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Posted on 12 June 2011 | 12,970 views

Is the Stock Market Signaling a Crash and Double Dip Recession or Great Depression?

Recent economic data indicates the United States economy is heading into a “Double Dip Recession” and if we are to have a double dip, we had better hope the second down-leg is a deep one, the 2008-09 recession was nothing like as deep as that of 1929-33 but current misguided policies have actually made things worse.

The costs imposed by current policymakers’ have now created different errors which must now be paid.

Before we entertain the much dreaded word double dip “Great Recession” or even “Great Depression“, let’s take a look at some of the recent economic indicators and see what’s going on.

Housing Market — The S&P/Case-Shiller Home Price Index has now dipped to the lowest level since March 2003.

Unemployment — Job market loses momentum and if you really look at the numbers, you’ll see that the jobless recovery never had any momentum. Statistics are excluding workers that have been out of a job for more than 99 weeks and simply decreasing the workforce.

Consumer Confidence — The Consumer Board’s Consumer Confidence Index was at a dismal 60.8 for May 2011. The average reading since 1967 is 94.5, the current reading is lower than it was after the 9-11 attacks and about as low as in 2002. Consumer spending accounts for 75% of GDP. What happens if the consumer doesn’t feel confident?

We are indeed destined for a “Great Depression”, with hyperinflation and a major stock market crash — this time around, the initial plunges in 1929 and 1987 will be considered weak compared to what we are about to experience and it will be known as the “Great Crash” years later.

What happens now depends on what policy is pursued. At one extreme, a watertight agreement between Democrats and Republicans on sharp cuts in public spending, combined with a realization by the Federal Reserve that inflation is a major danger, requiring sharply positive real interest rates (and presumably accompanied by the forced resignation of Ben Bernanke) would in the short term produce a sharp decline in commodity prices, a major stock market crash (3,500 on the DJIA — 400 on the S&P 500) and a deep recession, taking GDP down perhaps 6-8% from its current level.

Essentially we would pay today the stored-up costs of past fiscal and monetary mistakes, producing a second double dip in the economy that will be more severe than the first. However, that second dip would probably be far less damaging in terms of employment than the first dip. The return of sharply positive real interest rates — perhaps a Federal Funds rate of 10% if inflation was running at 6% would cause businesses to seek ways to substitute labor for suddenly expensive capital, causing new jobs to appear even as bankruptcies removed the old ones.

Once bottom had been reached, probably within 12-18 months from the decline’s start, a true economic recovery would begin that would rapidly increase demand for labor as in the 1983-84 recession, quickly reducing unemployment except for those unfortunate souls whose skills had atrophied due to the duration of their enforced leisure.

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One Comment »

  • Simon Ellis said:

    RT @tweetmeme Is the Stock Market Signaling a Crash and Double Dip Recession or Great Depression? http://t.co/MKL5ict

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