Conventional wisdom states that U.S. economy recovered nicely from the tech crash and September 11th and roared for much of the first decade of the new century. Conventional wisdom also states that the current U.S. economy is recovering from the financial crisis, albeit very slowly. In reality, both "recoveries" have been illusions of prosperity based, in large part, on unsustainable consumer and governmental credit expansion. The deleveraging of the massive debt this nation has incurred to sustain the ongoing 12-year illusion will suffocate economic growth next year.
Last summer I argued on Seeking Alpha that, after 4.5 quarters of tepid growth during the period Q2 2009 - Q2 2010, the economy plunged back into recession in Q3 2010 and remained there. As part of my argument, I pointed out that, if inflation were calculated the way it used to be (with food and energy prices included in the formula), the GDP deflator would be greater than GDP growth for most "post-recession" quarters, as defined by the National Bureau of Economic Research.
Consulting economist Walter J. "John" Williams of Shadow Government Statistics takes this concept one step further. Adding back food and energy prices to the GDP deflator from 2000-present, Mr. Williams concludes that the U.S. has been in near-continuous recession since the early 2000's tech crash. Using Mr. Williams' methodology, even nominal GDP gains during the "boom times" of 2002-2006 were nullified by rising food and energy costs.
So, if we've been in a near-continuous recession for more than a decade (i.e. a depression), why did the economy appear healthy during most of the Bush years? And why does there appear to be a small post-crisis recovery taking place?
The $7 trillion illusion of prosperity of 2002-2006 was put on the mortgage and the personal credit card ...
... and the illusion of the post-crisis recovery has been made possible, in large part, by adding $5 trillion to the national debt.
So, the $12 trillion consumer and governmental credit expansion used to fund the ongoing 12-year illusion of prosperity is clearly unsustainable. And, contrary to popular belief, neither consumers nor the federal government have even begun to pay down debt. So, when realty sets in and we have no choice but to deleverage, how bad is the pain going to be? And when can we expect the pain? Well, the CBO estimates that the fiscal year 2013 federal budget contains enough tax increases and spending cuts to push the economy back into recession by Q1 of next year. The Fed warns that austerity could push the country off a "fiscal cliff" during this time. And the McKinsey Global Institute predicts that, beginning next year, consumer delveraging will "prevent the necessary conditions" for GDP growth.
In other words, we're going to pay for the ongoing 12-year illusion of prosperity with a 2013 recession.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.