Yes, Virginia, a Double-Dip Recession is Possible

| Wed Aug. 10, 2011 11:23 AM EDT

Karl Smith says his internal models strongly suggest a double-dip recession, but he just can't bring himself to believe it:

I look at a lot of fundamentals but at the end of the day the money markets drive my forecasts. The money markets are telling me in every possible way that recession is coming. Liquidity demand is rising, inflation expectations are falling, nominal interests rates are collapsing.

However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer doubted a recession because he didn’t think there were enough manufacturing jobs left to lose.

This time, I look at construction and local government and think the same thing. The cyclical employment sectors are already so far down. Are we going to start losing jobs in Health Care and Education at this point?

I don't know that I can bring myself to believe it either. Then again, in 1931, guess what? It hardly seemed possible, but things got worse! The truth is that as long as insane conservatives continue to drive our national economic policy, a double-dip recession is not only possible, it's likely. They simply show no signs of stopping their madness, and most of the mainstream press and punditocracy aren't numerate enough to recognize what's really going on. We are trapped in a cycle of insanity that's truly Kafkaesque.