how bad is it going to get?

Are we headed for a depression? I assume not but we are dealing with asset deflation in the residential housing market -- very large numbers -- trillions at stake but several trillions are borrowed against that declining asset value and that is the potential problem. A deflationary spiral occurred in the 1930's thanks to the huge build up of capacity in the 1920's plus the big growth in debt -- with all the new toys that were being sold came new installment payment plans to help folks pay for them. Not to mention those that had borrowed to buy stocks or the businesses that had borrowed to buy other companies or build new capacity, etc.

The problem is debt service -- can you generate the income necessary to make your debt payments, when that debt is tied to a deflating asset? Why would you make the payments when your house is so far under water (debt worth more than house) that your hopes of having any equity are a huge long shot?

In the 1930's incomes dropped but the debt didn't -- that made it hard for folks to pay their debts -- once they can't they lose everything. the banks look to sell those assets but there's too much supply of basically the same things so they are worth a fraction of their peak value. The process works like a snowball getting bigger and bigger as more folks are brought under. Keys to surviving this environment -- no debt. Unfortunately, I have a mortgage and a home equity line of credit.

Last time I was worried about an asset deflation was in 2001 when the tech stock bubble was bursting. Lots of money lost then but housing has the potential to make the tech stock losses look puny. The Fed's aggressive rate cuts helped bail the economy out of that asset deflation by getting the housing market going pretty strong. that card has been played already -- not sure what is up the Fed's sleeve anymore but my hope has been that international strength plus good employment would be enough to keep the economy growing -- slowly but still growing. Part of the theory is that the housing problem would be a long term drag on the economy -- say several years but it might not be any worse of a drag that it currently is. its a theory. honestly don't know -- that's why I am focused on finding the right secular stories.

BTW, the WSJ has a good editorial monday about corporate tax rates -- the US has some of the highest tax rates -- Europe is being forced into cutting rates due to the strength of Ireland and eastern europe -- both low tax areas. Combined with the low taxes in Asia and our housing issues -- it means more risk to US underperformance. This year could be an outlier year due to current expectations but over time the US will underperform unless we start cutting taxes.

not likely.