by Rene Pharisien

Created on: February 08, 2008

America, the "Vanilla Sky" economy.

Whether or not we are in a recession depends on who you talk to. If you are a consumer reeling from the loss of value in your home, no longer able to lower payments by refinancing your mortgage, or someone in residential real estate, construction or the mortgage industry, the answer is certainly YES. On the other hand, if you are in a more traditional industry such as pharmaceutical, transportation, food, energy, or a large technology firm, things are probably OK.

While experts continue debating, the economy is still chugging along. The unemployment rate is at 5.5%, up from a low of 4.5% a year ago, but far from the 8% to 10% levels seen in the early 90's. But while the economy grew at a healthy 2% last year, profits have been declining, with earnings for S&P500 companies down in both third and fourth quarters of 2007. This is why I call it the "Vanilla Sky" economy, like the creepy 2001 movie where after a car crash Tom Cruise cannot figure out whether he is alive or living a dream or where reality lies. Business is growing but not profitably, and evidence of a slowdown is all around us. We are hanging on to our jobs but not getting raises because employers are making less money. We pay our bills but feel poor. The real estate downturn and market turmoil have caused our networths to decline. The banking crisis is making it near impossible to refinance our houses, get more cash and lower payments. Gone are the days of cashing lucrative stock options, day trading to pay off bills, or getting cash out of the house to finance our life style.

So are we in a recession? And why is it so difficult to figure out?

The answer is we just went through a bubble. America has a history of bubbles: the energy crisis in the late 80's, the dot.com busts in early 2000's, and now real estate. All have the same root cause, too much money thrown at a sector for too long.

In the late 80's government tax shelters caused enormous inflows into energy. You could put money into an oil and gas trust and immediately get a full return on your taxes, without the promise of the venture ever making a single profit, the equivalent of free money. It ended when the government changed the tax laws, causing a glut and an energy recession that lasted well into the 90's. In the mid to late 90's it was the VC's chasing the Internet gold rush, virtually throwing money at any high tech start-up with a pulse. The industry eventually went bust in 2001 and didn't fully recover

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