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U.S. Recession: It’s worse than you thought

Posted January 28, 2008

"We think it'll take a lot more pain than that before the collapse of the credit bubble has fully unwound." — John Stepek

by John Stepek, Money Week

Baltimore and London – (TFN):  How bad could the US recession get?

While the majority of commentators now believe that a US recession is only a matter of time, a lot of them are still hoping that it'll be a matter of a quick 'in and out', a bit like the 'mini-recession' that followed the bursting of the tech bubble.

The country will suffer in the first half of 2008, but then the impact of Federal Reserve interest rate cuts will kick in, everything will pick up in the second half, and by Christmas we'll be stuffing ourselves with turkey and flat-screen TVs again and wondering what all the fuss was about.

Now regular readers won't be surprised to learn that we think it'll take a lot more pain than that before the collapse of the credit bubble has fully unwound.

But you don't just need to take our word for it…

Stephen Roach, the highly-regarded, if perennially bearish Morgan Stanley economist, believes that the coming US recession will be far worse than the one that followed the tech bubble.

He points out that the affected parts of the economy, house-building and consumption, are six times bigger than the part that was affected back then - spending on IT.

"We have, as relatively sophisticated, well-developed economies, gotten hooked on credit as never before. If we had been running our economies the old-fashioned way… where saving and consumption were funded by income, maybe we wouldn't be in this mess we are in now."

There's going to be a lot of navel-gazing on this topic over the coming year, I suspect. Already columnists all over the press, many of whom would never normally touch a financial story, are writing oddly cheery pieces about how we could do with a recession to kick our addiction to vapid consumerism. This sort of piece normally ends with some complaint about how we throw too much food away and a recipe for turning your potato peelings into a tasty broth.

U.S. Recession: Recessions are miserable

Now there's nothing wrong with this new-found appetite for thrift and a more spiritual appreciation of life. But they shouldn't be so quick to cheer. The reason that no one likes recessions is that they are miserable. The reason that we're always going on about how unsustainable the recent boom has been is because we'd frankly rather have avoided a recession. The fact that we think it is now too late to do so, doesn't mean we're looking forward to it.

Read on to learn why the U.S. recession is not going to be simply a "January sale" for consumers.

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