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The Nightmare that Nobody Wants to Talk About: The Next Depression

By: Steve Johnson

11/4/2008 - 86 Comments

The economy continues contracting significantly with day after day of relentless bad news.

The signs of economy decline are coming in faster and bigger every day. Yesterday’s news alone was disastrous;

- U.S. manufacturing activity in October fell to the lowest level in 26 years,

- U.S. crude settled down $3.90 at $63.91 a barrel, after October saw the steepest monthly price decline ever for oil as global demand slowed,

- U.S. auto sales plunged near 25-year lows in October, led by a 45 percent drop at General Motors Corp (GM.N), with no sign the industry's year-long slump had hit bottom and doubts persisting that all the major automakers can survive.

- Circuit City Stores Inc. said Monday it is closing about 20% of its U.S. stores - cutting thousands of jobs and closing 155 stores

The question of if we are going to have a recession has moved to how long of a recession we are going to have. We are long past the V-shaped or U-shaped recession scenario.

An L-shape recession is a recession that goes down and then stays there for a long period of time without a recovery. An L-shaped recession could last 20 years.  An example would be the recession suffered by Japan in the 90’s, which they are still recovering from 25 years later.

This is the nightmare that nobody even wants to talk about. The Japan recession started when their economy was flying high and looked to be the next economic superpower.  And it all started with a housing market meltdown which a few years later resulted in a stock market meltdown.  The combination brought their economy to its knees.

The parallels of the housing market crash and the teetering stock market are staggering - especially if you add the other fundamental weaknesses plaguing our economy.  The current economy downturn doesn’t have a shinny spot anywhere.  America just maybe headed for an L-shaped recession, which will drastically reduce the average standard of living. 

Mean while, the Wall Street brain trust is at it again, spinning up several over optimistic ideas, which Peter Schiff clearly identified in this latest article.

“Mesmerized by technical moves and oblivious as always to the fundamentals, the Wall Street brain trust has offered flimsy explanations. One popular rationale is that as bad as things are in the United States, they are even worse every place else. Still another is that since the U.S. was the first country into the crisis that we will be the first nation to come out. Still another is that since our government is acting more boldly than most to tackle the problems, our economy will not suffer as badly as others where governments have been slower to react and more timid in their responses. In addition, many still perceive the United States as the citadel of stability in a world of second-rate economies.”

Peter later explains why the current market moves which appear to be in favor the US are not going to last as the fundamental problem in the global economy are centered in America.

“So while it may appear to some that things are worse abroad, that is only because the full extent of our problems has yet to be reckoned with. The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our “cart before the horse” borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come.”


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