Economic events are not a series of events that happen despite the actions of people. They are the results of those actions. We are currently suffering and ultimately paying for a situation where we inflated demand for assets such as housing by recklessly extending so much credit to bad risk individuals that prices skyrocketed, creating a false sense of economic wellness because of the jobs created, the apparent wealth created, and the high level of economic activity that ensued. When we hit the limit on this because supply actually exceeded demand, and prices started to fall, everything escalated dramatically since equity wealth disappeared, the bad credit risks couldn't make payments, unemployment skyrocketed as disposable income plummeted, the stock market tumbled, etc. etc.

Can this continue forever? Well the simple and true answer is no. As bad as things seem, the law of supply and demand still rules. As the prices have dropped, demand has started to increase. Valuations are much lower but products are starting to move again. Because there was no demand production of new items is way down and supply has dropped. Essentially, all that was required was for a step down of valuations to bring the supply and demand into balance again.

However, it is at a lower point than it was. Inventories are still being burned off and until they are gone, production is going to stay down. As long as production is down, there will be fewer jobs. However, it is inevitable that at some point new product will be in demand and jobs will be created.

The first question is when? I believe there is no simple answer to this question but I believe in some areas we are already there. The term green shoots has been overused, but whatever you call them, there are signs that some companies have stopped getting worse and are getting better. Profitability has in some cases been achieved by reductions in cost instead of increased sales. This better prepares those companies for the future and makes them more productive. Is it true for the entire economy? Obviously not, but as some industries stabilize, it will increase demand. The rate of increase can be argued, but the increase is inevitable, especially since the credit markets have largely been stabilized.

The second question has to be, what will the recovery look like? If you are expecting a rapid surge back to the levels of 2007, I can't really agree with that. In effect assets in the country have been revalued at a lower level than they were. I don't think they can return to those levels for quite a while. However, if a house has lost 30% of its value, but then stabilizes and perhaps starts increasing modestly in value (say 1-2%), we will have recovered from the lows. It is not going to recreate the wealth that was lost for quite a while. However, if the prices are based on a more solid base we may in fact be better off.