The mainstream view of our current economic situation:

After the worst downturn since the Great Depression, signs of recovery are mounting — albeit tinged with ambiguity. Despite worries that American consumers might hunker down for years — spooked by debt, lost savings and unemployment — thriftiness has given way to the outlines of a new shopping spree: households are replacing cars, upgrading home furnishings and amassing gadgets.

Many economists estimate that consumer spending — which makes up some 70 percent of American economic activity — swelled by 4 percent during the first three months of the year, more than the double the pace once anticipated. Some have nudged upward their estimates for economic growth to more than 3 percent this year.

“Consumers are showing extraordinary resilience,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “There’s a lot of pent-up demand out there that is now being unleashed. The whole supply chain system is now being revitalized.”

While few dispute signs of recovery across much of the economy, significant debate remains on how robust and sustained it will be. The lingering effects of the financial crisis have some economists envisioning a long stretch of sluggish growth.

But recent months have delivered a stream of news bolstering the notion of a more vigorous recovery. Technology companies have racked up substantial sales. After a decade of painful decline, manufacturing is tentatively adding jobs. Retail sales increased by 9.1 percent in March at established stores compared with a year earlier, according to Thomson Reuters, marking the seventh consecutive month of growth. Exports swelled in the first two months of the year by nearly 15 percent compared with a year earlier, according to the Commerce Department.

Still, much of the improvement appears the result of the nearly $800 billion government stimulus program. As that package is largely exhausted late this year, further expansion may hinge on whether consumers keep spending. That probably depends on the job market, which remains weak.

[source: New York Times]

The numbers do look good, as we pointed out about the recent report that showed home sales rising 27% month over month.

We continue to have our doubts for a number of reasons, however:

• What has actually been fixed in terms of underlying economic fundamentals? The reason the system collapsed in the first place, starting with real estate, is because of leverage in the system – you know, buying a $300,000 home with zero down, essentially, 100% leverage dependent on the buyer maintaining or increasing their income over thirty years. Even though the numbers suggest that credit is not expanding like it was before, this leverage has not yet been cleared.
• Has thriftiness, as the NYT points out, really given way to a new shopping spree? Where is this consumer resilience coming from? While there are consumers who undoubtedly have savings or continue to generate the income they made prior to the crisis, there are millions who have been destroyed by job losses and maxed out credit. One possibility for this resilience which we discussed in The Recovery Is Not Real Even Though Ben Bernanke is ‘Confident’, is that there are upwards of 7 million homes with unpaid mortgages where the tenants are essentially living for free until the banks decide to foreclose. That’s roughly $8.4 billion a month sitting without a place to go. Perhaps consumers are taking what  should have been their mortgage payment and boosting retail sales as a result.
• Stimulus packages, especially unemployment, have kept millions of people from dropping into the poverty rolls. Some unemployment packages can last as many as 99 weeks. That’s two years of additional spending the government has been able to pump into the economy. As people start falling off of unemployment rolls, and they have no jobs available, you can expect that they will further tighten their budgets.
• Which brings us to jobs — where are they? The temporary census jobs numbering 1 million, will be gone by the end of this year. Joe Biden predicts job creation will return to 250,000 to 400,000 per month in the next few months. But where are these jobs going to come from? And let’s say that we do have 400,000 jobs created next month, will they be the high paying tech jobs of the late 90’s and early 2000’s, or are we talking about near minimum wage labor here? Jobs are the elephant in the room, and they are not coming back. Didn’t we export most of them to foreign countries over the last two decades?
• The second elephant, of course, is the shadow inventory we mentioned above, and the future delinquencies coming in real estate. Millions of mortgages will fall apart over the next couple of years as a result of rising variable mortgages interest rates. As one of our readers recently pointed out, in the 1980’s recession, when his mortgage was at 16% and it looked like they could only go down from there, the rate jumped even higher, to 18%!
• Finally, we have the interest rates. What consumer is going to survive when credit card rates on major bank cards, even for people with good credit, are approaching 30%? Have you checked your retail branded card lately? We can almost guarantee your rate is over 20% (or approaching it) on anything you buy at places like Home Depot or Target. Home mortgages are at roughly 5% now, but as we mentioned previously, it would not be out of the norm for these rates to bounce to 10% or more. In an already tight lending market, it’s about to get really expensive to buy a home, even if real estate prices crash.

Yes, there are signs of recovery, but this does not mean we have recovered. The government, mainstream economists and media pundits look at this in day-to-day or week-to-week time frames. We are in the middle of an economic detonation, one that does not occur overnight. This is a long and drown out process that will span not months, but years, possibly decades, with positive and negative swings in between.

This is why we recommend that our readers not only prepare for short-term crisis, but a long-term paradigm shift in the way the world we have come to know works. Learn trade skills that can be used to produce tangible goods (carpentry, farming, welding, etc.), store extra wealth in tangible goods (like precious metals, food commodities, farmland), and develop multiple income streams to provide a buffer if one income generator falls to depression.

The times are a changing and there aren’t as many six figure managerial jobs out there as there were before, and when a job does appear, hundreds of applicants compete for it. We can continue to wait for someone else, be it the government or a business owner, to create our careers for us, or we can take matters into our own hands and create a self sustaining lifestyle ourselves.

This is one of the new paradigms – prepare yourself for it.