A lot of mainstream media has been touting that we're on the way to recovery. In my house, when I present the contrarian view (that we haven't hit bottom yet), family members disbelieve me. This already feels like the worst recession in even my parents' (and my wife's parents') lives so - really, how much worse can it get?
The answer is not to compare it to previous recessions, but to work through fundamentals.
The US savings rate is very low by historical standards. A few years ago it was actually negative, and even now it is running at 4%. Moreover, the US has prior debt to pay off. The only way it can do so is to drastically reduce consumption.
The question everybody should be asking is: What will the world look like if the US decides to tighten its belt and pay off all its debt. To do that, it must consume less and produce more. Producing more will take time - but what it can do immediately is start consuming less.
70% of the US economy relies on consumer spending - and if that falls, the US economy will fall.
It is useful to think of nations like individuals. What if the US were a person? What if this person - call him Mr. U - lived on credit, and consumed a lot and racked up a lot of debt? Eventually, Mr. U would have to cut down on consumption, live frugally until he had built up enough saving. That's exactly what needs to happen in the US.
We're not there yet.
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