Likely Consequences of a big "D" Depression

I’ve heard some fiery declarations from people opposing bail-outs of banks, insurance companies, real estate companies and their borrowers, and certainly the auto companies – “Let them fail;” “Let the shake-up come;” and the most interesting, “What this country needs is a good depression to get it straightened out!”

Most of these people have never been through a big “D” Depression. I’m 66 years old and I haven’t. But, I heard about it constantly from my parents and their contemporaries, and I’ve read about it – it wasn’t a pleasant catharsis! It was ugly for the vast majority of people. One needs to be careful what one wishes for!

As bad as the 1930’s Depression was, I think one today could be even worse. Let’s look at some likely consequences internally and externally and then decide whether it’s better to at least attempt to avoid it or to passively let it happen.

Likely internal consequences:
1. Loss of millions of jobs with the resulting difficulties economically, socially, and psychologically. Great Depression of 30's was 25% unemployment and many who remained employed did so with jobs that provided little more than subsistance living.
2. Young families eagerly wanting to get started in life might have limited opportunities in a depression. They may be forced to grab what they can and hold on where they can.
3. We have a growing number of people – the “Baby Boomers” – retiring. They are intending to live on pensions, 401K’s, IRA’s, mutual funds, stocks and bonds, equity from their homes, etc. A depression will deplete these savings significantly and this age group doesn’t have the luxury of waiting out a long term recovery.
4. The sale of bonds is the typical way for the government to borrow money. A depression will probably call for an even larger national debt because the usual way to respond is for the government to “prime the pump” – spend money. Who will buy these bonds and what will the interest rate be? Our debt has doubled over the last 8 years and at some point people will begin to question the “good faith and credit of the U.S.”
5. Another response from the government in desperate times is to print more money. The progression is likely to be deflation as we spiral down; and then, if and when we start the presses printing new money, high inflation will follow and our money will be worth less and less in buying power.
6. Personal consumer debt is already too high. Who will be left holding the bag for credit card debt, mortgages, car loans, furniture, appliances, etc. when this debt goes unpaid?
7. There are likely to be serious cut-backs in some government programs that many people rely on – education, health care, corporate welfare, farm programs, social welfare, research and development, management of parks and public lands, etc.
8. Many state and local governments could go broke because of reduced tax revenues, and default on bonds they have sold. They will certainly cut services.
9. Retail stores, restaurants, car dealerships, service companies, etc. – “all up and down Main Street” will be hurting if not going under.
10. Our construction industry might be hard hit because capital expenditures at the local, state and national level will be backing off. Unless they are government funded, alternative energy projects might not go forward and infrastructure like roads, bridges, electric grid, ports, dams, airports, railroads/mass transit, etc. might be put on hold.
11. We are pretty stable politically, but radical solutions like socialism might gain credibility because of class warfare and loss of faith in capitalistic system.
12. Private philanthropic assistance programs and faith based relief programs are already pushed to the limit and might not be able to respond adequately as they couldn’t during the Great Depression of the 30’s.

Likely external consequences:
1. To cut costs we may be forced to exit the war effort in Iraq and Afghanistan before it is wise to do so. The result could be serious instability in the Middle East with other wars, civil unrest, and disruption of flow of oil. Israeli security would be a major concern.
2. Radical Muslims will take credit for our troubles and taunt us with, “I told you so.” It could enhance recruitment of radicals throughout the growing Muslim world.
3. Chance of an attack on the U.S. and our allies from terrorists could increase because less money might be allocated to security efforts.
4. May have to limit and/or go slow on the rebuilding of the military which will put us in a weakened position to defend our interests in the world.
5. Lack of confidence in the U.S. economy could make us even more vulnerable to disastrous economic instability if creditor nations like China (our biggest lender) cash in their U.S. bonds and/or refuse to lend us more money.
6. Free trade could very well be curtailed with other countries putting restrictions or tariffs on our goods being sold there to protect their own industries. Then, we might reciprocate and a vicious cycle will begin.
7. Because of desperate economic situations in countries throughout the world, some countries could very well turn to dictatorial, fascist, or even communist forms of government. We saw this with Russia, Germany, and Italy in the early 20th century.
8. American private enterprise has spent billions of dollars on capital expenditures in some less than stable countries as we outsourced manufacturing. Some of these countries could very well step in and restrict or nationalize (take over) these facilities to enhance their income. Where would we get our manufactured goods?
9. Ecologically sound practices, which have struggled in good times, may be put way down the list of priorities which would compound destruction of the world environment.
10. Many countries will play the blame game pointing to our failures and excesses as the epicenter of world economic instability. Efforts to improve our relationship with the world to create a functioning global economy might be hindered.

It is a sobering list and it is undoubtedly incomplete. Not all of these problems may develop, but conventional wisdom suggests otherwise. If we can develop processes/programs that could avoid it, it would be in our best interest to do so. Economic strength is paramount to our security.