The dynamics of Depression

are settling in.

From Bloomberg.

March 9 (Bloomberg) -- The U.S. economy’s vital signs may not confirm a diagnosis of depression. The symptoms increasingly point to one.

As in the Great Depression, world trade is collapsing, wealth is evaporating and the banking system is broken. Deflation is a growing threat as companies slash production, pay and prices. And leaders worldwide are having difficulty making headway in halting the self-perpetuating decline.

“We are tracking 1929-1930,” says Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley.

The result: This contraction may leave a lasting imprint on the economy and society, just as the Depression did. In the wake of the devastation of the 1930s, Americans swore off stocks, husbanded their own resources and looked to the government for help. Now, another generation might draw some of the same lessons from the deepest economic collapse of their lifetime.

“This is going to scar the collective psyche,” says Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “People will become much more conservative in borrowing, lending and investing.”

Debt Deflation is its own spiral, its own negative feedback loop. Breaking it requires restoring confidence which requires prices floating which requires restoring monetary levels, requires massive printing of money or the reset of the financial system. Politicos look completely blindsided. The housing market needs to find its bottom before the cleaning can happen and all the while the economic conditions are snow-balling. I don't expect soup lines. In retrospect stagflation was a blessing, at least they had inflation and that inflated away the problems and avoided a severe depression in the 70's. Japan looks like the bullish outcome (stability of economy, stability of prices). Ojala!