This has been no garden-variety recession

Is this a depression?

What's a depression anyway? Basically, a depression is a very long recession.

You know you're in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.

The economy is in a depression when the banks are sitting on $1.3-trillion (U.S.) of cash and yet there is no lending going on to the private sector. It's called a liquidity trap.

Depressions, usually, are caused by a bursting of an asset bubble and a contraction in credit, whereas a "plain-vanilla" recession is typically caused by inflation and excessive manufacturing inventories.

You tell me which fits the bill today.

When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can't see the soup lines; but the soup lines are in the mail - 99 weeks of unemployment cheques for more than 10 million jobless Americans. Don't be lulled into the view that we are into anything remotely close to a normal economic cycle.

In a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That could be a reason why we saw existing home sales slide to 15-year lows and new home sales to record lows despite mortgage rates tumbling to their lowest levels in modern history.

More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between these two states.

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Let's be clear. After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response is testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signalling, with U.S. Treasury yields rapidly approaching Japanese levels.

For all the chatter about whether the recession that started in December of 2007 ended some time last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the first quarter of 1933.

What is important to know is this. In that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six - six! - quarterly bounces in the GDP data. The average gain in these up-quarters was 8 per cent at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research refused to declare that the recession officially ended, even though the stock market rallied 50 per cent in the opening months of 1930 on the belief that the downturn was about to end. False premise.

Guess what? We may well be reliving history here. If you're keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3 per cent.

I can understand how emotional the debate can get over whether we have actually just stumbled along some post-recession recovery path or whether this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention.

The reality is that the Fed cut the funds rate to zero, as was the case in Japan, and tripled the size of its balance sheet to little avail. Government deficits of nearly 10 per cent relative to GDP, or double what FDR ever ran during the 1930s, have obviously fallen flat in terms of providing any lasting impact to the economy.

This is going to sound like a broken record, but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless "quick fix" toward bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6-trillion of excess debt that has to be extinguished, either by paying it down or by walking away from it (or having it socialized).

Look, we understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop were are in. The markets are telling us something valuable when we have a two-year note auction in which the yield was dragged to new record lows of 0.46 per cent.

Instead of lamenting about how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market. Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being cut. We may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12-times earnings was actually buying the market with a 17-times multiple.

How's that for a reality check? It's not too late, by the way, to shift course if you have stayed long this market.