Recession question now: not if, but how bad.

Professional and academic economists have quit discussion whether there will be a recession in 208. The discussion has shifted to one of just how deep the recession will be. From Nouriel Roubini's Global EconoMonitor:

David Rosenberg of Merrill Lynch is now clearly predicting a recession for the US economy in 2008; Jan Hatzius at Goldman Sachs is not formally speaking of a certain recession in 2008 but most of his analysis is consistent with a high likelihood of a recession in 2008; Mark Zandi of Moody’s Economy.com is also very close to a hard landing view.

More interesting now even the thoughtful Richard Berner – who used to be strongly in the soft landing camp while his counterpart Steve Roach was in the hard landing camp – is now predicting a recession in the US in 2008, even if he expects such a recession to be mild. And even the soft-landing optimists at JPMorgan are now recognizing that the likelihood of a US recession is now at its highest level in years. When mainstream analysts such as Berner start to talk about a recession beng likely you know that the debate has clearly shifted towards a discussion of not whether a recession but rather how deep of a recession.

And in the academic camp some of the most senior economists in the profession – Bob Shiller, Marty Feldstein, Larry Summers, Paul Krugman – are all in various degrees in the hard landing camp or very concerned about a hard landing.

So it is time to move away from the soft landing vs. hard landing discussion and start considering seriously how deep the coming recession will be; in the view of this authors the 2008 recession will be more deep, protracted and painful than the short recessions of 1990-1991 and 2001; this time around – unlike 2001 when only tech investment faltered - most components of aggregate demand are under threat: falling residential investment, falling capex spending by the corporate sector and now evidence of a sharp slowdown and near stall of private consumption that accounts for 70% of GDP. When the US saving-less and debt burdened US consumer is now under threat the risk of a more protracted and severe recession than the mild one of 2001 are significant.

The last I heard the Fed was expected to lower the interest rate 1/4% to stimulate the economy at their next meeting, but that the financial professionals were hoping for 1/2%.

Either move will cause the dollar to drop further. That drop will itself be inflationary, but it will also cause OPEC to be more likely to switch from the petrodollar to either the Euro or a basket of currencies.

The resulting increase in the price of oil will be inflationary, while the demand for dollars that is currently driven by pricing oil in dollars will fall away. That will cause a further drop in the international value of the dollar. So we can expect the recession along with inflation - classic stagflation.

How bad will it be? We still don't know that yet. But remember, this post started out discussing whether the recession would have a soft or hard landing. Going in to the recession we already have a wave of home foreclosures. That, too, is expected to get worse. All the signs are that this one is going to be worse than the recessions in 1990-1991 and 2001. So don't make any major credit purchases that you have to depend on keeping your job to pay off. Lay in savings. Hold down Christmas spending - let someone else keep up consumer demand during the Christmas season, because there will be no one left to do it afterwards.

Oh, and Merry Christmas.

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Addendum 2:31 PM
I knew this was coming, but I forgot they were meeting today. But only a quarter point?

Wall Street is not happy, and I can see why. Apparently the fed is not taking the approaching recession seriously. Or the implications of a half percent reduction on the international value of the dollar frightened them off.

The Fed has a role to play in the approaching recession. They will either accept a deep recession, or they will delay the worst of the recession by larger interest rate decreases and accept the worse stagflation. That's all the fed will be able to do with monetary policy.

As for fiscal policy by the federal government, the Republicans will continue to try to apply the snake oil of tax cuts for the wealthy, which would do nothing except give the very rich more funds to invest in the best investments worldwide (meaning mostly outside the U.S. where economies are growing.) Fiscal policy will only be effective with Keynesian approaches to kick-starting the economy and supporting export industries. Don't count on that, since even the Democratic leadership has bought the lies that the federal government can't effectively apply deficit spending to pump up an economy in recession.