Two More Years and a Further Deepening of the Great Recession

The U.S. consumer has gone on a consumption binge for the last 10 years unlike anything seen in history. That binge has been financed by housing debt, car loans, credit card debt, college loans, etc... This easy credit has fed this consumer binge just like pushers feed a drug addict. We have seen the first half of the drug addict's withdrawal, and the second wave is coming, as illustrated by the graph of monthly mortgage resets. In 2009, there is a slight respite from the extremes we've seen over the last year or so. But in 2010, a massive wave of option adjustable rate and Alt-A (also known as liar's loans) are coming. Add to that credit card debt and other forms of consumer debt, bubbles that have yet to burst, and unemployment that may well top 10%, and you have a collapse of credit just as extreme and just as painful, if not more so, than the first wave. With the Feds pumping money into the system with corporate bailouts and stimulus plans, both past and proposed, an effort that is simply pouring more gasoline on the fire, you have a recipe for disaster. Fighting deflation comes at price. How is the Fed going to stimulate a corpse of an economy over the course of 2009 and 2010 as this economy spirals further into the abyss. I suppose they could institute negative interest rates and send everybody a free printer to print money at home. And when they have to suck all this liquidity back out, how are they going to time that sensitive maneuver without creating further havoc throughout the economy. The best policy is to stay out, let failed institutions fail, let deflation do what it needs to do, and let the consumer learn to be lean and live within their means again. The graph illustrates that we will not come out of this until 2012, and whether it takes longer depends on how many zombie corporations the Feds create and how far they take their socialist policies.