Interesting perspective. A recession in this century is most likely the result of a crisis of confidence, right? With the international economy basing the value of currencies on their holdings of other currencies it's a bit of a shell game, so all Americans should need to do is persuade themselves and others there's no problem and things will fall into place again.

So true. The sun WILL come up eventually just like sooner or later the drought will be broken and it will rain -or at least I'm hoping so bein' as I bought 152 shares of AT&T last Friday, lol.

Good article, Doc. Well written and well done!   

There's that saying that "things will get worse before they get better". But people only believe it and are OK with it when it is not them the ones with the problems.

I see the same thing as you Cacto.

No, the causes are many and varied. I think Artysim hit upon it (while being a bit over dramatic with it as well). 8 years ago, the dot come bubble burst, and we had a recession.

Last year (or maybe 2 depending upon who you believe) the Housing bubble burst, and we will have a recession. Over speculation for both of them, just in different areas.

But over speculation is not always the cause. A real crises of confidence (I am not talking ma and pa citizen, but of the money movers) could cause one as well. I am not seeing that yet. We are in a global economy, and the American economy has been riding high now for 20 years, and is due for an adjustment (which is really all a recession is from a macro perspective).

I guess it is just the ostriches I hear too much that caused me to write this. I am so tired of the "doomsday sayers" that every time the economy goes into a recession, they see the world ending. As if we have never had one before.

or ever will again.

I would say that is one safe investment! You may not make a fortune, but you are not going to go broke in the near future with that kind of investment either.

The "part 2" of this is the way they look to the politicians to save them. Like all the people in OZ looked to the wizard. When it was themselves who solved the problems, not the wizard. I dont know who is going to win, but I do know one thing. None will make it better. They may make it worse, but that is all they can do.

I dont even see them convincing themselves. Unless we do something stupid (a distinct possibility) it will fall back into place. Even without anyone convincing themselves. After all, for the last 8 years, they have been told the economy was in the crapper. And the economy still boomed. They just dont need to panic (something I am seeing from the politicians and the talking heads). As long as the people go about making a living, the economy will rebound.

Drama is a good thing every now and then, no?

I think everyone is in agreement that the U.S economy is due for a "correction" the question is, how much of a correction will it be, who will be affected negatively (who will stand to profit the most from it) and what will the landscape be afterwards.

No one is saying that the world is coming to a grinding halt, but this may indeed change the lives of many folks profoundly, just as the great depression did. Nor am I saying that this is going to be another depression, but there are a lot of similarities.

I agree that everything is cyclical and we are just seeing the "down side" of the cycle, but with a few caveats-

1) In any system (natural or manmade) if the rules are adhered to then the system operates normally and predictably. ~if~ the basic underpinnings of economic theory were being followed here, then yes, this would just be a normal market correction. However, in any system, natural or manmade, if you try to break the rules, you end up breaking the system (or it becomes wildly unpredictable and then it's anybody's game as to what will happen next, good or bad).

Part of the reason that a lot of folks are saying this correction could indeed to be much different and far worse than many previous corrections is the assertion that the banks and the fed reserve have broken the rules, or gotten involved in such convoluted, complicated transactions (to effectively bend around the rules) that the very banks who started it can't effectively state their own available assets or worth (or massive debt as it's turning out in a lot of cases) becuase it's all tied up in off-sheet derivatives and securitizations that were sliced and diced and then re-sold again and again. It's a crazy tangle of unkown variables, intentionally created by the banks in a quest for pure, maximum profits.

This is part of the reason why the Carlyle fund, Bear Stearns, Countrywide (and probably soon Lehman brothers too) have all gone under, and part of the reason why liquidity in the system is grinding to a halt. None of the banks want to lend each other anything, because no one really knows what the other has (or even what they have)

With the repeal of the last provisions in glass steagall a few years ago (remember that act that was passed after the great depression to ensure something like that didn't happen again) the protectionary divide between commercial and investment banks is gone, a BIG oversight once again made in the mad drive for profit. 

The idea that a bank can be self-regulating is another big reason why things are so haywire right now. Telling a bank it can regulate itself is like telling a fox to guard the henhouse. But alas that is precisely what has hapenned in recent years in the name of "unhindered free markets". Saddly, a true free-market is anything but self-regulating, as we are soon to see!

We've broken or ignored the basic rules of the system, and what happens next is anybody's guess. Best case scenario it's just another down cycle like you state.

2) The federal reserve!

The fed is supposed to be an independent, autonomous body overseeing the central banking system. Yes, it is there to be a lender of last resort to big business that falls on hard times, but it is not meant to be beholden to those banks. Now it is, and this has been illustrated over the last few years by the fed reserves inability to acknowledge reality and let the system act how it's supposed to. The fed should be allowing the big banks to fail. Instead they are bailing them out with billions of dollars of taxpayer money (yes, I know they're not actually diverting billions of tax dollars but it's the same end effect).

With the fed no longer a neutral, impartial party that's supposed to keep the good of the overall economy in mind, it's now firmly acting as the pet of the banks. This will have a disastrous effect on foreign investment, (and investment in general) as foreigners especially see that instead of playing by the rules the fed is concerned only in serving their masters. The reason why foreign investment is particularly important is because foreigners hold more than 6 trillion dollars of U.S treasury notes that if they so choose they can dump on your shores. If this happens, say hello to the Weimar days of inflation, Circa post WW1 Germany!

3) The world has changed since 1929. In fact, it's changed since the 70's big time, too. Population is much greater, and other nations have significantly more demand for natural resources than in the past. At the end of WW2 the U.S was the world biggest lender- now it is the world's biggest debtor. There are a whole host of factors that could exacerbate this market correction in ways much worse and unforeseen than in the past.

Long story short, I agree that the sky is indeed, not falling. However the ground is rumbling and we're due for a bit of an earthquake

Maybe not up north, but down here the cacophony is getting deafening. We have too many chicken littles running around promising it - especially if they are not elected.



very true. As I said, I agree with most of what you say, but not the magnitude. The Housing market is going to create a shake out. But you may not remember the S&L crises of the late 80s. That was another "end of the world" scenario much like this one, that failed to come to pass. The checks are there. And I dont believe weakened to such an extent as this one will be that bad.

As for the Fed, I disagree with you on means, not the ends. They are screwing up big time, but not because they are beholding to banks, but because they think they can stop a recession with monetary policy. That was never the case. They can only moderate the ups and downs. Their open money policy of the early century got us into the Housing boom, and then bust. Now it is going to shorten this recession, only to plunge us into another "crises" in a few short years.

To the economy, swings of 3-4% in the lending rate give rise to the boom and then bust. They reduced rates too far before, then raised them too fast. Now they are doing the same thing again.

Oh, for the days of Paul Volcker!