Is there any way to avoid the coming economic calamity?

Last week I wrote about the US economy ending up in a Depression. Karl Denninger has a hard-hitting piece about our economic future that reaches a similar conclusion.  

He believes that our economy could contract as much as 40%. While that might be difficult to accept, his points are well taken. If I were to object, it would be regarding the magnitude rather than the direction. But his number might eventually be correct. This economy is about to implode.

There is no question that we are in for a massive change in our lifestyles. As I wrote in Worse than a Depression:

We are witnessing the death of democratic socialism. No politician wants it to happen, but none can prevent it. We are at the point where the Ponzi concept of "extend and pretend" has been extended beyond social commitments and banking systems to entire economies. We are approaching what Ludwig von Mises described as "the crack-up boom":

There is no means of avoiding the final collapse of a boom brought about by credit [debt] expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

The economic risk goes well beyond the United States as recent events in Europe have suggested. Once the dominoes start to fall, it is difficult to see even what appear to be sound economies not taken down.

Mr. Denninger and I are in agreement that we are headed into a Depression. There may be disagreement regarding the route we take to get there, but, if there is, that is understandable. The Depression forecast is relatively simple, albeit it politically incorrect. It is simple because it is based on mathematics. It is politically incorrect in the sense that Washington does not want you to understand how badly they have mucked things up.

The route that leads to the Depression is not deterministic because it involves behavior variables that are beyond forecasting with any high degree of probability. These behavioral variables primarily involve politicians. Specifically, how will they react as events begin to spin out of control?

From my reading, and I hope I am not misinterpreting Mr. Denninger, he seems to suggest the politicians will halt the stimulus at some point. That would put us into an economic downturn almost immediately, as he points out. My understanding of Mr. Denninger's view of the political class, however is such that it is difficult for me to accept that he believes that politicians would do the right thing. Thus, if I am misinterpreting him somewhat, I apologize. From a substance standpoint, it really has little bearing.

At this point, there are only two options for the political class: stop the stimulus immediately and face the music, or try to bluff through one more time. The best thing for the country, especially if it were accompanied by necessary cut-backs in government at all levels (unlikely until markets force it) would be the first option.

The second option is clearly not possible, but "possible" is no deterrent to politicians. We have passed the tipping point where additional debt can be either useful or possibly even obtained. Per Mr. Denninger:

This is unavoidable, and no amount of bleating will change it.  I wish there was a solution to this problem, but there is not.  The promises made cannot be kept, not due to lack of political will but inability to continue to compound debt upon debt upon debt any longer.

I believe that politicians will not willingly cut stimulus spending. Eventually markets will force that action on them, but probably not before we are on the verge of, or actually in, a hyperinflation. Like cornered, wounded animals the politicians will do everything to save themselves and their government. Concern for the "good of the nation" left Washington years ago.

Thus, I expect us to end with a hyperinflationary Depression. This ending is more damaging than entering a Depression with a functioning price system. It is so because hyperinflation causes markets to fail. More importantly, it wipes out all savings (read the middle-class).  

Monty Pelerin at www.economicnoise.com
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