Recessions are a normal and even essential part of our modern economic system.  They tend to occur every 5-7 years as a normal function of the business cycle, and they are believed to purge waste from the economic system.  But the recession that came out of the 2008 Global Credit Crisis has not been a normal recession.  Normally, a recession runs its course in a few months and an economy resumes economic growth and upward movement.  The 2008 Crisis erupted in the early fall of 2008.  We are now in the late summer of 2010, and the economy is still facing major systemic risks that have caused Federal Reserve Chairman Ben Bernanke to say that the economic outlook for the 2^nd half of 2010 is “unusually uncertain.”  It is right and normal for a Fed Chairman to use such words to describe the economic outlook at the beginning of a recession, but to use those words two years into a recession???  That is scary.

And this is the current state of the U.S. economic recovery—“unusually uncertain.”  During the last two years the United States and the Federal Reserve have done everything in their power to stimulate an anemic U.S. economy, but nothing has been able to really get the recovery to what is referred to as a “self-sustaining” phase.  At the self-sustaining phase, a Central Bank is able to remove economic stimulus.  In early 2010, the recovery seemed to be doing relatively well in the United States and speculation began to rise that the Fed would hike rates and remove stimulus as soon as the 3^rd quarter of 2010.

Then, Greece happened.  The sovereign default scare in the EuroZone punished investor sentiment around the world and caused a wave of fear to enter financial markets as the very existence of the Euro and EuroZone came into question.  Finally, in late May the European Central Bank stepped up to the plate and created a bailout fund for any EuroZone countries in danger of default.  This move by the ECB did reassure market participants as it became clear there would be no sovereign defaults in the short term, but by that point, the damage in the United States had been done, and economic recovery was beginning to stall.

After a string of positive economic data throughout the first half of 2010 for the United States, economic data started to strongly disappoint to the downside in June and July.  Consumer demand began to drop, employment started to fall again, credit markets remained tight, and retail sales fell.  Bad report after bad report began to emerge out of the United States.  It suddenly became clear in late June that the U.S. recovery was hitting a wall of resistance.

Then, as poor economic data continued to come out through July, it quickly became evident the U.S. recovery was in dire circumstances.  The Federal Reserve had released a historically unprecedented amount of economic stimulus in the last two years, and still it was not enough.  The economy was beginning to show signs of a possible contraction in the housing sector, which, in a worst case scenario, could lead the entire economy back into recession.

Thus, Fed Chairman came out in late July and stated that the Federal Reserve was ready to act in decisive action by unloading another round of quantitative easing into the economy.  The markets got scared.  The U.S. Dollar continued its precipitous fall, and equity markets began to falter as investors and forex brokers attempted to weigh the seriousness of the slow-down.  Now, in August of 2010, the economic outlook is “unusually uncertain.”  This is definitely scary ground to be on two years after the largest economic catastrophe since the Great Depression.

Popularity: 2% [?]