – other national governments have sold their postal service, air traffic control, port authorities, etc.

All in all, I think it likely that we won’t see significant economic growth for quite some time, that unemployment will remain high, and that government will not be able to do much to help short of shrinking itself – which is politically unlikely.


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