BEYOND RECESSION: DEPRESSION

August 4, 2011

Math was not my best subject in school. But like most students who have an enlightenment upon entrance into college, math wasn't so much of a threat to my brains anymore.

Math is one thing, but politics is another. Throw in a heavy dose of economic theory and your brains will get scrambled quickly.  

I’m not talking about raising the debt ceiling by $10 trillion over ten years, reducing it to $7 trillion (maybe?), and then having a kumbaya moment about responsibility. 

Rather, I’m referring to Sir Isaac Newton’s laws regarding a body in motion remaining in motion unless acted upon by an external force. 

I’ve talked to businessmen, laborers, housewives, and even teenagers, and they all say the same thing about our current economy.  “I sure hope it gets better soon, but it really looks like things are only getting worse.” 

These words are also being echoed by statisticians who measure such things. The most recent ISM report shows that manufacturing has come to a standstill, thus discarding the term “soft patch” in favor of the newest global buzzwords: “global slowdown.” 

Housing, as represented by Case-Shiller, continues its decline to what seems to be a bottomless pit.  Unemployment continues to accelerate as the next rounds of layoffs, from Cisco to HSBC, are announced with no relief in sight. 

The European Union is imploding as CDS spreads tell the tale of a strategy in crisis.  Finally, the charade in Washington, D.C. …well, enough said.  Everything seems to be getting worse, and the facts bear this conclusion.   

Let’s examine the trend, in Newton’s law. 

Third quarter 2010 GDP revised downward from 2.6% to 2.5%.  Fourth quarter 2010 GDP changed from 3.1% to 2.3%, and first quarter 2011 GDP adjusted from 1.9% to 0.4%. So the revised numbers show that each quarter was worse than the last, now a body in slower motion. 

However, what confuses me is the most recent 2011 GDP report for the second quarter, which was reported at 1.3%. While most economists were shocked, exclaiming this was a very low number, I was shocked it was that high. 

What could have happened to make the GDP 225% better in the second quarter than in the first quarter of this year?  Absolutely nothing, and that’s where revision comes into play over the next several months. 

Look for the second quarter of 2011 to be revised down, down, down.  If not ultimately adjusted to a negative number, it will be very close.  This sets the stage for a collapsing third and fourth quarter of this year. 

Everyone is worried about the double-dip, and some even think recession.  If we only get away with a recession, we’ll be lucky. 

I think Newton has it right. This “body” (economy) has much more painful “motion” in its future before we ever see improvement. 

Recession can be followed by depression, and I believe a depression is inevitable.


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