Many commentators are discussing the prospect of the worst possible case in the current economic down-spiral.

Hard times for all

That case is deflation, where the relative value of our debts rises while the price of our assets fall.

In a period of low indebtedness in the early 1930s, America’s debt burden is said to have risen by 40pc in comparative terms.

In 2008, the U.S. and Britain have massive debts in all sectors across both economies. Dealing with debt in a deflationary environment is the all-pervading burden laid upon this generation and the next.

By some calculations, the United States has already fallen into the deadly whirlpool of debt-deflation, a term coined in Irving Fisher’s suddenly much talked about 1930s book, Debt-Deflation Theory of Great Depressions.

In Britain, as the BBC’s Business Editor, Robert Peston, points out on his blog: “If you combine consumer, corporate and public sector debt, the ratio of our borrowings to our annual economic output is a bit over 300 per cent, or more than £4,000 billion [six trillion dollars].” The latest figures indicate that may be a serious under-estimate.

Deflation will inevitably cause that debt to become more burdensome. It will be decades before we get it under control, and it will be future generations who pay. The bonanza of the past decade, which Gordon Brown bizarrely boasted about, will pauperize the nation’s children.

Even so, we’re not supposed to discuss this in case we “spook the markets”, a laughable notion in the circumstances. Part of the problem was the paucity of discussion on the way up, when spooking the markets was a necessary “evil”.

There will always be business cycles, just as there will always be wars. Damping them down should be a priority, rather than “cleaning up after them”, to use Alan Greenspan’s complacent phrase.

Cleaning up after this mess is going to be a generational task. If you are over 40, don’t expect to experience a time of prosperity again in your lifetime. Great disasters build caution into the human psyche. We will become suspicious of the new, the innovative, preferring what we know and consider safe.

Strong voices will emerge, suggesting simplistic political solutions to our ills. The American historian, Philip Bobbit has already proposed passing shadow laws of a draconian nature in case something nasty happens in the future. A growing autocracy will become the greatest danger.

So what are the consolations of the worst case scenario? There are many. It will make us honest again. Recently, too many people have behaved like those low-income folk who win the lottery and haven’t a clue how to handle the money. They invariably end up more miserable than they were before.

Our view of the world will alter radically in the coming year. It will seem greyer and more hostile than we’re used to. We will be forced back onto older verities. Thoreau and Emerson may come back into fashion, as self-reliance becomes interesting again.

The evils of over-consumption: roads clogged with expensive gas-guzzling cars, epidemics of obesity, low personal fitness levels, strains on the world’s ability to produce enough resources to fuel the tide of plenty, will be gone sooner than we imagine.

In an age when we feel less free than we did, freedom itself should top our agenda. Authoritarianism always prowls the perimeter when times are hard.

Can we survive this new world of limitation? Of course, and tackling it may make Barack Obama a considerable President, not just a curiosity because of his background.

In the end, we have to fall back on philosophy and practical psychology. As Albert Einstein said: “We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about.”

John Evans

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