Did We Say 2008? Hahahahaha...

It's now official, folks: according to the National Bureau of Economic Research, the United States is in a recession... which started in December 2007. Actually, the recession is really a depression, but that's a detail; the illusion that things are just 'slow' has been eradicated, a year into the problem. Whatever the case, we wish the Depression a happy first birthday!

It is customary to name a depression after the year in which it started, so officially the United States is in the 2007 Depression. We resist the temptation to retcon our previous posts to fit the present circumstances, but we will use 2007 Depression from now on. It is the way this depression will be remembered in the history books, and who are we to argue with history?

Now that the economic situation is 'official,' let's look at what this may mean. One thing we feel is certain: fear is going to be much stronger than before. As an example, news has broken that credit card companies are thinking of cutting $2 trillion in consumer credit. Although we aren't convinced the banks will actually do this, it's a sign of increased tension and fear.

Fear will also help drive President-elect Barack Obama's sweeping social programmes with neck-snapping speed. In the manner of President Franklin Roosevelt before him, we believe Mr. Obama will be coming out swinging... and one doesn't want to be in his way. We fear his new policies, like Roosevelt's inept and destructive New Deal, will only serve to worsen and prolong the 2007 Depression.

The Looming Tax Catastrophe

The 2008 Depression is lowering tax revenues due to investment losses, declining earned income, and falling property values. To raise taxes at this point, even to maintain revenue, will create even less investment if levied on business, thus hurting prospects for job creation; and if levied against individuals, will lower discretionary spending and further the crash in consumer spending.

Governments can cut spending, as is happening in most U.S. states, but the effects of that are also depressing - government spending is, after all, somebody's income. Governments at present are actually increasing their spending in a big way via the bailout mania both by 'investing,' and by covering the losses these 'investments' will inevitably bring. Additionally, there are plans in the works for a new, New Deal.

Governments tend to have pretty good credit ratings, so they can borrow quite a bit to cover the shortfall of tax revenues, but there are limits. There comes a point when lenders begin to doubt whether the funds will be repaid and that source is precluded. Currently the USA has a direct federal debt liability of about $40,000 for each and every person in the country. Evidently the USA's creditors (mostly trade partners) think that is a viable sum. How much higher will they let that go, especially as incomes start falling? We don't care to hazard a guess, but probably not too much higher. So while this option is open to the USA Federal Government for the time being, it is a temporary phenomenon.

There is a darker 'solution' to where a government could get money to spend - the printing press. This would, of course, cause a ruinous decline in purchasing power - furthering deepening the depression.

Raise taxes to cover spending - deepens the depression. Cut spending to match the fall in taxes - deepens the depression. Max out the Federal Debt 'credit card' - keeps the bills paid for the time being, but what to do when it's maxed out? 'Print' money - one way ticket to Zimbabwe. This is looking like a no-win situation.