The question we have is why these other eight recessions in the post-WWII era
are relevant. This wasn’t just a blip or correction in GDP due to a
manufacturing inventory-led recession. This was a traumatic asset price
deflation and credit contraction of historical proportions. In essence, this was
— or still is — a balance sheet recession that has absolutely nothing in
common with the experience of the post-war business cycle when recessions
were temporary dips in GDP in the context of a secular credit expansion. And,
this wasn’t just a U.S recession and debt-deleveraging cycle — it was global in
nature. This is why a re-read of the Rogoff-Reinhart and McKinsey reports on
the history of what the aftermath of a secular credit contraction really looks
like is imperative. This is all the more so after a six-day power surge in the
stock market as the gap to the 200-day moving average gets filled.
Take us at our word that if Ben Bernanke is worried, it is not about what drives a
post-WWII cycle. He has the 1937-38 brutal downturn in mind and this is actually
a much more appropriate template, notwithstanding the changed structure of the
economy (we don’t have one-third of the population living on the farm).
Why do so many cling to the
“yield curve” in a credit cycle
in any event? Are you going
to tell me that a 50 basis
point inversion in 2007 was
the principal cause of the
recession?
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