Dreaded 'D' Word Picking Up Steam

The fact that the dreaded "D" word is starting to pop up with increasing frequency is a clear indication of a progressively worsening outlook from the economic soothsayers.
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In early July, Princeton University economist and New York Times columnist Paul Krugman dropped an economic bombshell, warning us we're in the early stages of a depression.

In turn, some of his economic brethren privately ridiculed him, describing the Nobel prize winner as way too pessimistic, or, as one put it, "an economic buffoon who has gone off the deep end."

Whether that's a fair characterization is anybody's guess, but what's newsworthy is that Krugman, who has now openly allied himself with the doomsayer fraternity with his depression forecast, is picking up supporters.

Most recently, for example, well regarded David Rosenberg, formerly Merrill Lynch's North American economist who now plies his trade at Gluskin Sheff, a Canadian wealth management firm, told clients "we're sinking into a '30s-style depression."

In addition, several other economists echo such thinking, giving some odds, as well, to the possibility of a depression.

At this stage, of course, no one knows whether a depression, as far fetched as it seems, is in the works. But the fact that the dreaded "D" word is starting to pop up with increasing frequency is a clear indication of a progressively worsening outlook from the economic soothsayers.

The facts speak for themselves. In mid-2008, for example, amid a slumping economy, we began to hear them raise the "R" word (recession). Things changed late in the first quarter of 2010, a switch to the "DDR" phrase (double-dip recession). Now, in the past couple of months, another change, the emergence of the grimmest of outlooks, the "D" word (depression).

It all reminds me of some of the lyrics from "Show me," a hit tune sung by Lisa Doolittle in My Fair Lady. In particular, "Words! Words! Words! I'm so sick of words. Is that all you blighters can do?"

Judging from the steady flow of conflicting and changing economic messages, we may all soon be humming that tune. The reason: the likely advent of many more mixed messages, in summation signaling a clear lack of clarity as to what kind of an economy looms down the road.

If the latest GDP numbers are any barometer, there's a lot to worry about, what with Friday's revelation that second quarter growth had been revised downward to 1.6% from 2.4%. That wasn't a disaster, but it was weak and above the consensus expectation of 1.4%. Generally, you need at least 2.5% to 3% growth to goose the economy, which would set the stage for more job creations and stepped-up home purchases.

Already, many economists, in just the past few months, have shaved their current quarter's GDP growth estimates from around 3% to about 2.5%. And Rosenberg reckons there's more shaving to come. He figures the estimates will grind down to something closer to zero -- or maybe even negative -- which means, he says, the recent bounce in yields and equity prices are unlikely to last very long.

Since Rosenberg's lens shows a 30s-style depression, it's worth knowing what that's all about. A check of that period unveils such horror stories as a 25% jobless rate, a 60% decline in wages, a nearly 90% drop in stock prices and plunging real estate values, in many cases, as much as 60% to 75%.

Tack on, as well, a 33% decline in GDP between 1929 and 1933, the failure of 86,000 businesses, a number of suicides, 4,000 failures of banks and other lenders, skyrocketing crime rates, establishment of free soup kitchens across the country, which drew long lines, and loans from loan sharks, if you were lucky enough to get them, with interest charges ranging from 50% to 200%.

Madeline Schnapp, the economics skipper at West Coast liquidity tracker TrimTabs Research, figures the odds of a depression are swelling. Given a series of economic shortfalls, she puts the possibility at 60%. Earlier in the year, she says, she would have pegged the odds at 30% to 40%.

Second quarter GDP growth of just 1.6% -- which she views as poor -- is considered a harbinger of things to come. It suggests to her the economy is slowing precipitously and that job growth has stopped; further that the unemployment rate is likely to rise throughout the year to a range of 10% to 10.2%.

Schnapp, in fact, is one of those economists who believes the recessionary effects -- which kicked off in late 2007 -- have never really gone away despite four consecutive quarters of GDP growth.

Taking note of the fact the market responded favorably to the 1.6% reading since it expected 1.4% (the Dow rose nearly 165 points), Schnapp thinks investors acted irresponsibly. "A 1.6% growth rate means stagnation in real terms," she says. "Not good!"

Her GDP outlook for the remainder of the year: growth of 1.5% or less in both the third and fourth quarters. Factored into this projection is the fact that housing remains in a funk, It may not be declining as much as in the past, but it's still declining, she says.

In the event of swelling depression fears, Schnapp says she would expect, among other things, a prolonged drop in home prices, causing more mortgage defaults, falling wages (though unions will fight this), declines in the prices of some goods and services and a sharp drop in stock prices.

Raymond James Financial's senior economist Scott Brown also sees a chance of a depression. "It could develop and "I'd give it a 10% probability," he tells me.

Why so? Because, he says, the risks are tilted to the downside. In this context, he offers a host of them, such as impending tax hikes, ramping down of the stimulus, a likely rise to double-digit unemployment that could last four to six years and a much bigger slowdown in consumer spending.

Also cited is the fact we're operating well below capacity, the lack of any future favorable impact from fiscal or monetary policy, renewed housing problems and the expiration of the Bush tax cuts.

J.C. Spender, professor of economics at the Open University Business School in Milton Keynes, U.K., views the prospects of a depression as a political issue, not an economic issue.

"I'm optimistic we won't have one," he says, "that reason will prevail and the government will remain in the hands of the moderates and the progressives." But he believes all bets are off if the influence of the right wingers, such as Glenn Beck, Sarah Palin and Rush Limbaugh, takes hold on government strategy. Then, he believes, chances of a depression would take on a considerably higher likelihood.

Meanwhile, says Spender, "right now we have a civil war in the U.S. -- Wall Street against Main Street, or the haves versus the have-nots. And who knows how it ends?"

Pointing to shrinking savings, falling home values, killing health care costs and the reluctance of banks to lend to such job creators as the manufacturing sector and entrepreneurs, he notes the average person is being robbed of hope. "And when people have no hope," says Spender, "they become terrorists."

What do you think? E-mail me at Dandordan@aol.com

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