Something more that I wrote about the current economic problems. Still trying to understand what is going on and increasingly hoping that I don't.
A recession is defined as a period of two or more consecutive quarterly declines in gross domestic product, while a depression is defined as a prolonged period of recession usually lasting two or more years.
However, GDP can be increased to the detriment of long term economic prosperity, or in other words, recessions can sometimes be a good thing.
One way to increase GDP in the short term is to borrow. Suppose that we wish to measure your contribution to GDP. The major component of your contribution will be consumption, that is, the final price of all goods and services you purchase in your country of residence (distinguished from imports). If, therefore, your consumption can be increased without decreasing other spending then GDP will increase. But how can you spend more on consumption without spending less somewhere else? It's easy, take out a loan!
Loans redistribute money across time. For example, suppose that your income this year will be $10,000, and further, your expected income over the next five years $250,000, or $50,000 per annum on average. Noting that your future self will have a far greater income than your present self, you decide that some income redistribution would be appropriate and decide to borrow $30,000. Your income this year jumps to $40,000, while your expected income only decreases to $220,000, or $44,000 per annum on average (we'll ignore interest rates to keep it simple). By redistributing your income across time you can gain access to it when it is needed most.
In the short term this loan can substantially increase your contribution to GDP by increasing consumption. It is, however, offset by lower contributions to GDP in successive years as the loan is paid off. Nonetheless, your contribution to GDP would have a positive, or at least neutral, trend. But suppose that you grossly overestimate your expected income. Instead of $250,000, you will actually have $150,000.
The $30,000 loan is sold on these false expectations, meanwhile, you begin to adjust your consumption to your new $40,000 income and $250,000 expected income. Your contribution to GDP soars---not only do you have more money now but expect to have even more in the future, and you spend accordingly.
Eventually, however, the 'next five years' begins and you discover that your expected income was overestimated. Instead of $50,000 per annum on average you have only $30,000, and you still have to pay back your loan! After the first year, your income actually declines from $40,000 to $24,000 and your contribution to GDP decreases. Unwilling to give up your $40,000 income lifestyle you decide to borrow $16,000. Another redistribution of wealth from an increasingly poor future to the present. You have, in effect, delayed a personal recession by borrowing. However, when the future once more becomes the present, you have an even lower income and even greater debts.
It is a cycle that cannot go on forever. Even if you wish it to, eventually lenders are going to wise up, look upon your impoverished future, and decline to loan you any more money. In fact, by not accepting the recession the first time the eventual depression is magnified. The bad decisions of the past needed to be paid for before progress could once again be made, and denial of this only deepened the eventual misery. Your contribution to GDP may go down to correct errors of the past, and trying to prop it up by borrowing and spending on consumption can at best delay, and at worst deepen, your eventual crash.
The recent credit bubble, fuelled by decades of espansionary monetary policy by the fed (so-called 'easy money' policy which make loans more attractive) and the delusion that property prices could only go up, greatly inflated Americans' current income and expected income (e.g. home equity). Some proportion of the rise in GDP preceding these economic troubles was misleading, and a recession is desperately needed to pay for the mistakes it led people into.
The government, however, is currently trying to prop up GDP by borrowing even more money from an increasingly impoverished future. Expansionary fiscal and monetary policy are both veiled forms of borrowing. They are trying to prop up GDP (or aggregate demand) and delay the inevitable, but this will only make the eventual crash worse. Moreover, once the lenders get wise to this pyramid scheme (because that's what it's like), they'll stop giving the US, including its government, any loans. At that point they'll have to just print the money to fund their activities, and thereby, create massive inflation (they'll call all of this 'economic stimulus', of course).
Now lets hope that I am utterly wrong, or at the least, the impact of all this will not be so great.