Great Depression Narrowly Averted

From a posting by Paul Krugman on his NY Times blog:

What we’ve had is a sharp increase in the desired private surplus at any given level of GDP, due to a combination of higher personal saving and reduced investment demand. This is shown as an upward shift in the private-surplus curve.

In the 1930s the public sector was very small. As a result, GDP basically had to shrink enough to keep the private-sector surplus equal to zero; hence the fall in GDP labeled “Great Depression”.

This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus. Hence the smaller fall in GDP labeled “Great Recession.”

What Hatzius is saying is that the initial shock — the surge in desired private surplus — was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful — and it’s all because of the rise in deficits. Deficits, in other words, saved the world.

The talking heads in Washington and the right wing nuts don't realize how close the world came to a second, even greater, Great Depression according to Krugman. It is thanks only to a large government deficit that this has been averted. But the idiots who know no economics keep jabbering away talking about "inflation" and "burdensome debt" when they don't realize how close we came to long soup lines, a quarter of the workforce unemployed, and hobos riding rails for the next decade. It was very close. But the idiots don't and won't realize that. Sad.