By: Harry S. Dent, Jr., Author of The Great Depression Ahead

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It is already obvious that we are in a recession that will deepen at least into the summer. The real question, as Obama has raised recently, is whether we can act boldly and start to come out of this by next year rather than having this deep recession linger for years. In my first book, The Great Boom Ahead, published in November 1992, we forecast: “the next great depression will occur between 2006 and 2023.” This was based on projectable trends in spending by the baby boom generation. Hence, we are entering a long term crisis and downturn, the subprime and CMO/CDO crisis is merely a major symptom, not the cause.

This stimulus plan is doomed to fail and will be seen as reckless rather than bold in retrospect. By early to mid-2010 we will enter a deeper downturn or “great depression” almost regardless of what the government tries to do! They didn’t create this boom and they can’t stop this bust — the massive baby boom generation has largely created these boom and bust trends on a natural 39 - 40-year generational cycle that has seen major long term peaks in the stock market in 1929, 1968, and now 2007, with prolonged downturns to follow. In Chart 1, we have been forecasting this unprecedented boom and this downturn since 1988 based on a 46-year lag on births for peak spending of the average household. The government and economists do not appreciate that this is a serious long term slowing ahead. On top of naturally slowing spending as they age and their kids leave the nest, baby boomers will accelerate in their retirement leaving the workforce altogether from 2010 on which is even more devastating and deflationary. To add insult to injury, as all assets are
deflating they are going to have to save even more to catch up for retirement.

The other major factor is that the housing bubble was simply the most extreme in history and would have to deflate even without the subprime and CMO/CDO crisis. Chart 2 from Robert Shiller shows home prices have to fall at least 50% from the top for future generations to be able to afford the American dream again and this will lower business costs as well! No amount of stimulus can stop such a slide, anymore than the Japanese could in the 1990s — and our demographic slide is steeper and our financial system in much worse shape. The U.S. government is coming into this long slide as the largest net debtor in the world from longstanding trade deficits and with huge budget deficits from the war. And now the government wants to add trillions in stimulus programs and buy Treasury bonds with printed money to keep mortgage rates low – which obviously devalues an already failing U.S. dollar. If the recovery is on the strong side, this “money printing” will cause inflation and accelerating commodity prices by early 2010. If the recovery is weak despite such massive stimulus (which is more likely) then the U.S. and global markets will lose confidence in the economy and the U.S. dollar will crash. Thus far dramatically falling mortgage rates have only stimulated refinancing, not new home purchases, just as occurred in Japan in the 1990s.

Either way, the government cannot just endlessly stimulate without consequences as it does not have the luxury Japan had of a growing world economy for export growth and low national and foreign debts. The economy is going to deflate and deleverage anyway — there are no exceptions in history following “bubble booms” — and this is likely the greatest ever. Japan’s housing market went down over 60% between 1991 and 2005 and their stock market fell 80%, despite near zero interest rates and government stimulus plans. The U.S. government’s more reckless stimulus program will simply add trillions more in debt to add to the painful deleveraging crisis. How could grown men think that the solution to a debt and leverage crisis is more debt and leverage? The solution is to support the banking system with liquidity and allow the deflation process to happen a bit less violently – and not generally to bail out banks and businesses or try to prop up ridiculously high home prices.

Mark my words: we will see another stock crash and a deeper downturn that will qualify as a “depression” set in by early to mid-2010. Ultimately, the failure of this stimulus program will likely force the U.S. government to turn to China, Japan and the Middle East nations with strong trade surpluses and Treasury holdings to bail it out after it is near bankrupt — now that will be humbling!

For more research from HS Dent, please review our HS Dent Economic Forecast, released monthly.