I was thinking at the federal level the interest payments would crush us before we ever had to pay back significant principle, but I suspect on the consumer level you are correct.

http://en.wikipedia.org/wiki/Debt_deflation for a theory on the matter (Roubini and a couple others suggest that it is already occurring)

I'm not saying that deflation would be pain-free, but what you're saying is basically the rationale for government inflationary stimulus. (I realize you say you're not endorsing anything, but...) You're looking at consumption as being the factor we need to worry about. What about the flip side of deflation, that it encourages savings and all the opportunities that would be available for those who have made responsible financial decisions?
The problem with the housing market isn't that prices have gone down. The problem is they were artificially inflated, and subsequent problems will ensue from the housing market having not been allowed to fall to the levels the market would dictate. Deflation wasn't the problem.

I was going to keep going on here, but maybe you don't disagree with anything I've said. You did say you're not endorsing anything, so let me ask you before I keep going, what is your opinion? Obviously, there's no easy way out at this point. The options are bad, worse, and worst. So which door is deflation, because I know you're not a fan of government stimulus (read: inflation), etc.

To a certain extent I would agree with you. As our economy failed to adapt to evolving labor markets in a post WWII globalized world we certainly used Fed policy as a means of expending savings and encouraging private sector debt as a means of growing the economy. I forward a neutral currency, but it's difficult to achieve, which is why central banks tend to favor low inflation and why I tend to agree with say...1% target inflation. You're right that deflation encourages savings, but it'd screw me on my college debt, and I'd never purchase a house. I think you'd end up tipping the scales too much in one direction if you specifically sought to deflate the currency. You just wouldn't see people making BIG investments. I favor a neutral fiat currency specifically because it robs governments and central banks of their ability to socially engineer people into saving or acquiring debt. It also provides stability in the market place.

As for what we need to do now ... a bunch of deflation now to correct our massive market dislocations would be far better than the total collapse we'll see if we continue down a road of chronic 10% of GDP federal deficits and fail to address the other structural issues within our economy.

other structural issues... such as, declining infrastructure that requires government spending.

We really don't have declining infrastructure. This is a complete and total myth forwarded by special interest groups who make a shit ton of money constructing infrastructure.

who are these groups? and while we're at it, what are the other structural issues?

The Federal Reserve, a consumption-based economy, unsustainable social programs, foreign adventures, our ever increasingly inflationary monetary policy, to name a few.

Keep in mind that plenty of people who don't like killing all those Muslims believe any candidate's presidency would result in an American and global economic crisis.

before you added the quote, i thought you meant these were supposed to be the special interests. that was a fun thought process.

Even gold standard era Britain had a central bank (and so did France, who J Lawrence Broz argues did not operate especially close to the principles of the gold standard, maintaining international financial stability in a lender of last resort esque role).

I agree that our economy itself, yes, needs reform from consumption and debt to greater production, but I wonder to what degree that is possible given lower wage competition resulting from globalization.

Yes, we need to look to the long term and reform our major social programs, and maybe they won't be sustainable.

I agree that invasion and long term occupation are not good for our country. We shouldn't do that anymore. Still, I don't know that they're especially related to our current economic predicament (longer term they're related to our debt, but I'm not a debt pessimist in the short term, and I don't think there was an especially strong relationship between debt generated under Bush and the credit boom/bust).

Yes, I'm not in favor of high levels of inflation, especially given that it's going to hit lower and middle class families harder than those with money to invest in commodities. But, say, the dollar losing value might not, given that it would mean fewer manufacturing etc jobs leaving the country (on the other hand, if a cheaper dollar leads to a slowdown in Chinese growth, and political chaos in China results, then we have a whole other set of implications to consider).

Point being, plenty of folks are sympathetic to the argument that we've pursued unsustainable policies for several decades, and that the ultimate outcome of failing to pursue something that approaches some sustainable alternative - understanding that, yes, the transition would be very ugly - would be no less chaotic than the alternative.

Of course. But hey, if the crisis you're fearful of is going to come, it's going to come, and there's not much we can do about it.

We should be looking at pursuing more sustainable policies in the long run. Then again, my sympathies with pursuing them now lie in the realization that promises are easy to break when no one is holding a gun to your head. But if someone's going to hold the gun (which isn't 100%--nothing is), then why do it ourselves(which would be 100% if we made the choice)?

Those are two of your worst posts I've ever read.

I like this actually, for non-internet reasons.

Anyway, I'll reply later. Time for work. Why so bad, in the mean time?

There's a distinction to be made from the kind of deflation that is a function of increasing productivity, and the kind of deflation that is a function of credit contraction. The former is (or, at least, can be) benign and slowly improve standards of living. The latter - which precipitated the crisis - would quite likely result in a global run on liquidity and throw governments and most modern financial institutions into something approaching a crisis.

One of the effects of removing the tether to some kind of monetary constraint in the 70s was to effectively convert the base of the money supply from a commodity to debt. The upshot is that the post-1971 money supply is the sum of all assets against which one is willing and able to borrow. To the extent more and more assets were created - many of them dubious; I assume you read "The Big Short" and saw just what junk most of the leveraged Wall Street firms were borrowing against - more and more "money" was created. It might not have been the kind of money that shows up in M0, M1, M2, etc, but these assets nonetheless performed the function of money, and thus were on net additive to overall economic activity. That is, more and more and more debt was pyramided on fewer and fewer assets that actually stood a chance of generating enough cash flow to service the said debt. When the jig was up, there was a global run on shadow liquidity, as both the debt that had been pyramided and the assets which comprised the base became illiquid. Result: chaos.

The kind of deflation that would result from a replay of that scenario would absolutely result in another meltdown.

For what it's worth, you can't really go wrong reading Gary Gorton's analysis of the role of the shadow banking system in the recent crisis. I'm kind of obsessed with the topic.

Is there any end game that doesn't include crisis?

I mean, magnitudes and semantics vary. The only thing I'm sure of is that the debt-based growth paradigm has peaked, and because most - if not all - monetary regimes are at root based on some sort of debt instrument, the viability of modern monetary arrangements are threatened. Regarding the United States' outlook, the best case scenario seems to me to be a Japan-like lost decade or two (assuming there is no miraculous energy advance or discovery).

What about the next internet? That could work too!