How close is the US economy to a major recession?
Sam Adelton
Aug. 19, 2007

Since 1980-82, the sailing is smooth. Other than some minor bumps and hiccups, the US economy has performed exceedingly well while some of the fundamentals have deteriorated very highly.

The dollar is weak, trade deficit is uncontrolled, and the budget deficit, social security and the mediocre are all in doldrums. The American budget deficit has recently started a downward trend based on capital gains tax revenues from the rich. But that is in the process of a massive reversal because of lower real-estate and stock prices from the peak.

Six bubbles have exploded in the last seven years – unprecedented by any measure. First, the dot com and tech bubble gave up in year 2000. Then came the real estate and mortgage bubble. The real estate bubble exploded in 2006. The mortgage bubble has exploded in early 2007 and the after shocks are creating ripple effects in the economy in the name of sub prime mortgage fiasco.

The mother of all bubbles is in the process of exploding. It is the bubble of mergers and acquisitions. The leveraged buy out based on borrowed money touched insane levels with little regard for fundamentals. Even in the third world the mania spread. Indian tycoons started buying European and American assets on borrowed money without any regard for fundamentals and base valuation principles.

The stock market bubble is also a major one. It has finally imploded from the after shocks of the liquidity crunch.

The other bubble that finally exploded in the face of the Federal Reserve is the artificial liquidity creation. The lowered standard of loan underwriting provided the massive liquidity that drove the anemic economy to its heights. With Federal Reserve finally deciding to lower the rates, the bubble has finally exploded.

How close are we to a recession?

Believe it or not, the recession is still far out. The reason is simple. Recession comes when the attitude of consumers change. The consumer attitude will take some time to change. Falling home prices, lower dollar, lower stock prices will create the ripple effect in the consumer driven economy. However, do not expect a recession right now. The current Fed is determined to fight the liquidity crunch with all means. That means things will stabilize for now.

However, the dark clouds in the horizon are giving signal of a cyclone this time. The cyclone will not be due for some time when Federal Reserve will lose all its ability to control the economy. The fact that in two weeks of a Fed statement, the central bank has to take a drastic step of reducing rates is a signal how fast this Fed is losing all its credibility.

The unemployment picture shows full underemployment. That means it is difficult to get a decent paying job while there are plenty of low paying jobs.

Recession will not happen till these low paying jobs disappear. That may take some time but when it comes, it will not be a recession – it will be a deflation driven depression in the economy.

How close is the US economy to a major recession?
Sam Adelton
Recession will not happen till these low paying jobs disappear. That may take some time but when it comes, it will not be a recession – it will be a deflation driven depression in the economy.
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