If you've been following the stock market, watch CNBC, read Yahoo Finance, and other media outlets, you would think that the recession is already over. But the fact of the matter is that we are nowhere near an economic recovery. Why? First, we have to understand what caused this recession in the first place. And second, we need to know what type of recession that we are in right now so we can address the issues accordingly.
There are two types of recessions. The most common recession is driven by overcapacity of "stuff" like cars, TVs, houses, etc. The supply is simply higher than the demand. Once this inventory has been depleted and cleared out, then the economy can resume its normal growth cycle. These are the types of recessions that most of us have experienced in the past and typically lasts anywhere from 9-15 months. No big deal.
However, there is another kind of recession that no one talks about and that is a credit-driven recession which is what we are experiencing right now. For the past 10+ years, economic growth has been driven by consumers buying massive amount of goods, but with BORROWED money. That is the difference. People have borrowed money at unprecedented levels by maxing out their ten credit cards and cashing in on their fictitious home values. So now what happens when those people lose their jobs and can't pay down their debt? File for bankruptcy, which of course affects the banks. The problem is not only with consumer loans, but also with auto loans, mortgages, commercial loans, etc. It's a huge mess and there is TRILLIONS of debt on the books! Until all debt has been paid down or defaulted, there is no way that this credit driven recession can be resolved in just 9 months. In fact, it could take many years for the debt to be cleared out of the system.
So what is the solution for an economic recovery?
This recession would end quicker if all troubled banks failed and restructured. But here is the problem. The government is preventing the larger banks (and insurance companies) from failing because it fears that a global financial meltdown could be catastrophic. Yes, that is quite possible. But either we take the pain now and recover quicker, or delay the inevitable resulting in a longer recovery. Well, it seems like the government has already decided for us.
What do I expect in the coming months and years?
-Double digit unemployment in 2010.
-Housing prices to continue to plummet.
-Stock market to retest March 2009 lows at 6600.
When was the last credit-driven recession in the United States?
The Great Depression.
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