There are times when nothing very interesting seems to happen, when the years fly by like one of the uneventful periods in the history book that connect one war to another. Of course, as Americans learned on Sept. 11, 2001, it is those uneventful and uninteresting periods of history that provide a superior quality of life for those actually living through it. It may be tedious for future historians to read of people living peacefully for year after year in prosperity, but no sane individual would prefer the excitement of famine, chaos and war to comfortable boredom.

Even in the shadow of Sept. 11, Americans have been fortunate to enjoy their fat and peaceful lives. Gate rape may be irksome and ominous in what it suggests for the future, but the minor molestations of TSA perverts aren’t exactly the Red Army’s entry into Berlin, either.

But we are living, quite literally, on borrowed time. While the economy has not entirely collapsed into a second Great Depression, neither has it recovered. The problem is not that unemployment remains high or that immigration has rendered the wages of millions of jobs too low to be appealing to Americans living off the largesse of the state. The problem is that the Federal Reserve and the federal government have papered over the bankruptcy of many banks, states and corporations in a foolish attempt to create an illusion of recovery where none exists.

It must be admitted that the central bankers of the world have been more successful in their desperate attempts to delay the eventual reckoning than I had expected them to be. I anticipated that by the end of this year, it would be obvious to even the casual observer that America was caught in the Great Depression 2.0, an economic contraction of larger scope and scale than the first Great Depression. That, clearly is not yet the case. For every report of widening bond yield spreads or international debt bailouts, there is a positive quarterly GDP release or upbeat Federal Reserve statement. The number of bank failures are up 21 percent from 2009, but the percentage of failed bank deposits to total bank deposits is down 43 percent over the same period.

Both the U.S. and the global economy presently run on debt. That is why the Federal Reserve went to such great lengths to prevent further bankruptcies after the collapse of Lehman Brothers in 2008 and why the International Monetary Fund and the European Central Bank have forced European taxpayers to cover the debts incurred by bank debts in Greece and Ireland. Over the last two years, private debt has been declining at a rate of 15 percent in the financial sector as bad assets are written off and 3 percent in the household sector as homeowners default on their mortgages and credit cards. State and local government debt has increased 8 percent while federal government debt has grown 71 percent.

This is why both the economic optimists as well as the economic pessimists appear to be wrong. The economy is essentially treading water with an overall level of debt that has remained between 52 trillion and 52.9 trillion for the last nine quarters. To put this in perspective, it had previously been increasing by an average of $1.1 trillion per quarter, which means that there is presently $10 trillion less credit expansion than one would expect given the post-World War II average. That is the source of the demand-gap that Neo-Keynesian economists lament and which the orgy of government borrowing and spending has been unsuccessfully attempting to fill. Without the record-setting deficits of 2008, 2009 and now 2010, the credit-based demand gap would have been closer to $14 trillion over the two years, which is nearly the size of the U.S. GDP.

Although it has already persisted longer than I expected, there is no question that this rate of increased spending cannot continue in 2011. Illinois and California are nearly bankrupt already, as is Detroit and many other cities across the country. Pension fund liabilities will lead to a significant decline in state and local spending, thus putting even more pressure on the federal government in its attempt to counteract the various sectoral declines. But that will not be possible, as despite their pro-banking tendencies, the new Republican majority in the House cannot permit the Obama administration to continue its unrestrained spending if they have any desire to keep their seats in 2012.

So, contraction in all credit sectors is the general economic theme. And regardless of how the $52 trillion question is ultimately answered, regardless of whether that contraction results in hyperinflation or deflation, we are probably going to get that answer in 2011.

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