In judging the severity of an economic downturn, one ought to include the costs of fighting it, as well as the costs in lost output and employment that are incurred during the depression. The costs of fighting a depression have two components: the costs of fighting it that are incurred during the depression itself, and the costs incurred after the depression ends--what I call the "aftershock." The difficulty of predicting the form and severity of the aftershock is one of the sources of the uncertainty that I emphasized in blog entries VI and VII in this series.

I want to set aside, as utterly unpredictable, the possible political consequences of the depression and their costs, and focus just on economic losses, and indeed just on the economic losses flowing from (1) the expansion of the money supply by the Federal Reserve and (2) the increase in the annual budget deficit and therefore in the national debt as a result of (a) the fall in tax revenues during the depression, as a consequence of the decline in taxable income of both individuals and corporations, and (b) borrowing by the Treasury Department to finance the government's debt.]]>