Ever skeptical of doomsday talk, my pen-pal Fred Hapgood  has finally acknowledged that the current recession is fundamentally more serious than any before it. I’d warned him that this downturn contains the spores of a deflationary depression, but as always, he only wanted to know – not unreasonably – how I will be able to recognize if and when I am wrong.  I had just sent him a particularly disturbing essay in which NYU professor Nouriel Roubini laid out the case for an economically ruinous debt deflation. Roubini prefaced his thoughts with this remarkable insight from John Stuart Mill: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."

Fred’s response, as always, was skeptical:

“The current recession, or whatever you call it, is interesting to me mostly in providing the  severest test to date of catastrophism, or whatever you call your system,” he wrote in an e-mail. “Do you see it that way? Suppose a year goes by without unemployment ever coming near double digits, the Dow falling below 10K, the GDP ever even approaching 10 trillion, or whatever other measures you care to define.  Will you then admit your ideas have been fairly tested and failed? Two years?  Three?”

I replied as follows: “I don't have a catchy name for my point of view, Fred, only a deep sense of foreboding that America's standard of living has lurched into intractable decline and that at least a generation will pass before we can begin to reverse the trend. The slippage in 2008 alone has been so steep that most Americans probably think that it cannot persist at its current rate. Tragically, they are about to be proven wrong.

“Whatever happens, I would sooner trust optimists like you to recognize a resumption of economic growth, since we pessimists are liable to mistake the very first glimmer of light perhaps 15 to 20 years hence for a migraine attack. I would suggest that you take any statistical evidence of recovery with a grain of salt, however, since there will always be enough such evidence around, as there evidently was during the 1930s, to nurture false hopes and delusion. 

Jobless Data Will Mislead

“Unemployment data in particular are not to be trusted, since, even with the unprecedented layoffs that are about to occur in the terminally bloated public sector, joblessness is unlikely to approach the 25% figure seen at the depths of the Great Depression.  We are going to experience instead toxic levels of underemployment -- of America's vast cadre of consultants and entrepreneurs, few of whom will elect to go on the dole. Their collective misery is going to be statistically invisible, other than to observers who are properly focused on the effect that such underemployment has on our standard of living.  It is on signs of improvement in the standard of living on which you will need to focus.  That may sound unscientific, but I'm afraid that, in the coming years, it will be all to easy for you to see that things are only getting worse.”

No Optimist

Ever the inquiring and scientific mind, here is Fred once again, with the final word. He seems not to have imagined how a debt deflation might creep up to his doorstep in Cambridge one day and become more than merely academic:

“I'm not an optimist. I think that within the parameters of interest here the economy, on a macro level, to a large degree is, like the weather, a chaotic system.  Small causes can have large effects and large causes fail to perturb the system in the least, and there is no way of knowing when either is going to happen. Indeed the economy is even more chaotic system than the weather, since its units are actively and consciously engaged in making each other look ridiculous.

“This is of course a hypothesis and can be disproved, or at least qualified, by finding statistically significant regularities in the data.