Recession Has Already Begun, Analyst Says

The U.S. economy is currently entering a recession, argues John P. Hussman, Ph.D., the head of an investment company. Others, from both the left and the right of the political spectrum, have similar forecasts about the country's immediate future.

"By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now," Hussman wrote Monday in a commentary on the Hussman Funds website.

Hussman believes that more evidence that the economy has entered a recession will be forthcoming in the next few months, "but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth."

The primary reason that the economy is entering another recession, Hussman believes, is that the causes of the previous recession, which began in 2008, were never adequately addressed. Instead, the financial system has "lost its function of directing scarce capital toward projects that enhance the world's standard of living." Furthermore, government policies have encouraged this change through "misguided policy and short-sighted monetary interventions."

"In effect," Hussman writes, "we're going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable."

Hussman compares the current financial system to "a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet."

Hussman's article places much emphasis on the role that government policy has played in encouraging the causes of the recession.

The problem will not be fixed by either Republican Party proposed solutions (lower taxes and deregulation) or Democratic Party solutions (more stimulus spending), Hussman argues. Instead, he proposes encouraging debt restructuring, strengthening capital requirements, removing fiscal and monetary backstops, and discontinuing "reckless monetary interventions."

He was particularly critical toward governments around the world that protected those who made risky investments while passing on the losses from those investments to everyone else.

"Unless we want a world where public services are cut to the bone in order to make bank bondholders whole, and where recession (or in some countries depression) is forced onto citizens in order to make government bondholders whole, the world's leaders will eventually have to wake up and recognize that bad debt requires bondholders who willingly took the risk to also take the loss."

Others have similarly stated that the economy will get worse before it gets better.

"We're in decline," former Florida Governor Jeb Bush said Monday at a Bloomberg View breakfast in New York. "We're in very difficult times right now, very different times than we've been."

A Congressional Budget Office report last month said that the pending "fiscal cliff" or "taxmageddon" that may come as tax cuts expire and automatic spending cuts go into effect, will likely cause a recession, but not allowing those changes will cause more problems long term.

The electorate also believes the nation's economy will get worse before it gets better, according to a Monday report by Democracy Corps, a Democratic consulting firm headed by James Carville and Stanley Greenburg.

Voters understand that the economy is in bad shape, states the report, which is based upon focus groups with independent and weak partisan voters. Democrats, it argued, need a forward looking message showing that they understand the struggles of ordinary Americans and have plans for making things better.

"These voters are not convinced that we are headed in the right direction," Democracy Corps wrote. "They are living in a new economy -- and there is no conceivable recovery in the year ahead that will change the view of the new state of the country. They actually have a very realistic view of the long road back and the struggles of the middle class -- and the current narrative about progress just misses the opportunity to connect and point forward."

A Federal Reserve study released Monday showed that the financial crisis reduced U.S. household net worth by 38.8 percent from 2007 to 2010. In an interview with Bloomberg about the study, Lance Roberts, CEO of Streettalk Advisors LLC, said, "What you see is an economy that's really very, very stressed for the bottom 60 to 70 percent of the population that's struggling just to make ends meet."

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