The Economic Ruin Ahead

Regardless of what President Obama does in 2009, the US is going to be facing a terrible economic situation. The happy-face economic press is expecting a short recession to be over soon. Nothing could be further from the truth: we're looking at five, possibly six quarters of recession at the minumum and much worse news is on the way.

US markets lost another 5% across the board today, the Dow alone having lost 1,400 points in six sessions.

Roubini's outlook is nothing short of catastrophic:

• The U.S. will experience its most severe recession since WWII, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions. The recession will continue until at least the end of 2009 for a cumulative GDP drop of over 4%; the unemployment rate will likely reach 9%. The US consumer is shopped out saving less and debt burdened and now faltering: this will be the worst consumer recession in decades.
• The prospect of a short and shallow 6-8 months V-shaped recession is out of the window; a U-shaped 18-24 months recession is now a certainty and the probability of a worse multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009 the recovery could be so weak because of the impairment of the financial system and of the credit mechanism (i.e. a growth rate of 1-1.5% for a while well below the potential of 2.5-2.75%) that it may feel like a recession even if the economy is technically out of the recession.
• Obama will inherit and economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollar in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed Funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise given price deflation while the value of financial assets is still plunging.
• The world economy will experience a severe recession: output will sharply contract in the Eurozone, UK and the rest of Europe, in Canada, Japan, and Australia/New Zealand; there is also a risk of a hard landing in emerging market economies. Expect global growth – at market prices – to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

That's just leading off. It gets worse: predictions of stag-deflation (a nasty combination of stagnating GDP and deflation), Fed rates hitting zero basis points, the S&P 500 going at low as 500, Credit market losses approaching $2 trillion, more deleveraging and downgrading of long-term corporate bonds, the collapse of the commercial real-estate market, a $1 trillion deficit in 2009 and 2010, the dollar dropping off the cliff, and the markets crumbling as the year-end rally that the economic press is betting on failing to materialize.

General Growth Properties, the second largest US mall operator, saw their stock hit 33 cents today. Bankruptcy is all but certain for this company as it's already looking for a deal.

Ford, GM, and Chrysler will not survive as independent companies. The Big Three Automakers are almost dead and if they all go under, unemployment in this country will double overnight. We're talking the cascading losses of eight to ten million jobs, that would devastate the country for a decade.

Throw in the airlines falling apart and retail stores crumbling across the country, and you have an idea of just how bad the worst case scenario is.

A recession...a bad one lasting into 2010...is assured. A depression is still very possible. A lot will depend on what Obama does. If he and his administration recognize that we're facing a second Great Depression, we have a chance.

If not...we'll all find out just how likely the depression scenario is.