All Fall Down

Dow closed down nearly 300 points to under 6,800 as AIG's record loss simply crushed the life out of the market. This is not a good sign, folks. I think we're headed down a nasty slope here and we're back into freefall mode. At this point, even Nouriel Roubini is scared.

LAST year, the debate over how long the recession will last was between those in the consensus who argued that it would be V-shaped — only about eight months long like those in 1990 to 1991 and in 2001 — and those like me who argued that it would last at least three times as long, 24 months, and be more than three times as deep as the previous two.

Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.

Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.

And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.

A 36 month depression, meaning no real recovery until first quarter 2011. That's a terrifying thought, and it should be terrifying. Two more years is enough for the Dow to disintegrate back down to under 4k...levels last seen in 1995...or worse 3k, levels last seen when Clinton was elected in late 1992. We could be looking at 20 years of economic growth reversed in this country. That's a tremendous thing.

If we're really looking now at recession in 2011, it might as well be a depression. It's a word even the AP is throwing around at this point. If housing has another 20% to fall, then anyone who buys now is dooming themselves. If there's no housing stabilization, there will be no US recovery. No US recovery means no global recovery, and the whole thing could come crashing down. Americans are already trading down from steak to chicken. Ask your Great Depression era relatives about chicken sometime...there are some who refuse to eat it even today because they couldn't get beef or pork during the depression and didn't want to be reminded of having to eat a "poor man's food."

If you think it's bad now, just wait.