Depressing Depression

Ambrose Evans-Pritchard has an extremely grim take on 2010's economy for America.

US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then we're back where we were before – in a nightmare."

David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War.

Fed hawks are playing with fire by talking up about exit strategies, not for the first time. This is what they did in June 2008. We know what happened three months later. For the record, manufacturing capacity use at 67.2pc, and "auto-buying intentions" are the lowest ever.

The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

Professor Tim Congdon from International Monetary Research said the Fed is baking deflation into the pie later this year, and perhaps a double-dip recession. Europe is even worse.

This has not stopped an army of commentators is trying to bounce the Fed into early rate rises. They accuse Ben Bernanke of repeating the error of 2004 when the Fed waited too long. Sometimes you just want to scream. In 2004 there was no housing collapse, unemployment was 5.5pc, banks were in rude good health, and the Fed Multiplier was 1.73.

How anybody can see imminent inflation in the dying embers of core PCE, just 0.1pc in November, is beyond me.

Pritchard and others like him, along with David Rosenberg and Nouriel Roubini, have been warning of a double-dip recession for quite some time now.   The only thing keeping us above water right now is the supposedly "failed" Obama stimulus, which Republicans are hovering around like buzzards, waiting for the kill.  They are demanding we stop spending.  The results will be not a double-dip recession, but a full-blown depression if that happens.

As it is, unless we see some sort of major jobs stimulus in 2010, states are going to lay off hundreds of thousands of government workers.  Real unemployment is only going to go up as the year goes on.  It may hit 20% nationally.  That means there are pockets now where this U-6 number is 25 or 30% or worse.

If Congress cuts the stimulus spigot, the Dems are done.  Republicans will regain control and insist that we "live within our means" and will do to the Federal budget what they have done to California and all but eliminate social programs while saying we need to cut taxes, cut taxes, cut taxes.  The results will be catastrophic.

As bad as things are now, we're very close to a point of no return where we slide down into the pit for a long, long time.