The Great Recession officially began around Christmas, 2007. Although it technically ended in June 2009, the actual economic recovery has proceeded at a sloth’s pace, and thus has been termed the Lesser Depression by Nobel economist Paul Krugman.

So, in the waning hours of our year, 2013, we still must ask: why has the recovery been so sluggish?

Although market factors informing the housing recovery are manifold, the general malaise of the broader recovery can be attributed to two converging phenomena, according to Krugman.

The recession:

  • began with a housing bubble driven by massive household debt; and
  • was followed by government-imposed austerity.

As housing prices were skyrocketing through the first half of the 2000s, so to was household debt. In the year 2000, the ratio of household debt to personal income was nearing 1:1. By the height of the recession, household debt was grossly askew, approaching 150% of personal incomes.

While massive layoffs were leading to even more household leveraging during the height of the recession, the employer of last resort was insisting on austerity. Real government spending actually fell during a time it should have increased to compensate for the lack of consumer spending and ongoing household debt deleveraging of the past five years.

Neither of these conditions is improving much as of today — debt reduction continues and government policies remain austere, making little dent in unemployment. Thus, the so-called recovery will remain slow, despite the mere appearance of a booming stock market and increasing home prices.

first tuesday insight

The accrual of household debt has been occurring steadily since the 1970s. Yes, it ramped up to extraordinary heights during the Millennium Boom, but real household debt has increased as interest rates have fallen for the past 30 years. It simply became easier to borrow more on the same income, so families did so and lenders happily obliged.

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Falling incomes, falling prices

Interest rates are already on the rise, and given the fact short-term rates have hit zero as a result of the Federal Reserve’s (the Fed’s) intervention to stop the recession, they can only increase from here on out. As rates continue to rise for around the next 30 years, debt will fall — axiomatically!

Why? This is axiomatic since as rates rise, especially given the fact that incomes have and will remain stagnant for the massive middle class, buyers can only borrow a lesser amount today than they did yesterday. It is a mathematic certainty.

Anybody reading these tea leaves who has  even the faintest clue knows what this adds up to: falling real estate prices, back to the historical mean — at best.

Re: “What Janet Yellen — and everyone else — got wrong” from the New York Times