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Neither markets nor economies proceed in straightforward linear fashion. But they do tend to unfold in recognizable historical patterns. While technical analysis often appears to be little more than geometric witchdoctory, the time to sit up and pay attention is when the technical analysis is supported by the observable economic situation.

Self-serving economists in the financial media always like to pretend after the fact that no one can reasonably foresee economic catastrophe on the horizon. But the reality is that it is usually quite obvious if you know what to look for. For example, the seeds of the financial crisis of September 2008 were already apparent to practically everyone who was paying attention in March of that year. In like manner, it has been clear from the start that if the two financial stimulus plans of 2008 and 2009 were not successful in kick-starting the American economy, it would finally have to be admitted that the country is locked in a severe state of economic contraction that is most accurately described as a depression.

First of all, it is important to understand that there is no recovery. This will surprise those who make the mistake of taking the media at its word because the Business Cycle Committee of the National Bureau of Economic Research has resolutely declined to declare an end to the 2008-2009 recession to this day. This is why all the recent talk about a “double-dip” recession is absurd. It is so absurd that anyone who now uses the term in an unironic manner should not be taken seriously as an economic commentator.

The only reason that there was even an illusion of a recovery is due to the use of GDP as a proxy for economic growth. The problem is that GDP counts government spending as economic growth, so therefore the stimulus plans have added around $1 trillion in statistical growth. Now, federal numbers never add up when one government report (in this case the budget) is compared to another one (the BEA’s GDP), otherwise the U.S. economy would have enjoyed 7 percent growth on the basis of the stimulus packages alone. Even if we accept the BEA’s lesser number of 2.4 percent growth in the second quarter of 2010, though, it is clear that the economy will be seen as contracting even by the government measures once the stimulus money runs out. And despite its best efforts, Washington will soon learn that paying bureaucrats to shuffle paper and harass the citizenry does not generate economic growth.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade. Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis.

What we saw from the summer of 2007 to the spring of 2009 was the first phase of the economic contraction. From March 2009 to May 2010 was a reactive second phase that was artificially prolonged by the financial bailouts and massive stimulus packages enacted in every major industrialized nation. Now that the effects of those government measures are running out and it is becoming clear to everyone that they were only short-term band aids and not the long-term structural corrections that are still required, the social mood is darkening again and the third stage in the contractionary cycle is beginning.

As the happy talk about the nonexistent recovery fades away, the depression talk will continue to grow until it finally penetrates the consciousness of the mainstream. This week, the announcement that home sales have fallen to levels not seen since 1997, when there were 43 million fewer people living in the United States, is only one of the many negative reports that will have the capability of kicking off the next sizable market panic over the next three months.

When I wrote “The Return of the Great Depression,” I did so in the full knowledge that I could be completely wrong. After all, I have been wrong about the movement of markets before, and I certainly never imagined that the housing bubble I recognized in 2002 could inflate to such an extreme so soon after the tech bubble devastated the NASDAQ. Although the book was published in October last year, I finished writing it during August. And unfortunately, when I look at how things stand one year on, I cannot say that there is a single prediction that needs to be altered or conclusion that needs to be modified in light of the actual events to date.

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