We could be entering a future that none of us wants to face, a future in which we will be much poorer, a future in which we realize that everything Barack Obama tried only made things worse.
Most economists are debating whether the United States has led the world into a V-shaped recession, marked by sharp economic decline and an equally quick recovery, or a U-shaped recession, which takes a while to get under way but lasts a long time and takes a long time to climb out of.
But a minority of economists and economic analysts believe what's happening is L-shaped. We are witnessing a global economic contraction resulting from years of artificial growth fuelled by personal, corporate and governmental debt. When we reach bottom, they say, we will stay there. Globalism will collapse, and deflation and depression will stalk the land.
A 'lost decade' for the world economy is quite possible
"A 'lost decade' for the world economy is quite possible," wrote Peter Boone, Simon Johnson and James Kwak in a much-discussed online analysis earlier this year on the website Baseline Scenario. "There will be some episodes of incipient recovery, as there were in Japan during the 1990s, but this will prove very hard to sustain."
If so, the market recoveries and encouraging reports of the past few days are nothing but a dead-cat bounce: temporary phenomena masking an ongoing decline.
At a Japan Society symposium in Toronto yesterday, several economists and analysts revealed they had reached the same conclusion (http://business.theglobeandmail.com/crashandrecover).
Canadians must face "the very real possibility that not only could the systemic global credit crisis and the spreading U.S. balance-sheet recession lead to a lost decade or worse for the global economy," predicted veteran analyst William Macdonald in his written submission, "it could also lead to the breakdown of the globalization project itself."
A balance-sheet recession is unlike other recessions. Even the healthiest corporations fear bankruptcy, as demand plummets. In response, executives apply all revenue to corporate debt, in an effort to right the balance sheet. Fearful consumers do the same thing, creating a vortex of falling demand, declining revenue, curtailed investment, bankruptcies and rising unemployment.
This has been happening in Japan since the early 1990s. But at least Japan has been able to cushion its decline through export earnings. If the entire planet is in recession, who is there to export to?
U.S. financial analyst Martin Weiss, in a white paper he released last week, believes that a second Great Depression is already under way. If his and similar analyses are correct, then the Obama administration is doing everything wrong. Throwing billions at trying to remove and resell the toxic assets that banks accumulated is a waste of time, because those assets are worthless and should be written off.
Worse, according to some, Mr. Obama's $3.6-trillion budget, with its emphasis on health care, education and energy reform, wastes money that is needed to combat the coming depression. It robs the economy of future growth by piling on debt. And it depletes the President's political capital.
Doomsayers on the left believe the solution is to temporarily nationalize much of the financial sector, and to massively stimulate all economies, regardless of the cost. Those on the right believe the federal government should let failing institutions fail, to cleanse the system, while cutting back on deficits.
"An economic depression, although traumatic, is not the end of the world," Mr. Weiss concludes. "Moreover, if managed wisely, it can deliver fundamental benefits: a cleansing of excess debts, a reduction in the cost of living, and a firmer foundation for subsequent growth." Most people will find this slender consolation.
Mr. Obama believes all this is false. The February stimulus is working, he and his supporters argue, and recovery will begin later this year or early next year; the banking system can be rescued without resorting to nationalization or liquidation; and now is precisely the time to tackle the reforms in health care, education and energy that will equip the U.S. economy to compete when good times return.
There's an old saying: "He was often wrong but never in doubt." This is as true of economists as it is of columnists. All we can do is pray that Mr. Obama and those who advise him are right, even if, in the small, dark hours, we fear for what might come.