America faces new Depression misery as financial crisis worsens

” By the wide stretch of the American River in Sacramento, history is repeating itself. Here, during the Great Depression of the 1930s, men and women who had lost everything and despaired of finding work built rough shelters and huddled around fires.

Now the spiral of job losses and house repossessions has left another wave of Americans homeless, and a new tent city is growing rapidly on lumpy, derelict land between the river and the railway tracks here in the capital of California.

There are more than 300 people living in scattered encampments stretching a couple of miles along the river bank. As many as 50 more arrive each week.”


” The recession will take an $8 billion bite out of California’s finances next year unless Gov. Arnold Schwarzenegger and lawmakers make more spending cuts or close some tax loopholes, the state’s leading budget analyst said in a new report Friday.”

Somewhat different articles but intimately related. What you should take away from the first article isn’t so much that tent cities are cropping up in California. The poor, the disenfranchised, the homeless exist in all countries around the world including the most prosperous. What matters here is the rate of expansion of the poor. What also matters here, is the fact that California ranks as the fourth largest economy in the world; for all intents and purposes, California has a bigger economy than many countries you can name off the top of your head and it is usually a bell weather of things to come.

What you should take away from the second article, is the quandary governments find themselves in. In the absence of inflation, that is, in the absence of positive money velocity and/or expanding credit markets, governments and the political process become paralyzed. If you read my essay on Stiglitz (part III, the case for war) and my essay ” Is government almighty?” then you know that in the absence of inflation government and the political process wither and die. We are in a deflationary recession that is real in the sense that individuals and corporations have sustained real material losses and are today overwhelmed by debt service expenses. This translates in reduced expenditures for other things like computers, cars, high end groceries or holidays.

The most evident consequence of reduced expenditure (other than debt service) is reduced economic activity. But the more pernicious and much less evident consequence is a dramatic decline in tax revenue. This means that municipalities, counties, state governments and, eventually, the Federal Government MUST redirect decreasing revenues away from non critical public services (mail delivery, passport or driver license renewal, public transport…) towards services they deem critical. So, unless someone comes up with a brilliant plan to restart inflation somewhere in some asset class, Western governments will be forced to declare bankruptcy imminently. Imminently in this case is a matter of months…

Now, both you and I know that Western government can’t declare bankruptcy… can they?… If they can’t, then what other options are there?


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