Our trip to Paris served as a brief distraction from the “good news” chatter that MSM floods us with. “Global confidence index holds at record high as signs recession has ended,” reads Bloomberg. Yesterday, Chairman Ben indicated that the recession is over, sending stocks and commodities higher.

And Warren Buffett came out saying he’s buying equities again. All the while, the dollar is sitting at an 11 month low, and gold touched $1006 this morning.

As I perused the underground, I came across a piece by Jeff Harding of the Daily Capitalist that I had to share. He begins by asking, “how has the playing field for our economy changed and how will those changes affect our future? The answer to these questions will determine the future of the world’s economies.”

He then outlines the 7 mega-trends that will dictate our economic future. We’ve touched upon many of these ideas in previous issues. But here they are:

• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No.1. The culture of consumption is broken and won’t return to former levels. This is the key to everything.
• Megatrend No. 2. Consumers will continue to increase savings to prepare for retirement.
• Megatrend No. 3. Declining U.S. consumer demand will continue to negatively impact the world economy.
• Megatrend No. 4. Deflation will continue for some time.
• Megatrend No. 5. Home ownership rates will decline to more historical levels of, say, around 66%, down from the high of 69% during the boom, which will keep a lid on home prices.
• Megatrend No. 6. Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
• Megatrend No. 7. Massive federal deficits will double the national debt, result in higher taxes, and will act as a permanent drag on the economy.

If you have a chance, you should check out the piece in full. It is jam packed with facts and figures that will give you something to chew on for breakfast, lunch and dinner.

So where do these trends all lead?

All cycles eventually bottom out and growth resumes. The timing of any recovery is impossible to predict and for the most part it depends on what the government will do (or, hopefully, not do). The more the government interferes with the recovery process by propping up bankrupt banks, by manipulating the economy with fiscal and monetary stimulus, by creating a huge national debt, and by increasing taxes, the longer it will take.

With commercial real estate in serious decline, deflation will continue, and we’ll see more bank failures. While we may see a “bump” in GDP in Q3 and Q4, the liquidation of commercial real estate assets and other debt will accelerate. At some point, deflation will stop, and asset prices will find a bottom, as housing is starting to do now. My view is that the post-deflation economy will remain sluggish with high unemployment for some time. I believe that, unlike Japan, we will eventually see inflation.

There are significant differences between our economy and Japan’s and the comparison to Japan in the 1990s may not be entirely applicable here. The Japanese were reluctant to let banks and companies fail, but, despite a few notable exceptions, we aren’t. This is a necessary requirement for recovery, and we are better at “creative destruction” than are the Japanese.

Also, we have a more dynamic culture of entrepreneurship than Japan, making us more responsive to a recovery. However, the main difference is that Japan’s debt was largely financed internally due to their very high savings rate in the 1990s (about 14%). While our savings rate will continue to grow, I do not believe it will keep up with rising federal deficits, and we will need to finance our national debt on the international markets. This will drive interest rates up and put pressure on the dollar.

Then I believe inflation will assert itself as banks renew the lending cycle. I believe the Fed will maintain its loose monetary policy in order to keep interest rates down to stimulate growth. Governments always find it expedient to create inflation to give people the impression that the economy is growing. The problem is that inflation will depress the formation of real savings necessary to finance growth, and like the 1970s, we’ll see stagnation and inflation (”Stagflation”). If inflation gets out of hand, then, for a while we may see price and wage controls.

After that, who knows? Cut the money supply as Paul Volker did, and drive up interest rates and bring on a new recession? Continue to inflate? That’s too far in the future and politicians don’t think that far ahead.