I will be one of the first (and few) to predict that we are actually headed for a depression, rather than a recession. I admit this is mostly based on gut feelings (I think my brain tends to shut down when there are too many variables to calculate). At any rate, there is a little method to my madness.
The science behind my prediction is based primarily on the consumption factor of GDP, which is often broken down between personal and public sector consumption. The US is the largest single consumer in the world. Consumption in the US has been “priming the pump” since the dot com bust. Unfortunately, this consumption has been financed largely by housing speculation and cheap loans. This is somewhat similar to the lead-up of the Great Depression.
From Wikipedia:
“Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect.”
Some predicted that the dot com bubble would lead us to a depression. This was offset by extremely low loan rates and artificially boosted housing prices. In other words, I think we averted an impending depression after the dot com bust and 9/11 by falsely boosting consumption. And now, in the words of Ward Churchill, the chickens have come home to roost. We are no longer able to consume at our previous levels. The worldwide “pump” will no longer be fed by US consumption.
