Third, rising unemployment clearly means that a small but growing segment of the population has less money to spend. Unemployment is at 5.1% and is likely to rise to over 6%. That is clearly bearish of consumer spending.

All of these factors suggest a recession of at least two quarters if not three. While lower Fed funds rates and the efforts by Congress to stimulate lower mortgage rates will eventually help, it will not be an immediate panacea.

As to a slow and prolonged recovery, the "Muddle Through Recovery," the reasons to me are clear. The cause for the current recession is the bursting of the twin bubbles of the housing markets and the credit crisis. These are problems that are going to take several years to solve, not matter that the Fed does to interest rates and opening the discount window to investment banks for all sorts of mortgage and other asset backed paper. While doing so is a good thing, we still have to work our way through 3.5 million excess homes, 2 million of which are vacant. That will take a few years.

Further, we have to develop new sources for the buying of debt. We vaporized 60% of the market for debt in the implosion of CDOs, SIVs, CLOs, etc. These buyers are never going to come back. It took 15 years to create that market. It will take a few years to create its replacement.

Let me offer one caveat. If the Bush tax cuts are not kept largely intact you will see the recovery that I think will be coming in late 2009 and 2010 evaporate quickly. If an Obama (probably) or a Clinton (small chance) get their way, we will see the largest tax increase in history. That is not the medicine that the economy needs when it is weak already. It could easily push the economy back into recession as it will make the consumer even weaker.

A Soft Depression? Not.

So, if things are all that bad, why won't we roll into the soft Depression that Bill Bonner and others predict? It is quite easy to make a very bearish case with a falling dollar, rising inflation, a seemingly never-ending rise in oil and commodity prices, a nasty housing market crash, a frozen credit market and more.

To establish a basis for my relative optimism, I have to re-visit what is for me a painful moment in my forecasting life. This is just between you and me, gentle reader, and I would appreciate you keeping this just between us.

Back in 1998, I thought the US and the world would drift into a recession caused by the failure of some large computer programs not being fixed on time for the Y2K rollover. I did not think it would be the disaster some thought, but I did see the potential for problems.

Why? Because of one statistic that was very clear. 50% of all major software projects for 40 years did not finish on time, and a large percentage of those missed their targets by years. That number had not changed for decades.

The Y2K software problem was very real. There were thousands of huge software projects under way by late 1998 to fix the problem. I went to many software conferences and talked with the software developers and management who were quite distressed. Their concern was real.

How, I asked them (and myself), could we expect all the projects to be done on time when the clear record said that software was difficult and managers very poor at getting things done on time. While I expected most things to be fixed, it seemed reasonable to think that there would be some problem areas. And I generally got agreement from very serious managers and consultants.

I remember talking about this with the late Harry Browne, a true friend and a very wise investment writer (and the nominee of the Libertarian Party for President for two elections). Harry was generally bearish on many things. But he told me there would be no Y2K problem. I confronted him with my evidence and research.

"John, you are missing the main point. A free market figures out how to solve problems. This is a problem that we know about well in advance. It is not slipping up on us. If it must get solved in order for a company to survive, it will get solved. End of story."

I just shook my head and took comfort in my research. And I was wrong, of course. Interestingly, all the investment advice in that book ended up being right as the stock market did drop, long term interest rates fell, and the economy did go into a recession and so on. I ended up being right for the wrong reason. And some of my very first and now long term readers met me through that book, so all was not lost.

But in looking back on it, I realize what I had missed. Whenever I talked to managers at these conferences (and I talked to a lot of them), they all told me privately that they were going to meet their deadlines, but the real concern was other companies or projects. I missed the forest for the trees. Everyone was busy making sure they were going to be fine. I look back now and wonder how did I miss it?

As it turned out, Harry was absolutely right. Because there was a literal drop dead date on each of the projects, management became very focused. It seems now that we know software projects can be finished on time if the motivation is survival of your company.

It is a lesson that has been burned into me.

Now, let me throw out a very important and interesting point. Today I am in Switzerland speaking on behalf of Bank Sarasin to their mainly institutional clients. (I should note my hosts at Sarasin were most thoughtful. It is a very impressive bank with very good people.) The conference was in German except for my speech and one by a Swedish Economics professor named Dr. Kjell Nordstrom. I attended that session and am glad I did. It was a fascinating presentation.

When I travel around the world, I am used to a certain amount of America and/or Bush bashing. It is just part of the background noise.

So, I was somewhat surprised to see the professor, in the middle of a talk on why some businesses succeed and others fail, put up a rather large flag of the United States and went on to say that the US would be the dominant developed country for his life, the life of his children and the life of their children's children. You could feel the surprise in the room. It is not what they were expecting to hear. I certainly did not.

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