By Martin D Weiss, Phd
Fear of depression is sweeping the nation. Millions of Americans are consumed with anxiety, abandoning their old shop-till-they-drop habits, slashing their spending, trying desperately to pinch pennies for the coming hard times.

Thousands of bankers are snapping shut their coffers, tightening their lending standards, hunkering down in anticipation of a massive economic downturn. Sophisticated investors also see the handwriting on the wall. They’re pulling out of hedge funds, selling their mutual funds, rushing their money to the safety of Treasury bills. Even the established media, often late to see the dangers, is beginning to speak out more loudly …

CNN Money: “The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5% or so for that period. Since that makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4% rate in the fourth quarter.”

New York Times: “As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s.”

The Wall Street Journal, USA Today, and hundreds of other newspapers around the world are all asking essentially the same question: Are we sinking into a depression? How bad will it be?

The answer, they say with unanimity, lies with Washington. That’s why General Motors has suddenly switched PR tactics, now admitting it will run out of the cash it needs to stay in business. It wants a Washington handout.

That’s why dozens of major cities and states are saying the same thing. They want their share of the federal money too.

In this Washington-worship environment, you may even see Wall Street brokers drop their traditional embellishment of the news and begin stressing the negative — all for the sake of pressing the case for “bigger and better” federal bailouts.

The dire reality: Washington is not God. It cannot save the world. It cannot prevent the next depression.

Hard to believe? Here’s the proof:

The Debt Crisis, the Primary Catalyst of the Economy’s Decline, Is Far Too Bigfor the U.S. Government to Control

The facts:
1. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.

2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.

3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion!

In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion — a huge, unwieldy amount, but still minuscule in comparison to the massive debt build-up.

The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding.

Still, most people insist,
“If only Washington can avoid the mistakes it made in the 1930s … if only Washington can preemptively nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”
What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how …

Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.
Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red. Clearly the government bailouts are too little, too late to end this crisis. At the same time …

The Cost of the Bailouts Is Too Much, Too Soon for Those Who Must Finance It
With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do it by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money.

  Continued...