Where is This Economy Going

Markets are down about 2% at mid day today, which is but a single data point in an increasingly unstable market that looks very much like last summer. More worrisome is the longer term prospects for western economies reflected in market trends and in macroeconomic numbers.

If the market dips this summer, as it did last, this will represent the third turn back in three years from post-recession highs. And each of these peaks was fueled by dumping vast amounts of cash into the financial sector, primarily via the U.S. Fed. Despite these historical infusions, inflation remains near zero, suggesting that absent such intervention we would be in a period of long-term deflation.

Normally, as U.S. election year would see an uptick in markets and this may well happen later in the summer. And Bernanke does not want to determine the election either by sitting tight or being overly aggressive. So we might yet see a modest QE 3 as the election nears. But the economic numbers out of Canada and the U.S. as well as the BRICS are not inspiring. And Europe dances along the edge of the abyss month after month and year after year.

My own guess is that the most likely outcome moving forward is more of the same. Like the Japanese, we might be entering an extended period of perhaps decades of economic malaise -- a sort of lost generation or generations. This will be driven by unprecedented concentrations of wealth that both limit purchasing power and created vast pools of investment capital that have no place to go because demand, limited by that purchasing power, remains flat.

Welcome to the root canal economy -- a sort of permanent condition of chronic pain that is not serious enough to demand immediate alleviation but sufficient to make life more or less permanently miserable.