[centaurmyth]

Borodog: great commentary, insight and analysis. I believe that there are historical differences in the current macro-economic climate which demonstrate that our domestic credit profile and the impact of our monetary policy undercuts the importance of traditionally positively viewed economic data. Specifically I am referring to misguiding and deflated inflationary numbers, GDP (a poor economic metric in its own right), employment, and consumer confidence. Hence, I am also bearish on American economic prospects over the foreseeable long-term future. Besides the raw data and analysis you’ve highlighted, several trends in a now-realized global marketplace play a role as well.

In addition to saving America from a recession in 2001, many of us benefited directly and all of us, indirectly, from loose monetary policy and the side-effects it had on the housing market. There were the financial institutions that fueled it, the labor market which had low barriers to entry into real-estate related professions that earned from it, the blue collar workforce that built into it, the middle class that spent out of unrealized equity gains caused by it, and the speculators that profited from it. However, for nearly all of the players in this game, the price of a few more years of hyper-growth has escalated the potential damage of a credit crunch even further as leverage, derivative or otherwise, has soared to gargantuan proportions. Dropping the bottom out of these extra-normal profit generators has just begun, and the fall-out goes far beyond the falling value of homes and potential needed bail-out of financial institutions that got creative with mortgage-backed securities…

Zooming out a bit further, the U.S. is facing the stiffest global competition it has ever seen in nearly every sector by emerging markets and established players alike, and, as expected, profits have fallen (seen Ford lately?). Now, Phil/Exsubmariner have valid points that economic models, whether Keynesian, Austrian or otherwise, often do a poor job of incorporating the human element. Adjustments are made by the resilience of people and institutions that retool to profit from such conditions, and America has long been creative to insure that. So further technological advance or other unseen conditions may support our leveraged economy through additional cycles of unexpected growth, temporarily bolstering the beleaguered dollar and give new life to the credit markets. But, really, in the end, all of the recent creativity brought about by the over-extension of credit (and not just in real estate investment: see government, consumer, corporate, etc.) is ripe for correction.

With America’s diminishing force as the dominant power within the global marketplace, rising commodity prices against a falling dollar, combined credit woes, its sense of entitlement and corresponding lack of competitiveness, and over-leveraged credit crunch, this correction suggests that we are in a larger cycle where other nations are looking to bring about a new global equilibrium in resource distribution. To get there, it is likely that a recession embodying the stagflation your analysis suggests is exactly how it comes about. The vehicles for such are already in place, and, although the timing for it is ultimately unknowable, it certainly appears it could be happening right now. For all my studies, I still don’t get gold, but it certainly looks like it will out-perform the American economy and, especially, the relative spending power of the dollar for the foreseeable future in real spending power.