I found this column arguing that the current recession isn’t as bad as the ones in the 70s-80s to be hilarious. People that are making this argument based on current data don’t understand the difference between a recession caused by an external shock (such as the oil crisis) or government attempts to curb inflation (the sharp 81/82 recessions) and one caused by over leveraged debt, where the interest rate is 0% and things are still getting worse due to deflation. But even discounting a long argument about the dynamics, there is a clear data point that should be everyone pause.

The last quarter will see the first collective loss across the S&P 500, even excluding financials. That didn’t occur even during the Great Depression.

Now there is a caveat. I’m not saying that the environment is already worse than the Great Depression — that’d just be stupid — as the losses are coming from massive asset write downs across all industries instead of current negative cash flow. What this means however, is that much of our “wealth” was (still is) completely illusionary and based on debt inflation. Our current problems are simply a result of a wholescale deleveraging process back to historical norms. In fact we still have to fall another 20-30% across most asset classes just to get back to normal. This is why I’m so skeptical of the bailouts/stimulus packages/whatever…until the system is flushed back to at least normal levels, it’ll be impossible to use the money productively. This is why I really wish the government would throw in the towel and use our limited resources to help set up programs that anticipate 25% unemployment etc. and then use the bullets we’ve saved for when the system is flushed out and needs a real Keynesian reboot.

Right now we are in the eye of the storm where people are arguing about whether we are in an ahistorical time or just overreacting. My bet is on ahistorical time and the problems we have are massive in a way that still very few people in power appreciate. I fear that when the reality can no longer be denied, there will be panic. I’ve basically just come to accept Churchill was right, “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”